Q: Does the Financial Accounting Standards Board’s exposure draft on accounting for goodwill have any implications on the tax treatment for goodwill or other intangibles?
It is my understanding that goodwill is not tax deductible.
A: The FASB exposure draft will have no impact on the tax treatment of goodwill or other intangibles.
Prior to the adoption of Internal Revenue Code section 197, goodwill and most other intangible assets acquired as part of an acquisition could not be amortized for tax purposes. The only intangible assets the acquiring taxpayer could amortize for tax purposes were intangibles that the taxpayer could demonstrate had only a finite useful life (such as newspaper subscriptions). The IRS opposed the amortization of most intangible assets, and many intangible amortization attempts found their way into court.
The tax treatment of goodwill is currently governed by IRC section 197, which became law on August 10, 1993. It stipulates that intangible assets acquired as part of an acquisition after August 10, 1993 must be amortized over 15 years. Moreover, section 197 also stipulates that any excess of the acquisition purchase price over the fair market value of both tangible and intangible assets (known as “acquisition goodwill”) must also be amortized over 15 years for tax purposes.
IRC section 197 can be applied retroactively to acquisitions completed after July 15, 1991 at the election of the acquiring taxpayer.
A firm’s financial accounting treatment of goodwill and other intangibles has no impact on the tax treatment of those assets. Both before and after August 10, 1993, generally accepted accounting practices required goodwill to be amortized over a period not exceeding 40 years. This policy remains in effect until changed, possibly by the FASB’s current exposure draft on the subject. However, the tax treatment will always be independent of the financial accounting treatment of goodwill.
A. Scott Keating, Visiting Assistant Professor
Graduate School of Business
University of Chicago
Editor’s Note: Read the latest CFO.com coverage of FASB’s new goodwill standard.
See previous “Ask the Experts” columns:
Recognizing Upfront Fees
Proving Tax-exempt Status
The ABCs of OECD
Credentials for Credit
Big Five Audits and Venture Funding
GAAP for Private Firms
Insurance for E- business Infrastructure
401(k) Brokerage Links
Navigating the Rough Waters of Sales Tax
Ask the Experts is a weekly column that aims to help finance executives like you find answers to difficult questions.
Submit your questions by E-mailing them to firstname.lastname@example.org. Unfortunately, we cannot answer all questions individually.
While we will enlist professionals to try to answer your questions, Ask the Experts is meant only to create a dialogue on the topics. Consult legal or financial professionals before acting on any of the advice given by our expert panel.