Question

The cost of a covenant not to compete for 20 years incurred in connection with the acquisition of a business is amortized over 10 years. True or False?

1) True
2) False

Answer 1

The answer is False, as the cost of a covenant not to compete should be amortized over its life span of 20 years, not 10 years.

Step-by-step explanation:

The question concerns whether the cost associated with a covenant not to compete for 20 years, acquired in the context of a business acquisition, is amortized over 10 years. The correct answer is False. According to the Internal Revenue Service (IRS) in the United States, for tax purposes, the cost of a covenant not to compete is amortized over the life of the covenant, which in this case is 20 years. Amortization allows for the deduction of this intangible asset’s cost over its useful life, providing a way for businesses to recover certain capital expenditures over the time they are expected to generate income.