The Internal Revenue Service and the tax authorities in some states have specific rules about trademark amortization deductions. Section 197 of the Internal Revenue Code (IRC) allows the capitalized cost of a trademark to be amortized and then deducted from taxable income rather deducted as an ordinary business expense. Capital cost amortization is required if the trademark is part of a trade or business, or if it is otherwise used to generate revenue.
What Is Amortization?
All costs incurred in the development of a trademark, including filing fees and attorney fees, are included in the capital costs. When a trademark is acquired from another party, the total cost of the acquisition is capitalized. The IRC permits a trademark's capital costs to be amortized over a 15-year period, which means the taxpayer can deduct a portion of these costs in each year of the amortization period. This deduction reduces the trademark owner's income subject to taxation.
Trademarks Are Intangibles
"Intangibles" are defined by Section 197 to include intellectual property, good will, licenses and permits, and the going concern value of a business. A trademark is considered among these intangibles, and it includes any name, word, symbol or other mark utilized in income-producing activities to distinguish the goods of one seller from another. Under Section 197, the costs incurred in renewing a trademark may be amortized as an acquisition over the allowed amortization period.
If the capitalized cost of a trademark is $20,000, that amount is divided by 15 and the resulting deduction for each year would be $1,333. The 15-year amortization period begins the month that the trademark was acquired or the month it was actively used to produce income, whichever is earlier. If the adjusted cost basis of the trademark is increased as a result of additional capitalization, this increase should be amortized over the remaining period.
State Trademark Amortization Rules
In addition to federal trademark amortization rules, some states have rules on trademark amortization. For example, the state of Kentucky adopted Internal Revenue Code Section 197 into its own tax code effective January 1, 1994. After that date, the amount used for the federal trademark amortization deduction is used for Kentucky state tax filings as well.
References & Resources
- University of California: Accounting Manual
- Internal Revenue Service: Publication 535 – Amortization | Section 197 Intangibles
- Cornell University Law School: USC › Title 26 › Subtitle A › Chapter 1 › Subchapter B › Part VI › § 197 prev next 26 USC § 197 - Amortization of Goodwill and Certain Other Intangibles
- State of Kentucky: Administrative Regulation 103 KAR 15:090. Computing the Amortization Deduction for Intangible Assets.
- Michigan Legislature: Single Business Tax Act of 1975
- United States Patent and Trademark Office: Trademarks Homepage
- United States Patent and Trademark Office: Post-Registration Timeline
- The Entrepreneur's Guide to Patents, Copyrights, Trademarks, Trade Secrets & Licensing; Jill Gilbert Welytok