I have a Franchise with a stated term of 5 years that is currently being amortized over 15 years as required for a section 197 intanagable. Original fee was $15000. It is being renewed this year for $5000. My plan would be to dispose of and take a loss on the balance of the original Franchise and create a new asset for the new Franchise (Renewal- it is a new contract with new terms and a new 5 year period) and start a fresh amortization for a new 15 year period. Because the IRS does not appear to allow amortization of a Franchise (or any other 197 Intangable) over the same period as the stated life in the Franchise document causes a lot of problems.

asked 18 Feb '10, 23:07

Brian%202's gravatar image

Brian 2
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Code Sec. 197(f)(4)(B) - The costs paid or incurred for the renewal of a franchise, trademark, or trade name or any license, permit, or other right granted by a governmental unit or an agency or instrumentality are amortized over the 15-year period that begins with the month of renewal. Any costs paid or incurred for the issuance, or earlier renewal, continue to be taken into account over the remaining portion of the amortization period that began at the time of the issuance, or earlier renewal. Any amount paid or incurred for the protection, expansion, or defense of a trademark or trade name and chargeable to capital account is treated as an amount paid or incurred for a renewal. 43.1

Thus, where a franchise, trademark, or trade name, or a license, permit or other government-granted right is renewed, the original acquisition costs and the renewal costs are treated as separate and distinct section 197 intangibles, each of which is amortized separately.

Great question, I think this is a terrible answer and unfair. The law basically states if this is a straight renewal in year 6 you have to continue to amortize the old agreement and add the renewal as a new intangible for 15 years. The theory seems to be you have not disposed of the "old" intangible just added a new one.

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answered 19 Feb '10, 15:41

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PStampley
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edited 21 Feb '10, 01:40

I found an excellent article in the Journal of Accountancy, derived from FASB 142, that gives a rational way to amortize intangibles with a defined life. The link is: http://www.journalofaccountancy.com/Issues/2004/Dec/AmortizationOfCertainIntangibleAssets.htm (you may need to cut and paste) There is a logic tree that would lead me to believe there is a very good argument that could be presented to the IRS. Your opinion would be appreciated. Thanks, Brian

(20 Feb '10, 21:51) Brian 2
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I think the article ony applies to book amortization. Congress passed the law with no flexibilty as to life or method of deducting the franchise fees and other intangibles

197(b) No other depreciation or amortization deduction allowable. Except as provided in subsection(a), no depreciation or amortization deduction shall be allowable with respect to any amortizable section 197 intangible.

(21 Feb '10, 01:42) PStampley

I'm with my esteemed colleague, PStampley, on this one. About the only out I see that MIGHT work for you is IF the $5K renewal is going to be a recurring item. If you're going to be paying that $5K annually from here on out you MIGHT be able to classify it as an annual licenseing fee rather than an amortizable franchise fee. Otherwise, PStampley hit it right on the head - the answer sucks, but it is what it is.

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answered 21 Feb '10, 02:52

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EAgent
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Asked: 18 Feb '10, 23:07

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Last updated: 21 Feb '10, 02:52