Tax amortization benefit


accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compare with other ob ...
, tax amortization benefit (or tax amortisation benefit) refers to the
present value In economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behavi ...
of income tax savings resulting from the
tax deduction Tax deduction is a reduction of income that is able to be tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of ...

tax deduction
generated by the
amortization Amortization (or amortisation; ) is paying off an amount owed over time by making planned, incremental payments of principal Principal may refer to: Title or rank * Principal (academia) The principal is the chief executive and the chief academ ...
of an
intangible asset An intangible asset is an asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economi ...

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 The Internal Revenue Code (IRC), formally the Internal Revenue C ...
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, is a direct tax Though the actual definitions vary between jurisdictions, in general, a direct tax is a tax imposed upon a person or property as distinct from a tax imposed upon a tra ...
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 type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also ...
can have an indefinite useful life for accounting purposes, the tax legislation of the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America North America is a continent A continent is any of several large ...

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

See also

Business valuation Business valuation is a process and a set of procedures used to estimate the economic value In economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, a ...

Business valuation
Business valuation standard Business Valuation Standards (BVS) are codes of practice that are used in business valuation. The major business appraisal standards are these: * CICBV Practice Standards. Published by the CBV Institute. * Uniform Standards of Professional Appraisa ...
Intellectual property valuation Valuation (finance), Valuation is considered one of the most critical areas in finance; it plays a key role in many areas of finance such as buy/sell, solvency, merger and Takeover, acquisition. Rationale There are numerous individual reasons or mo ...
Market-based valuation A Market-based valuation is a form of stock valuationIn financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more gene ...
* Purchase price allocation




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

External links

Online tax amortization benefit calculator and a list of legal tax amortization periods per country

Tax amortization benefit calculator
Intellectual property law Corporate taxation Tax law Valuation (finance) Intangible assets