A tax reform proposal unveiled in the Senate will bring needed market-based reform to the tax code by implementing a fairer depreciation schedule for intangible assets held by small businesses, according to Independent Insurance Agents & Brokers of America (IIABA) CEO Robert A. Rusbuldt.
S. 1371, introduced on a bipartisan basis by Sens. Jim Bunning (R-Ky.) and John Breaux (D-La.), proposes to amend Section 197 of the Internal Revenue Code by allowing the acquiring business owner to write off the first $5 million of intangible assets in the year of the purchase, with the remainder to be depreciated equally over 14 years.
Under current law, all intangible assets must be amortized ratably over a 15-year schedule. Both Bunning and Breaux are members of the Senate Finance Committee, which oversees tax policy in that chamber and will debate this measure. Reps. Mark Foley (R-Fla.) and Max Sandlin (D-Texas), members of the tax-policy-writing Ways and Means Committee, introduced companion legislation in the House in March.
“The current 15-year depreciation schedule is problematic for business owners seeking to sell their small business because the tremendous tax burden assumed by the purchaser limits their financial ability to pay the former owner,” Rusbuldt said.
“Also, the amortization schedule contained in current law is not close to reflecting the reality of the useful life of intangible assets in the business world. Small business owners, like independent agents and brokers, have learned that the actual economic life of an intangible asset is much shorter than the 15 years currently called for in Section 197.”
To ensure that the bill is specifically targeted at small business owners, S. 1371 defines an eligible small business as “a taxpayer whose average annual gross receipts do not exceed $5 million for the preceding three years.” If enacted, the proposal would apply retroactively to transactions completed on or after Jan. 1 of this year.
“S. 1371 would make it easier for independent insurance agents and brokers to sell their operations because the largest and highest-value assets they hold are their customer and prospect lists,” explains IIABA Senior Vice President of Federal Government Affairs Maria L. Berthoud.
“The change in the tax code enacted in 1993 provided certainty in the tax treatment of intangible assets, but unfortunately its depreciation schedule is not reflective of business practice used by thousands of entrepreneurs nationwide. S. 1371 would make the write off of intangible assets more equitable for small business owners.”
The types of intangible assets covered by Section 197 are lengthy. Classified as intangible assets under the Internal Revenue Code are goodwill, going-concern value, workforce in place, business records (to include customer lists), patents and other intellectual property, customer-based intangibles (market share and other values resulting from future provision of goods and services), supplier-based intangibles (any value resulting from future acquisitions of goods or services), licenses, covenants not to compete and franchise, trademark or trade name.
This provision would not apply to the acquisition of a patent, trademark or customer list without a transfer of the entire related business in which the asset is used.
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