Goodwill often grows with the life of a business. Even if it does not grow, it can be very difficult to show the rate at which it declines. Without demonstrating a useful life, amortization could not be justified. The IRS historically argued that goodwill could not be amortized for tax purposes. Amortization was allowed only if the taxpayer could show a specific useful life of the goodwill. IRS had the upper hand in this argument and won many court challenges. Then almost 30 years ago, the Supreme Court heard the case of the purchaser of the Newark (New Jersey) Morning Ledger newspaper.
The tax law follows this general principle but assigns a different life to the asset than conventional accounting rules might suggest. However, for our purposes the concept is the same. Accounting rules generally allow you to write off the cost of a purchased asset that declines in value over time. This is usually called depreciation but is called amortization if the asset is intangible.
………………………………………………………. A: It sure does make sense that you should be able to write off goodwill that seems to have evaporated during the pandemic. But, you can’t. I will even try to convince you that the no write off makes sense.
However, this legislation also denied an early write off of purchased goodwill provided the business to which it relates is still operating. You seem quite logical in saying that goodwill that no longer exists should be able to be deducted in full when it is no longer useful. IRS then supported legislation in Congress to specify a single life for purchased intangibles. That is why 15 years is the period used to amortize goodwill and other intangibles.
The buyer’s homework project produced strong enough evidence to allow it to amortize the purchased intangible. The Supreme Court decision also offered a road map to others that could support amortization in other purchases. The buyer allocated purchase price to customers – customers make a newspaper valuable. The buyer also used past data to show the “useful life” of a customer of that newspaper.
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- In tax law, goodwill can die while businesses survive »Jornal Albuquerque
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