Amortization is a method of recovering (deducting) certain capital costs over a fixed period of time. It is similar to the straight line method of depreciation. The amortizable costs discussed in this section include the start-up costs of going into business, reforestation costs, the costs of pollution control facilities, and the costs of section 197 intangibles. See chapter 8 in Publication 535 for more information on these topics.taxmap/pubs/p225-035.htm#en_us_publink1000218309
When you go into business, treat all costs you incur to get your business started as capital expenses. Capital expenses are a part of your basis in the business. Generally, you recover costs for particular assets through depreciation deductions. However, you generally cannot recover other costs until you sell the business or otherwise go out of business.
Start-up costs are costs for creating an active trade or business or investigating the creation or acquisition of an active trade or business. Start-up costs include any amounts paid or incurred in connection with any activity engaged in for profit and for the production of income before the trade or business begins, in anticipation of the activity becoming an active trade or business.
You can elect to currently deduct up to $5,000 of business start-up costs paid or incurred during the tax year. See Capital Expenses
in chapter 4
. If this election is made, any costs that are not currently deducted can be amortized.
The amortization period for business start-up costs paid or incurred before October 23, 2004, is 60 months or more. For start-up costs paid or incurred after October 22, 2004, the amortization period is 180 months. The period starts with the month your active trade or business begins.taxmap/pubs/p225-035.htm#en_us_publink1000218311
To amortize your start-up costs that are not currently deductible under the election to deduct, complete Part VI of Form 4562 and attach a statement containing any required information. See the Instructions for Form 4562.
For more information, see Starting a Business in chapter 8 of Publication 535.taxmap/pubs/p225-035.htm#en_us_publink1000218312
You can elect to currently deduct a limited amount of qualifying reforestation costs for each qualified timber property. See Capital Expenses
in chapter 4
. You can elect to amortize over 84 months any amount not deducted. There is no annual limit on the amount you can elect to amortize. Reforestation costs are the direct costs of planting or seeding for forestation or reforestation.
Qualifying costs include only those costs you must otherwise capitalize and include in the adjusted basis of the property. They include costs for the following items.
- Site preparation.
- Seeds or seedlings.
- Depreciation on equipment used in planting and seeding.
If the government reimburses you for reforestation costs under a cost-sharing program, you can amortize these costs only if you include the reimbursement in your income.taxmap/pubs/p225-035.htm#en_us_publink1000218314
Qualified timber property is property that contains trees in significant commercial quantities. It can be a woodlot or other site that you own or lease. The property qualifies only if it meets all the following requirements.
- It is located in the United States.
- It is held for the growing and cutting of timber you will either use in, or sell for use in, the commercial production of timber products.
- It consists of at least one acre planted with tree seedlings in the manner normally used in forestation or reforestation.
Qualified timber property does not include property on which you have planted shelter belts or ornamental trees, such as Christmas trees. taxmap/pubs/p225-035.htm#en_us_publink1000218315
The 84-month amortization period starts on the first day of the first month of the second half of the tax year you incur the costs (July 1 for a calendar year taxpayer), regardless of the month you actually incur the costs. You can claim amortization deductions for no more than 6 months of the first and last (eighth) tax years of the period.taxmap/pubs/p225-035.htm#en_us_publink1000218316
To elect to amortize qualifying reforestation costs, enter your deduction in Part VI of Form 4562. Attach a statement containing any required information. See the Instructions for Form 4562.
Generally, you must make the election on a timely filed return (including extensions) for the year in which you incurred the costs. However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). Attach Form 4562 and the statement to the amended return and write "Filed pursuant to section 301.9100-2" on Form 4562. File the amended return at the same address you filed the original return.
For additional information on reforestation costs, see chapter 8 of Publication 535.taxmap/pubs/p225-035.htm#en_us_publink1000218317
You can elect to amortize the cost of a certified pollution control facility generally over a 60-month period, beginning either the month following the month the facility is completed or acquired or with the tax year following the year the facility was completed or acquired.
You can claim a special depreciation allowance on a certified pollution control facility that is qualified property even if you elect to amortize its cost rather than capitalize the costs and depreciate the facility. You must reduce its cost (amortizable basis) by the amount of any special depreciation allowance you claim.
A certified pollution control facility is a new identifiable treatment facility used in connection with a plant or other property generally in operation before 1976 to reduce or control water or atmospheric pollution or contamination. The facility must do so by removing, changing, disposing, storing, or preventing the creation or emission of pollutants, contaminants, wastes, or heat. The facility must also be certified by the state and federal certifying authorities. Examples of such a facility include septic tanks and manure control facilities.
The federal certifying authority will not certify your property to the extent it appears you will recover (over the property's useful life) all or part of its cost from the profit based on its operation (such as through sales of recovered wastes). The federal certifying authority will describe the nature of the potential cost recovery. You must then reduce the amortizable basis of the facility by this potential recovery.taxmap/pubs/p225-035.htm#en_us_publink1000218320
This year, you purchase a new $75,000 manure control facility for use in connection with a dairy plant on your farm. The farm has been in operation since you bought it in 1976 and all of the dairy plant was in operation before that date. You have no intention of recovering the cost of the facility through sale of the waste and a federal certifying authority has so certified.
Your manure control facility qualifies for amortization. You can elect to amortize its cost over 60 months. Otherwise, you can capitalize the cost and depreciate the facility.
In addition, to amortize its cost over 60 months, the facility must not significantly increase the output or capacity, extend the useful life, or reduce the total operating costs of the plant or other property. Also, it must not significantly change the nature of the manufacturing or production process or facility.taxmap/pubs/p225-035.htm#en_us_publink1000218321
This year, you converted your 100-sow farrow-to-finish swine operation, which has existed on your farm since 1975, to a 5,000-head finishing swine operation. Even though you are in a similar business after the conversion, you cannot amortize the cost of a new manure control facility used in connection with your swine operation because you have significantly increased its output or capacity. You can, however, recover the cost of the facility by claiming depreciation deductions.taxmap/pubs/p225-035.htm#en_us_publink1000218322
For more information on the amortization of pollution control facilities, see chapter 8 of Publication 535 and section 169 of the Internal Revenue Code and the related regulations.taxmap/pubs/p225-035.htm#en_us_publink1000218323
You must generally amortize over 15 years the capitalized costs of section 197 intangibles you acquired after August 10, 1993. You must amortize these costs if you hold the section 197 intangible in connection with your farming business or in an activity engaged in for the production of income. Your amortization deduction each year is the applicable part of the intangible's adjusted basis (for purposes of determining gain), figured by amortizing it ratably over 15 years (180 months). You are not allowed any other depreciation or amortization deduction for an amortizable section 197 intangible.
Section 197 intangibles include the following assets.
- Covenants not to compete.
See chapter 8 in Publication 535 for more information, including a complete list of assets that are section 197 intangibles and special rules.