Intangible Asset

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What is an 'Intangible Asset'

An intangible asset is an asset that is not physical in nature. Corporate intellectual property, including items such as patents, trademarks, copyrights and business methodologies, are intangible assets, as are goodwill and brand recognition. Intangible assets exist in opposition to tangible assets which include land, vehicles, equipment, inventory, stocks, bonds and cash.

BREAKING DOWN 'Intangible Asset'

An intangible asset can be classified as either indefinite or definite. A company brand name is an indefinite asset, as it stays with the company as long as the company continues operations. However, if a company enters a legal agreement to operate under another company's patent, with no plans of extending the agreement, the agreement has a limited life and is classified as a definite asset.

To learn more about asset classes, check out "What is the difference between tangible and intangible assets?"

Value of Intangible Assets

While intangible assets don't have the obvious physical value of a factory or equipment, they can prove valuable for a firm and can be critical to its long-term success or failure. For example, a business such as the Coca-Cola Company wouldn't be nearly as successful were it not for the high value obtained through its brand-name recognition. Although brand recognition is not a physical asset that can be seen or touched, its positive effects on bottom-line profit are the driving force behind Coca-Cola's global sales year after year.

Reporting Intangibles to the IRS

Businesses may create or acquire intangible assets. For example, a business may create a mailing list of clients or it may establish a patent. However, another business may eventually buy or acquire either of those intangibles. If a business creates an intangible asset, it cannot write off its value on its income tax return, but if a business acquires the asset, it may claim the cost as a capital expense.

To illustrate, if a business takes out a patent, it may claim the cost of paying inventors, filing the patent application, hiring a patent lawyer and other related costs as business expenses. It may not, however, evaluate the patent and claim that amount as a business expense as well. However, if another business buys the patent, it may write off the cost of the patent. The IRS requires businesses to amortize the cost of intangibles, which means to write them off incrementally over a number of years.

Tangible Vs. Intangible Assets

Tangible assets include both real and financial assets. Real assets include machinery, vehicles, buildings and equipment, while financial assets include those that derive their value from a contractual claim, such as stocks and bonds.