The Federal Board of Revenue (FBR) has clarified the provisions related to amortization deductions for intangibles in Section 24 of the Income Tax Ordinance, 2001, through updates issued up to June 30, 2021.
The ordinance, amended by the Finance Act, 2021, outlines the criteria and methodology for allowing individuals a deduction for the cost of intangibles used in deriving business income.
Key Provisions of Section 24:
1. Eligibility for Amortization Deduction:
• Individuals are eligible for an amortization deduction in a tax year for the cost of intangibles.
• The intangibles must be wholly or partly used by the person in the tax year to derive income from business chargeable to tax.
• The intangibles must have a normal useful life exceeding one year.
2. Restrictions on Deductions:
• No deduction is allowed under this section if another section of the ordinance has already allowed a deduction for the entire cost of the intangible in the tax year of acquisition.
3. Calculation of Amortization Deduction:
• The deduction is computed using the formula A/B, where A is the cost of the intangible, and B is the normal useful life of the intangible in whole years.
• For intangibles without an ascertainable useful life, a normal useful life of twenty-five years is assumed.
4. Partial Use of Intangibles:
• If an intangible is used partly for deriving income from business chargeable to tax and partly for another use, the deduction is restricted to the fair proportional part of the amount that would be allowed if the intangible were wholly used for business.
5. Partial Year Usage:
• If an intangible is not used for the entire tax year in deriving income from business chargeable to tax, the deduction is calculated using the formula A x B/C, where A is the amount of amortization, B is the number of days the intangible is used for business, and C is the number of days in the tax year.
6. Total Deduction Limit:
• The total deductions allowed in the current tax year and previous tax years for an intangible shall not exceed the cost of the intangible.
7. Disposal of Intangibles:
• If a person disposes of an intangible in a tax year, no amortization deduction is allowed.
• Excess consideration received over the written down value of the intangible is treated as income, and if less, the difference is allowed as a deduction.
8. Written Down Value and Consideration:
• The written down value of an intangible at the time of disposal is determined by subtracting total deductions allowed from the cost.
• The consideration received on disposal is determined as per Section 77.
9. Treatment of Availability:
• An intangible available for use on a day is treated as used on that day.
10. Definition of Terms:
• “Cost” includes any expenditure incurred in acquiring or creating the intangible.
• “Intangible” encompasses various properties like patents, inventions, designs, copyrights, trademarks, and contractual rights, excluding self-generated goodwill.
It is important to note that the provided information is for reference purposes, and individuals are advised to consult with tax professionals for accurate and up-to-date advice. The disclaimer emphasizes that while efforts are made to provide correct information, the team at PkRevenue.com is not responsible for any errors or omissions.