Assembled Workforce Under Section 197: Amortization and Anti-Churning

An assembled workforce acquired as part of buying a trade or business is a Section 197 intangible, and the buyer recovers its cost through straight-line amortization over 15 years, beginning in the month the deal closes.¹ The rule is mechanical once the asset exists, but whether it exists at all depends on how the deal is structured, and the amount allocated to it must be defensible enough to survive review. Errors can trigger accuracy-related penalties of 20% of the resulting underpayment.²

What Counts as Workforce in Place

Section 197(d)(1)(C)(i) defines workforce in place to include the composition of the workforce and the terms and conditions of employment, whether those terms sit in formal contracts or informal arrangements.¹ Treasury Regulation 1.197-2(b)(3) defines “composition” as the collective experience, education, and training of the employees. Any portion of the purchase price tied to the existence of a skilled team, an existing employment contract, or a relationship with key consultants falls into this bucket.³

The consultant point catches people. The regulation reaches beyond W-2 employees to include established relationships with independent contractors who know the systems and processes. What the asset really captures is that the buyer inherits a functioning operation instead of starting from scratch.

Workforce in place is a separate Section 197 category from goodwill and going concern value, even though all three amortize over the same 15 years. The distinction matters for valuation and for purchase price allocation on Form 8594, where workforce in place falls under Class VI while goodwill and going concern value sit in Class VII.⁴

You Cannot Amortize a Workforce You Built Yourself

Section 197(c)(2) excludes self-created intangibles from amortization unless they fall within a short list of exceptions (franchises, trademarks, trade names, covenants not to compete, and certain government-granted rights). Workforce in place is not on that list.¹

So if you spend years recruiting, training, and assembling a team yourself, those costs are ordinary business expenses you deduct as incurred. You never capitalize them as a Section 197 intangible. The 15-year amortization only becomes available when you acquire someone else’s workforce as part of buying their trade or business. One narrow exception: if you create an intangible in connection with acquiring assets that constitute a trade or business or a substantial portion of one, the self-created bar does not apply.¹

How the 15-Year Amortization Works

Once the asset exists on your books, recovery is mechanical. Straight-line, exactly 15 years, 180 months. The same amount each month, starting in the month the acquisition closes. Close on October 15 and your first monthly deduction covers all of October.¹

The 15-year timeline is fixed regardless of what happens to the workforce afterward. If half the acquired employees quit within a year and the rest leave within three, you keep taking the same monthly deduction for the full 180 months. Section 197 deliberately eliminates the useful-life inquiry that used to generate disputes between buyers and the IRS.

The Loss Disallowance Trap

This is where many buyers get caught off guard. If the acquired workforce turns over completely and the asset becomes worthless, you cannot simply write off the remaining unamortized basis. Not while you still hold other Section 197 intangibles from the same acquisition.

Section 197(f)(1) provides that when you dispose of, or recognize the worthlessness of, one amortizable Section 197 intangible but retain other Section 197 intangibles acquired in the same transaction, no loss is recognized. The unrecovered basis of the disposed asset is added to the basis of the retained intangibles and continues amortizing over their remaining periods.¹

In practice, the loss is only recognized when you dispose of all remaining Section 197 intangibles from the original deal. Because goodwill is itself a Section 197 intangible and typically survives as long as the business operates, a workforce loss may be deferred for years or permanently. Buyers who plan to allocate a substantial portion of the purchase price to workforce in place should understand this limitation before signing.

How the Deal Structure Controls Whether You Get the Deduction

Whether an acquired workforce is amortizable at all depends almost entirely on how the acquisition is structured.

Asset Purchases

In an asset purchase, the buyer acquires specific assets and steps up their tax basis to fair market value. The purchase price is allocated among those assets under Section 1060, using the residual method that also governs deemed asset sales under Section 338(b)(5).⁵ The workforce-in-place allocation is set here, in that residual process.

Stock Purchases

Buying corporate stock buys the equity, not the individual assets. The target’s asset bases carry over unchanged, no workforce intangible is separately identified, and there is nothing to amortize. The buyer’s basis sits in the stock itself.

A Section 338 election can change that. When a purchasing corporation makes the election after a qualified stock purchase, the target is treated as though it sold all its assets at fair market value on the acquisition date and repurchased them as a new corporation the following day.⁶ The deemed sale triggers a basis step-up and lets the buyer recognize workforce in place as a Section 197 intangible, just as in a true asset purchase. The election has to be filed properly and on time; a defective election forfeits the benefit entirely.

Valuing the Workforce

The dollar amount allocated to an assembled workforce has to be defensible under IRS review. Most appraisers use the cost-to-replace method (also called cost-to-recreate) to build that number: estimate what a buyer would spend assembling an equivalent team from scratch.

A cost-to-replace analysis typically layers in:

Recruitment costs: job postings, recruiter fees, and internal HR time spent screening and interviewing.
Onboarding costs: background checks, drug screenings, administrative processing, equipment setup, and orientation.
Training costs: wages paid to both trainee and trainer during the learning period, plus any external training programs or materials.
Productivity loss: the gap between a new hire’s output and an experienced employee’s output during ramp-up, multiplied by fully loaded compensation.

Appraisers calculate these costs for each category of employee, weight them by headcount, and sum the totals. The cost-based approach is generally preferred over income-based methods because it draws on observable data (actual hiring budgets, salary figures, training timelines) rather than requiring the appraiser to isolate cash flows attributable specifically to the workforce.

Documentation matters as much as the number itself. The IRS Internal Revenue Manual sets detailed expectations for intangible property valuations, including identification of the property, the effective valuation date, the standard of value, limiting conditions, market conditions near the valuation date, expected remaining useful life, contractual restrictions, and the relationship between the chosen approach and fair market value. Workpapers documenting every step must be maintained.⁷ Skimping here is the fastest way to lose a valuation dispute, and Section 6662 penalties of 20% of the underpayment attach to substantial valuation misstatements and negligence.⁸

Reporting the Allocation on Form 8594

Both buyer and seller in an applicable asset acquisition must file Form 8594 with their income tax returns for the year of the sale, allocating the total purchase price among seven asset classes.⁴ Workforce in place goes in Class VI, which covers Section 197 intangibles other than goodwill and going concern value. Those two sit in Class VII.

If an allocation changes after the year of sale (earnouts, purchase price adjustments, or valuation corrections), the affected party must file an updated Form 8594 with the return for the year of the change. Failing to file a correct form by the return’s due date without reasonable cause can carry penalties.⁹

Buyer and seller each file their own Form 8594, and the IRS compares them. Inconsistent allocations are a reliable audit trigger. Negotiating the allocation into the purchase agreement, in writing, is the cleanest way to prevent that mismatch.

Anti-Churning for Related-Party Deals

Section 197(f)(9) contains anti-churning rules aimed at preventing taxpayers from generating new amortization deductions on intangibles they effectively already owned. The rules apply chiefly to transactions between related parties, using a 20% ownership threshold rather than the 50% figure common elsewhere in the Code, and target intangibles held or used between July 25, 1991, and August 10, 1993.¹

For most workforce-in-place assets, that window has little practical effect because the 1993-era employees are long gone. The rules still bite in related-party reorganizations and rollover-equity transactions involving goodwill or going concern value continuously held since that period. Any deal involving related parties and a basis step-up in intangibles deserves a careful review of these provisions before you count on the amortization deduction.

1
Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
2
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
3
eCFR. 26 CFR 1.197-2 – Amortization of Goodwill and Certain Other Intangibles
4
Internal Revenue Service. Instructions for Form 8594 (Rev. November 2021)
5
Office of the Law Revision Counsel. 26 USC 1060 – Special Allocation Rules for Certain Asset Acquisitions
6
Office of the Law Revision Counsel. 26 USC 338 – Certain Stock Purchases Treated as Asset Acquisitions
7
Internal Revenue Service. Intangible Property Valuation Guidelines (IRM 4.48.5)
8
eCFR. 26 CFR 1.6662-2 – Accuracy-Related Penalty
9
Internal Revenue Service. Instructions for Form 8594 (Rev. November 2021)