Does partial-year use of property impact the amortization period for tax purposes?
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Partial-year use of property does not change the total amortization period for tax purposes, but it does affect the amount of the deduction allowed in the first and last years of the amortization period.
1. Amortization of Section 197 Intangibles
Under IRC §197, amortizable section 197 intangibles (such as goodwill, going concern value, and certain licenses, including interests in films or broadcast contracts acquired as part of a trade or business acquisition) are amortized ratably over a 15-year period beginning with the month in which the intangible is acquired, regardless of the actual useful life of the asset. The statute and regulations require that the amortization period is always 15 years (180 months), and this period is not shortened or lengthened due to the property being held for only part of a year or due to a short taxable year.
2. Partial-Year (Short Year) Rules
If the property is placed in service or disposed of during a short taxable year (a year with less than 12 months), or if the taxpayer is in existence for only part of the year (for example, due to formation, dissolution, or death), the deduction for that year is prorated. The amount of the amortization deduction for the first and last years is based on the number of months (or partial months) the property was held during the year, but the total amortization period remains 180 months.
3. Technical Advice and IRS Guidance
- In TAM 199944006, the IRS confirmed that the amortization period for section 197 intangibles is not affected by the fact that a subsidiary was in existence for only part of the year. The amortization period begins with the month of acquisition, and the deduction for the first year is prorated based on the number of months the intangible was held.
- The IRS has also ruled that for depreciation (and by analogy, amortization), if a taxpayer is in existence for only part of a year, the deduction is limited to the portion of the year the property was held, but the recovery or amortization period itself is not shortened.
4. Summary of the Rule
- The amortization period for section 197 intangibles is always 15 years (180 months), regardless of partial-year use.
- The deduction for the first and last years is prorated based on the number of months the property was held during those years.
- The total allowable amortization is spread over the 180-month period, and partial-year use does not accelerate or extend the period.
5. Example
If a taxpayer acquires a section 197 intangible in July of Year 1, the amortization period begins in July, and the taxpayer is allowed 6 months of amortization in Year 1 (July–December). The remaining amortization is spread over the next 14 years and 6 months, with the final deduction in the 180th month. If the taxpayer ceases to exist or disposes of the asset before the end of the 15-year period, the deduction for the final year is prorated for the months held.
6. Conclusion
Partial-year use affects the amount of the deduction in the first and last years, but does not change the total 15-year amortization period for section 197 intangibles or similar assets. The deduction is prorated for the months the property is held in a short year, but the overall period remains fixed.
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