On January 2, 2014, Fran acquires a business from Chuck. Among the assets purchased are the following intangibles: patent with a 7-year remaining life, a covenant not to compete for 10 years, and goodwill.
Of the purchase price, $140,000 was paid for the patent and $60,000 for the covenant. The amount of the excess of the purchase price over the identifiable assets was $100,000. What is the amount of the amortization deduction for 2014?
A) $10,667.
B) $16,000.
C) $20,000.
D) $32,667.
E) None of the above.

Question

Quizplus · Accepted Answer

The patent can be amortized over its remaining 7-year life, which gives an annual amortization of $140,000 / 7 = $20,000.
The covenant not to compete can be amortized over its 10-year life, which gives an annual amortization of $60,000 / 10 = $6,000.
The excess amount of $100,000 is attributed to the goodwill. Goodwill is not amortized for tax purposes, but it is classified as a Section 197 intangible and must be amortized over 15 years for financial reporting purposes. However, this question is asking for the tax amortization deduction. Therefore, the total amortization deduction for 2014 is $20,000 + $6,000 = $26,000, which is closest to answer choice C).

On January 2, 2014, Fran Acquires a Business from Chuck