Tax amortization benefit

When the purchaser of an intangible asset is allowed to amortize the price of the asset as an expense for tax purposes, the value of the asset is enhanced by this tax amortization benefit.[1] Specifically, the fair market value of the asset is increased by the present value of the future tax savings derived from the tax amortization of the asset. The present value of these savings is to be estimated and included as a part of the fair market value when valuing an intangible asset.

The present value of the future tax savings is a mathematical function of the fair market value. This creates circularity, because the fair market value includes the present value of the tax savings.[2] This circularity can be handled using a two-step procedure consisting in estimating the value of the intangible asset in the absence of the tax amortization benefit first and then grossing up the previous value by a tax amortization benefit factor.[3]

${\displaystyle FMV\,=\,{VBAB*TAB_{factor}}}$

where

1. FMV is the fair market value of the intangible asset
2. VBAB is the value of the intangible asset before amortization benefits
3. TAB factor is the result of the formula defined below

The tax amortization benefit factor (or TAB factor) is the result of a mathematical function of a corporate tax rate, a discount rate and a tax amortization period:

${\displaystyle TAB_{factor}\,=\,{1 \over [1-{t \over n}*({1 \over k}-{1 \over (k*(1+k)^{n})})]}}$

where

1. TAB factor is the value assuming end-year discounting
2. t is the corporate tax rate applicable to the future amortization of the asset
3. n is the tax amortization period of the asset in years
4. k is the discount rate

The corporate tax rate as well as the tax amortization period are defined by country-specific tax legislations. The tax amortization period might be different from the useful life used in accounting. For example, while trademarks can have an indefinite useful life for accounting purposes, the tax legislation of the United States establishes a mandatory 15-year amortization period for trademarks.[4]

• Business valuation
• Business valuation standard
• Intellectual property valuation
• Market-based valuation
• Purchase price allocation

• The Canadian Institute of Chartered Business Valuators. Illustrative Example of Intangible Asset Valuation. 2009.

• Online tax amortization benefit calculator and a list of legal tax amortization periods per country
• Tax amortization benefit calculator