Property consists of two basic types – tangible and intangible. Intangible property is exempt in some US states, while almost all tangible property is taxable.
Some states exempt all intangibles, while others exempt only certain parts of intangible property. In either case, the tax savings can be substantial. If you do business in a state that exempts intangibles, that value can reduce your tax burden. It is well worth the time to find out what is and what isn’t taxable in any jurisdiction where you own property.
Identifying Intangible Assets
Tangible property comprises all physical assets, the property you can see and touch. Intangible property comprises assets that do not have physical form. A trademark is an intangible asset, as are licenses, franchises, and contracts. But these are only a few of the many intangible property types. Consider the following list, which covers just the first four letters of the alphabet:
Advertising, agreements, awards and judgments, bank customers, blueprints, brand names and logos, certificates, chemical formulas, claims, computer software, databases, contracts, copyright, credit information, customer lists and relationships, designs, development rights, distribution rights, docking rights, domain names, drilling rights.
Once your intangible property is identified, its worth must be determined. While Intangible assets can be hard to appraise, they are valuable in a business, and there are ways to determine that value.
The Value of Intangibles
How do you know if intangible property has value? One way is to compare the current costs of the hard assets (tangible property) with the overall value of the property. If the overall value is higher, then intangible property values exist.
This intangible value difference can be substantial. In fact, for some companies the value of intangibles is as much or more than that of tangible assets. Telecommunication companies, for example, may see more value in their intangible than tangible property when elements such as spectrum licenses are considered. If you have a good-sized industrial or utility property, you may have a great deal of intangible value that could potentially be tax exempt.
It is important to know whether the state in which you do business exempts intangibles, as well as how they define those intangibles. For example, one of the primary areas of intangible value is goodwill, which states define in several different ways. The broadest definition allows intangibles to include everything above book cost. Some states go with this, while others define the term more narrowly. If your state uses a broad definition, you could get a substantial tax deduction.
Of course, to secure those tax savings, it is also important to know how much intangible property you have. If you do business in a state that exempts all or part of the value of intangibles, you want to know what that value is for your system. Often the onus is upon the taxpayer to present or prove the existence of intangible property, so you may have to do some work to get there.
You may be able to do it yourself if you have some experience with intangible value. But if you are not proficient in discerning what intangible property is and how much value it has, you will want some outside support.
Some states allow booked intangible value to be deducted. Again, the onus is on you to prove it, but proving booked intangibles is easy. Much harder to prove is the intangible value that is not booked and where a professional can help. So Before attempting to delve into this area alone, you may consider getting some expert assistance with your intangible assets to see tangible tax benefits.
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