Purchased Customer list

[Taxadvisor VA]

Client purchases a customer list for $153K, puts a $100K down, and agreement calls for the $53K to be paid off in one year less any cancelled accounts.
Well, accounts have cancelled totaling $34K. This reduces the original intangible asset base of $153K to $119K.
Questions:
1) Do I reduce the asset base to $119K and amortize that over the remaining 14 years?
2) Does this $34K get reduced over this same 14 year amortization period or can I take a write-off in 2012 of the full $34K?

Thanks,
Taxadvisor VA

[JON]

Close intangibles

You amortize the $100 over 15 years when the agreement is signed. The $19,000 is amortized over 14 years when the amount is determined exactly.

[Taxadvisor VA]

Close intangibles

You amortize the $100 over 15 years when the agreement is signed. The $19,000 is amortized over 14 years when the amount is determined exactly.

Jon- Thank you for your response.
I'm on board with the $100K. The intangible did have a signed contract started at 153K so amortization was based upon that value initially. Here we are one year later and $34K in contract value has been cancelled. Owners do not have to pay back the total 53K if contracts cancel within the first year.

Question- Do I take a one time write down of the $153K to $119K in 2012 by expensing the difference? Namely the $34K. Do I take a more conservative approach and write it down over the remaining 14 years ($34K)?

Let me know.
Thanks,
Taxadvisor VA

[Roland Slugg]

A purchased customer list is an amortizable section 197 intangible and can be amortized (straight-line) over 15 years. Now that the final cost of the asset is known, namely $119k, amortize that amount starting with the month it was placed in service (or when the related business was started, if later). This is $7,933 per year. If a tax return has already been filed and a different amount of amortization was deducted for this asset on that return, I would file an amended return to correct. For example, if the first year's deduction was based on a cost of $153k, then amortization of $10,200 was probably taken, adjusted for the actual number of months ... $850 per month. If it was based on an estimated cost of just $100k, then amortization of $6,667 was likely deducted, again adjusted for the actual number of months.

Under no circumstances is the price adjustment of $35k deductible. All that does is adjust the buyer's basis of the customer list he purchased.

Added point: If additional customers are lost, no write-off of their allocated portion of the $119k net cost is deductible. Code §197(f)(1)(A). The list's cost can only be recovered via amortization over 15 years or when it is sold or abandoned, if sooner, at which time its remaining unamortized basis will become deductible.

[JON]

Like I said

amortize the $100,000 over 15 starting in year one. Year two you have $19,000 more paid and amortize it over 14 years. Any other amount would only be a book writeoff of an asset. In the business if you buyout a tax practice at 25% of collections on your accounts over 5 years.. First year amourt of the known amount 15yr, second year 14 years etc . Uncertain items in purchases are handled this way. If there is no uncertianity for tax purposes/and probably book also and start amortizing when known..