(Archived Content)
Today, the Treasury Department issued proposed regulations on capitalizing costs incurred in acquiring, creating or enhancing intangible assets. In January of 2002, the Treasury Department and the IRS released an advance notice of proposed rulemaking requesting comments on rules expected to be contained in the proposed regulations. The proposed regulations generally follow the rules described in the advance notice.
“Uncertainty regarding the proper treatment of amounts spent that result in intangible assets has caused significant controversy between taxpayers and the IRS in recent years,” stated Treasury Assistant Secretary for Tax Policy Pam Olson. “The proposed regulations are an important step to clear and administrable rules that will allow taxpayers to compute their tax liability properly and the IRS to administer the law efficiently and fairly. The rules in the proposed regulations will reduce uncertainty and controversy in this area, freeing up both IRS and taxpayer resources for more productive activities.”
To clarify the application of section 263(a) of the Internal Revenue Code, the proposed regulations describe specific categories of expenditures incurred in acquiring, creating, or enhancing intangible assets that taxpayers are required to capitalize. Expenditures incurred in acquiring, creating or enhancing intangible assets that are not described in the proposed regulations are not required to be capitalized under section 263(a); however, such expenditures may need to be capitalized under another provision of the Code.
To reduce the administrative and compliance costs associated with section 263(a), the proposed regulations provide safe harbors and simplifying assumptions permitting the current deduction of certain costs and significantly reducing taxpayers' record-keeping burden. They include (i) a “12 month” rule, covering costs for certain intangible assets with relatively short useful lives, (ii) “de minimis” rules, covering certain costs less than a specified dollar amount, (iii) an employee compensation rule, covering salaries, bonuses, and commissions paid to employees, and (iv) an overhead rule, covering fixed and variable overhead costs.
In addition, the regulations propose a 15-year safe harbor amortization period for certain created intangible assets that do not have a readily ascertainable useful life. The proposed regulations also explain how taxpayers may deduct debt issuance costs. Comments are requested from the public regarding all of these rules.
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