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ISO 9000 costs.

According to an Internal Revenue Service audit position paper, all internal and external costs of ISO 9000 certification should be capitalized because ISO certification confers benefits that last beyond the year in which the costs are incurred.

ISO 9000 certification signifies that a company's processes conform to a series of quality system standards developed by the International Organization for Standardization (ISO), based in Geneva, Switzerland. Many businesses, both foreign and domestic, and governments require their suppliers to be ISO 9000 certified.

The IRS position paper likens ISO certification to an initial entry into a new market or business. It cites court cases dealing with obtaining a seat on a stock exchange, admission to the bar or acquiring hospital privileges. The IRS does not analyze certification in the context of maintaining existing customers and markets, which motivates many if not most certifications. The position paper also cites the U.S. Supreme Court's holding in Indopco v. Commissioner (503 U.S., 112 S.Ct. 1039, 1992) that certain legal and professional fees incurred by a target company to facilitate a friendly merger created significant long-term benefits and thus should be capitalized. The IRS has used Indopco to support capitalization for a broad range of expenses, such as environmental cleanup costs.

Observation: Interestingly, the paper does not address amortization of capitalized costs. A taxpayer faced with an IRS proposed adjustment seeking capitalization of ISO certification costs may want to negotiate a short amortization term. Also, the IRS decision to capitalize ISO 9000 costs could impose significant administrative burdens on some businesses and have the effect of increasing the cost of certification -- a competitive disadvantage not faced by non-U.S. companies.
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Title Annotation:taxation of International Organization for Standardization certification expenses
Author:Hollingsworth, Tracy
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Feb 1, 1997
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