CPA Regulation Reg Quiz: Amortize Intangible Assets

What this quiz covers

This quiz focuses on Amortize Intangible Assets, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Regulation Reg.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. 15 years (180 months) using the straight-line method, beginning with the month of acquisition (correct answer)
2. The asset's estimated useful life using the straight-line method
3. 40 years for goodwill and 15 years for all other Section 197 intangibles
4. 5 years for customer-based intangibles and 15 years for goodwill

Explanation: IRC Section 197(a) requires amortization of Section 197 intangibles over 15 years (180 months) using the straight-line method beginning in the month of acquisition. All Section 197 intangibles use the same 15-year period regardless of actual useful life. Option B is incorrect; the taxpayer's estimate of useful life is irrelevant. Option C is incorrect; goodwill and all other Section 197 intangibles use the same 15-year period. Option D invents category-specific periods that do not exist in Section 197.

Question 2

1. $40,000
2. $20,000 (correct answer)
3. $30,000
4. $8,000

Explanation: Total Section 197 intangibles = $120,000 +$60,000 + $420,000 =$600,000. Annual amortization = $600,000 / 15 =$40,000. Year 1 covers July through December = 6 months. Year 1 deduction = $40,000 x (6/12) =$20,000. Tangible assets are not Section 197 intangibles and are depreciated separately. Option A is the full annual amount without the partial-year adjustment. Option C uses 9 months. Option D uses 2 months.

Question 3

1. A patent created internally by the taxpayer's own research and development team
2. Off-the-shelf computer software purchased separately and readily available to the general public
3. A franchise agreement acquired as part of the purchase of an ongoing business (correct answer)
4. A short-term operating lease on commercial office space

Explanation: A franchise agreement acquired in connection with the purchase of an ongoing business is expressly listed as a Section 197 intangible under IRC Section 197(d)(1)(F). Option A is incorrect; self-created intangibles generally do not qualify as Section 197 intangibles. Option B is incorrect; off-the-shelf software readily available to the public is specifically excluded from Section 197 under Section 197(e)(3). Option D is incorrect; interests under leases of tangible property are excluded from Section 197 under Section 197(e)(5).

Question 4

1. Over 8 years (remaining legal life) using the straight-line method
2. Over the lesser of 15 years or the remaining legal life of the patent
3. Over 17 years (original patent protection period) using straight-line
4. Over 15 years using the straight-line method as a Section 197 intangible (correct answer)

Explanation: A patent acquired in connection with a business acquisition is a Section 197 intangible under Section 197(d)(1)(C). It must be amortized over 15 years regardless of its remaining legal life. The actual remaining legal life (8 years) is irrelevant for tax purposes once the asset is classified as a Section 197 intangible. Option A uses the remaining legal life, which applies to separately acquired patents (not acquired as part of a business). Option B invents a lesser-of rule that does not apply to Section 197. Option C uses the original patent life.

Question 5

1. $10,000 (correct answer)
2. $12,000
3. $60,000
4. $6,000

Explanation: The covenant not to compete is a Section 197 intangible (acquired in connection with a business acquisition), amortized over 15 years regardless of the contractual 3-year term. Annual amortization = $180,000 / 15 =$12,000. Year 1 covers March through December = 10 months. Year 1 deduction = $12,000 x (10/12) =$10,000. Option B is the full annual deduction without the partial-year adjustment. Option C amortizes over 3 years (the contractual term), which is incorrect. Option D uses only half a year.

Question 6

1. $6,000
2. $3,000
3. $1,500 (correct answer)
4. $4,500

Explanation: Annual amortization = $90,000 / 15 =$6,000. Year 1 covers October, November, and December = 3 months. Year 1 deduction = $6,000 x (3/12) =$1,500. Option A is the full annual amount. Option B is 6 months. Option D is 9 months.

Question 7

1. Over 15 years as a Section 197 intangible
2. Over 5 years as 5-year MACRS property
3. Expensed immediately in the year of acquisition
4. Over 36 months using the straight-line method beginning in the month of acquisition (correct answer)

Explanation: Computer software that is acquired separately (not as part of a business acquisition) is excluded from Section 197 under Section 197(e)(3) if it is not of a type that generally is available to the public. Under Rev. Proc. 2000-50, such separately acquired software is amortized over 36 months using the straight-line method beginning in the month placed in service. Option A is incorrect; this software is excluded from Section 197. Option B incorrectly applies 5-year MACRS. Option C would require the software to qualify for Section 179 or bonus depreciation.

Question 8

1. $18,000
2. $6,000 (correct answer)
3. $4,500
4. $9,000

Explanation: Annual amortization = $270,000 / 15 =$18,000. Year 1 covers September, October, November, and December = 4 months. Year 1 deduction = $18,000 x (4/12) =$6,000. Option A is the full annual amount. Option C uses 3 months. Option D uses 6 months.

Question 9

1. $22,500
2. $28,000
3. $30,000 (correct answer)
4. $45,000

Explanation: Annual amortization = $450,000 / 15 =$30,000. Year 2 is a full calendar year, so the deduction is the full $30,000. The partial-year calculation only applies to Year 1 (the acquisition year). For Year 2 and all subsequent full years, the deduction is$30,000. Option A applies an 8-month partial year to Year 2, which is incorrect. Option B uses an incorrect calculation. Option D applies a 10-year period.

Question 10

1. $1,500 per month
2. $750 per month
3. $900 per month
4. $1,000 per month (correct answer)

Explanation: Monthly amortization = Cost / 180 months = $180,000 / 180 =$1,000 per month. Section 197 requires straight-line amortization over exactly 180 months regardless of whether the asset has a fixed or indefinite life. Option A applies a 10-year (120-month) period. Option B applies a 20-year (240-month) period. Option C applies a 200-month period.

Question 11

1. Yes; client lists are Section 197 intangibles regardless of how they were created
2. No; Section 197 does not apply to self-created intangibles; only intangibles acquired from another party in connection with a trade or business qualify (correct answer)
3. Yes; but at 50% of the normal amortization rate as a penalty for not purchasing the asset at arm's length
4. No; client lists are never amortizable regardless of how they were acquired

Explanation: Section 197(c)(2) excludes self-created intangibles from Section 197 amortization. Only intangibles that are acquired (not created by the taxpayer) in connection with carrying on a trade or business qualify. Since the client list was developed internally, it has no tax basis and cannot be amortized. Option A incorrectly allows Section 197 for self-created intangibles. Option C has no basis in the tax code. Option D is incorrect in the other direction - client lists acquired from another party as part of a business acquisition do qualify for Section 197.

Question 12

1. The $350,000 gain is entirely capital gain because goodwill is a capital asset
2. The $350,000 gain is entirely Section 1231 gain eligible for preferential capital gain rates
3. The $350,000 gain consists of$200,000 of Section 1245 ordinary income (recapture of amortization taken) and $150,000 of Section 1231 gain (correct answer)
4. The entire $350,000 gain is Section 1245 ordinary income because all Section 197 dispositions are fully recaptured

Explanation: Total gain = $750,000 -$400,000 = $350,000. Section 1245 recapture applies to the extent of prior amortization deductions:$200,000 of ordinary income. The remaining $150,000 gain ($350,000 - $200,000) is Section 1231 gain, which qualifies for long-term capital gain treatment if Section 1231 produces a net gain. Options A and B treat the entire gain as capital without applying Section 1245. Option D treats all gain as ordinary, which would be correct only if amortization taken equaled or exceeded the total gain.

Question 13

1. Workforce in place is not a Section 197 intangible; it must be amortized based on estimated employee tenure
2. Workforce in place qualifies as a Section 197 intangible only if the workforce includes more than 50 employees
3. Workforce in place is a Section 197 intangible but is amortized over 10 years because it involves human capital
4. Workforce in place is expressly listed as a Section 197 intangible under IRC Section 197(d)(1)(C) and is amortized over 15 years using the straight-line method (correct answer)

Explanation: IRC Section 197(d)(1)(C) expressly includes 'work force in place including its composition and terms and conditions (contractual or otherwise) of its employment' as a Section 197 intangible. It is amortized over 15 years like all other Section 197 intangibles. Option A incorrectly denies Section 197 status. Option B fabricates an employee-count threshold. Option C incorrectly assigns a 10-year period.

Question 14

1. Organizational costs are deducted over 5 years since the corporation has not yet commenced operations
2. The corporation may deduct up to $5,000 immediately, but since costs exceed$50,000 by $30,000, the immediate deduction is fully phased out; all$80,000 is amortized over 180 months beginning when the corporation commences business (correct answer)
3. All organizational costs must be capitalized as Section 197 intangibles and amortized over 15 years
4. Organizational costs are fully deductible in the year incurred as start-up expenses under Section 195

Explanation: Under Section 248, a corporation may deduct up to $5,000 of organizational costs immediately. This amount is reduced dollar-for-dollar by the amount costs exceed$50,000. Here: $80,000 -$50,000 = $30,000 excess; immediate deduction =$5,000 - $30,000 =$0 (phased out). All $80,000 is amortized over 180 months beginning with the month the corporation begins business. Option A invents a 5-year amortization period. Option C incorrectly classifies organizational costs as Section 197 intangibles. Option D confuses organizational costs (Section 248) with start-up costs (Section 195).

Question 15

1. All $53,000 qualifies as Section 197 amortizable intangibles attributable to the acquisition
2. All $53,000 qualifies as start-up costs deductible under Section 195
3. Facilitating costs such as broker fees and legal closing costs must be capitalized; investigative due diligence costs incurred in pursuing a specific targeted acquisition are also capitalized; neither category is separately amortizable as a standalone Section 197 intangible (correct answer)
4. All $53,000 is immediately deductible as ordinary and necessary business expenses

Explanation: Under Treasury Regulation Section 1.263(a)-5, costs that facilitate a business acquisition must be capitalized. Inherently facilitative costs such as broker fees and legal closing costs are always capitalized. Investigative costs are also capitalized when incurred to pursue a specific identified acquisition target - as the due diligence costs here are. Truly pre-decisional investigatory costs incurred before any specific target is identified may be deductible, but once the taxpayer has targeted a specific acquisition, investigation costs become facilitation costs subject to capitalization. Both categories are capitalized into the acquisition's cost basis and amortized as part of the acquired assets (including goodwill) rather than as standalone Section 197 intangibles. Answer C is correct. Option A incorrectly characterizes these as standalone Section 197 intangibles. Option B misclassifies the costs as Section 195 start-up costs. Option D incorrectly treats all costs as immediately deductible.

Question 16

1. Section 197 amortization is available only in actual asset purchases, not deemed asset sales resulting from a Section 338(h)(10) election
2. Goodwill receives the same tax treatment regardless of whether the deal is structured as an asset purchase or a stock purchase
3. A Section 338(h)(10) election allows the acquirer to obtain a stepped-up basis in all acquired assets, including intangibles, enabling Section 197 amortization of goodwill that would not be available in a plain stock acquisition (correct answer)
4. A Section 338(h)(10) election always produces a better combined after-tax result for both buyer and seller compared to a stock purchase without the election

Explanation: In a straight stock acquisition without a Section 338(h)(10) election, the acquirer takes a carryover basis in the target's assets, and no goodwill step-up or new Section 197 amortization is available. A Section 338(h)(10) election treats the transaction as a deemed asset sale, giving the acquirer a stepped-up basis in all of the target's assets (including intangibles and goodwill) equal to the purchase price allocation. This enables Section 197 amortization of the full allocated goodwill and other intangibles. Option A is incorrect; deemed asset sales qualify for Section 197 the same as actual asset sales. Option B is incorrect; the treatment differs significantly. Option D overstates the election's benefit; the seller often bears higher tax cost from the deemed asset sale.

Question 17

1. The $15,000 loss is deductible in the current year as a capital loss
2. The $15,000 loss is deductible in the current year as an ordinary loss
3. The $15,000 loss is deductible only in the year the final Section 197 intangible from that acquisition is disposed of
4. No loss is recognized; under Section 197(f)(1), the unrecognized loss basis is reallocated proportionally to the other Section 197 intangibles from the same acquisition that are still held (correct answer)

Explanation: Section 197(f)(1) prevents recognition of a loss on the disposition of a Section 197 intangible when other Section 197 intangibles from the same acquisition bundle are still held. The rationale is that the individual intangibles were part of a bundle purchase and their individual values are interdependent. Instead of recognizing the loss, the unrecognized loss basis is added to the adjusted bases of the remaining Section 197 intangibles from the same acquisition. Options A and B allow current-year loss recognition contrary to Section 197(f)(1). Option C incorrectly defers the loss to a future year rather than reallocating the basis.

Question 18

1. $40,000 (correct answer)
2. $36,000
3. $30,000
4. $60,000

Explanation: Total Section 197 intangibles = $360,000 +$90,000 + $150,000 =$600,000. Annual amortization = $600,000 / 15 =$40,000. The acquisition was January 1, so the full calendar year is available - 12 months of amortization. Year 1 deduction = $40,000. Option B applies 13.5 months. Option C applies a 20-year period. Option D applies a 10-year period.

Question 19

1. The software is a Section 197 intangible and must be amortized over 15 years
2. Off-the-shelf software is excluded from Section 197 and is depreciable under MACRS as 3-year property; small-dollar purchases may qualify as immediately deductible de minimis business expenses (correct answer)
3. The software is amortized over 36 months using the straight-line method regardless of cost
4. Off-the-shelf software always qualifies for Section 179 expensing but not for regular MACRS depreciation

Explanation: Off-the-shelf computer software that is not customized and is available to the general public is specifically excluded from Section 197 under Section 197(e)(3). Under MACRS, such software is 3-year property. For low-cost software, many businesses can deduct it as a de minimis business expense if it meets the threshold under Treasury Regulation Section 1.263(a)-1(f). Option A incorrectly classifies the software as Section 197. Option C applies the 36-month rule that pertains to proprietary non-off-the-shelf software, not off-the-shelf software. Option D is incorrect; regular MACRS applies in addition to Section 179 eligibility.

Question 20

1. $8,000 (correct answer)
2. $5,000
3. $50,000
4. $3,000

Explanation: Under Section 195, up to $5,000 of start-up costs may be deducted immediately, reduced dollar-for-dollar by the amount by which start-up costs exceed$50,000. Since costs are exactly $50,000 (no excess), the full$5,000 immediate deduction is available. The remaining $45,000 is amortized over 180 months starting January 1. Year 1 amortization =$45,000 / 180 x 12 months = $3,000. Total Year 1 deduction =$5,000 + $3,000 =$8,000. Option B is only the immediate deduction. Option C expenses all costs immediately. Option D is only the amortization portion.