Treatment of Capitalized Costs of Intangible Assets (Part I)

The first in a two-part series of special reports on cost recovery of intangible asset expenditures summarizes the applicable capitalization regulations, Sec. 197 cost recovery and general Sec. 167 amortization rules. In 2004, the Internal Revenue Service (IRS) issued final regulations under Sec. 263(a) on capitalizing the cost of intangible assets. To clarify matters with regard to intangible assets, the IRS issued Regs. Sec. 1 .263(a)-4 (acquiring or creating intangibles) and Regs. Sec. 1.263(a)-5 (facilitating the acquisition, restructuring or reorganization of a business). These regulations, commonly called the "INDOPCO regulations," are effective for intangible asset costs paid or incurred after 2003. After the INDOPCO regulations, at least with regard to intangible assets, deducting is the norm; capitalizing is the exception. For amortizable Sec. 197 intangibles, Sec. 197(a) allows amortization over 15 years, on a straight-line basis, with no salvage value, beginning in the month when such intangible assets are acquired.