Question

Describe how goodwill amortized for tax purposes for not for book purposes (i.e. no impairment) leads to temporary book-tax differences?

Why does Congress provide the dividends received deduction for corporations receiving dividends?

Answer 1

1)

Goodwill Amortization

Goodwill is the value of a business's name and reputation in the marketplace and is reported in the balance sheet. When you buy a company, you buy goodwill. According to IFRS 3, goodwill is calculated as the difference between the amount of consideration transferred from acquirer to acquiree and net identifiable assets acquired. You can normally write-off goodwill by amortizing it.

Writing Off Impairment

The goodwill will become "impaired", no matter what you do, and it will be worth less to the business than it was when you bought it.

For example: If a company follows the straight-line amortization method, the amount will be divided into 15years. For example, if goodwill is valued at $100,000, the company would divide that amount by 15 years to get the yearly tax-deductible amount of $6,666.

Companies report their intangible asset tax-deductible amounts in Part VI of IRS Form 4562, Depreciation and Amortization.

Assets Amortized Only for Tax

According to financial accounting regulations, intangible assets whose value over time doesn't decrease should not be amortized, but are amortized only for tax purposes.

Deferred tax consequences arise from the difference between the accounting treatment of an asset or liability and tax treatment. Under U.S. GAAP, goodwill cannot be amortized. In contrast, goodwill under prescribed circumstances may be amortized and deducted in determining the income tax liability

2)

The dividends acquired mitigates the extent to which the profits of a corporation may be a situation to more than two levels of taxation. It should only be subject to "double taxation", first taxable at the corporate level and then at the shareholder level. That is why congress provide the dividends received deduction for corporations receiving dividends.