US Treasury officials gave a preview in late January of guidelines the government may propose later this year to settle controversies over writeoffs | Norton Rose Fulbright
Examples of intangibles are debt instruments, contracts and permits. Companies must usually “capitalize” amounts they spend on such assets. This means recover the cost for tax purposes ratably over the life of the assets. The US tax laws assign an arbitrary write-off period of 15 years to many intangibles, but the actual life must be used for contracts and other assets that a company creates itself rather than buys from someone else.
However, there are many instances where US companies deduct amounts they spend on intangibles immediately in the year the money is spent, only to be challenged later on audit by the IRS.
Treasury officials said the new guidelines will let payments that do not produce a benefit beyond the end of the next tax year be deducted immediately. An example is where a company prepays its insurance premium in December for a one-year policy that runs from December to December. However, a prepayment in December for a policy that runs from February to February would have to be deducted proportionately in each of the next two years.
The new rules will also allow expensing — or immediate deductions — for small dollar amounts where the paperwork to capitalize is not worth the cost. Small may mean up to $5,000.
Transaction costs must be included in the cost of the intangible. The Treasury said the IRS may stop insisting that transaction costs include an allocation of employee salaries and other overhead. However, bonuses and commissions tied directly to a transaction would still have to be treated as a cost of the intangible acquired.
The Treasury said it is weighing an alternative where all employee compensation — including tied bonuses and commissions — could be expensed if the transaction is considered “regular or recurring.”
Outside legal fees that a lender pays to document a loan must be treated as a cost of the debt instrument. However, the government will no longer require lenders to capitalize reasonable amounts paid to secure a credit history and property appraisal or salaries and other internal overhead of the loan origination department.
Fees paid to outside counsel in acquisitions would still have to be capitalized, but the government will no longer require capitalization of a portion of the officers’ salaries for the time spent on negotiating the deal. Also, capitalization will not be required for amounts spent after the acquisition on integrating the two companies or paying severance to employees who are let go.
These are guidelines the government may adopt. It will be interesting to see whether the IRS backs off in pending taxpayer audits before the guidelines are formally published.