Intangible Personal Property and Intangible Assets

Demystifying Intangible Personal Property and Intangible Assets

In valuation, the concepts of intangible personal property (IPP) and intangible assets (IA) are often conflated, or combined and confused as the same thing, leading to misunderstandings and potential mistakes. It's crucial to understand the distinctions between these two terms, as they have significant implications for property taxation and accurate asset valuation.

What is Intangible Personal Property (IPP)?

IPP refers to specific, identifiable intangible assets that are legally protected and owned by a business. Examples of IPP include trademarks, trade names, brand names, patents, copyrights, trade secrets, franchise agreements, licenses, non-compete agreements, customer lists, patient lists, favorable contracts, favorable financing agreements, and reputation.

Essentially, IPP is a form of property that provides tangible economic benefits to the owner. It is legally recognized and protected, much like physical property.

What are Intangible Assets (IA)?

On the other hand, intangible assets (IA) are an accounting concept, not a legal one. By definition, IA are non-monetary assets without physical substance. These assets are created through accounting transactions and are expected to generate economic returns for the company in the future, with this expectation extending for more than one year or one operating cycle.

While IPP is an intangible asset with legal protections, IA is a broader category that includes both IPP and other intangible items, such as accounting goodwill.

The Importance of Distinguishing IPP from Accounting Goodwill

One of the most critical distinctions to make is between IPP and accounting goodwill. Accounting goodwill is an unidentifiable residual value that represents a company's overall competitive advantage, created as the result of a business acquisition. It can include factors like the company's reputation, superior management, or favorable business location. Unlike IPP, accounting goodwill is invisible, immeasurable, and not considered a true "property" in the legal sense.

For assessors and taxpayers, properly separating IPP from accounting goodwill is essential, as many states exempt IPP from personal property taxation. However, attempting to estimate IPP and accounting goodwill values using simplistic formulas or rules-of-thumb often leads to inaccurate results.

For assessors, clearly delineating these concepts allows for a more precise valuation of IPP assets that are subject to taxation. It prevents overvaluation and double-taxation of the same intangible values.

The Bottom Line

Both taxpayers and assessors benefit from an in-depth understanding and methodical analysis when dealing with the complex realm of intangible asset valuation. By clearly distinguishing between IPP, IA, and accounting goodwill, businesses can rightfully claim IPP exemptions, while assessors can properly tax the true tangible values.

Navigating the world of intangible assets requires expertise and a nuanced approach. By demystifying these concepts, businesses can unlock the full potential of their intangible assets while remaining compliant with taxation regulations.

If you need further assistance to understand and apply these concepts, contact Sampson Valuation Consulting. Our specialty is intangibles valuation, and we can guide you through the process, ensuring accuracy and compliance.