accounting Accounting, also known as accountancy, is the process of recording and processing information about economic entity, economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activit ...

, tax amortization benefit (or tax amortisation benefit) refers to the

present value In economics and finance, present value (PV), also known as present discounted value (PDV), is the value of an expected income stream determined as of the date of valuation. The present value is usually less than the future value because money ha ...

of income tax savings resulting from the

tax deduction A tax deduction or benefit is an amount deducted from taxable income, usually based on expenses such as those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and tax credits. The diff ...

generated by the

amortization Amortization or amortisation may refer to: * The process by which loan principal decreases over the life of an amortizing loan * Amortization (accounting), the expensing of acquisition cost minus the residual value of intangible assets in a syst ...

of an

intangible asset An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, exclusive franchises, Goodwill (accounting), goodwill, trademarks, and trade names, reputation, Research and development, R&D, Procedural knowledge, ...

Intangible asset valuation

When the purchaser of an intangible asset is allowed to amortize the price of the asset as an expense for tax purposes, the value of the asset is enhanced by this tax amortization benefit. Specifically, the

fair market value The fair market value of property is the price at which it would change hands between a willing and informed buyer and seller. The term is used throughout the Internal Revenue Code, as well as in bankruptcy laws, in many state laws, and by several ...

of the asset is increased by the present value of the future tax savings derived from the tax amortization of the asset. The present value of these savings is to be estimated and included as a part of the fair market value when valuing an intangible asset.

Circularity of the tax amortization benefit

The present value of the future tax savings is a mathematical function of the fair market value. This creates circularity, because the fair market value includes the present value of the tax savings. This circularity can be handled using a two-step procedure consisting in estimating the value of the intangible asset in the absence of the tax amortization benefit first and then grossing up the previous value by a tax amortization benefit factor. :

FMV\,=\,

where # FMV is the fair market value of the intangible asset # VBAB is the value of the intangible asset before amortization benefits # TAB factor is the result of the formula defined below

Tax amortization benefit factor

The tax amortization benefit factor (or TAB factor) is the result of a mathematical function of a

corporate tax A corporate tax, also called corporation tax or company tax or corporate income tax, is a type of direct tax levied on the income or capital of corporations and other similar legal entities. The tax is usually imposed at the national level, but ...

rate, a discount rate and a tax amortization period: :

TAB_\,=\,

where # TAB factor is the value assuming end-year discounting # t is the corporate tax rate applicable to the future amortization of the asset # n is the tax amortization period of the asset in years # k is the discount rate The corporate tax rate as well as the tax amortization period are defined by country-specific tax legislations. The tax amortization period might be different from the useful life used in accounting. For example, while

trademarks A trademark (also written trade mark or trade-mark) is a form of intellectual property that consists of a word, phrase, symbol, design, or a combination that identifies a product or service from a particular source and distinguishes it from ot ...

can have an indefinite useful life for accounting purposes, the tax legislation of the

United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...

establishes a mandatory 15-year amortization period for trademarks.IRC SECTION 704(c) AND IRC SECTION 197 INTANGIBLES
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References

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Sources

* The Canadian Institute of Chartered Business Valuators. ''Illustrative Example of Intangible Asset Valuation''. 2009.

External links