A trademark is a type of intangible, or nonphysical, asset that gives a business the exclusive right to use a name, phrase or logo. Amortization is the process of allocating, or spreading out, the cost of an intangible asset over its useful life. This process gradually reduces your small business’s profit over time instead of all at once. Although some intangible assets are always amortized in your accounting records, you amortize a trademark only when you have a good idea of how long you'll use it.
Definite vs. Indefinite Life
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Generally accepted accounting principles, or GAAP, require a business to amortize only intangible assets with definite lives. Because a trademark can be renewed every 10 years with the U.S. Patent and Trademark Office indefinitely, a business typically does not amortize a trademark in its accounting records. However, if a business determines it will no longer use a trademark, it must amortize the cost of the trademark for the remainder of its useful life because its life can now be identified.
Acquiring a Trademark
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When a business initially obtains a trademark, it capitalizes its cost, which means it reports the cost on its balance sheet instead of as an expense on the income statement. If a business buys a trademark from another entity, it capitalizes the entire purchase price. If it develops a trademark internally, it capitalizes only the costs directly related to creating and registering it, such as design and legal fees. Unless a business later determines that it must amortize the trademark or that the trademark has lost value, this capitalized value remains on the balance sheet.
Amortization Calculation
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To amortize a trademark in its records, a business debits the amortization expense account and credits the trademark account by the amount of the appropriate amortization expense each year. The annual amortization expense equals the trademark’s value on the balance sheet minus its expected value at the end of its life, divided by the number of years remaining in its life. This reduces the trademark’s value on the balance sheet and records the expense on the income statement, which reduces your reported profit.
Example
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Assume your small business buys a trademark from another company for $60,000 that you plan to use indefinitely. Later, you decide you will use the trademark for only another four years, at which time you expect it to be worthless. Initially, you would not amortize the trademark. When you determine you will no longer use it, you would amortize it over the remaining four years. The annual amortization expense is $15,000, or $60,000 divided by four. To amortize the trademark, debit the amortization expense account and credit the trademark account annually by $15,000.
