Need help with amortization?

Question

we bought a business in 2000 and we amortized the goodwill . Now we sold the business .. are we supposed to recapture the amortiziaton when we are calculating the capital gain?

Answer 1

Since your goodwill arose from the acquisition of a business, IFRS 3 Business Combinations would apply. That means effective 31 March 2004 you're not supposed to amortize goodwill. You were to have effectively written back the accumulated amortisation a/c to goodwill and then tested goodwill for impairment in accordance with IAS 36. If you had done that, there would be no accumulated amortisation now for you to agonise over.

Here's an excerpt from IFRS 3:
Previously recognised goodwill
79. An entity shall apply this IFRS prospectively, from the beginning of the first annual period beginning on or after 31 March 2004, to goodwill acquired in a business combination for which the agreement date was before 31 March 2004, and to goodwill arising from an interest in a jointly controlled entity obtained before 31 March 2004 and accounted for by applying proportionate consolidation. Therefore, an entity shall:
(a) from the beginning of the first annual period beginning on or after 31 March 2004, discontinue amortising such goodwill;
(b) at the beginning of the first annual period beginning on or after 31 March 2004, eliminate the carrying amount of the related accumulated amortisation with a corresponding decrease in goodwill; and
(c) from the beginning of the first annual period beginning on or after 31 March 2004, test the goodwill for impairment in accordance with IAS 36.
80. If an entity previously recognised goodwill as a deduction from equity, it shall not recognise that goodwill in profit or loss when it disposes of all or part of the business to which that goodwill relates or when a cash-generating unit to which the goodwill relates becomes impaired.

Answer 2

I've read the responses and I think I beg to differ here.

For "accounting purposes" these answers make sense. For income tax purposes, they don't make as much sense.

If you purchased the business in an asset transaction, you have "inside basis" in those assets and you can amortize the goodwill and other intangibles for tax purposes over 15 years. I don't know exactly which code section this is . . . but I assure you it's there.

If you purchased the business in a stock transaction, you have "outside basis" in the stock and you may NOT amortize the goodwill for tax purposes.

When you sell the business - if you're selling assets, you would recognize an overall gain equal to the sales price (less broker costs and such) minus the net tax basis in the assets. So for depreciable property like machinery and equipment - you'll have some depreciation recapture. For the intangible assets - you would have a gain - but I can't recall if it's ordinary or capital - so I'd have to look that one up if you need me to.

But the short answer is, you can amortize goodwill for tax purposes and when you do, your basis goes down so when you sell, your gain goes up.

You absolutely want this because you get deductions in the early years to shelter your taxable income and defer the gain until the later years when you sell . . . time value of money works in your favor.

Good luck!

Answer 3

Great question.

Just to clarify: I assume that you're concerned with the U.S. income tax effects of the transaction.

First, the "bad" news: in calculating capital gain, the rules require that amortization and depreciation be recaptured (i.e. added to the tax basis) and also that the amount of the amortization and/or depreciation recaptured be taxed as ordinary income. It is this latter effect which is meant by "recapture" -- it's recapatured as ordinary income, rather than as capital gains.

Second, the "good" news (maybe): the amount of the purchase price allocated to goodwill cannot be amortized. That is, you cannot take any deduction for the amortization of goodwill. As a result, upon the sale of the business, there is no amortization available to recapture. (Note: It is advisable in purchasing a business that the amount allocated to goodwill be kept to a minimum and that amounts be allocated to, for example, customer lists, vendor lists, etc.)

Hope this helps. Good luck.

Answer 4

as long as you have quite a number of fairness on your place refinancing with a decision ARM or ARM to liberate your cash flow isn't a bad thought. Its no longer an prolonged term restoration, so what's your returned up plan if the marketplace continues to be "delicate"?

Answer 5

not if you start another one; which is what I advise all my clients to do.

even if it is 1 hour a month as a consultant!

Answer 6

your mind is the key to the answer......