Several years ago, Y&S Inc. purchased a patent on a production process for $250,000 and has amortized $91,000 of the cost. Y&S has learned that a rival company recently developed a new process that renders the patent worthless. Consequently, Y&S made a public announcement that it would no longer enforce the patent. What is the tax consequence to Y&S of this unfortunate situation?

Question

Quizplus · Accepted Answer

The correct answer is an ordinary abandonment loss of $159,000, which is the remaining book value of the patent ($250,000 original cost minus $91,000 amortized). When a business asset like a patent becomes worthless and is abandoned, the loss is treated as an ordinary loss rather than a capital loss, allowing the company to fully deduct the loss against ordinary income.

Several Years Ago, Y&S Inc