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Goodwill Amortization


bmichaud
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I know GW is no longer amortizable for financial statement purposes, but I have yet to find that GW is no longer amortizable for tax purposes across the board.

 

From a small business perspective, it appears GW generated via an acquisition where there is a significant change in control is amortizable over 15 years:

 

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Intangibles

 

BUT, what about from a GAAP/large corporation perspective? Are large corporations writing off GW behind the scenes and we only get a small glimpse via the "effective" tax rate?

 

There are folks on here with far deeper tax knowledge than I, so I thought I'd ask.

 

 

TIA

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Goodwill is amortizable for tax purposes if the acquisition is an asset acquisition for tax purposes.  If it is a stock purchase for tax purposes then it is not.  There is a difference between tax amortization goodwill (all intangibles) and financial reporting intangibles (total intangibles less indentifiable intangibles - things like customers, technology which is amortizable over the asset expected life). 

 

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There is a difference between tax amortization goodwill (all intangibles) and financial reporting intangibles (total intangibles less indentifiable intangibles - things like customers, technology which is amortizable over the asset expected life).

 

Meaning....the total intangibles less identifiable intangibles calculation is what is amortized for tax purposes behind the scenes, whereas only the identifiable intangibles are amortized for both financial reporting and tax purposes?

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So if a company has $1,000 of intangibles with $500 attributed to a specific customer contract that expires in 5 years and $500 attributed to the "brand" (i.e. no expiration), the customer contract is amortized for financial accounting purposes....

 

But you are saying, if that "brand" goodwill was acquired via an acquisition with stock and is thus not amortizable, then even the customer contract cannot be amortized for tax purposes?

 

Sorry for being dense, just trying to square it in my head.

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Yes for tax purposes it is either all intangibles are amortized or none are.  However, for a stock purchase, you could have continued amortization from a previous asset purchase.

 

In your example, either all intangibles will be amortized or not for tax purposes.  The tradename will be recognized for financial reporting purposes as an identifiable asset.  The life will be based upon management's estimate of either a fixed life (for most tradenames) or an idefinite life (for classic names - like Coca Cola).

 

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I know GW is no longer amortizable for financial statement purposes, but I have yet to find that GW is no longer amortizable for tax purposes across the board.

 

From a small business perspective, it appears GW generated via an acquisition where there is a significant change in control is amortizable over 15 years:

 

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Intangibles

 

BUT, what about from a GAAP/large corporation perspective? Are large corporations writing off GW behind the scenes and we only get a small glimpse via the "effective" tax rate?

 

There are folks on here with far deeper tax knowledge than I, so I thought I'd ask.

 

 

TIA

 

So if there were two business for sale for $30 million each, that make $4.5 million pre-tax and $3 million after taxes (33% rate for simplicity).  Business A has $30 million of net assets, while Business B has only $15 million of net assets.  The buyer of Business A (in an asset purchase) would effectively have no goodwill amortization since purchase price equals net assets.  The buyer of Business B would have $15 million of goodwill and get to deduct $1 million per year (1/15 because of 15 year amortization) from pre-tax income.  Thus the buyer of Business B will report $1 million less of income and thus pay $333k less taxes.  So the cash earnings of the higher quality business will actually be higher by the amount of tax savings from the goodwill amortization. 

 

I think some things are actually amortized over 20 years.  For example, when micro cap Hennessy Advisors (HNNA) bought the management contract for FBR's mutual funds.  Between the added benefit of goodwill amortization and low interest rates, cash rich companies can do some very accretive acquisitions.  Hennessy actually borrowed at something like 4%.  So you don't even have to be cash rich to do it.  The business becomes worth more to the buyer than it was to the seller. 

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The additional dynamic you have to consider if an asset purchase occurs the seller has to pay taxes on the gain in asset value.  Depending upon the sellers tax basis, this may require the seller to pay more for an asset purchase to the seller.  In some cases sellers don't want to pay a higher price for an uncertain tax benefit so they will structure the deal as a stock deal for tax purposes.  Most all deals are asset deals for financial reporting.  For most public companies the tax amoritzation is not disclosed only the financial reporting amortization is disclosed.  The difference is captured (along with other tax items) is the deferred tax assets/liabilities.

 

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