Intangible assets include goodwill, patents, copyrights, trademarks, trade names, and franchises. Intangible assets also include your business start-up costs.
The basis of a patent is the cost of research and development expenditures (unless you choose to deduct them as expenses), drawings, working models, and attorneys’ fees and government charges for obtaining the patent.
The basis of a copyright generally includes copyright fees, attorneys’ fees, and clerical assistance. The value of your time as the writer or producer of the copyrighted material is generally not considered part of the basis.
The basis of trademarks, trade names, and franchises is the amount you paid for them. Goodwill is an intangible asset that represents the excess of the amount you paid over the book value of the assets or investment you acquired.
Business start-up costs include legal and tax consulting fees to set up the legal structure for your business and all other expenditures you incur prior to actually starting operations. Up to $5,000 of start-up costs paid or incurred after October 22, 2004 can be deducted as expenses for tax purposes, and the remainder can be amortized over a period of 180 months.
Group of Assets or Trade or Business Acquired
If you pay a lump sum for a group of assets, you need to allocate the purchase price among the assets to determine the basis of each. This could be done on a proportional basis, according to fair market values at the time of the purchase.
For tax purposes, when you acquire a trade or business you generally allocate the total consideration paid (including cash, the value of property and services you give, and any debt you assume) among the assets acquired. You do this by first reducing the total consideration you paid by the cash or bank accounts you received (which have a definite monetary value), and then allocating the remainder of the amount you paid to the other business assets you acquired , in proportion to the fair market value, in the following order:
Certificates of deposit, securities and other highly liquid assets
Accounts receivable and other debt instruments
Inventory
Fixed assets
Intangibles
Goodwill
The buyer and seller can enter into an agreement as to how the purchase price should be allocated among the assets, and this agreement will be binding unless the IRS determines otherwise.