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.

a-True
b-False

Answer 1

The statement is false because the cost of a covenant not to compete should be amortized over the life of the covenant, up to 15 years, not 10 years.

Step-by-step explanation:

False. According to the Internal Revenue Service (IRS) regulations, the cost of a covenant not to compete is capitalized and amortized over its useful life. When it comes to acquisition of a business, typically, such covenants should be amortized over the same period of the benefit of the covenant, which would generally be the life of the covenant up to 15 years as set by the IRS for intangible assets. So if the covenant not to compete is for 20 years, it should be amortized over 15 years, not 10 years, for tax purposes.