A corporation, Atlas Corp., acquired a patent for $90,000 on March 1, 2023. What is the amortization deduction for this patent for the tax year 2023?
- A$5,000
- B$4,000
- C$0
- D$6,000
Show answer & explanationAnswer & explanation
Correct answer: A. $5,000
Patents are generally considered Section 197 intangibles and are amortized straight-line over 15 years (180 months), regardless of their actual useful life. The amortization begins in the month the intangible is acquired. For 2023, the patent was acquired in March, so it will be amortized for 10 months (March through December). The annual amortization is $90,000 / 15 years = $6,000. Monthly amortization is $6,000 / 12 months = $500. For 10 months, the deduction is $500 * 10 = $5,000.
Why the other options are wrong
- B. This might be a miscalculation of months or annual amount.
- C. This would be incorrect, as patents are amortizable intangibles.
- D. This represents the full annual amortization, not prorated for the first year.
Section 197 Intangibles Amortization
Certain acquired intangible assets, such as patents, copyrights, goodwill, and covenants not to compete, are amortized over a 15-year (180-month) straight-line period, starting in the month of acquisition.
- 15-year (180-month) straight-line amortization period.
- Amortization begins in the month of acquisition.
- Applies to acquired intangibles, not self-created ones.
- Includes goodwill, going concern value, patents, copyrights, trademarks, etc.
Memory trick: 197 is 'I'ntangibles for 'I'nvestment, 15 years.