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Many changes have taken, and are continuing to take place in the industry. Savvy consumers need to keep up with new rules, products, and services to make sure they are getting the best quality and taking advantage of the best offers.

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Internet TV

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The Income Tax Preparation Seniors

Income tax preparation seniors 8. Income tax preparation seniors   Amortization Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: How To Deduct Amortization Starting a BusinessBusiness Start-Up Costs Costs of Organizing a Corporation Costs of Organizing a Partnership How To Amortize Getting a Lease Section 197 IntangiblesSection 197 Intangibles Defined Assets That Are Not Section 197 Intangibles Safe Harbor for Creative Property Costs Anti-Churning Rules Incorrect Amount of Amortization Deducted Disposition of Section 197 Intangibles Reforestation Costs Geological and Geophysical Costs Pollution Control FacilitiesNew identifiable treatment facility. Income tax preparation seniors Research and Experimental Costs Optional Write-off of Certain Tax Preferences Introduction Amortization is a method of recovering (deducting) certain capital costs over a fixed period of time. Income tax preparation seniors It is similar to the straight line method of depreciation. Income tax preparation seniors The various amortizable costs covered in this chapter are included in the list below. Income tax preparation seniors However, this chapter does not discuss amortization of bond premium. Income tax preparation seniors For information on that topic, see chapter 3 of Publication 550, Investment Income and Expenses. Income tax preparation seniors Topics - This chapter discusses: Deducting amortization Amortizing costs of starting a business Amortizing costs of getting a lease Amortizing costs of section 197 intangibles Amortizing reforestation costs Amortizing costs of geological and geophysical costs Amortizing costs of pollution control facilities Amortizing costs of research and experimentation Amortizing costs of certain tax preferences Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 4626 Alternative Minimum Tax—Corporations 6251 Alternative Minimum Tax—Individuals See chapter 12 for information about getting publications and forms. Income tax preparation seniors How To Deduct Amortization To deduct amortization that begins during the current tax year, complete Part VI of Form 4562 and attach it to your income tax return. Income tax preparation seniors To report amortization from previous years, in addition to amortization that begins in the current year, list on Form 4562 each item separately. Income tax preparation seniors For example, in 2012, you began to amortize a lease. Income tax preparation seniors In 2013, you began to amortize a second lease. Income tax preparation seniors Report amortization from the new lease on line 42 of your 2013 Form 4562. Income tax preparation seniors Report amortization from the 2012 lease on line 43 of your 2013 Form 4562. Income tax preparation seniors If you do not have any new amortizable expenses for the current year, you are not required to complete Form 4562 (unless you are claiming depreciation). Income tax preparation seniors Report the current year's deduction for amortization that began in a prior year directly on the “Other deduction” or “Other expense line” of your return. Income tax preparation seniors Starting a Business When you start a business, treat all eligible costs you incur before you begin operating the business as capital expenditures which are part of your basis in the business. Income tax preparation seniors Generally, you recover costs for particular assets through depreciation deductions. Income tax preparation seniors However, you generally cannot recover other costs until you sell the business or otherwise go out of business. Income tax preparation seniors For a discussion on how to treat these costs, see If your attempt to go into business is unsuccessful under Capital Expenses in chapter 1. Income tax preparation seniors For costs paid or incurred after September 8, 2008, you can deduct a limited amount of start-up and organizational costs. Income tax preparation seniors The costs that are not deducted currently can be amortized ratably over a 180-month period. Income tax preparation seniors The amortization period starts with the month you begin operating your active trade or business. Income tax preparation seniors You are not required to attach a statement to make this election. Income tax preparation seniors You can choose to forgo this election by affirmatively electing to capitalize your start-up costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Income tax preparation seniors Once made, the election to either amortize or capitalize start-up costs is irrevocable and applies to all start-up costs that are related to your trade or business. Income tax preparation seniors See Regulations sections 1. Income tax preparation seniors 195-1, 1. Income tax preparation seniors 248-1, and 1. Income tax preparation seniors 709-1. Income tax preparation seniors For costs paid or incurred after October 22, 2004, and before September 9, 2008, you can elect to deduct a limited amount of business start-up and organizational costs in the year your active trade or business begins. Income tax preparation seniors Any costs not deducted can be amortized ratably over a 180-month period, beginning with the month you begin business. Income tax preparation seniors If the election is made, you must attach any statement required by Regulations sections 1. Income tax preparation seniors 195-1(b), 1. Income tax preparation seniors 248-1(c), and 1. Income tax preparation seniors 709-1(c), as in effect before September 9, 2008. Income tax preparation seniors Note. Income tax preparation seniors You can apply the provisions of Regulations sections 1. Income tax preparation seniors 195-1, 1. Income tax preparation seniors 248-1, and 1. Income tax preparation seniors 709-1 to all business start-up and organizational costs paid or incurred after October 22, 2004, provided the period of limitations on assessment has not expired for the year of the election. Income tax preparation seniors Otherwise, the provisions under Regulations sections 1. Income tax preparation seniors 195-1(b), 1. Income tax preparation seniors 248-1(c), and 1. Income tax preparation seniors 709-1(c), as in effect before September 9, 2008, will apply. Income tax preparation seniors For costs paid or incurred before October 23, 2004, you can elect to amortize business start-up and organization costs over an amortization period of 60 months or more. Income tax preparation seniors See How To Make the Election , later. Income tax preparation seniors The cost must qualify as one of the following. Income tax preparation seniors A business start-up cost. Income tax preparation seniors An organizational cost for a corporation. Income tax preparation seniors An organizational cost for a partnership. Income tax preparation seniors Business Start-Up Costs Start-up costs are amounts paid or incurred for: (a) creating an active trade or business; or (b) investigating the creation or acquisition of an active trade or business. Income tax preparation seniors Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for profit; and for the production of income in anticipation of the activity becoming an active trade or business. Income tax preparation seniors Qualifying costs. Income tax preparation seniors   A start-up cost is amortizable if it meets both of the following tests. Income tax preparation seniors It is a cost you could deduct if you paid or incurred it to operate an existing active trade or business (in the same field as the one you entered into). Income tax preparation seniors It is a cost you pay or incur before the day your active trade or business begins. Income tax preparation seniors   Start-up costs include amounts paid for the following: An analysis or survey of potential markets, products, labor supply, transportation facilities, etc. Income tax preparation seniors Advertisements for the opening of the business. Income tax preparation seniors Salaries and wages for employees who are being trained and their instructors. Income tax preparation seniors Travel and other necessary costs for securing prospective distributors, suppliers, or customers. Income tax preparation seniors Salaries and fees for executives and consultants, or for similar professional services. Income tax preparation seniors Nonqualifying costs. Income tax preparation seniors   Start-up costs do not include deductible interest, taxes, or research and experimental costs. Income tax preparation seniors See Research and Experimental Costs , later. Income tax preparation seniors Purchasing an active trade or business. Income tax preparation seniors   Amortizable start-up costs for purchasing an active trade or business include only investigative costs incurred in the course of a general search for or preliminary investigation of the business. Income tax preparation seniors These are costs that help you decide whether to purchase a business. Income tax preparation seniors Costs you incur in an attempt to purchase a specific business are capital expenses that you cannot amortize. Income tax preparation seniors Example. Income tax preparation seniors On June 1st, you hired an accounting firm and a law firm to assist you in the potential purchase of XYZ, Inc. Income tax preparation seniors They researched XYZ's industry and analyzed the financial projections of XYZ, Inc. Income tax preparation seniors In September, the law firm prepared and submitted a letter of intent to XYZ, Inc. Income tax preparation seniors The letter stated that a binding commitment would result only after a purchase agreement was signed. Income tax preparation seniors The law firm and accounting firm continued to provide services including a review of XYZ's books and records and the preparation of a purchase agreement. Income tax preparation seniors On October 22nd, you signed a purchase agreement with XYZ, Inc. Income tax preparation seniors All amounts paid or incurred to investigate the business before October 22nd are amortizable investigative costs. Income tax preparation seniors Amounts paid on or after that date relate to the attempt to purchase the business and therefore must be capitalized. Income tax preparation seniors Disposition of business. Income tax preparation seniors   If you completely dispose of your business before the end of the amortization period, you can deduct any remaining deferred start-up costs. Income tax preparation seniors However, you can deduct these deferred start-up costs only to the extent they qualify as a loss from a business. Income tax preparation seniors Costs of Organizing a Corporation Amounts paid to organize a corporation are the direct costs of creating the corporation. Income tax preparation seniors Qualifying costs. Income tax preparation seniors   To qualify as an organizational cost, it must be: For the creation of the corporation, Chargeable to a capital account (see chapter 1), Amortized over the life of the corporation if the corporation had a fixed life, and Incurred before the end of the first tax year in which the corporation is in business. Income tax preparation seniors   A corporation using the cash method of accounting can amortize organizational costs incurred within the first tax year, even if it does not pay them in that year. Income tax preparation seniors   Examples of organizational costs include: The cost of temporary directors. Income tax preparation seniors The cost of organizational meetings. Income tax preparation seniors State incorporation fees. Income tax preparation seniors The cost of legal services. Income tax preparation seniors Nonqualifying costs. Income tax preparation seniors   The following items are capital expenses that cannot be amortized: Costs for issuing and selling stock or securities, such as commissions, professional fees, and printing costs. Income tax preparation seniors Costs associated with the transfer of assets to the corporation. Income tax preparation seniors Costs of Organizing a Partnership The costs to organize a partnership are the direct costs of creating the partnership. Income tax preparation seniors Qualifying costs. Income tax preparation seniors   A partnership can amortize an organizational cost only if it meets all the following tests. Income tax preparation seniors It is for the creation of the partnership and not for starting or operating the partnership trade or business. Income tax preparation seniors It is chargeable to a capital account (see chapter 1). Income tax preparation seniors It could be amortized over the life of the partnership if the partnership had a fixed life. Income tax preparation seniors It is incurred by the due date of the partnership return (excluding extensions) for the first tax year in which the partnership is in business. Income tax preparation seniors However, if the partnership uses the cash method of accounting and pays the cost after the end of its first tax year, see Cash method partnership under How To Amortize, later. Income tax preparation seniors It is for a type of item normally expected to benefit the partnership throughout its entire life. Income tax preparation seniors   Organizational costs include the following fees. Income tax preparation seniors Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement. Income tax preparation seniors Accounting fees for services incident to the organization of the partnership. Income tax preparation seniors Filing fees. Income tax preparation seniors Nonqualifying costs. Income tax preparation seniors   The following costs cannot be amortized. Income tax preparation seniors The cost of acquiring assets for the partnership or transferring assets to the partnership. Income tax preparation seniors The cost of admitting or removing partners, other than at the time the partnership is first organized. Income tax preparation seniors The cost of making a contract concerning the operation of the partnership trade or business including a contract between a partner and the partnership. Income tax preparation seniors The costs for issuing and marketing interests in the partnership such as brokerage, registration, and legal fees and printing costs. Income tax preparation seniors These “syndication fees” are capital expenses that cannot be depreciated or amortized. Income tax preparation seniors Liquidation of partnership. Income tax preparation seniors   If a partnership is liquidated before the end of the amortization period, the unamortized amount of qualifying organizational costs can be deducted in the partnership's final tax year. Income tax preparation seniors However, these costs can be deducted only to the extent they qualify as a loss from a business. Income tax preparation seniors How To Amortize Deduct start-up and organizational costs in equal amounts over the applicable amortization period (discussed earlier). Income tax preparation seniors You can choose an amortization period for start-up costs that is different from the period you choose for organizational costs, as long as both are not less than the applicable amortization period. Income tax preparation seniors Once you choose an amortization period, you cannot change it. Income tax preparation seniors To figure your deduction, divide your total start-up or organizational costs by the months in the amortization period. Income tax preparation seniors The result is the amount you can deduct for each month. Income tax preparation seniors Cash method partnership. Income tax preparation seniors   A partnership using the cash method of accounting can deduct an organizational cost only if it has been paid by the end of the tax year. Income tax preparation seniors However, any cost the partnership could have deducted as an organizational cost in an earlier tax year (if it had been paid that year) can be deducted in the tax year of payment. Income tax preparation seniors How To Make the Election To elect to amortize start-up or organizational costs, you must complete and attach Form 4562 to your return for the first tax year you are in business. Income tax preparation seniors You may also be required to attach an accompanying statement (described later) to your return. Income tax preparation seniors For start-up or organizational costs paid or incurred after September 8, 2008, an accompanying statement is not required. Income tax preparation seniors Generally, for start-up or organizational costs paid or incurred before September 9, 2008, and after October 22, 2004, unless you choose to apply Regulations sections 1. Income tax preparation seniors 195-1, 1. Income tax preparation seniors 248-1, and 1. Income tax preparation seniors 709-1, you must also attach an accompanying statement to elect to amortize the costs. Income tax preparation seniors If you have both start-up and organizational costs, attach a separate statement (if required) to your return for each type of cost. Income tax preparation seniors See Starting a Business , earlier, for more information. Income tax preparation seniors Generally, you must file the return by the due date (including any extensions). Income tax preparation seniors However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Income tax preparation seniors For more information, see the instructions for Part VI of Form 4562. Income tax preparation seniors You can choose to forgo the election to amortize by affirmatively electing to capitalize your start-up or organizational costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Income tax preparation seniors Note. Income tax preparation seniors The election to either amortize or capitalize start-up or organizational costs is irrevocable and applies to all start-up and organizational costs that are related to the trade or business. Income tax preparation seniors If your business is organized as a corporation or partnership, only the corporation or partnership can elect to amortize its start-up or organizational costs. Income tax preparation seniors A shareholder or partner cannot make this election. Income tax preparation seniors You, as a shareholder or partner, cannot amortize any costs you incur in setting up your corporation or partnership. Income tax preparation seniors Only the corporation or partnership can amortize these costs. Income tax preparation seniors However, you, as an individual, can elect to amortize costs you incur to investigate an interest in an existing partnership. Income tax preparation seniors These costs qualify as business start-up costs if you acquire the partnership interest. Income tax preparation seniors Start-up costs election statement. Income tax preparation seniors   If you elect to amortize your start-up costs, attach a separate statement (if required) that contains the following information. Income tax preparation seniors A description of the business to which the start-up costs relate. Income tax preparation seniors A description of each start-up cost incurred. Income tax preparation seniors The month your active business began (or was acquired). Income tax preparation seniors The number of months in your amortization period (which is generally 180 months). Income tax preparation seniors Filing the statement early. Income tax preparation seniors   You can elect to amortize your start-up costs by filing the statement with a return for any tax year before the year your active business begins. Income tax preparation seniors If you file the statement early, the election becomes effective in the month of the tax year your active business begins. Income tax preparation seniors Revised statement. Income tax preparation seniors   You can file a revised statement to include any start-up costs not included in your original statement. Income tax preparation seniors However, you cannot include on the revised statement any cost you previously treated on your return as a cost other than a start-up cost. Income tax preparation seniors You can file the revised statement with a return filed after the return on which you elected to amortize your start-up costs. Income tax preparation seniors Organizational costs election statement. Income tax preparation seniors   If you elect to amortize your corporation's or partnership's organizational costs, attach a separate statement (if required) that contains the following information. Income tax preparation seniors A description of each cost. Income tax preparation seniors The amount of each cost. Income tax preparation seniors The date each cost was incurred. Income tax preparation seniors The month your corporation or partnership began active business (or acquired the business). Income tax preparation seniors The number of months in your amortization period (which is generally 180 months). Income tax preparation seniors Partnerships. Income tax preparation seniors   The statement prepared for a cash basis partnership must also indicate the amount paid before the end of the year for each cost. Income tax preparation seniors   You do not need to separately list any partnership organizational cost that is less than $10. Income tax preparation seniors Instead, you can list the total amount of these costs with the dates the first and last costs were incurred. Income tax preparation seniors   After a partnership makes the election to amortize organizational costs, it can later file an amended return to include additional organizational costs not included in the partnership's original return and statement. Income tax preparation seniors Getting a Lease If you get a lease for business property, you may recover the cost of acquiring the lease by amortizing it over the term of the lease. Income tax preparation seniors The term of the lease for amortization purposes generally includes all renewal options (and any other period for which you and the lessor reasonably expect the lease to be renewed). Income tax preparation seniors However, renewal periods are not included if 75% or more of the cost of acquiring the lease is for the term of the lease remaining on the acquisition date (not including any period for which you may choose to renew, extend, or continue the lease). Income tax preparation seniors For more information on the costs of getting a lease, see Cost of Getting a Lease in  chapter 3. Income tax preparation seniors How to amortize. Income tax preparation seniors   Enter your deduction in Part VI of Form 4562 if you are deducting amortization that begins during the current year, or on the appropriate line of your tax return if you are not otherwise required to file Form 4562. Income tax preparation seniors Section 197 Intangibles Generally, you may amortize the capitalized costs of “section 197 intangibles” (defined later) ratably over a 15-year period. Income tax preparation seniors You must amortize these costs if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income. Income tax preparation seniors You may not be able to amortize section 197 intangibles acquired in a transaction that did not result in a significant change in ownership or use. Income tax preparation seniors See Anti-Churning Rules, later. Income tax preparation seniors Your amortization deduction each year is the applicable part of the intangible's adjusted basis (for purposes of determining gain), figured by amortizing it ratably over 15 years (180 months). Income tax preparation seniors The 15-year period begins with the later of: The month the intangible is acquired, or The month the trade or business or activity engaged in for the production of income begins. Income tax preparation seniors You cannot deduct amortization for the month you dispose of the intangible. Income tax preparation seniors If you pay or incur an amount that increases the basis of an amortizable section 197 intangible after the 15-year period begins, amortize it over the remainder of the 15-year period beginning with the month the basis increase occurs. Income tax preparation seniors You are not allowed any other depreciation or amortization deduction for an amortizable section 197 intangible. Income tax preparation seniors Tax-exempt use property subject to a lease. Income tax preparation seniors   The amortization period for any section 197 intangible leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership), shall not be less than 125 percent of the lease term. Income tax preparation seniors Cost attributable to other property. Income tax preparation seniors   The rules for section 197 intangibles do not apply to any amount that is included in determining the cost of property that is not a section 197 intangible. Income tax preparation seniors For example, if the cost of computer software is not separately stated from the cost of hardware or other tangible property and you consistently treat it as part of the cost of the hardware or other tangible property, these rules do not apply. Income tax preparation seniors Similarly, none of the cost of acquiring real property held for the production of rental income is considered the cost of goodwill, going concern value, or any other section 197 intangible. Income tax preparation seniors Section 197 Intangibles Defined The following assets are section 197 intangibles and must be amortized over 180 months: Goodwill; Going concern value; Workforce in place; Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers; A patent, copyright, formula, process, design, pattern, know-how, format, or similar item; A customer-based intangible; A supplier-based intangible; Any item similar to items (3) through (7); A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals); A covenant not to compete entered into in connection with the acquisition of an interest in a trade or business; Any franchise, trademark, or trade name; and A contract for the use of, or a term interest in, any item in this list. Income tax preparation seniors You cannot amortize any of the intangibles listed in items (1) through (8) that you created rather than acquired unless you created them in acquiring assets that make up a trade or business or a substantial part of a trade or business. Income tax preparation seniors Goodwill. Income tax preparation seniors   This is the value of a trade or business based on expected continued customer patronage due to its name, reputation, or any other factor. Income tax preparation seniors Going concern value. Income tax preparation seniors   This is the additional value of a trade or business that attaches to property because the property is an integral part of an ongoing business activity. Income tax preparation seniors It includes value based on the ability of a business to continue to function and generate income even though there is a change in ownership (but does not include any other section 197 intangible). Income tax preparation seniors It also includes value based on the immediate use or availability of an acquired trade or business, such as the use of earnings during any period in which the business would not otherwise be available or operational. Income tax preparation seniors Workforce in place, etc. Income tax preparation seniors   This includes the composition of a workforce (for example, its experience, education, or training). Income tax preparation seniors It also includes the terms and conditions of employment, whether contractual or otherwise, and any other value placed on employees or any of their attributes. Income tax preparation seniors   For example, you must amortize the part of the purchase price of a business that is for the existence of a highly skilled workforce. Income tax preparation seniors Also, you must amortize the cost of acquiring an existing employment contract or relationship with employees or consultants. Income tax preparation seniors Business books and records, etc. Income tax preparation seniors   This includes the intangible value of technical manuals, training manuals or programs, data files, and accounting or inventory control systems. Income tax preparation seniors It also includes the cost of customer lists, subscription lists, insurance expirations, patient or client files, and lists of newspaper, magazine, radio, and television advertisers. Income tax preparation seniors Patents, copyrights, etc. Income tax preparation seniors   This includes package design, computer software, and any interest in a film, sound recording, videotape, book, or other similar property, except as discussed later under Assets That Are Not Section 197 Intangibles . Income tax preparation seniors Customer-based intangible. Income tax preparation seniors   This is the composition of market, market share, and any other value resulting from the future provision of goods or services because of relationships with customers in the ordinary course of business. Income tax preparation seniors For example, you must amortize the part of the purchase price of a business that is for the existence of the following intangibles. Income tax preparation seniors A customer base. Income tax preparation seniors A circulation base. Income tax preparation seniors An undeveloped market or market growth. Income tax preparation seniors Insurance in force. Income tax preparation seniors A mortgage servicing contract. Income tax preparation seniors An investment management contract. Income tax preparation seniors Any other relationship with customers involving the future provision of goods or services. Income tax preparation seniors   Accounts receivable or other similar rights to income for goods or services provided to customers before the acquisition of a trade or business are not section 197 intangibles. Income tax preparation seniors Supplier-based intangible. Income tax preparation seniors   A supplier-based intangible is the value resulting from the future acquisitions, (through contract or other relationships with suppliers in the ordinary course of business) of goods or services that you will sell or use. Income tax preparation seniors The amount you pay or incur for supplier-based intangibles includes, for example, any portion of the purchase price of an acquired trade or business that is attributable to the existence of a favorable relationship with persons providing distribution services (such as a favorable shelf or display space or a retail outlet), or the existence of favorable supply contracts. Income tax preparation seniors Do not include any amount required to be paid for the goods or services to honor the terms of the agreement or other relationship. Income tax preparation seniors Also, see Assets That Are Not Section 197 Intangibles below. Income tax preparation seniors Government-granted license, permit, etc. Income tax preparation seniors   This is any right granted by a governmental unit or an agency or instrumentality of a governmental unit. Income tax preparation seniors For example, you must amortize the capitalized costs of acquiring (including issuing or renewing) a liquor license, a taxicab medallion or license, or a television or radio broadcasting license. Income tax preparation seniors Covenant not to compete. Income tax preparation seniors   Section 197 intangibles include a covenant not to compete (or similar arrangement) entered into in connection with the acquisition of an interest in a trade or business, or a substantial portion of a trade or business. Income tax preparation seniors An interest in a trade or business includes an interest in a partnership or a corporation engaged in a trade or business. Income tax preparation seniors   An arrangement that requires the former owner to perform services (or to provide property or the use of property) is not similar to a covenant not to compete to the extent the amount paid under the arrangement represents reasonable compensation for those services or for that property or its use. Income tax preparation seniors Franchise, trademark, or trade name. Income tax preparation seniors   A franchise, trademark, or trade name is a section 197 intangible. Income tax preparation seniors You must amortize its purchase or renewal costs, other than certain contingent payments that you can deduct currently. Income tax preparation seniors For information on currently deductible contingent payments, see chapter 11. Income tax preparation seniors Professional sports franchise. Income tax preparation seniors   A franchise engaged in professional sports and any intangible assets acquired in connection with acquiring the franchise (including player contracts) is a section 197 intangible amortizable over a 15-year period. Income tax preparation seniors Contract for the use of, or a term interest in, a section 197 intangible. Income tax preparation seniors   Section 197 intangibles include any right under a license, contract, or other arrangement providing for the use of any section 197 intangible. Income tax preparation seniors It also includes any term interest in any section 197 intangible, whether the interest is outright or in trust. Income tax preparation seniors Assets That Are Not Section 197 Intangibles The following assets are not section 197 intangibles. Income tax preparation seniors Any interest in a corporation, partnership, trust, or estate. Income tax preparation seniors Any interest under an existing futures contract, foreign currency contract, notional principal contract, interest rate swap, or similar financial contract. Income tax preparation seniors Any interest in land. Income tax preparation seniors Most computer software. Income tax preparation seniors (See Computer software , later. Income tax preparation seniors ) Any of the following assets not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Income tax preparation seniors An interest in a film, sound recording, video tape, book, or similar property. Income tax preparation seniors A right to receive tangible property or services under a contract or from a governmental agency. Income tax preparation seniors An interest in a patent or copyright. Income tax preparation seniors Certain rights that have a fixed duration or amount. Income tax preparation seniors (See Rights of fixed duration or amount , later. Income tax preparation seniors ) An interest under either of the following. Income tax preparation seniors An existing lease or sublease of tangible property. Income tax preparation seniors A debt that was in existence when the interest was acquired. Income tax preparation seniors A right to service residential mortgages unless the right is acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Income tax preparation seniors Certain transaction costs incurred by parties to a corporate organization or reorganization in which any part of a gain or loss is not recognized. Income tax preparation seniors Intangible property that is not amortizable under the rules for section 197 intangibles can be depreciated if it meets certain requirements. Income tax preparation seniors You generally must use the straight line method over its useful life. Income tax preparation seniors For certain intangibles, the depreciation period is specified in the law and regulations. Income tax preparation seniors For example, the depreciation period for computer software that is not a section 197 intangible is generally 36 months. Income tax preparation seniors For more information on depreciating intangible property, see Intangible Property under What Method Can You Use To Depreciate Your Property? in chapter 1 of Publication 946. Income tax preparation seniors Computer software. Income tax preparation seniors   Section 197 intangibles do not include the following types of computer software. Income tax preparation seniors Software that meets all the following requirements. Income tax preparation seniors It is, or has been, readily available for purchase by the general public. Income tax preparation seniors It is subject to a nonexclusive license. Income tax preparation seniors It has not been substantially modified. Income tax preparation seniors This requirement is considered met if the cost of all modifications is not more than the greater of 25% of the price of the publicly available unmodified software or $2,000. Income tax preparation seniors Software that is not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Income tax preparation seniors Computer software defined. Income tax preparation seniors   Computer software includes all programs designed to cause a computer to perform a desired function. Income tax preparation seniors It also includes any database or similar item that is in the public domain and is incidental to the operation of qualifying software. Income tax preparation seniors Rights of fixed duration or amount. Income tax preparation seniors   Section 197 intangibles do not include any right under a contract or from a governmental agency if the right is acquired in the ordinary course of a trade or business (or in an activity engaged in for the production of income) but not as part of a purchase of a trade or business and either: Has a fixed life of less than 15 years, or Is of a fixed amount that, except for the rules for section 197 intangibles, would be recovered under a method similar to the unit-of-production method of cost recovery. Income tax preparation seniors However, this does not apply to the following intangibles. Income tax preparation seniors Goodwill. Income tax preparation seniors Going concern value. Income tax preparation seniors A covenant not to compete. Income tax preparation seniors A franchise, trademark, or trade name. Income tax preparation seniors A customer-related information base, customer-based intangible, or similar item. Income tax preparation seniors Safe Harbor for Creative Property Costs If you are engaged in the trade or business of film production, you may be able to amortize the creative property costs for properties not set for production within 3 years of the first capitalized transaction. Income tax preparation seniors You may amortize these costs ratably over a 15-year period beginning on the first day of the second half of the tax year in which you properly write off the costs for financial accounting purposes. Income tax preparation seniors If, during the 15-year period, you dispose of the creative property rights, you must continue to amortize the costs over the remainder of the 15-year period. Income tax preparation seniors Creative property costs include costs paid or incurred to acquire and develop screenplays, scripts, story outlines, motion picture production rights to books and plays, and other similar properties for purposes of potential future film development, production, and exploitation. Income tax preparation seniors Amortize these costs using the rules of Revenue Procedure 2004-36. Income tax preparation seniors For more information, see Revenue Procedure 2004-36, 2004-24 I. Income tax preparation seniors R. Income tax preparation seniors B. Income tax preparation seniors 1063, available at  www. Income tax preparation seniors irs. Income tax preparation seniors gov/irb/2004-24_IRB/ar16. Income tax preparation seniors html. Income tax preparation seniors A change in the treatment of creative property costs is a change in method of accounting. Income tax preparation seniors Anti-Churning Rules Anti-churning rules prevent you from amortizing most section 197 intangibles if the transaction in which you acquired them did not result in a significant change in ownership or use. Income tax preparation seniors These rules apply to goodwill and going concern value, and to any other section 197 intangible that is not otherwise depreciable or amortizable. Income tax preparation seniors Under the anti-churning rules, you cannot use 15-year amortization for the intangible if any of the following conditions apply. Income tax preparation seniors You or a related person (defined later) held or used the intangible at any time from July 25, 1991, through August 10, 1993. Income tax preparation seniors You acquired the intangible from a person who held it at any time during the period in (1) and, as part of the transaction, the user did not change. Income tax preparation seniors You granted the right to use the intangible to a person (or a person related to that person) who held or used it at any time during the period in (1). Income tax preparation seniors This applies only if the transaction in which you granted the right and the transaction in which you acquired the intangible are part of a series of related transactions. Income tax preparation seniors See Related person , later, for more information. Income tax preparation seniors Exceptions. Income tax preparation seniors   The anti-churning rules do not apply in the following situations. Income tax preparation seniors You acquired the intangible from a decedent and its basis was stepped up to its fair market value. Income tax preparation seniors The intangible was amortizable as a section 197 intangible by the seller or transferor you acquired it from. Income tax preparation seniors This exception does not apply if the transaction in which you acquired the intangible and the transaction in which the seller or transferor acquired it are part of a series of related transactions. Income tax preparation seniors The gain-recognition exception, discussed later, applies. Income tax preparation seniors Related person. Income tax preparation seniors   For purposes of the anti-churning rules, the following are related persons. Income tax preparation seniors An individual and his or her brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Income tax preparation seniors ), and lineal descendants (children, grandchildren, etc. Income tax preparation seniors ). Income tax preparation seniors A corporation and an individual who owns, directly or indirectly, more than 20% of the value of the corporation's outstanding stock. Income tax preparation seniors Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 20%” is substituted for “at least 80%” in that definition and the determination is made without regard to subsections (a)(4) and (e)(3)(C) of section 1563. Income tax preparation seniors (For an exception, see section 1. Income tax preparation seniors 197-2(h)(6)(iv) of the regulations. Income tax preparation seniors ) A trust fiduciary and a corporation if more than 20% of the value of the corporation's outstanding stock is owned, directly or indirectly, by or for the trust or grantor of the trust. Income tax preparation seniors The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Income tax preparation seniors The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. Income tax preparation seniors The executor and beneficiary of an estate. Income tax preparation seniors A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization (or whose family members control it). Income tax preparation seniors A corporation and a partnership if the same persons own more than 20% of the value of the outstanding stock of the corporation and more than 20% of the capital or profits interest in the partnership. Income tax preparation seniors Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 20% of the value of the outstanding stock of each corporation. Income tax preparation seniors Two partnerships if the same persons own, directly or indirectly, more than 20% of the capital or profits interests in both partnerships. Income tax preparation seniors A partnership and a person who owns, directly or indirectly, more than 20% of the capital or profits interests in the partnership. Income tax preparation seniors Two persons who are engaged in trades or businesses under common control (as described in section 41(f)(1) of the Internal Revenue Code). Income tax preparation seniors When to determine relationship. Income tax preparation seniors   Persons are treated as related if the relationship existed at the following time. Income tax preparation seniors In the case of a single transaction, immediately before or immediately after the transaction in which the intangible was acquired. Income tax preparation seniors In the case of a series of related transactions (or a series of transactions that comprise a qualified stock purchase under section 338(d)(3) of the Internal Revenue Code), immediately before the earliest transaction or immediately after the last transaction. Income tax preparation seniors Ownership of stock. Income tax preparation seniors   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. Income tax preparation seniors Rule 1. Income tax preparation seniors   Stock directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Income tax preparation seniors Rule 2. Income tax preparation seniors   An individual is considered to own the stock directly or indirectly owned by or for his or her family. Income tax preparation seniors Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. Income tax preparation seniors Rule 3. Income tax preparation seniors   An individual owning (other than by applying Rule 2) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Income tax preparation seniors Rule 4. Income tax preparation seniors   For purposes of applying Rule 1, 2, or 3, treat stock constructively owned by a person under Rule 1 as actually owned by that person. Income tax preparation seniors Do not treat stock constructively owned by an individual under Rule 2 or 3 as owned by the individual for reapplying Rule 2 or 3 to make another person the constructive owner of the stock. Income tax preparation seniors Gain-recognition exception. Income tax preparation seniors   This exception to the anti-churning rules applies if the person you acquired the intangible from (the transferor) meets both of the following requirements. Income tax preparation seniors That person would not be related to you (as described under Related person , earlier) if the 20% test for ownership of stock and partnership interests were replaced by a 50% test. Income tax preparation seniors That person chose to recognize gain on the disposition of the intangible and pay income tax on the gain at the highest tax rate. Income tax preparation seniors See chapter 2 in Publication 544 for information on making this choice. Income tax preparation seniors   If this exception applies, the anti-churning rules apply only to the amount of your adjusted basis in the intangible that is more than the gain recognized by the transferor. Income tax preparation seniors Notification. Income tax preparation seniors   If the person you acquired the intangible from chooses to recognize gain under the rules for this exception, that person must notify you in writing by the due date of the return on which the choice is made. Income tax preparation seniors Anti-abuse rule. Income tax preparation seniors   You cannot amortize any section 197 intangible acquired in a transaction for which the principal purpose was either of the following. Income tax preparation seniors To avoid the requirement that the intangible be acquired after August 10, 1993. Income tax preparation seniors To avoid any of the anti-churning rules. Income tax preparation seniors More information. Income tax preparation seniors   For more information about the anti-churning rules, including additional rules for partnerships, see Regulations section 1. Income tax preparation seniors 197-2(h). Income tax preparation seniors Incorrect Amount of Amortization Deducted If you later discover that you deducted an incorrect amount for amortization for a section 197 intangible in any year, you may be able to make a correction for that year by filing an amended return. Income tax preparation seniors See Amended Return , next. Income tax preparation seniors If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amortization. Income tax preparation seniors See Changing Your Accounting Method , later. Income tax preparation seniors Amended Return If you deducted an incorrect amount for amortization, you can file an amended return to correct the following. Income tax preparation seniors A mathematical error made in any year. Income tax preparation seniors A posting error made in any year. Income tax preparation seniors An amortization deduction for a section 197 intangible for which you have not adopted a method of accounting. Income tax preparation seniors When to file. Income tax preparation seniors   If an amended return is allowed, you must file it by the later of the following dates. Income tax preparation seniors 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Income tax preparation seniors (A return filed early is considered filed on the due date. Income tax preparation seniors ) 2 years from the time you paid your tax for that year. Income tax preparation seniors Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. Income tax preparation seniors File Form 3115, Application for Change in Accounting Method, to request a change to a permissible method of accounting for amortization. Income tax preparation seniors The following are examples of a change in method of accounting for amortization. Income tax preparation seniors A change in the amortization method, period of recovery, or convention of an amortizable asset. Income tax preparation seniors A change in the accounting for amortizable assets from a single asset account to a multiple asset account (pooling), or vice versa. Income tax preparation seniors A change in the accounting for amortizable assets from one type of multiple asset account to a different type of multiple asset account. Income tax preparation seniors Changes in amortization that are not a change in method of accounting include the following: A change in computing amortization in the tax year in which your use of the asset changes. Income tax preparation seniors An adjustment in the useful life of an amortizable asset. Income tax preparation seniors Generally, the making of a late amortization election or the revocation of a timely valid amortization election. Income tax preparation seniors Any change in the placed-in-service date of an amortizable asset. Income tax preparation seniors See Regulations section 1. Income tax preparation seniors 446-1(e)(2)(ii)(a) for more information and examples. Income tax preparation seniors Automatic approval. Income tax preparation seniors   In some instances, you may be able to get automatic approval from the IRS to change your method of accounting for amortization. Income tax preparation seniors For a list of automatic accounting method changes, see the Instructions for Form 3115. Income tax preparation seniors Also see the Instructions for Form 3115 for more information on getting approval, automatic approval procedures, and a list of exceptions to the automatic approval process. Income tax preparation seniors For more information, see Revenue Procedure 2006-12, as modified by Revenue Procedure 2006-37, and Revenue Procedure 2008-52, as amplified, clarified, and modified by Revenue Procedure 2009-39, as clarified and modified by Revenue Procedure 2011-14, as modified and amplified by Revenue Procedure 2011-22, as modified by Revenue Procedure 2012-39, or any successor. Income tax preparation seniors See Revenue Procedure 2006-12, 2006-3 I. Income tax preparation seniors R. Income tax preparation seniors B. Income tax preparation seniors 310, available at  www. Income tax preparation seniors irs. Income tax preparation seniors gov/irb/2006-03_IRB/ar14. Income tax preparation seniors html. Income tax preparation seniors  See Revenue Procedure 2006-37, 2006-38 I. Income tax preparation seniors R. Income tax preparation seniors B. Income tax preparation seniors 499, available at  www. Income tax preparation seniors irs. Income tax preparation seniors gov/irb/2006-38_IRB/ar10. Income tax preparation seniors html. Income tax preparation seniors  See Revenue Procedure 2008-52, 2008-36 I. Income tax preparation seniors R. Income tax preparation seniors B. Income tax preparation seniors 587, available at www. Income tax preparation seniors irs. Income tax preparation seniors gov/irb/2008-36_IRB/ar09. Income tax preparation seniors html. Income tax preparation seniors  See Revenue Procedure 2009-39, 2009-38 I. Income tax preparation seniors R. Income tax preparation seniors B. Income tax preparation seniors 371, available at  www. Income tax preparation seniors irs. Income tax preparation seniors gov/irb/2009-38_IRB/ar08. Income tax preparation seniors html. Income tax preparation seniors  See Revenue Procedure 2011-14, 2011-4 I. Income tax preparation seniors R. Income tax preparation seniors B. Income tax preparation seniors 330, available at  www. Income tax preparation seniors irs. Income tax preparation seniors gov/irb/2011-04_IRB/ar08. Income tax preparation seniors html. Income tax preparation seniors  See Revenue Procedure 2011-22, 2011-18 I. Income tax preparation seniors R. Income tax preparation seniors B. Income tax preparation seniors 737, available at  www. Income tax preparation seniors irs. Income tax preparation seniors gov/irb/2011-18_IRB/ar08. Income tax preparation seniors html. Income tax preparation seniors Also, see Revenue Procedure 2012-39, 2012-41 I. Income tax preparation seniors R. Income tax preparation seniors B. Income tax preparation seniors 470 available at www. Income tax preparation seniors irs. Income tax preparation seniors gov/irb/2012-41_IRB/index. Income tax preparation seniors html. Income tax preparation seniors Disposition of Section 197 Intangibles A section 197 intangible is treated as depreciable property used in your trade or business. Income tax preparation seniors If you held the intangible for more than 1 year, any gain on its disposition, up to the amount of allowable amortization, is ordinary income (section 1245 gain). Income tax preparation seniors If multiple section 197 intangibles are disposed of in a single transaction or a series of related transactions, treat all of the section 197 intangibles as if they were a single asset for purposes of determining the amount of gain that is ordinary income. Income tax preparation seniors Any remaining gain, or any loss, is a section 1231 gain or loss. Income tax preparation seniors If you held the intangible 1 year or less, any gain or loss on its disposition is an ordinary gain or loss. Income tax preparation seniors For more information on ordinary or capital gain or loss on business property, see chapter 3 in Publication 544. Income tax preparation seniors Nondeductible loss. Income tax preparation seniors   You cannot deduct any loss on the disposition or worthlessness of a section 197 intangible that you acquired in the same transaction (or series of related transactions) as other section 197 intangibles you still have. Income tax preparation seniors Instead, increase the adjusted basis of each remaining amortizable section 197 intangible by a proportionate part of the nondeductible loss. Income tax preparation seniors Figure the increase by multiplying the nondeductible loss on the disposition of the intangible by the following fraction. Income tax preparation seniors The numerator is the adjusted basis of each remaining intangible on the date of the disposition. Income tax preparation seniors The denominator is the total adjusted bases of all remaining amortizable section 197 intangibles on the date of the disposition. Income tax preparation seniors Covenant not to compete. Income tax preparation seniors   A covenant not to compete, or similar arrangement, is not considered disposed of or worthless before you dispose of your entire interest in the trade or business for which you entered into the covenant. Income tax preparation seniors Nonrecognition transfers. Income tax preparation seniors   If you acquire a section 197 intangible in a nonrecognition transfer, you are treated as the transferor with respect to the part of your adjusted basis in the intangible that is not more than the transferor's adjusted basis. Income tax preparation seniors You amortize this part of the adjusted basis over the intangible's remaining amortization period in the hands of the transferor. Income tax preparation seniors Nonrecognition transfers include transfers to a corporation, partnership contributions and distributions, like-kind exchanges, and involuntary conversions. Income tax preparation seniors   In a like-kind exchange or involuntary conversion of a section 197 intangible, you must continue to amortize the part of your adjusted basis in the acquired intangible that is not more than your adjusted basis in the exchanged or converted intangible over the remaining amortization period of the exchanged or converted intangible. Income tax preparation seniors Amortize over a new 15-year period the part of your adjusted basis in the acquired intangible that is more than your adjusted basis in the exchanged or converted intangible. Income tax preparation seniors Example. Income tax preparation seniors You own a section 197 intangible you have amortized for 4 full years. Income tax preparation seniors It has a remaining unamortized basis of $30,000. Income tax preparation seniors You exchange the asset plus $10,000 for a like-kind section 197 intangible. Income tax preparation seniors The nonrecognition provisions of like-kind exchanges apply. Income tax preparation seniors You amortize $30,000 of the $40,000 adjusted basis of the acquired intangible over the 11 years remaining in the original 15-year amortization period for the transferred asset. Income tax preparation seniors You amortize the other $10,000 of adjusted basis over a new 15-year period. Income tax preparation seniors For more information, see Regulations section 1. Income tax preparation seniors 197-2(g). Income tax preparation seniors Reforestation Costs You can elect to deduct a limited amount of reforestation costs paid or incurred during the tax year. Income tax preparation seniors See Reforestation Costs in chapter 7. Income tax preparation seniors You can elect to amortize the qualifying costs that are not deducted currently over an 84-month period. Income tax preparation seniors There is no limit on the amount of your amortization deduction for reforestation costs paid or incurred during the tax year. Income tax preparation seniors The election to amortize reforestation costs incurred by a partnership, S corporation, or estate must be made by the partnership, corporation, or estate. Income tax preparation seniors A partner, shareholder, or beneficiary cannot make that election. Income tax preparation seniors A partner's or shareholder's share of amortizable costs is figured under the general rules for allocating items of income, loss, deduction, etc. Income tax preparation seniors , of a partnership or S corporation. Income tax preparation seniors The amortizable costs of an estate are divided between the estate and the income beneficiary based on the income of the estate allocable to each. Income tax preparation seniors Qualifying costs. Income tax preparation seniors   Reforestation costs are the direct costs of planting or seeding for forestation or reforestation. Income tax preparation seniors Qualifying costs include only those costs you must capitalize and include in the adjusted basis of the property. Income tax preparation seniors They include costs for the following items. Income tax preparation seniors Site preparation. Income tax preparation seniors Seeds or seedlings. Income tax preparation seniors Labor. Income tax preparation seniors Tools. Income tax preparation seniors Depreciation on equipment used in planting and seeding. Income tax preparation seniors Qualifying costs do not include costs for which the government reimburses you under a cost-sharing program, unless you include the reimbursement in your income. Income tax preparation seniors Qualified timber property. Income tax preparation seniors   Qualified timber property is property that contains trees in significant commercial quantities. Income tax preparation seniors It can be a woodlot or other site that you own or lease. Income tax preparation seniors The property qualifies only if it meets all of the following requirements. Income tax preparation seniors It is located in the United States. Income tax preparation seniors It is held for the growing and cutting of timber you will either use in, or sell for use in, the commercial production of timber products. Income tax preparation seniors It consists of at least one acre planted with tree seedlings in the manner normally used in forestation or reforestation. Income tax preparation seniors Qualified timber property does not include property on which you have planted shelter belts or ornamental trees, such as Christmas trees. Income tax preparation seniors Amortization period. Income tax preparation seniors   The 84-month amortization period starts on the first day of the first month of the second half of the tax year you incur the costs (July 1 for a calendar year taxpayer), regardless of the month you actually incur the costs. Income tax preparation seniors You can claim amortization deductions for no more than 6 months of the first and last (eighth) tax years of the period. Income tax preparation seniors Life tenant and remainderman. Income tax preparation seniors   If one person holds the property for life with the remainder going to another person, the life tenant is entitled to the full amortization for qualifying reforestation costs incurred by the life tenant. Income tax preparation seniors Any remainder interest in the property is ignored for amortization purposes. Income tax preparation seniors Recapture. Income tax preparation seniors   If you dispose of qualified timber property within 10 years after the tax year you incur qualifying reforestation expenses, report any gain as ordinary income up to the amortization you took. Income tax preparation seniors See chapter 3 of Publication 544 for more information. Income tax preparation seniors How to make the election. Income tax preparation seniors   To elect to amortize qualifying reforestation costs, complete Part VI of Form 4562 and attach a statement that contains the following information. Income tax preparation seniors A description of the costs and the dates you incurred them. Income tax preparation seniors A description of the type of timber being grown and the purpose for which it is grown. Income tax preparation seniors Attach a separate statement for each property for which you amortize reforestation costs. Income tax preparation seniors   Generally, you must make the election on a timely filed return (including extensions) for the tax year in which you incurred the costs. Income tax preparation seniors However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Income tax preparation seniors Attach Form 4562 and the statement to the amended return and write “Filed pursuant to section 301. Income tax preparation seniors 9100-2” on Form 4562. Income tax preparation seniors File the amended return at the same address you filed the original return. Income tax preparation seniors Revoking the election. Income tax preparation seniors   You must get IRS approval to revoke your election to amortize qualifying reforestation costs. Income tax preparation seniors Your application to revoke the election must include your name, address, the years for which your election was in effect, and your reason for revoking it. Income tax preparation seniors Please provide your daytime telephone number (optional), in case we need to contact you. Income tax preparation seniors You, or your duly authorized representative, must sign the application and file it at least 90 days before the due date (without extensions) for filing your income tax return for the first tax year for which your election is to end. Income tax preparation seniors    Send the application to: Internal Revenue Service Associate Chief Counsel Passthroughs and Special Industries CC:PSI:6 1111 Constitution Ave. Income tax preparation seniors NW, IR-5300 Washington, DC 20224 Geological and Geophysical Costs You can amortize the cost of geological and geophysical expenses paid or incurred in connection with oil and gas exploration or development within the United States. Income tax preparation seniors These costs can be amortized ratably over a 24-month period beginning on the mid-point of the tax year in which the expenses were paid or incurred. Income tax preparation seniors For major integrated oil companies (as defined in section 167(h)(5)), these costs must be amortized ratably over a 5-year period for costs paid or incurred after May 17, 2006 (a 7-year period for costs paid or incurred after December 19, 2007). Income tax preparation seniors If you retire or abandon the property during the amortization period, no amortization deduction is allowed in the year of retirement or abandonment. Income tax preparation seniors Pollution Control Facilities You can elect to amortize the cost of a certified pollution control facility over 60 months. Income tax preparation seniors However, see Atmospheric pollution control facilities for an exception. Income tax preparation seniors The cost of a pollution control facility that is not eligible for amortization can be depreciated under the regular rules for depreciation. Income tax preparation seniors Also, you can claim a special depreciation allowance on a certified pollution control facility that is qualified property even if you elect to amortize its cost. Income tax preparation seniors You must reduce its cost (amortizable basis) by the amount of any special allowance you claim. Income tax preparation seniors See chapter 3 of Publication 946. Income tax preparation seniors A certified pollution control facility is a new identifiable treatment facility used in connection with a plant or other property in operation before 1976, to reduce or control water or atmospheric pollution or contamination. Income tax preparation seniors The facility must do so by removing, changing, disposing, storing, or preventing the creation or emission of pollutants, contaminants, wastes, or heat. Income tax preparation seniors The facility must be certified by state and federal certifying authorities. Income tax preparation seniors The facility must not significantly increase the output or capacity, extend the useful life, or reduce the total operating costs of the plant or other property. Income tax preparation seniors Also, it must not significantly change the nature of the manufacturing or production process or facility. Income tax preparation seniors The federal certifying authority will not certify your property to the extent it appears you will recover (over the property's useful life) all or part of its cost from the profit based on its operation (such as through sales of recovered wastes). Income tax preparation seniors The federal certifying authority will describe the nature of the potential cost recovery. Income tax preparation seniors You must then reduce the amortizable basis of the facility by this potential recovery. Income tax preparation seniors New identifiable treatment facility. Income tax preparation seniors   A new identifiable treatment facility is tangible depreciable property that is identifiable as a treatment facility. Income tax preparation seniors It does not include a building and its structural components unless the building is exclusively a treatment facility. Income tax preparation seniors Atmospheric pollution control facilities. Income tax preparation seniors   Certain atmospheric pollution control facilities can be amortized over 84 months. Income tax preparation seniors To qualify, the following must apply. Income tax preparation seniors The facility must be acquired and placed in service after April 11, 2005. Income tax preparation seniors If acquired, the original use must begin with you after April 11, 2005. Income tax preparation seniors The facility must be used in connection with an electric generation plant or other property placed in operation after December 31, 1975, that is primarily coal fired. Income tax preparation seniors If you construct, reconstruct, or erect the facility, only the basis attributable to the construction, reconstruction, or erection completed after April 11, 2005, qualifies. Income tax preparation seniors Basis reduction for corporations. Income tax preparation seniors   A corporation must reduce the amortizable basis of a pollution control facility by 20% before figuring the amortization deduction. Income tax preparation seniors More information. Income tax preparation seniors   For more information on the amortization of pollution control facilities, see Code sections 169 and 291(c) and the related regulations. Income tax preparation seniors Research and Experimental Costs You can elect to amortize your research and experimental costs, deduct them as current business expenses, or write them off over a 10-year period (see Optional write-off method below). Income tax preparation seniors If you elect to amortize these costs, deduct them in equal amounts over 60 months or more. Income tax preparation seniors The amortization period begins the month you first receive an economic benefit from the costs. Income tax preparation seniors For a definition of “research and experimental costs” and information on deducting them as current business expenses, see chapter 7. Income tax preparation seniors Optional write-off method. Income tax preparation seniors   Rather than amortize these costs or deduct them as a current expense, you have the option of deducting (writing off) research and experimental costs ratably over a 10-year period beginning with the tax year in which you incurred the costs. Income tax preparation seniors For more information, see Optional Write-off of Certain Tax Preferences , later, and section 59(e) of the Internal Revenue Code. Income tax preparation seniors Costs you can amortize. Income tax preparation seniors   You can amortize costs chargeable to a capital account (see chapter 1) if you meet both of the following requirements. Income tax preparation seniors You paid or incurred the costs in your trade or business. Income tax preparation seniors You are not deducting the costs currently. Income tax preparation seniors How to make the election. Income tax preparation seniors   To elect to amortize research and experimental costs, complete Part VI of Form 4562 and attach it to your income tax return. Income tax preparation seniors Generally, you must file the return by the due date (including extensions). Income tax preparation seniors However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Income tax preparation seniors Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Income tax preparation seniors 9100-2” on Form 4562. Income tax preparation seniors File the amended return at the same address you filed the original return. Income tax preparation seniors   Your election is binding for the year it is made and for all later years unless you obtain approval from the IRS to change to a different method. Income tax preparation seniors Optional Write-off of Certain Tax Preferences You can elect to amortize certain tax preference items over an optional period beginning in the tax year in which you incurred the costs. Income tax preparation seniors If you make this election, there is no AMT adjustment. Income tax preparation seniors The applicable costs and the optional recovery periods are as follows: Circulation costs — 3 years, Intangible drilling and development costs — 60 months, Mining exploration and development costs — 10 years, and Research and experimental costs — 10 years. Income tax preparation seniors How to make the election. Income tax preparation seniors   To elect to amortize qualifying costs over the optional recovery period, complete Part VI of Form 4562 and attach a statement containing the following information to your return for the tax year in which the election begins: Your name, address, and taxpayer identification number; and The type of cost and the specific amount of the cost for which you are making the election. Income tax preparation seniors   Generally, the election must be made on a timely filed return (including extensions) for the tax year in which you incurred the costs. Income tax preparation seniors However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Income tax preparation seniors Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Income tax preparation seniors 9100-2” on Form 4562. Income tax preparation seniors File the amended return at the same address you filed the original return. Income tax preparation seniors Revoking the election. Income tax preparation seniors   You must obtain consent from the IRS to revoke your election. Income tax preparation seniors Your request to revoke the election must be submitted to the IRS in the form of a letter ruling before the end of the tax year in which the optional recovery period ends. Income tax preparation seniors The request must contain all of the information necessary to demonstrate the rare and unusual circumstances that would justify granting revocation. Income tax preparation seniors If the request for revocation is approved, any unamortized costs are deductible in the year the revocation is effective. Income tax preparation seniors Prev  Up  Next   Home   More Online Publications