Intangible assets are often overlooked in day-to-day operations but understanding them can be an invaluable tool when it comes to building your brand and reducing your tax bill. In this article, we’ll discuss what are intangible assets are and how they can benefit your business.
What are intangible assets?
Intangible assets are the non-physical resources owned by a business. Intangible assets can include intellectual property like patents, trademarks, and copyrights as well as brand recognition, customer loyalty, and reputation.
Intangible assets can provide a competitive advantage by distinguishing a business from its competitors, creating value for customers and even provide future economic benefits. As a small business owner or solopreneur, it’s important to understand the value of an intangible asset and how it can be leveraged to help your business grow and succeed.
What are identifiable intangible assets?
Identifiable intangible assets are assets that can be separated from the company and bought or sold. They still fall under the umbrella of intangible assets, which means they don’t have a physical form. Examples of identifiable intangible assets are intellectual property, patents, copyrights, and trademarks.
What are unidentifiable intangible assets?
Unidentifiable intangible assets are assets that can’t be separated from the company and exist in relation to the company. Brand recognition, customer loyalty, and goodwill are all examples of unidentifiable intangible assets.
Why are intangible assets important?
Even though there’s nothing to touch, see or feel, an intangible asset can still generate a huge benefit for a small business owner.
Freelancers and solopreneurs often rely on intangible assets, like customer loyalty, referrals and reputation to gain clients and grow their businesses. Understanding and investing in intangible assets can build credibility and trust with clients and also provide a competitive edge in a crowded marketplace.
And as a final bonus, a company’s intangible assets may also help you lower your tax bill! Keep reading to learn about how intangible assets become a deductible expenses.
How do intangible assets impact your Balance Sheet?
Intangible assets have an effect on both your Profit and Loss and Balance Sheet, and can have a financial effect on your business.
Intangible assets can become a business deduction in the form of amortization expense, which affects your Profit and Loss statement. Amortization is a method of spreading the cost of an intangible asset over its useful life, similar to the depreciation of tangible assets. By doing so, the business can deduct a portion of the cost of an intangible asset each year, through the amortization expense, which can help to reduce its taxable income.
Intangible assets are also reflected on your Balance Sheet. They are grouped with the rest of your business assets, like your cash accounts and fixed assets, like buildings or equipment.
As a quick refresh: assets are resources that a business owns that have economic value and they contribute to determining the total value of your business. Properly reporting intangible assets can help with the valuation of your business and demonstrate the resources it can use to generate revenue and support its operations.
What are examples of intangible assets?
The most common intangible assets include:
Goodwill: Represents the value of a business beyond its tangible assets, generated through factors such as reputation, customer loyalty, and brand recognition.
Trademarks: Distinctive words, names, logos, and symbols used to identify and distinguish a business’s products or services.
Patents: Legal protections granted for new inventions or discoveries, providing the owner with exclusive rights to make, use, and sell the invention.
Copyrights: Legal protections granted for original works of authorship, such as books, music, and art, giving the owner exclusive rights to reproduce, distribute, and display the work.
Trade secrets: Confidential information that provides a business with a competitive advantage, such as formulas, processes, and customer lists.
Brand names: A unique name or design that identifies and distinguishes a business’s products or services from those of its competitors.
Licenses: Legal agreements that grant the right to use or sell a product, service, or technology that is owned by another business or individual.
Intangible assets FAQs
What’s a real world example of an intangible asset?
Apple’s logo is a valuable intangible asset that immediately communicates quality, innovation, and user-friendliness to consumers worldwide. Similarly, Coca-Cola’s secret recipe is an intangible asset that has kept the company ahead of its rivals for over a century.
Are intangible assets current assets?
The distinction between current and noncurrent assets has to do with the liquidity of the asset – meaning, how quickly can it turn into cash. A noncurrent asset typically means it can’t be converted to cash within a year.
Intangible assets are assigned useful lives, which are typically more than one year and would be classified as non-current assets.
Is research and development an intangible asset?
Research and development (R&D) costs are typically expensed as incurred, rather than being recorded as an intangible asset on the Balance Sheet. This is because R&D costs do not have a direct and determinable future economic benefit, which is a key criterion for recognizing an asset on the balance sheet.
However, some R&D costs can meet the criteria for capitalization as an intangible asset if certain conditions are met. In order to be capitalized, R&D costs must meet specific criteria, such as having a clear and specific future economic benefit, a reliable estimate of the asset’s useful life, and the ability to measure the cost of the asset reliably.
What are tangible assets?
Tangible assets are physical assets. It can be financial assets, like cash, or non-financial assets like equipment and property. Other examples of tangible assets are inventory, accounts receivable, and prepaid expenses. Tangible assets are often easier to value than intangible assets because they have a physical form. Tangible assets are still subject to depreciation and may lose value over time.
- Intangible assets are non-physical resources owned by a business, such as intellectual property, brand recognition, customer loyalty, and reputation.
- Intangible assets can provide a competitive advantage by distinguishing a business from its competitors and creating value for customers.
- Understanding and investing in intangible assets can build credibility and trust with clients and provide a competitive edge in a crowded marketplace.
- Intangible assets impact both the Profit and Loss and Balance Sheet of a business and can become a business deduction in the form of amortization, which helps to reduce taxable income.
- Different types of identifiable intangible assets include goodwill, trademarks, patents, copyrights, trade secrets, brand names, and licenses.
- Properly reporting intangible assets can help with the valuation of a business and demonstrate the resources it can use to generate revenue and support its operations.
Overall, intangible assets are an important part of a business’s operations and can have a material effect on its financial statements. They can provide a competitive advantage and create value for a business, and it’s important for business owners to understand and properly manage them.
Marissa Achanzar is part of the sales team at Collective and doubles as a content writer based in Roseville, California. After a successful seven-year-stint in public accounting, Marissa decided to pivot and put her tax compliance and client engagement experience to use by creating practical, people-first educational content.
Marissa is also the founder of Something Good Co., a non-profit that supports foster and at-risk youth in the Sacramento region. In her spare time, she enjoys exercise, trying out new recipes, dabbling on piano or guitar and won’t say no to a good TV/movie marathon. You can find her on LinkedIn or contact her at [email protected]