Trademarks avoid confusion in the marketplace and help your customers quickly recognize your brand name. A trademark is a unique identifier that consists of one or more logos, symbols, names words or phrases. A company may seek legal recourse for infringement against anyone found using the trademark without permission.
The costs of creating or acquiring a trademark are treated, for accounting purposes, the same way as goodwill and other intangible assets. Instead of taking a large expense in one accounting period, the costs are spread out over the life of the asset. Divide the total capitalized cost by the economic life of the trademark to determine the monthly amortization amount. Amortization is shown on the company's general ledger as an expense. To set up the asset account in your general ledger, debit the total cost of the trademark. Credit this asset account by the monthly amortization amount each month and debit the amortization expense account.
Some expenses related to development must be expensed instead of amortizing them over the life of the trademark. Expense any costs that cannot be assumed to bring a tangible future benefit. This includes general research and development costs and software costs before the company has created a viable design of the trademark. Record the expense in the accounting period in which the cost occurs.
Direct costs incurred in creating or obtaining a trademark should be capitalized and amortized. These costs may include design and consulting fees, registration fees and legal or court fees incurred while acquiring or defending the trademark. You may can capitalize software costs once you have a finished trademark to submit with your application. If the trademark was purchased from another company, capitalize it at the value you paid or its fair market value.
For tax purposes, trademarks are considered intangible assets as defined in Section 197 of the Internal Revenue Code. The trademark must be expected to bring in future economic benefits and may not have a physical presence in the company's inventory. To qualify as a long-term asset for amortization, the trademark must last at least 12 months. Amortize the trademark over 180 months to determine your allowable tax deduction. You must complete Form 4562 if you have any trademark amortization deductions to report. Transfer the total from line 44 to the "Other Expenses" or "Other Deductions" section of your company's annual tax return.