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Www irs gov 2011freeefile 8. Www irs gov 2011freeefile   Amortization Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: How To Deduct Amortization Starting a BusinessBusiness Start-Up Costs Costs of Organizing a Corporation Costs of Organizing a Partnership How To Amortize Getting a Lease Section 197 IntangiblesSection 197 Intangibles Defined Assets That Are Not Section 197 Intangibles Safe Harbor for Creative Property Costs Anti-Churning Rules Incorrect Amount of Amortization Deducted Disposition of Section 197 Intangibles Reforestation Costs Geological and Geophysical Costs Pollution Control FacilitiesNew identifiable treatment facility. Www irs gov 2011freeefile Research and Experimental Costs Optional Write-off of Certain Tax Preferences Introduction Amortization is a method of recovering (deducting) certain capital costs over a fixed period of time. Www irs gov 2011freeefile It is similar to the straight line method of depreciation. Www irs gov 2011freeefile The various amortizable costs covered in this chapter are included in the list below. Www irs gov 2011freeefile However, this chapter does not discuss amortization of bond premium. Www irs gov 2011freeefile For information on that topic, see chapter 3 of Publication 550, Investment Income and Expenses. Www irs gov 2011freeefile Topics - This chapter discusses: Deducting amortization Amortizing costs of starting a business Amortizing costs of getting a lease Amortizing costs of section 197 intangibles Amortizing reforestation costs Amortizing costs of geological and geophysical costs Amortizing costs of pollution control facilities Amortizing costs of research and experimentation Amortizing costs of certain tax preferences Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 4626 Alternative Minimum Tax—Corporations 6251 Alternative Minimum Tax—Individuals See chapter 12 for information about getting publications and forms. Www irs gov 2011freeefile How To Deduct Amortization To deduct amortization that begins during the current tax year, complete Part VI of Form 4562 and attach it to your income tax return. Www irs gov 2011freeefile To report amortization from previous years, in addition to amortization that begins in the current year, list on Form 4562 each item separately. Www irs gov 2011freeefile For example, in 2012, you began to amortize a lease. Www irs gov 2011freeefile In 2013, you began to amortize a second lease. Www irs gov 2011freeefile Report amortization from the new lease on line 42 of your 2013 Form 4562. Www irs gov 2011freeefile Report amortization from the 2012 lease on line 43 of your 2013 Form 4562. Www irs gov 2011freeefile If you do not have any new amortizable expenses for the current year, you are not required to complete Form 4562 (unless you are claiming depreciation). Www irs gov 2011freeefile Report the current year's deduction for amortization that began in a prior year directly on the “Other deduction” or “Other expense line” of your return. Www irs gov 2011freeefile Starting a Business When you start a business, treat all eligible costs you incur before you begin operating the business as capital expenditures which are part of your basis in the business. Www irs gov 2011freeefile Generally, you recover costs for particular assets through depreciation deductions. Www irs gov 2011freeefile However, you generally cannot recover other costs until you sell the business or otherwise go out of business. Www irs gov 2011freeefile For a discussion on how to treat these costs, see If your attempt to go into business is unsuccessful under Capital Expenses in chapter 1. Www irs gov 2011freeefile For costs paid or incurred after September 8, 2008, you can deduct a limited amount of start-up and organizational costs. Www irs gov 2011freeefile The costs that are not deducted currently can be amortized ratably over a 180-month period. Www irs gov 2011freeefile The amortization period starts with the month you begin operating your active trade or business. Www irs gov 2011freeefile You are not required to attach a statement to make this election. Www irs gov 2011freeefile You can choose to forgo this election by affirmatively electing to capitalize your start-up costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Www irs gov 2011freeefile Once made, the election to either amortize or capitalize start-up costs is irrevocable and applies to all start-up costs that are related to your trade or business. Www irs gov 2011freeefile See Regulations sections 1. Www irs gov 2011freeefile 195-1, 1. Www irs gov 2011freeefile 248-1, and 1. Www irs gov 2011freeefile 709-1. Www irs gov 2011freeefile For costs paid or incurred after October 22, 2004, and before September 9, 2008, you can elect to deduct a limited amount of business start-up and organizational costs in the year your active trade or business begins. Www irs gov 2011freeefile Any costs not deducted can be amortized ratably over a 180-month period, beginning with the month you begin business. Www irs gov 2011freeefile If the election is made, you must attach any statement required by Regulations sections 1. Www irs gov 2011freeefile 195-1(b), 1. Www irs gov 2011freeefile 248-1(c), and 1. Www irs gov 2011freeefile 709-1(c), as in effect before September 9, 2008. Www irs gov 2011freeefile Note. Www irs gov 2011freeefile You can apply the provisions of Regulations sections 1. Www irs gov 2011freeefile 195-1, 1. Www irs gov 2011freeefile 248-1, and 1. Www irs gov 2011freeefile 709-1 to all business start-up and organizational costs paid or incurred after October 22, 2004, provided the period of limitations on assessment has not expired for the year of the election. Www irs gov 2011freeefile Otherwise, the provisions under Regulations sections 1. Www irs gov 2011freeefile 195-1(b), 1. Www irs gov 2011freeefile 248-1(c), and 1. Www irs gov 2011freeefile 709-1(c), as in effect before September 9, 2008, will apply. Www irs gov 2011freeefile For costs paid or incurred before October 23, 2004, you can elect to amortize business start-up and organization costs over an amortization period of 60 months or more. Www irs gov 2011freeefile See How To Make the Election , later. Www irs gov 2011freeefile The cost must qualify as one of the following. Www irs gov 2011freeefile A business start-up cost. Www irs gov 2011freeefile An organizational cost for a corporation. Www irs gov 2011freeefile An organizational cost for a partnership. Www irs gov 2011freeefile Business Start-Up Costs Start-up costs are amounts paid or incurred for: (a) creating an active trade or business; or (b) investigating the creation or acquisition of an active trade or business. Www irs gov 2011freeefile Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for profit; and for the production of income in anticipation of the activity becoming an active trade or business. Www irs gov 2011freeefile Qualifying costs. Www irs gov 2011freeefile   A start-up cost is amortizable if it meets both of the following tests. Www irs gov 2011freeefile It is a cost you could deduct if you paid or incurred it to operate an existing active trade or business (in the same field as the one you entered into). Www irs gov 2011freeefile It is a cost you pay or incur before the day your active trade or business begins. Www irs gov 2011freeefile   Start-up costs include amounts paid for the following: An analysis or survey of potential markets, products, labor supply, transportation facilities, etc. Www irs gov 2011freeefile Advertisements for the opening of the business. Www irs gov 2011freeefile Salaries and wages for employees who are being trained and their instructors. Www irs gov 2011freeefile Travel and other necessary costs for securing prospective distributors, suppliers, or customers. Www irs gov 2011freeefile Salaries and fees for executives and consultants, or for similar professional services. Www irs gov 2011freeefile Nonqualifying costs. Www irs gov 2011freeefile   Start-up costs do not include deductible interest, taxes, or research and experimental costs. Www irs gov 2011freeefile See Research and Experimental Costs , later. Www irs gov 2011freeefile Purchasing an active trade or business. Www irs gov 2011freeefile   Amortizable start-up costs for purchasing an active trade or business include only investigative costs incurred in the course of a general search for or preliminary investigation of the business. Www irs gov 2011freeefile These are costs that help you decide whether to purchase a business. Www irs gov 2011freeefile Costs you incur in an attempt to purchase a specific business are capital expenses that you cannot amortize. Www irs gov 2011freeefile Example. Www irs gov 2011freeefile On June 1st, you hired an accounting firm and a law firm to assist you in the potential purchase of XYZ, Inc. Www irs gov 2011freeefile They researched XYZ's industry and analyzed the financial projections of XYZ, Inc. Www irs gov 2011freeefile In September, the law firm prepared and submitted a letter of intent to XYZ, Inc. Www irs gov 2011freeefile The letter stated that a binding commitment would result only after a purchase agreement was signed. Www irs gov 2011freeefile The law firm and accounting firm continued to provide services including a review of XYZ's books and records and the preparation of a purchase agreement. Www irs gov 2011freeefile On October 22nd, you signed a purchase agreement with XYZ, Inc. Www irs gov 2011freeefile All amounts paid or incurred to investigate the business before October 22nd are amortizable investigative costs. Www irs gov 2011freeefile Amounts paid on or after that date relate to the attempt to purchase the business and therefore must be capitalized. Www irs gov 2011freeefile Disposition of business. Www irs gov 2011freeefile   If you completely dispose of your business before the end of the amortization period, you can deduct any remaining deferred start-up costs. Www irs gov 2011freeefile However, you can deduct these deferred start-up costs only to the extent they qualify as a loss from a business. Www irs gov 2011freeefile Costs of Organizing a Corporation Amounts paid to organize a corporation are the direct costs of creating the corporation. Www irs gov 2011freeefile Qualifying costs. Www irs gov 2011freeefile   To qualify as an organizational cost, it must be: For the creation of the corporation, Chargeable to a capital account (see chapter 1), Amortized over the life of the corporation if the corporation had a fixed life, and Incurred before the end of the first tax year in which the corporation is in business. Www irs gov 2011freeefile   A corporation using the cash method of accounting can amortize organizational costs incurred within the first tax year, even if it does not pay them in that year. Www irs gov 2011freeefile   Examples of organizational costs include: The cost of temporary directors. Www irs gov 2011freeefile The cost of organizational meetings. Www irs gov 2011freeefile State incorporation fees. Www irs gov 2011freeefile The cost of legal services. Www irs gov 2011freeefile Nonqualifying costs. Www irs gov 2011freeefile   The following items are capital expenses that cannot be amortized: Costs for issuing and selling stock or securities, such as commissions, professional fees, and printing costs. Www irs gov 2011freeefile Costs associated with the transfer of assets to the corporation. Www irs gov 2011freeefile Costs of Organizing a Partnership The costs to organize a partnership are the direct costs of creating the partnership. Www irs gov 2011freeefile Qualifying costs. Www irs gov 2011freeefile   A partnership can amortize an organizational cost only if it meets all the following tests. Www irs gov 2011freeefile It is for the creation of the partnership and not for starting or operating the partnership trade or business. Www irs gov 2011freeefile It is chargeable to a capital account (see chapter 1). Www irs gov 2011freeefile It could be amortized over the life of the partnership if the partnership had a fixed life. Www irs gov 2011freeefile It is incurred by the due date of the partnership return (excluding extensions) for the first tax year in which the partnership is in business. Www irs gov 2011freeefile However, if the partnership uses the cash method of accounting and pays the cost after the end of its first tax year, see Cash method partnership under How To Amortize, later. Www irs gov 2011freeefile It is for a type of item normally expected to benefit the partnership throughout its entire life. Www irs gov 2011freeefile   Organizational costs include the following fees. Www irs gov 2011freeefile Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement. Www irs gov 2011freeefile Accounting fees for services incident to the organization of the partnership. Www irs gov 2011freeefile Filing fees. Www irs gov 2011freeefile Nonqualifying costs. Www irs gov 2011freeefile   The following costs cannot be amortized. Www irs gov 2011freeefile The cost of acquiring assets for the partnership or transferring assets to the partnership. Www irs gov 2011freeefile The cost of admitting or removing partners, other than at the time the partnership is first organized. Www irs gov 2011freeefile The cost of making a contract concerning the operation of the partnership trade or business including a contract between a partner and the partnership. Www irs gov 2011freeefile The costs for issuing and marketing interests in the partnership such as brokerage, registration, and legal fees and printing costs. Www irs gov 2011freeefile These “syndication fees” are capital expenses that cannot be depreciated or amortized. Www irs gov 2011freeefile Liquidation of partnership. Www irs gov 2011freeefile   If a partnership is liquidated before the end of the amortization period, the unamortized amount of qualifying organizational costs can be deducted in the partnership's final tax year. Www irs gov 2011freeefile However, these costs can be deducted only to the extent they qualify as a loss from a business. Www irs gov 2011freeefile How To Amortize Deduct start-up and organizational costs in equal amounts over the applicable amortization period (discussed earlier). Www irs gov 2011freeefile You can choose an amortization period for start-up costs that is different from the period you choose for organizational costs, as long as both are not less than the applicable amortization period. Www irs gov 2011freeefile Once you choose an amortization period, you cannot change it. Www irs gov 2011freeefile To figure your deduction, divide your total start-up or organizational costs by the months in the amortization period. Www irs gov 2011freeefile The result is the amount you can deduct for each month. Www irs gov 2011freeefile Cash method partnership. Www irs gov 2011freeefile   A partnership using the cash method of accounting can deduct an organizational cost only if it has been paid by the end of the tax year. Www irs gov 2011freeefile However, any cost the partnership could have deducted as an organizational cost in an earlier tax year (if it had been paid that year) can be deducted in the tax year of payment. Www irs gov 2011freeefile How To Make the Election To elect to amortize start-up or organizational costs, you must complete and attach Form 4562 to your return for the first tax year you are in business. Www irs gov 2011freeefile You may also be required to attach an accompanying statement (described later) to your return. Www irs gov 2011freeefile For start-up or organizational costs paid or incurred after September 8, 2008, an accompanying statement is not required. Www irs gov 2011freeefile Generally, for start-up or organizational costs paid or incurred before September 9, 2008, and after October 22, 2004, unless you choose to apply Regulations sections 1. Www irs gov 2011freeefile 195-1, 1. Www irs gov 2011freeefile 248-1, and 1. Www irs gov 2011freeefile 709-1, you must also attach an accompanying statement to elect to amortize the costs. Www irs gov 2011freeefile If you have both start-up and organizational costs, attach a separate statement (if required) to your return for each type of cost. Www irs gov 2011freeefile See Starting a Business , earlier, for more information. Www irs gov 2011freeefile Generally, you must file the return by the due date (including any extensions). Www irs gov 2011freeefile However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Www irs gov 2011freeefile For more information, see the instructions for Part VI of Form 4562. Www irs gov 2011freeefile You can choose to forgo the election to amortize by affirmatively electing to capitalize your start-up or organizational costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Www irs gov 2011freeefile Note. Www irs gov 2011freeefile The election to either amortize or capitalize start-up or organizational costs is irrevocable and applies to all start-up and organizational costs that are related to the trade or business. Www irs gov 2011freeefile If your business is organized as a corporation or partnership, only the corporation or partnership can elect to amortize its start-up or organizational costs. Www irs gov 2011freeefile A shareholder or partner cannot make this election. Www irs gov 2011freeefile You, as a shareholder or partner, cannot amortize any costs you incur in setting up your corporation or partnership. Www irs gov 2011freeefile Only the corporation or partnership can amortize these costs. Www irs gov 2011freeefile However, you, as an individual, can elect to amortize costs you incur to investigate an interest in an existing partnership. Www irs gov 2011freeefile These costs qualify as business start-up costs if you acquire the partnership interest. Www irs gov 2011freeefile Start-up costs election statement. Www irs gov 2011freeefile   If you elect to amortize your start-up costs, attach a separate statement (if required) that contains the following information. Www irs gov 2011freeefile A description of the business to which the start-up costs relate. Www irs gov 2011freeefile A description of each start-up cost incurred. Www irs gov 2011freeefile The month your active business began (or was acquired). Www irs gov 2011freeefile The number of months in your amortization period (which is generally 180 months). Www irs gov 2011freeefile Filing the statement early. Www irs gov 2011freeefile   You can elect to amortize your start-up costs by filing the statement with a return for any tax year before the year your active business begins. Www irs gov 2011freeefile If you file the statement early, the election becomes effective in the month of the tax year your active business begins. Www irs gov 2011freeefile Revised statement. Www irs gov 2011freeefile   You can file a revised statement to include any start-up costs not included in your original statement. Www irs gov 2011freeefile However, you cannot include on the revised statement any cost you previously treated on your return as a cost other than a start-up cost. Www irs gov 2011freeefile You can file the revised statement with a return filed after the return on which you elected to amortize your start-up costs. Www irs gov 2011freeefile Organizational costs election statement. Www irs gov 2011freeefile   If you elect to amortize your corporation's or partnership's organizational costs, attach a separate statement (if required) that contains the following information. Www irs gov 2011freeefile A description of each cost. Www irs gov 2011freeefile The amount of each cost. Www irs gov 2011freeefile The date each cost was incurred. Www irs gov 2011freeefile The month your corporation or partnership began active business (or acquired the business). Www irs gov 2011freeefile The number of months in your amortization period (which is generally 180 months). Www irs gov 2011freeefile Partnerships. Www irs gov 2011freeefile   The statement prepared for a cash basis partnership must also indicate the amount paid before the end of the year for each cost. Www irs gov 2011freeefile   You do not need to separately list any partnership organizational cost that is less than $10. Www irs gov 2011freeefile Instead, you can list the total amount of these costs with the dates the first and last costs were incurred. Www irs gov 2011freeefile   After a partnership makes the election to amortize organizational costs, it can later file an amended return to include additional organizational costs not included in the partnership's original return and statement. Www irs gov 2011freeefile Getting a Lease If you get a lease for business property, you may recover the cost of acquiring the lease by amortizing it over the term of the lease. Www irs gov 2011freeefile The term of the lease for amortization purposes generally includes all renewal options (and any other period for which you and the lessor reasonably expect the lease to be renewed). Www irs gov 2011freeefile However, renewal periods are not included if 75% or more of the cost of acquiring the lease is for the term of the lease remaining on the acquisition date (not including any period for which you may choose to renew, extend, or continue the lease). Www irs gov 2011freeefile For more information on the costs of getting a lease, see Cost of Getting a Lease in  chapter 3. Www irs gov 2011freeefile How to amortize. Www irs gov 2011freeefile   Enter your deduction in Part VI of Form 4562 if you are deducting amortization that begins during the current year, or on the appropriate line of your tax return if you are not otherwise required to file Form 4562. Www irs gov 2011freeefile Section 197 Intangibles Generally, you may amortize the capitalized costs of “section 197 intangibles” (defined later) ratably over a 15-year period. Www irs gov 2011freeefile You must amortize these costs if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income. Www irs gov 2011freeefile You may not be able to amortize section 197 intangibles acquired in a transaction that did not result in a significant change in ownership or use. Www irs gov 2011freeefile See Anti-Churning Rules, later. Www irs gov 2011freeefile Your amortization deduction each year is the applicable part of the intangible's adjusted basis (for purposes of determining gain), figured by amortizing it ratably over 15 years (180 months). Www irs gov 2011freeefile The 15-year period begins with the later of: The month the intangible is acquired, or The month the trade or business or activity engaged in for the production of income begins. Www irs gov 2011freeefile You cannot deduct amortization for the month you dispose of the intangible. Www irs gov 2011freeefile If you pay or incur an amount that increases the basis of an amortizable section 197 intangible after the 15-year period begins, amortize it over the remainder of the 15-year period beginning with the month the basis increase occurs. Www irs gov 2011freeefile You are not allowed any other depreciation or amortization deduction for an amortizable section 197 intangible. Www irs gov 2011freeefile Tax-exempt use property subject to a lease. Www irs gov 2011freeefile   The amortization period for any section 197 intangible leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership), shall not be less than 125 percent of the lease term. Www irs gov 2011freeefile Cost attributable to other property. Www irs gov 2011freeefile   The rules for section 197 intangibles do not apply to any amount that is included in determining the cost of property that is not a section 197 intangible. Www irs gov 2011freeefile For example, if the cost of computer software is not separately stated from the cost of hardware or other tangible property and you consistently treat it as part of the cost of the hardware or other tangible property, these rules do not apply. Www irs gov 2011freeefile Similarly, none of the cost of acquiring real property held for the production of rental income is considered the cost of goodwill, going concern value, or any other section 197 intangible. Www irs gov 2011freeefile Section 197 Intangibles Defined The following assets are section 197 intangibles and must be amortized over 180 months: Goodwill; Going concern value; Workforce in place; Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers; A patent, copyright, formula, process, design, pattern, know-how, format, or similar item; A customer-based intangible; A supplier-based intangible; Any item similar to items (3) through (7); A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals); A covenant not to compete entered into in connection with the acquisition of an interest in a trade or business; Any franchise, trademark, or trade name; and A contract for the use of, or a term interest in, any item in this list. Www irs gov 2011freeefile You cannot amortize any of the intangibles listed in items (1) through (8) that you created rather than acquired unless you created them in acquiring assets that make up a trade or business or a substantial part of a trade or business. Www irs gov 2011freeefile Goodwill. Www irs gov 2011freeefile   This is the value of a trade or business based on expected continued customer patronage due to its name, reputation, or any other factor. Www irs gov 2011freeefile Going concern value. Www irs gov 2011freeefile   This is the additional value of a trade or business that attaches to property because the property is an integral part of an ongoing business activity. Www irs gov 2011freeefile It includes value based on the ability of a business to continue to function and generate income even though there is a change in ownership (but does not include any other section 197 intangible). Www irs gov 2011freeefile It also includes value based on the immediate use or availability of an acquired trade or business, such as the use of earnings during any period in which the business would not otherwise be available or operational. Www irs gov 2011freeefile Workforce in place, etc. Www irs gov 2011freeefile   This includes the composition of a workforce (for example, its experience, education, or training). Www irs gov 2011freeefile It also includes the terms and conditions of employment, whether contractual or otherwise, and any other value placed on employees or any of their attributes. Www irs gov 2011freeefile   For example, you must amortize the part of the purchase price of a business that is for the existence of a highly skilled workforce. Www irs gov 2011freeefile Also, you must amortize the cost of acquiring an existing employment contract or relationship with employees or consultants. Www irs gov 2011freeefile Business books and records, etc. Www irs gov 2011freeefile   This includes the intangible value of technical manuals, training manuals or programs, data files, and accounting or inventory control systems. Www irs gov 2011freeefile It also includes the cost of customer lists, subscription lists, insurance expirations, patient or client files, and lists of newspaper, magazine, radio, and television advertisers. Www irs gov 2011freeefile Patents, copyrights, etc. Www irs gov 2011freeefile   This includes package design, computer software, and any interest in a film, sound recording, videotape, book, or other similar property, except as discussed later under Assets That Are Not Section 197 Intangibles . Www irs gov 2011freeefile Customer-based intangible. Www irs gov 2011freeefile   This is the composition of market, market share, and any other value resulting from the future provision of goods or services because of relationships with customers in the ordinary course of business. Www irs gov 2011freeefile For example, you must amortize the part of the purchase price of a business that is for the existence of the following intangibles. Www irs gov 2011freeefile A customer base. Www irs gov 2011freeefile A circulation base. Www irs gov 2011freeefile An undeveloped market or market growth. Www irs gov 2011freeefile Insurance in force. Www irs gov 2011freeefile A mortgage servicing contract. Www irs gov 2011freeefile An investment management contract. Www irs gov 2011freeefile Any other relationship with customers involving the future provision of goods or services. Www irs gov 2011freeefile   Accounts receivable or other similar rights to income for goods or services provided to customers before the acquisition of a trade or business are not section 197 intangibles. Www irs gov 2011freeefile Supplier-based intangible. Www irs gov 2011freeefile   A supplier-based intangible is the value resulting from the future acquisitions, (through contract or other relationships with suppliers in the ordinary course of business) of goods or services that you will sell or use. Www irs gov 2011freeefile The amount you pay or incur for supplier-based intangibles includes, for example, any portion of the purchase price of an acquired trade or business that is attributable to the existence of a favorable relationship with persons providing distribution services (such as a favorable shelf or display space or a retail outlet), or the existence of favorable supply contracts. Www irs gov 2011freeefile Do not include any amount required to be paid for the goods or services to honor the terms of the agreement or other relationship. Www irs gov 2011freeefile Also, see Assets That Are Not Section 197 Intangibles below. Www irs gov 2011freeefile Government-granted license, permit, etc. Www irs gov 2011freeefile   This is any right granted by a governmental unit or an agency or instrumentality of a governmental unit. Www irs gov 2011freeefile For example, you must amortize the capitalized costs of acquiring (including issuing or renewing) a liquor license, a taxicab medallion or license, or a television or radio broadcasting license. Www irs gov 2011freeefile Covenant not to compete. Www irs gov 2011freeefile   Section 197 intangibles include a covenant not to compete (or similar arrangement) entered into in connection with the acquisition of an interest in a trade or business, or a substantial portion of a trade or business. Www irs gov 2011freeefile An interest in a trade or business includes an interest in a partnership or a corporation engaged in a trade or business. Www irs gov 2011freeefile   An arrangement that requires the former owner to perform services (or to provide property or the use of property) is not similar to a covenant not to compete to the extent the amount paid under the arrangement represents reasonable compensation for those services or for that property or its use. Www irs gov 2011freeefile Franchise, trademark, or trade name. Www irs gov 2011freeefile   A franchise, trademark, or trade name is a section 197 intangible. Www irs gov 2011freeefile You must amortize its purchase or renewal costs, other than certain contingent payments that you can deduct currently. Www irs gov 2011freeefile For information on currently deductible contingent payments, see chapter 11. Www irs gov 2011freeefile Professional sports franchise. Www irs gov 2011freeefile   A franchise engaged in professional sports and any intangible assets acquired in connection with acquiring the franchise (including player contracts) is a section 197 intangible amortizable over a 15-year period. Www irs gov 2011freeefile Contract for the use of, or a term interest in, a section 197 intangible. Www irs gov 2011freeefile   Section 197 intangibles include any right under a license, contract, or other arrangement providing for the use of any section 197 intangible. Www irs gov 2011freeefile It also includes any term interest in any section 197 intangible, whether the interest is outright or in trust. Www irs gov 2011freeefile Assets That Are Not Section 197 Intangibles The following assets are not section 197 intangibles. Www irs gov 2011freeefile Any interest in a corporation, partnership, trust, or estate. Www irs gov 2011freeefile Any interest under an existing futures contract, foreign currency contract, notional principal contract, interest rate swap, or similar financial contract. Www irs gov 2011freeefile Any interest in land. Www irs gov 2011freeefile Most computer software. Www irs gov 2011freeefile (See Computer software , later. Www irs gov 2011freeefile ) Any of the following assets not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Www irs gov 2011freeefile An interest in a film, sound recording, video tape, book, or similar property. Www irs gov 2011freeefile A right to receive tangible property or services under a contract or from a governmental agency. Www irs gov 2011freeefile An interest in a patent or copyright. Www irs gov 2011freeefile Certain rights that have a fixed duration or amount. Www irs gov 2011freeefile (See Rights of fixed duration or amount , later. Www irs gov 2011freeefile ) An interest under either of the following. Www irs gov 2011freeefile An existing lease or sublease of tangible property. Www irs gov 2011freeefile A debt that was in existence when the interest was acquired. Www irs gov 2011freeefile A right to service residential mortgages unless the right is acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Www irs gov 2011freeefile Certain transaction costs incurred by parties to a corporate organization or reorganization in which any part of a gain or loss is not recognized. Www irs gov 2011freeefile Intangible property that is not amortizable under the rules for section 197 intangibles can be depreciated if it meets certain requirements. Www irs gov 2011freeefile You generally must use the straight line method over its useful life. Www irs gov 2011freeefile For certain intangibles, the depreciation period is specified in the law and regulations. Www irs gov 2011freeefile For example, the depreciation period for computer software that is not a section 197 intangible is generally 36 months. Www irs gov 2011freeefile For more information on depreciating intangible property, see Intangible Property under What Method Can You Use To Depreciate Your Property? in chapter 1 of Publication 946. Www irs gov 2011freeefile Computer software. Www irs gov 2011freeefile   Section 197 intangibles do not include the following types of computer software. Www irs gov 2011freeefile Software that meets all the following requirements. Www irs gov 2011freeefile It is, or has been, readily available for purchase by the general public. Www irs gov 2011freeefile It is subject to a nonexclusive license. Www irs gov 2011freeefile It has not been substantially modified. Www irs gov 2011freeefile This requirement is considered met if the cost of all modifications is not more than the greater of 25% of the price of the publicly available unmodified software or $2,000. Www irs gov 2011freeefile Software that is not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Www irs gov 2011freeefile Computer software defined. Www irs gov 2011freeefile   Computer software includes all programs designed to cause a computer to perform a desired function. Www irs gov 2011freeefile It also includes any database or similar item that is in the public domain and is incidental to the operation of qualifying software. Www irs gov 2011freeefile Rights of fixed duration or amount. Www irs gov 2011freeefile   Section 197 intangibles do not include any right under a contract or from a governmental agency if the right is acquired in the ordinary course of a trade or business (or in an activity engaged in for the production of income) but not as part of a purchase of a trade or business and either: Has a fixed life of less than 15 years, or Is of a fixed amount that, except for the rules for section 197 intangibles, would be recovered under a method similar to the unit-of-production method of cost recovery. Www irs gov 2011freeefile However, this does not apply to the following intangibles. Www irs gov 2011freeefile Goodwill. Www irs gov 2011freeefile Going concern value. Www irs gov 2011freeefile A covenant not to compete. Www irs gov 2011freeefile A franchise, trademark, or trade name. Www irs gov 2011freeefile A customer-related information base, customer-based intangible, or similar item. Www irs gov 2011freeefile Safe Harbor for Creative Property Costs If you are engaged in the trade or business of film production, you may be able to amortize the creative property costs for properties not set for production within 3 years of the first capitalized transaction. Www irs gov 2011freeefile You may amortize these costs ratably over a 15-year period beginning on the first day of the second half of the tax year in which you properly write off the costs for financial accounting purposes. Www irs gov 2011freeefile If, during the 15-year period, you dispose of the creative property rights, you must continue to amortize the costs over the remainder of the 15-year period. Www irs gov 2011freeefile Creative property costs include costs paid or incurred to acquire and develop screenplays, scripts, story outlines, motion picture production rights to books and plays, and other similar properties for purposes of potential future film development, production, and exploitation. Www irs gov 2011freeefile Amortize these costs using the rules of Revenue Procedure 2004-36. Www irs gov 2011freeefile For more information, see Revenue Procedure 2004-36, 2004-24 I. Www irs gov 2011freeefile R. Www irs gov 2011freeefile B. Www irs gov 2011freeefile 1063, available at  www. Www irs gov 2011freeefile irs. Www irs gov 2011freeefile gov/irb/2004-24_IRB/ar16. Www irs gov 2011freeefile html. Www irs gov 2011freeefile A change in the treatment of creative property costs is a change in method of accounting. Www irs gov 2011freeefile Anti-Churning Rules Anti-churning rules prevent you from amortizing most section 197 intangibles if the transaction in which you acquired them did not result in a significant change in ownership or use. Www irs gov 2011freeefile These rules apply to goodwill and going concern value, and to any other section 197 intangible that is not otherwise depreciable or amortizable. Www irs gov 2011freeefile Under the anti-churning rules, you cannot use 15-year amortization for the intangible if any of the following conditions apply. Www irs gov 2011freeefile You or a related person (defined later) held or used the intangible at any time from July 25, 1991, through August 10, 1993. Www irs gov 2011freeefile You acquired the intangible from a person who held it at any time during the period in (1) and, as part of the transaction, the user did not change. Www irs gov 2011freeefile You granted the right to use the intangible to a person (or a person related to that person) who held or used it at any time during the period in (1). Www irs gov 2011freeefile This applies only if the transaction in which you granted the right and the transaction in which you acquired the intangible are part of a series of related transactions. Www irs gov 2011freeefile See Related person , later, for more information. Www irs gov 2011freeefile Exceptions. Www irs gov 2011freeefile   The anti-churning rules do not apply in the following situations. Www irs gov 2011freeefile You acquired the intangible from a decedent and its basis was stepped up to its fair market value. Www irs gov 2011freeefile The intangible was amortizable as a section 197 intangible by the seller or transferor you acquired it from. Www irs gov 2011freeefile This exception does not apply if the transaction in which you acquired the intangible and the transaction in which the seller or transferor acquired it are part of a series of related transactions. Www irs gov 2011freeefile The gain-recognition exception, discussed later, applies. Www irs gov 2011freeefile Related person. Www irs gov 2011freeefile   For purposes of the anti-churning rules, the following are related persons. Www irs gov 2011freeefile An individual and his or her brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Www irs gov 2011freeefile ), and lineal descendants (children, grandchildren, etc. Www irs gov 2011freeefile ). Www irs gov 2011freeefile A corporation and an individual who owns, directly or indirectly, more than 20% of the value of the corporation's outstanding stock. Www irs gov 2011freeefile Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 20%” is substituted for “at least 80%” in that definition and the determination is made without regard to subsections (a)(4) and (e)(3)(C) of section 1563. Www irs gov 2011freeefile (For an exception, see section 1. Www irs gov 2011freeefile 197-2(h)(6)(iv) of the regulations. Www irs gov 2011freeefile ) A trust fiduciary and a corporation if more than 20% of the value of the corporation's outstanding stock is owned, directly or indirectly, by or for the trust or grantor of the trust. Www irs gov 2011freeefile The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Www irs gov 2011freeefile The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. Www irs gov 2011freeefile The executor and beneficiary of an estate. Www irs gov 2011freeefile A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization (or whose family members control it). Www irs gov 2011freeefile A corporation and a partnership if the same persons own more than 20% of the value of the outstanding stock of the corporation and more than 20% of the capital or profits interest in the partnership. Www irs gov 2011freeefile Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 20% of the value of the outstanding stock of each corporation. Www irs gov 2011freeefile Two partnerships if the same persons own, directly or indirectly, more than 20% of the capital or profits interests in both partnerships. Www irs gov 2011freeefile A partnership and a person who owns, directly or indirectly, more than 20% of the capital or profits interests in the partnership. Www irs gov 2011freeefile Two persons who are engaged in trades or businesses under common control (as described in section 41(f)(1) of the Internal Revenue Code). Www irs gov 2011freeefile When to determine relationship. Www irs gov 2011freeefile   Persons are treated as related if the relationship existed at the following time. Www irs gov 2011freeefile In the case of a single transaction, immediately before or immediately after the transaction in which the intangible was acquired. Www irs gov 2011freeefile In the case of a series of related transactions (or a series of transactions that comprise a qualified stock purchase under section 338(d)(3) of the Internal Revenue Code), immediately before the earliest transaction or immediately after the last transaction. Www irs gov 2011freeefile Ownership of stock. Www irs gov 2011freeefile   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. Www irs gov 2011freeefile Rule 1. Www irs gov 2011freeefile   Stock directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Www irs gov 2011freeefile Rule 2. Www irs gov 2011freeefile   An individual is considered to own the stock directly or indirectly owned by or for his or her family. Www irs gov 2011freeefile Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. Www irs gov 2011freeefile Rule 3. Www irs gov 2011freeefile   An individual owning (other than by applying Rule 2) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Www irs gov 2011freeefile Rule 4. Www irs gov 2011freeefile   For purposes of applying Rule 1, 2, or 3, treat stock constructively owned by a person under Rule 1 as actually owned by that person. Www irs gov 2011freeefile Do not treat stock constructively owned by an individual under Rule 2 or 3 as owned by the individual for reapplying Rule 2 or 3 to make another person the constructive owner of the stock. Www irs gov 2011freeefile Gain-recognition exception. Www irs gov 2011freeefile   This exception to the anti-churning rules applies if the person you acquired the intangible from (the transferor) meets both of the following requirements. Www irs gov 2011freeefile That person would not be related to you (as described under Related person , earlier) if the 20% test for ownership of stock and partnership interests were replaced by a 50% test. Www irs gov 2011freeefile That person chose to recognize gain on the disposition of the intangible and pay income tax on the gain at the highest tax rate. Www irs gov 2011freeefile See chapter 2 in Publication 544 for information on making this choice. Www irs gov 2011freeefile   If this exception applies, the anti-churning rules apply only to the amount of your adjusted basis in the intangible that is more than the gain recognized by the transferor. Www irs gov 2011freeefile Notification. Www irs gov 2011freeefile   If the person you acquired the intangible from chooses to recognize gain under the rules for this exception, that person must notify you in writing by the due date of the return on which the choice is made. Www irs gov 2011freeefile Anti-abuse rule. Www irs gov 2011freeefile   You cannot amortize any section 197 intangible acquired in a transaction for which the principal purpose was either of the following. Www irs gov 2011freeefile To avoid the requirement that the intangible be acquired after August 10, 1993. Www irs gov 2011freeefile To avoid any of the anti-churning rules. Www irs gov 2011freeefile More information. Www irs gov 2011freeefile   For more information about the anti-churning rules, including additional rules for partnerships, see Regulations section 1. Www irs gov 2011freeefile 197-2(h). Www irs gov 2011freeefile Incorrect Amount of Amortization Deducted If you later discover that you deducted an incorrect amount for amortization for a section 197 intangible in any year, you may be able to make a correction for that year by filing an amended return. Www irs gov 2011freeefile See Amended Return , next. Www irs gov 2011freeefile If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amortization. Www irs gov 2011freeefile See Changing Your Accounting Method , later. Www irs gov 2011freeefile Amended Return If you deducted an incorrect amount for amortization, you can file an amended return to correct the following. Www irs gov 2011freeefile A mathematical error made in any year. Www irs gov 2011freeefile A posting error made in any year. Www irs gov 2011freeefile An amortization deduction for a section 197 intangible for which you have not adopted a method of accounting. Www irs gov 2011freeefile When to file. Www irs gov 2011freeefile   If an amended return is allowed, you must file it by the later of the following dates. Www irs gov 2011freeefile 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Www irs gov 2011freeefile (A return filed early is considered filed on the due date. Www irs gov 2011freeefile ) 2 years from the time you paid your tax for that year. Www irs gov 2011freeefile Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. Www irs gov 2011freeefile File Form 3115, Application for Change in Accounting Method, to request a change to a permissible method of accounting for amortization. Www irs gov 2011freeefile The following are examples of a change in method of accounting for amortization. Www irs gov 2011freeefile A change in the amortization method, period of recovery, or convention of an amortizable asset. Www irs gov 2011freeefile A change in the accounting for amortizable assets from a single asset account to a multiple asset account (pooling), or vice versa. Www irs gov 2011freeefile A change in the accounting for amortizable assets from one type of multiple asset account to a different type of multiple asset account. Www irs gov 2011freeefile Changes in amortization that are not a change in method of accounting include the following: A change in computing amortization in the tax year in which your use of the asset changes. Www irs gov 2011freeefile An adjustment in the useful life of an amortizable asset. Www irs gov 2011freeefile Generally, the making of a late amortization election or the revocation of a timely valid amortization election. Www irs gov 2011freeefile Any change in the placed-in-service date of an amortizable asset. Www irs gov 2011freeefile See Regulations section 1. Www irs gov 2011freeefile 446-1(e)(2)(ii)(a) for more information and examples. Www irs gov 2011freeefile Automatic approval. Www irs gov 2011freeefile   In some instances, you may be able to get automatic approval from the IRS to change your method of accounting for amortization. Www irs gov 2011freeefile For a list of automatic accounting method changes, see the Instructions for Form 3115. Www irs gov 2011freeefile Also see the Instructions for Form 3115 for more information on getting approval, automatic approval procedures, and a list of exceptions to the automatic approval process. Www irs gov 2011freeefile For more information, see Revenue Procedure 2006-12, as modified by Revenue Procedure 2006-37, and Revenue Procedure 2008-52, as amplified, clarified, and modified by Revenue Procedure 2009-39, as clarified and modified by Revenue Procedure 2011-14, as modified and amplified by Revenue Procedure 2011-22, as modified by Revenue Procedure 2012-39, or any successor. Www irs gov 2011freeefile See Revenue Procedure 2006-12, 2006-3 I. Www irs gov 2011freeefile R. Www irs gov 2011freeefile B. Www irs gov 2011freeefile 310, available at  www. Www irs gov 2011freeefile irs. Www irs gov 2011freeefile gov/irb/2006-03_IRB/ar14. Www irs gov 2011freeefile html. Www irs gov 2011freeefile  See Revenue Procedure 2006-37, 2006-38 I. Www irs gov 2011freeefile R. Www irs gov 2011freeefile B. Www irs gov 2011freeefile 499, available at  www. Www irs gov 2011freeefile irs. Www irs gov 2011freeefile gov/irb/2006-38_IRB/ar10. Www irs gov 2011freeefile html. Www irs gov 2011freeefile  See Revenue Procedure 2008-52, 2008-36 I. Www irs gov 2011freeefile R. Www irs gov 2011freeefile B. Www irs gov 2011freeefile 587, available at www. Www irs gov 2011freeefile irs. Www irs gov 2011freeefile gov/irb/2008-36_IRB/ar09. Www irs gov 2011freeefile html. Www irs gov 2011freeefile  See Revenue Procedure 2009-39, 2009-38 I. Www irs gov 2011freeefile R. Www irs gov 2011freeefile B. Www irs gov 2011freeefile 371, available at  www. Www irs gov 2011freeefile irs. Www irs gov 2011freeefile gov/irb/2009-38_IRB/ar08. Www irs gov 2011freeefile html. Www irs gov 2011freeefile  See Revenue Procedure 2011-14, 2011-4 I. Www irs gov 2011freeefile R. Www irs gov 2011freeefile B. Www irs gov 2011freeefile 330, available at  www. Www irs gov 2011freeefile irs. Www irs gov 2011freeefile gov/irb/2011-04_IRB/ar08. Www irs gov 2011freeefile html. Www irs gov 2011freeefile  See Revenue Procedure 2011-22, 2011-18 I. Www irs gov 2011freeefile R. Www irs gov 2011freeefile B. Www irs gov 2011freeefile 737, available at  www. Www irs gov 2011freeefile irs. Www irs gov 2011freeefile gov/irb/2011-18_IRB/ar08. Www irs gov 2011freeefile html. Www irs gov 2011freeefile Also, see Revenue Procedure 2012-39, 2012-41 I. Www irs gov 2011freeefile R. Www irs gov 2011freeefile B. Www irs gov 2011freeefile 470 available at www. Www irs gov 2011freeefile irs. Www irs gov 2011freeefile gov/irb/2012-41_IRB/index. Www irs gov 2011freeefile html. Www irs gov 2011freeefile Disposition of Section 197 Intangibles A section 197 intangible is treated as depreciable property used in your trade or business. Www irs gov 2011freeefile If you held the intangible for more than 1 year, any gain on its disposition, up to the amount of allowable amortization, is ordinary income (section 1245 gain). Www irs gov 2011freeefile If multiple section 197 intangibles are disposed of in a single transaction or a series of related transactions, treat all of the section 197 intangibles as if they were a single asset for purposes of determining the amount of gain that is ordinary income. Www irs gov 2011freeefile Any remaining gain, or any loss, is a section 1231 gain or loss. Www irs gov 2011freeefile If you held the intangible 1 year or less, any gain or loss on its disposition is an ordinary gain or loss. Www irs gov 2011freeefile For more information on ordinary or capital gain or loss on business property, see chapter 3 in Publication 544. Www irs gov 2011freeefile Nondeductible loss. Www irs gov 2011freeefile   You cannot deduct any loss on the disposition or worthlessness of a section 197 intangible that you acquired in the same transaction (or series of related transactions) as other section 197 intangibles you still have. Www irs gov 2011freeefile Instead, increase the adjusted basis of each remaining amortizable section 197 intangible by a proportionate part of the nondeductible loss. Www irs gov 2011freeefile Figure the increase by multiplying the nondeductible loss on the disposition of the intangible by the following fraction. Www irs gov 2011freeefile The numerator is the adjusted basis of each remaining intangible on the date of the disposition. Www irs gov 2011freeefile The denominator is the total adjusted bases of all remaining amortizable section 197 intangibles on the date of the disposition. Www irs gov 2011freeefile Covenant not to compete. Www irs gov 2011freeefile   A covenant not to compete, or similar arrangement, is not considered disposed of or worthless before you dispose of your entire interest in the trade or business for which you entered into the covenant. Www irs gov 2011freeefile Nonrecognition transfers. Www irs gov 2011freeefile   If you acquire a section 197 intangible in a nonrecognition transfer, you are treated as the transferor with respect to the part of your adjusted basis in the intangible that is not more than the transferor's adjusted basis. Www irs gov 2011freeefile You amortize this part of the adjusted basis over the intangible's remaining amortization period in the hands of the transferor. Www irs gov 2011freeefile Nonrecognition transfers include transfers to a corporation, partnership contributions and distributions, like-kind exchanges, and involuntary conversions. Www irs gov 2011freeefile   In a like-kind exchange or involuntary conversion of a section 197 intangible, you must continue to amortize the part of your adjusted basis in the acquired intangible that is not more than your adjusted basis in the exchanged or converted intangible over the remaining amortization period of the exchanged or converted intangible. Www irs gov 2011freeefile Amortize over a new 15-year period the part of your adjusted basis in the acquired intangible that is more than your adjusted basis in the exchanged or converted intangible. Www irs gov 2011freeefile Example. Www irs gov 2011freeefile You own a section 197 intangible you have amortized for 4 full years. Www irs gov 2011freeefile It has a remaining unamortized basis of $30,000. Www irs gov 2011freeefile You exchange the asset plus $10,000 for a like-kind section 197 intangible. Www irs gov 2011freeefile The nonrecognition provisions of like-kind exchanges apply. Www irs gov 2011freeefile You amortize $30,000 of the $40,000 adjusted basis of the acquired intangible over the 11 years remaining in the original 15-year amortization period for the transferred asset. Www irs gov 2011freeefile You amortize the other $10,000 of adjusted basis over a new 15-year period. Www irs gov 2011freeefile For more information, see Regulations section 1. Www irs gov 2011freeefile 197-2(g). Www irs gov 2011freeefile Reforestation Costs You can elect to deduct a limited amount of reforestation costs paid or incurred during the tax year. Www irs gov 2011freeefile See Reforestation Costs in chapter 7. Www irs gov 2011freeefile You can elect to amortize the qualifying costs that are not deducted currently over an 84-month period. Www irs gov 2011freeefile There is no limit on the amount of your amortization deduction for reforestation costs paid or incurred during the tax year. Www irs gov 2011freeefile The election to amortize reforestation costs incurred by a partnership, S corporation, or estate must be made by the partnership, corporation, or estate. Www irs gov 2011freeefile A partner, shareholder, or beneficiary cannot make that election. Www irs gov 2011freeefile A partner's or shareholder's share of amortizable costs is figured under the general rules for allocating items of income, loss, deduction, etc. Www irs gov 2011freeefile , of a partnership or S corporation. Www irs gov 2011freeefile The amortizable costs of an estate are divided between the estate and the income beneficiary based on the income of the estate allocable to each. Www irs gov 2011freeefile Qualifying costs. Www irs gov 2011freeefile   Reforestation costs are the direct costs of planting or seeding for forestation or reforestation. Www irs gov 2011freeefile Qualifying costs include only those costs you must capitalize and include in the adjusted basis of the property. Www irs gov 2011freeefile They include costs for the following items. Www irs gov 2011freeefile Site preparation. Www irs gov 2011freeefile Seeds or seedlings. Www irs gov 2011freeefile Labor. Www irs gov 2011freeefile Tools. Www irs gov 2011freeefile Depreciation on equipment used in planting and seeding. Www irs gov 2011freeefile Qualifying costs do not include costs for which the government reimburses you under a cost-sharing program, unless you include the reimbursement in your income. Www irs gov 2011freeefile Qualified timber property. Www irs gov 2011freeefile   Qualified timber property is property that contains trees in significant commercial quantities. Www irs gov 2011freeefile It can be a woodlot or other site that you own or lease. Www irs gov 2011freeefile The property qualifies only if it meets all of the following requirements. Www irs gov 2011freeefile It is located in the United States. Www irs gov 2011freeefile It is held for the growing and cutting of timber you will either use in, or sell for use in, the commercial production of timber products. Www irs gov 2011freeefile It consists of at least one acre planted with tree seedlings in the manner normally used in forestation or reforestation. Www irs gov 2011freeefile Qualified timber property does not include property on which you have planted shelter belts or ornamental trees, such as Christmas trees. Www irs gov 2011freeefile Amortization period. Www irs gov 2011freeefile   The 84-month amortization period starts on the first day of the first month of the second half of the tax year you incur the costs (July 1 for a calendar year taxpayer), regardless of the month you actually incur the costs. Www irs gov 2011freeefile You can claim amortization deductions for no more than 6 months of the first and last (eighth) tax years of the period. Www irs gov 2011freeefile Life tenant and remainderman. Www irs gov 2011freeefile   If one person holds the property for life with the remainder going to another person, the life tenant is entitled to the full amortization for qualifying reforestation costs incurred by the life tenant. Www irs gov 2011freeefile Any remainder interest in the property is ignored for amortization purposes. Www irs gov 2011freeefile Recapture. Www irs gov 2011freeefile   If you dispose of qualified timber property within 10 years after the tax year you incur qualifying reforestation expenses, report any gain as ordinary income up to the amortization you took. Www irs gov 2011freeefile See chapter 3 of Publication 544 for more information. Www irs gov 2011freeefile How to make the election. Www irs gov 2011freeefile   To elect to amortize qualifying reforestation costs, complete Part VI of Form 4562 and attach a statement that contains the following information. Www irs gov 2011freeefile A description of the costs and the dates you incurred them. Www irs gov 2011freeefile A description of the type of timber being grown and the purpose for which it is grown. Www irs gov 2011freeefile Attach a separate statement for each property for which you amortize reforestation costs. Www irs gov 2011freeefile   Generally, you must make the election on a timely filed return (including extensions) for the tax year in which you incurred the costs. Www irs gov 2011freeefile However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Www irs gov 2011freeefile Attach Form 4562 and the statement to the amended return and write “Filed pursuant to section 301. Www irs gov 2011freeefile 9100-2” on Form 4562. Www irs gov 2011freeefile File the amended return at the same address you filed the original return. Www irs gov 2011freeefile Revoking the election. Www irs gov 2011freeefile   You must get IRS approval to revoke your election to amortize qualifying reforestation costs. Www irs gov 2011freeefile Your application to revoke the election must include your name, address, the years for which your election was in effect, and your reason for revoking it. Www irs gov 2011freeefile Please provide your daytime telephone number (optional), in case we need to contact you. Www irs gov 2011freeefile You, or your duly authorized representative, must sign the application and file it at least 90 days before the due date (without extensions) for filing your income tax return for the first tax year for which your election is to end. Www irs gov 2011freeefile    Send the application to: Internal Revenue Service Associate Chief Counsel Passthroughs and Special Industries CC:PSI:6 1111 Constitution Ave. Www irs gov 2011freeefile NW, IR-5300 Washington, DC 20224 Geological and Geophysical Costs You can amortize the cost of geological and geophysical expenses paid or incurred in connection with oil and gas exploration or development within the United States. Www irs gov 2011freeefile These costs can be amortized ratably over a 24-month period beginning on the mid-point of the tax year in which the expenses were paid or incurred. Www irs gov 2011freeefile For major integrated oil companies (as defined in section 167(h)(5)), these costs must be amortized ratably over a 5-year period for costs paid or incurred after May 17, 2006 (a 7-year period for costs paid or incurred after December 19, 2007). Www irs gov 2011freeefile If you retire or abandon the property during the amortization period, no amortization deduction is allowed in the year of retirement or abandonment. Www irs gov 2011freeefile Pollution Control Facilities You can elect to amortize the cost of a certified pollution control facility over 60 months. Www irs gov 2011freeefile However, see Atmospheric pollution control facilities for an exception. Www irs gov 2011freeefile The cost of a pollution control facility that is not eligible for amortization can be depreciated under the regular rules for depreciation. Www irs gov 2011freeefile Also, you can claim a special depreciation allowance on a certified pollution control facility that is qualified property even if you elect to amortize its cost. Www irs gov 2011freeefile You must reduce its cost (amortizable basis) by the amount of any special allowance you claim. Www irs gov 2011freeefile See chapter 3 of Publication 946. Www irs gov 2011freeefile A certified pollution control facility is a new identifiable treatment facility used in connection with a plant or other property in operation before 1976, to reduce or control water or atmospheric pollution or contamination. Www irs gov 2011freeefile The facility must do so by removing, changing, disposing, storing, or preventing the creation or emission of pollutants, contaminants, wastes, or heat. Www irs gov 2011freeefile The facility must be certified by state and federal certifying authorities. Www irs gov 2011freeefile The facility must not significantly increase the output or capacity, extend the useful life, or reduce the total operating costs of the plant or other property. Www irs gov 2011freeefile Also, it must not significantly change the nature of the manufacturing or production process or facility. Www irs gov 2011freeefile The federal certifying authority will not certify your property to the extent it appears you will recover (over the property's useful life) all or part of its cost from the profit based on its operation (such as through sales of recovered wastes). Www irs gov 2011freeefile The federal certifying authority will describe the nature of the potential cost recovery. Www irs gov 2011freeefile You must then reduce the amortizable basis of the facility by this potential recovery. Www irs gov 2011freeefile New identifiable treatment facility. Www irs gov 2011freeefile   A new identifiable treatment facility is tangible depreciable property that is identifiable as a treatment facility. Www irs gov 2011freeefile It does not include a building and its structural components unless the building is exclusively a treatment facility. Www irs gov 2011freeefile Atmospheric pollution control facilities. Www irs gov 2011freeefile   Certain atmospheric pollution control facilities can be amortized over 84 months. Www irs gov 2011freeefile To qualify, the following must apply. Www irs gov 2011freeefile The facility must be acquired and placed in service after April 11, 2005. Www irs gov 2011freeefile If acquired, the original use must begin with you after April 11, 2005. Www irs gov 2011freeefile The facility must be used in connection with an electric generation plant or other property placed in operation after December 31, 1975, that is primarily coal fired. Www irs gov 2011freeefile If you construct, reconstruct, or erect the facility, only the basis attributable to the construction, reconstruction, or erection completed after April 11, 2005, qualifies. Www irs gov 2011freeefile Basis reduction for corporations. Www irs gov 2011freeefile   A corporation must reduce the amortizable basis of a pollution control facility by 20% before figuring the amortization deduction. Www irs gov 2011freeefile More information. Www irs gov 2011freeefile   For more information on the amortization of pollution control facilities, see Code sections 169 and 291(c) and the related regulations. Www irs gov 2011freeefile Research and Experimental Costs You can elect to amortize your research and experimental costs, deduct them as current business expenses, or write them off over a 10-year period (see Optional write-off method below). Www irs gov 2011freeefile If you elect to amortize these costs, deduct them in equal amounts over 60 months or more. Www irs gov 2011freeefile The amortization period begins the month you first receive an economic benefit from the costs. Www irs gov 2011freeefile For a definition of “research and experimental costs” and information on deducting them as current business expenses, see chapter 7. Www irs gov 2011freeefile Optional write-off method. Www irs gov 2011freeefile   Rather than amortize these costs or deduct them as a current expense, you have the option of deducting (writing off) research and experimental costs ratably over a 10-year period beginning with the tax year in which you incurred the costs. Www irs gov 2011freeefile For more information, see Optional Write-off of Certain Tax Preferences , later, and section 59(e) of the Internal Revenue Code. Www irs gov 2011freeefile Costs you can amortize. Www irs gov 2011freeefile   You can amortize costs chargeable to a capital account (see chapter 1) if you meet both of the following requirements. Www irs gov 2011freeefile You paid or incurred the costs in your trade or business. Www irs gov 2011freeefile You are not deducting the costs currently. Www irs gov 2011freeefile How to make the election. Www irs gov 2011freeefile   To elect to amortize research and experimental costs, complete Part VI of Form 4562 and attach it to your income tax return. Www irs gov 2011freeefile Generally, you must file the return by the due date (including extensions). Www irs gov 2011freeefile However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Www irs gov 2011freeefile Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Www irs gov 2011freeefile 9100-2” on Form 4562. Www irs gov 2011freeefile File the amended return at the same address you filed the original return. Www irs gov 2011freeefile   Your election is binding for the year it is made and for all later years unless you obtain approval from the IRS to change to a different method. Www irs gov 2011freeefile Optional Write-off of Certain Tax Preferences You can elect to amortize certain tax preference items over an optional period beginning in the tax year in which you incurred the costs. Www irs gov 2011freeefile If you make this election, there is no AMT adjustment. Www irs gov 2011freeefile The applicable costs and the optional recovery periods are as follows: Circulation costs — 3 years, Intangible drilling and development costs — 60 months, Mining exploration and development costs — 10 years, and Research and experimental costs — 10 years. Www irs gov 2011freeefile How to make the election. Www irs gov 2011freeefile   To elect to amortize qualifying costs over the optional recovery period, complete Part VI of Form 4562 and attach a statement containing the following information to your return for the tax year in which the election begins: Your name, address, and taxpayer identification number; and The type of cost and the specific amount of the cost for which you are making the election. Www irs gov 2011freeefile   Generally, the election must be made on a timely filed return (including extensions) for the tax year in which you incurred the costs. Www irs gov 2011freeefile However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Www irs gov 2011freeefile Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Www irs gov 2011freeefile 9100-2” on Form 4562. Www irs gov 2011freeefile File the amended return at the same address you filed the original return. Www irs gov 2011freeefile Revoking the election. Www irs gov 2011freeefile   You must obtain consent from the IRS to revoke your election. Www irs gov 2011freeefile Your request to revoke the election must be submitted to the IRS in the form of a letter ruling before the end of the tax year in which the optional recovery period ends. Www irs gov 2011freeefile The request must contain all of the information necessary to demonstrate the rare and unusual circumstances that would justify granting revocation. Www irs gov 2011freeefile If the request for revocation is approved, any unamortized costs are deductible in the year the revocation is effective. Www irs gov 2011freeefile Prev  Up  Next   Home   More Online Publications
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