CPA Exam — REG (Regulation)Federal Taxation of Property TransactionsEasy
A corporation, 'Global Tech Inc.', acquired another company's assets, including a patent for $150,000, on July 1, 2023. The patent has a remaining legal life of 10 years. What is the allowable amortization deduction for the patent in 2023?
- A$7,500
- B$15,000
- C$10,000
- D$5,000
Show answer & explanationAnswer & explanation
Correct answer: D. $5,000
Section 197 intangibles, such as patents acquired in connection with the acquisition of a trade or business, are amortized ratably over 15 years, regardless of their actual legal life. Since it was acquired on July 1, 2023, only half a year's amortization is allowed. Annual amortization = $150,000 / 15 years = $10,000. For 2023, $10,000 * (6/12) = $5,000.
Why the other options are wrong
- A. This incorrectly uses a 10-year life for half a year ($150,000 / 10 * 0.5 = $7,500), or uses a 15-year life for 9 months.
- B. This would be the full annual amortization if the asset was acquired for the entire year, which it was not.
- C. This is the full annual amortization for the 15-year period, without prorating for the partial year.
Section 197 Intangibles Amortization
Certain acquired intangible assets, including patents, goodwill, and covenants not to compete, are amortized ratably over a 15-year period, beginning in the month of acquisition, regardless of their actual useful or legal life.
- 15-year straight-line amortization.
- Amortization begins in the month of acquisition.
- Applies to intangibles acquired in connection with a trade or business.
Memory trick: Fifteen years flat for acquired intangibles, no matter the patent's tangibles.