. Harold Stevenson purchased substantially all of the business assets of the Troy
Creamery on January 17. As part of the purchase price he paid $200,000 for the patent on
an ice cream making process. Harold also pays $20,000 for the business's goodwill and
another $20,000 for the seller's covenant not to compete for the next five years. Compute
Harold's amortization deduction for the year of purchase.
To compute Harold's amortization deduction for the year of purchase, we need to determine the amortizable expenses related to the patent, goodwill, and covenant not to compete.
1. Patent: The cost of the patent on the ice cream making process is $200,000. Patents are amortized over a period of 15 years. Therefore, the annual amortization deduction for the patent is $200,000 / 15 = $13,333.33.
2. Goodwill: Harold paid $20,000 for the business's goodwill. Goodwill is not amortized for tax purposes if the purchase occurred after August 10, 1993. Therefore, there is no amortization deduction for goodwill.
3. Covenant not to compete: Harold paid $20,000 for the seller's covenant not to compete for the next five years. The covenant not to compete is amortized over the period it covers. In this case, it covers five years. Therefore, the annual amortization deduction for the covenant not to compete is $20,000 / 5 = $4,000.
To summarize, Harold's amortization deduction for the year of purchase is $13,333.33 for the patent and $4,000 for the covenant not to compete, for a total deduction of $17,333.33.
To compute Harold's amortization deduction for the year of purchase, we need to determine the amortizable amounts for each of the assets: the patent, goodwill, and the covenant not to compete.
1. Patent: Harold paid $200,000 for the patent on the ice cream making process. Patents are considered intangible assets with a limited useful life and need to be amortized. The amortization period for patents is typically 15 years.
2. Goodwill: Harold paid $20,000 for the business's goodwill. Goodwill is also an intangible asset, but it has an indefinite useful life and is not amortized. Therefore, there is no deduction for goodwill.
3. Covenant not to compete: Harold paid $20,000 for the seller's covenant not to compete for the next five years. The covenant not to compete is an intangible asset with a limited useful life. The amortization period for a covenant not to compete is typically the length of the agreement, in this case, five years.
Now, let's calculate the amortization deduction for each asset:
Patent:
Amortization deduction = Patent cost / Amortization period
Amortization deduction = $200,000 / 15 years = $13,333.33
Covenant not to compete:
Amortization deduction = Covenant cost / Amortization period
Amortization deduction = $20,000 / 5 years = $4,000
Therefore, Harold's total amortization deduction for the year of purchase would be the sum of the amortization deductions for the patent and the covenant not to compete:
Total amortization deduction = $13,333.33 + $4,000 = $17,333.33.
Note: It's important to consult with a tax advisor to ensure accurate and up-to-date information regarding tax laws and regulations.