An intangible tax is a tax assessed by federal and state governments on assets of intangible value, such as goodwill, the value of a worker’s experience and/or knowledge, trade and franchise names, non-competitive agreements related to business mergers and acquisitions, trademarks and a company’s human capital. The Internal Revenue Service defines intangible assets as types of property that possess value but cannot be touched or seen.
The IRS designates specific intangible assets. This list includes intangible assets that can be amortized over 15 years and other intangible assets that are not eligible for amortization.
The IRS states that intangible assets must be amortized if they are held in connection with the taxpayer’s trade, business or any activity that produces income. In addition to the aforementioned, intangible assets also include licenses, permits or other rights granted by a governing body or agency, customer or supplier-based property, business records and books, and operating systems or other information systems, including lists concerning prospective or current customers.
Businesses should recognize their intangible assets at their fair values. The costs of leasehold improvements or software developed in-house should be recognized at their true cost. If the asset has a finite useful life, it should be amortized over the useful life. The amount to be amortized is the recorded cost less any residual value.