Mr. and Mrs. Carleton founded Carleton Industries in 1993. This year, an independent appraiser placed a $25 million value on Carleton's business; $5 million of the value was attributable to unrecorded goodwill. Which of the following statements is true?
A) Mr. and Mrs. Carleton are allowed to amortize the $5 million value of their business goodwill over 15 years.
B) Mr. and Mrs. Carleton have a zero tax basis in their business goodwill.
C) Mr. and Mrs. Carleton cannot amortize the $5 million value of their business goodwill because it is an intangible asset with an indeterminable life.
D) None of these choices are true.

Question

Quizplus · Accepted Answer

According to the tax laws, goodwill acquired in a business acquisition can only be amortized for tax purposes if it is a purchased asset with a determinable life. Since the goodwill in this scenario was internally generated, it cannot be amortized for tax purposes, meaning Mr. and Mrs. Carleton have a zero tax basis in their business goodwill. Therefore, option B is the correct answer. Option A is incorrect because as stated earlier, goodwill cannot be amortized for tax purposes in this scenario. Option C is also incorrect because the goodwill was valued by an independent appraiser, so it does have a value and is not indeterminable. Option D is incorrect because option B is true.

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