Question

A patent was purchased by Telecom on a production process for $250,000 a few years ago and $91,000 of the cost has been amortized. A new process was developed by a competitor that makes the Telecom's patent worthless. Telcom public announced the patent will no longer be enforced. What is the tax consequence to Telecom?

A. $159,000 capital loss.

B. Telecom has no tax consequences because it did not sell or exchange the patent.

C. $159,000 Section 1231 loss.

D. $159,000 ordinary abandonment loss.

Correct answer WITH explanation will receive positive rating

Answer 1

Ans:

When an intangible asset is purchased it should be amortised per year based on the life of the asset. Once it is fully depreciated it is automatically removed from the books, but whenever an intangible asset is worthless before fully amortisation it should be amortised fully in the year of asset become worth less.

100% of balance amount of intangible asset should be amortised in such year. So when 100% of patent will be amortised it will create ordiniary business loss.

So correct answer is Option D.

Ordiniary abandonment loss of $159,000.