10/29/2020 What Is the Business Transfer Tax for Intangible Assets? | Small Business - Chron.

com

What Is the Business Transfer Tax for

Intangible Assets?
Small Business | Finances & Taxes | Business Taxes
By Pat O'Connor

A business transfer tax is the value-added tax (VAT) in many countries around the world. Some
governments charge businesses a fee on every product and service that's manufactured or
consumed in that country; a fee is paid when raw materials are sold, and another fee is paid when
the finished product is sold. It may be hidden from the public and not appear on the sales receipt,
but the cost of goods is higher. The sale of intellectual property is one intangible asset that's
subjected to a VAT in other parts of the world. However, the United States has no such tax. When
a business is sold for a profit, the IRS collects a capital gains tax, but there's no equivalent of a
business transfer tax.

Business Appraisal
A federal capital gains tax may be assessed when the ownership of a business changes hands.
Prior to this, the prospective buyer or the buyer's lender requests an appraisal to determine the
current fair market value of the company. This is an estimate of the purchase price that a
reasonable buyer will pay a reasonable seller. In order to derive this value, an appraiser must
estimate projected income and expenses, and the value of both the tangible -- equipment and
inventory -- and intangible -- goodwill -- assets of a business.

Intangible Assets
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10/29/2020 What Is the Business Transfer Tax for Intangible Assets? | Small Business - Chron.com

Intangible assets are nonphysical resources that add future value to a company. Intangibles are
classified into two categories: limited-life and unlimited-life. Limited life assets include goodwill,
intellectual property, licenses, copyrights and patents. A trademark, on the other hand, doesn't
expire and is categorized as an unlimited-life intangible asset. Intangible assets can't be
destroyed by wind or fire, but they can be lost over time. A company that enjoys a great reputation
as an honest, ethical firm may lose that characterization if the new management lowers the
standards of service.

Valuation of Intangibles
Estimating the value of equipment and inventory is a relatively straightforward process.
Estimating the intangible value is much more subjective. Since 2002, national accounting
standards require companies to report the value of their intangible assets on their balance sheets,
but it's often unclear to analysts how the numbers are derived. However, how the items are
categorized on the financial statements has a major affect on the future tax liability of the
company.

Capital Gains Tax

When an company holds an investment longer than one year, it may qualify for a favorable capital
gain tax, which has a maximum rate of 15 percent; the regular tax has a maximum 35 percent
rate. Many intangibles are taxed at the capital gains rate. However, if the intangible was
amortized, it is taxed at the higher rate. Amortization allows the cost of the intangible to be
deducted as an expense over 15 years. If the intangible has an expected useful life longer than 15
years, it probably isn't amortized.

References
Photo Credits
• Comstock/Comstock/Getty Images

About the Author

Pat O'Connor is the broker/owner of The Veritas Real Estate Group in Coral Springs, Fla. She
holds a M.A. in psychology from the University of South Carolina. O'Connor has been writing
real estate and loan origination textbooks, as well as developing online courses, since 2005.
Her latest publication is the kindle ebook, "The SAFE Mortgage Loan Originator National Exam
Study Guide."

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