WASHINGTON, D.C., March 12 - A tax reform proposal unveiled today by two House Ways and Means Committee members will bring some needed marketplace-based reform to the tax code by implementing a fair depreciation schedule for small businesses comprised largely of intangible assets, such as customer lists, says Robert A. Rusbuldt, CEO of the Independent Insurance Agents & Brokers of America (IIABA).
H.R. 1222, introduced jointly by Reps. Mark Foley (R-Fla.) and Max Sandlin (D-Texas), proposes to amend Section 197 of the Internal Revenue Code by allowing the acquiring business owner to write off the first $5 million of intangible assets in the year of the purchase, with the remainder to be depreciated equally over 14 years. Under current law, all intangible assets must be amortized ratably over a 15-year schedule.
“The current 15-year depreciation schedule is problematic for owners seeking to sell their small business because the tax burden assumed by the purchaser limits his or her financial ability to pay the former owner. Often times, potential buyers decide against buying an intangibles-laden business because of the tax implications,” explains Rusbuldt. “Besides, the amortization schedule contained in current law is not close to reflecting the reality of the useful life of intangible assets in the business world. Small business owners, like independent agents and brokers, have learned that the actual economic life of an intangible asset is five years, not the 15 years called for in Section 197.”
To ensure that the bill is specifically targeted at small business owners, Foley and Sandlin define an eligible small business “as a taxpayer whose average annual gross receipts do not exceed $5 million for the preceding three years.” If enacted, the proposal would apply retroactively to transactions completed on or after Jan. 1 of this year.
“For independent insurance agents and brokers, H.R. 1222 would make it easier for them to sell their operations because the largest and highest-value assets they hold are their customer and prospect lists,” explains IIABA Senior Vice President of Federal Government Affairs Maria L. Berthoud. “The change in the tax code enacted in 1993 provided certainty in the tax treatment of intangible assets. But unfortunately it did not adopt a depreciation schedule that is reflective of business practice used by thousands of entrepreneurs nationwide. H.R. 1222 would make the write-off of intangible assets more equitable for small business owners.”
Berthoud says the Foley-Sandlin proposal would provide a boost to not only independent agents and brokers, but literally thousands of small business owners whose operations include large amounts of intangible assets.
“H.R. 1222 has broad appeal to small business owners of many stripes. Whether they are an independent insurance agent or broker, a banker or a florist, once this bill is enacted it will make their business more attractive, and thus more salable, to a potential buyer,” says Berthoud.
The types of intangible assets covered by Section 197 are lengthy. Classified as intangible assets under the Internal Revenue Code are goodwill, going-concern value, workforce in place, business records (to include customer lists), patents and other intellectual property, customer-based intangibles (market share and other values resulting from future provision of goods and services), supplier-based intangibles (any value resulting from future acquisitions of goods or services), licenses, covenants not to compete and franchise, trademark or trade name. This provision would not apply to the acquisition of a patent, trademark or customer list without a transfer of the entire related business in which the asset is used.
Justin M. Roth, IIABA director of federal government affairs, says the Foley-Sandlin intangibles reform proposal will be a major point of conversation when 800 IIABA members are in Washington the first week of April to meet with their elected representatives during the Association’s annual legislative conclave.
“The number-one tax issue for IIABA members is reform of the tax treatment of intangible assets,” notes Roth. “They will be carrying a message about the importance of H.R. 1222 to their elected representatives in Congress.
“We commend Reps. Foley and Sandlin for their leadership. They clearly understand that a market-based, real-world depreciation schedule is needed for small businesses. They view this correction in the depreciation schedule for small businesses as overdue and equitable,” says Roth.
IIABA’s 27th Annual National Legislative Conference—the insurance industry's largest and most effective legislative meeting—will take place April 2-4 at The Capital Hilton in Washington, D.C.
Founded in 1896, IIABA is the nation’s oldest and largest national association of independent insurance agents and brokers, representing a network of more than 300,000 agents, brokers and their employees nationally. Its members are businesses that offer customers a choice of policies from a variety of insurance companies. Independent agents and brokers offer all lines of insurance—property, casualty, life and health—as well as employee benefit plans and retirement products. Web address: www.independentagent.com.