While intangible assets have no physical shape or size, they pack lots of power for your business. If you and your employees have worked hard to create trademarks, patents, or copyrights, for example, you can use these assets in several ways to grow your business or increase your business profit.
- Intangible assets have no physical form but they provide value to your business.
- You can use these assets to create profits by selling or licensing them.
- Intangible assets can also be used to form a joint venture or franchise system.
- You can deduct the cost of intangible assets over several years to decrease your business's taxable income.
What Are Intangible Assets?
An intangible asset is a business asset that has no material substance, but it has value to its owner. Some intangible assets may have a physical component. For example, stocks and bond certificates represent a share of ownership and a DVD is an object containing a movie.
- Alternate name: Intangible property
- Acronym: IP
Examples of Intangible Assets
Intangible assets can be found in all areas of a business. For example:
- Technology, like technical manuals, engineering processes, computer software
- Customer relationships
- Trained and competent workers (called "workforce in place")
- Customer relationships, including goodwill (the value of customer relationships),
- Trade secrets, brand recognition, and business processes ("the way you do things in your company")
- Marketing and advertising campaigns and materials
- Location-related assets like land, water, and mineral rights
Intellectual Property as Intangible Assets
Intellectual property (IP) is a category of intangible assets. These assets are creative works of individuals who have property ownership rights. The most common examples of intellectual property are:
- Trademarks and service mark registration for the "look" of a website, a company's logo, or its unique brand
- Copyright registration for works of authorship, including books, website content, movies, plays, artwork, and photos
- Patent registration for inventions, including processes, manufactured products, and plant hybrids
- Trade secrets for information that has economic value to a business because it is known only to a few key individuals, and for which registration depends on the type of asset
You can register intellectual property and some other types of intangibles to give you more clout in a lawsuit against someone who uses these types of intangible assets without your permission.
Use Intangible Assets for Profit
Sell Intangible Assets
Some general intangibles, like business processes, can be packaged and sold. You can receive royalties on the sale of a book while you keep the copyright or sell a mobile app, getting paid from users on a one-time or monthly basis.
Increase Sales Value
Goodwill is an important intangible asset in the sale of a business. It is the difference between the fair market price or book value of all the business assets and the sale price. It may be used in accounting for the purchase of all or part of a company. Other intangible assets may also be valued and included in the sale price of a business.
Consider Licensing, Joint Ventures, and Franchising
After intangible assets have been registered, they can be used in various ways to bring income to your business.
You can grant other businesses a license to make products from your copyrighted, trademarked, or patented work. For example, you can license someone to create and sell apparel using your company logo or to produce and sell the new machine you invented.
You can form a joint venture with another company that has marketing expertise to sell your new mobile app or your innovative customer relations software. Joint ventures are great ways to combine resources and expertise on specific projects to save money.
Another possibility is to bundle intangible assets like products and processes to franchise your business operation. In this case, you are basically selling clones of your business products and operations.
Deduct the Cost of Intangible Assets
Owning business assets allows companies to deduct their costs as expenses to reduce their income tax bill. The IRS has some requirements for deducting the cost of intangible assets, through a process called amortization. Amortization is a calculation for spreading out the expense deduction for intangible assets over the useful life of the asset instead of taking the full deduction in just one year.
Amortization works like straight-line depreciation, which is used for physical assets like vehicles, machinery, and equipment. The deductions begin with the month the intangibles were acquired or the month the intangible property begins to produce income, whichever is later.
Under Section 197 of the Internal Revenue Code, the IRS designates certain intangible assets that can be amortized over 15 years and other intangible assets which cannot be amortized. The complete list is on Section 197 Intangible Assets.
Frequently Asked Questions
How are intangible assets valued?
It's difficult to value assets that don't have a physical form, and different types of intangibles are valued differently. Most intellectual property is valued on the income it produces, while software developed and used within a business is valued primarily on the cost to produce it. A third approach, market valuation, is based on transactions involving intangible assets exchanged in an arms-length transaction or in public trading.
Do I need an attorney or CPA to sell or license intangible assets?
You will need to hire an intellectual property lawyer who can help you navigate the legal complexities of selling, licensing, and other contracts involving intangible assets. You will also need a licensed CPA to determine the value of your company's intangible assets for tax and accounting purposes.
How does tax work on the sale of intangible assets?
Selling an intangible asset might result in a net gain and require payment of capital gains tax instead of regular income tax. The tax is calculated on the difference between the original cost (called the asset's basis) and the sale cost. The tax rate depends on total income and how long you have owned the asset: the short-term rate for assets held less than a year; the long-term rate for assets held a year or more. The maximum net capital gains rate is 20%, but most taxpayers pay 15% or less.