Learn why living in a material tax world doesn't mean that your ISPs intangible assets can’t be counted. Under the right circumstances, the appraised value of such resources could provide your business with tangible tax deductions.

by Mark E. Battersby [March 7, 2001]

Surprisingly, there are a number of assets in your ISP business that help increase its value, but that do absolutely nothing to increase your ISP operation's tax deductions.

For example, the cost of the land under the building that houses your ISP operation remains a capital asset and only improvements to that land can be deducted, depreciated or amortized.

Similarly, the value of simply having been in business for a given period of time—your ISPs business reputation and even the value of its trained, skilled workforce—adds to the value of your operation, if not to its tax deductions. Of course, some of the more obvious physical or tangible assets do generate tax write-offs.

Appreciate depreciation
Under our current tax rules, your ISP business may claim an income tax deduction for the exhaustion, wear and tear of property that is used in your ISP operation—or for the production of income. Usually labeled as depreciation, this deduction is allowed for tangible property, but not for intangible assets such as inventory, stock in trade, unimproved land, and depletable natural resources, among many other forms of intangible assets.

Those intangible assets—copyrights, patents, trademarks, goodwill, computer programs, capitalized advertising costs, licenses, leases, franchises and the like—that are such a valuable part of your ISP operation, is largely ignored as a source for potential tax deductions. In some instances, amortization may be claimed, but the rules are often confusing, which makes it difficult to toe the line and get a tax break.

Amortization can best be defined as the systematic write-off of costs incurred to acquire an intangible asset. That's right, amortization generally applies only to acquired intangible assets—those so-called Section 197 intangibles. The systematic write-off under amortization can best be compared to straight-line depreciation where an equal portion of the intangible's acquisition costs is recovered every month during the recovery period.

Section 197 write-offs
Generally, self-created intangible assets are not amortized under Code Section 197 Amortization of Intangibles—unless they are created in connection with the acquisition of a trade or business.

The only exceptions to this general rule are government-granted licenses, permits and rights, non-compete covenants that are entered into in connection with the purchase of a business or franchises, trademarks and trade names.

So, just what does the IRS consider to be Section 197 intangibles? Consider the following:

• Goodwill: The value of your ISP business that is attributable to the expectancy of continued customer patronage, like long-term subscribers your ISP picked up in an acquisition.
• Going concern value: The additional value that attaches to property by reason of its existence as an integral part of an ongoing business activity.
• Workforce in place: the experience, education or training of a workforce, like your ISPs technicians and technical support staff that came to your company as part of an acquisition.
• Licenses and permits: Any license, permit or other right granted by a governmental unit even if granted for an indefinite period or reasonably expected to be renewed for an indefinite period, like acquired copyrights, patents and the like.
• Covenants: Any agreement not to compete or and agreement having substantially the same effect, entered into in connection with the direct or indirect acquisition of an interest in a trade or business.
• Franchises, trademarks and trade names: A franchise includes any agreement that provides one of the parties to the agreement with the right to distribute, sell or provide goods, services or facilities, within a specified area. Trademarks include any word, name, symbol or device, or any combination thereof, adopted and used to identify goods or services and distinguish them from those provided by others. A trade name includes any name used to identify or designate a particular trade or business or the name or title used by a person or organization engaged in a trade or business.

Our tax laws prescribe a 15-year amortization period for purchased goodwill and other Section 197 intangibles. Remember one caveat—self-created intangible assets such as the goodwill that has built up in your business over the years does not qualify for a tax deduction unless it is acquired.

The best—and least questioned—process for acquiring intangible assets involves a sale and purchase. Even though the buyer and seller are usually working toward different goals—the seller seeks lower taxed capital gain while the buyer wants to qualify as many assets as possible for quick tax write-offs—they both must agree, in writing, to allocations of part or all of the consideration involved in the transaction as well as to the fair market value of any assets transferred.

Remember, tax deductible or not, intangible assets are an integral part of every ISP operation and business. Have you covered your intangible assets lately?

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