Code Section 197 Intangibles: 15-Year Amortization and Anti-Churning Rules

Section 197 intangibles are acquired intangible assets—goodwill, going concern value, customer lists, trademarks, covenants not to compete, and similar property—that you must amortize straight-line over exactly 15 years (180 months) when you hold them in a trade or business. Internal Revenue Code Section 197 replaced decades of litigation over useful lives with a single mandatory recovery period. You get certainty, but you’re locked in: a three-year customer list and a franchise with no expiration both run on the same 15-year clock.¹

What Counts as a Section 197 Intangible

Two conditions have to be met. The asset was acquired (not self-created, with narrow exceptions), and it is held for use in a trade, business, or income-producing activity.¹ The statute then sweeps in a broad set of categories:

Goodwill — the premium paid above the fair market value of a business’s identifiable assets.
Going concern value — the extra value a business carries because it is already up and running.
Workforce in place, including the terms and conditions of employment.
Information bases: business books and records, operating systems, customer and prospect lists, proprietary data.
Patents, copyrights, formulas, designs, processes, and similar know-how.
Customer-based intangibles, including market share and (for financial institutions) deposit bases.
Supplier-based intangibles.
Government-granted licenses and permits, such as a liquor license or broadcast license.
Covenants not to compete entered into in connection with the acquisition of a business.
Franchises, trademarks, and trade names, which qualify even when acquired separately from a business.

Goodwill and going concern value usually dominate the schedule because any part of the purchase price that cannot be assigned to an identifiable asset lands in goodwill under the residual method.

Covenants not to compete deserve a flag. Buyers and sellers often negotiate a three- or five-year term, but the contractual term is irrelevant for tax: Section 197 forces 15-year amortization anyway, and the statute blocks you from treating the covenant as disposed of or worthless until the entire acquired business interest tied to it is disposed of.¹

Self-created intangibles generally fall outside Section 197. Two exceptions matter. Self-created franchises, trademarks, trade names, covenants not to compete, and government-granted licenses still qualify. And the self-created exclusion disappears entirely when the intangible is created as part of an acquisition of a trade or business.¹

What’s Excluded

Section 197 does not reach every intangible. The main carve-outs:

Financial interests — stock, partnership interests, trust and estate interests, futures contracts, foreign currency contracts, and similar instruments.
Interests in land, including leaseholds and easements.
Off-the-shelf computer software that is readily available to the public, sold under a nonexclusive license, and not substantially modified. Any other software not acquired as part of a business is also excluded.¹
Certain separately acquired rights to receive tangible property or services for a fixed duration, which can be amortized over their actual contractual life.

The software exclusion is where real planning lives. Qualifying software is amortized straight-line over 36 months under IRC Section 167(f)(1)—a much faster write-off than the 15 years that applies to the same software bought as part of a business.² Purchase price allocation between software and other intangibles has real tax consequences.

How the 15-Year Amortization Works

Straight-line, 180 months, no exceptions. No half-year convention, no accelerated method, no bonus depreciation. Amortization starts in the later of the month you acquire the asset or the month business use begins.³

The arithmetic is simple. Take the basis allocated to the intangible and divide by 180 to get your monthly deduction. Allocate $900,000 to goodwill in an acquisition that closes October 1, and your monthly amortization is $5,000. That first calendar year gives you three months, or $15,000. Each full year afterward yields $60,000, running until the full $900,000 is recovered.¹

Once Section 197 applies to an asset, no other depreciation or amortization method is available for it. The upside is that you never need an expensive useful-life study. The downside shows up with short-lived assets whose economic value is gone long before the 180 months run out.

Purchase Price Allocation and the Forms You File

How you split the total purchase price among acquired assets drives the tax treatment of each piece, and the allocation is not optional. Both buyer and seller must use the residual method under Section 1060 and report on Form 8594.

Under the residual method, the price is allocated across seven asset classes in order, starting with cash and ending with Class VII — goodwill and going concern value. Whatever is left after allocating to all identifiable assets drops into Class VII.⁴ That’s why goodwill so often dominates the amortization schedule: it absorbs the residual. Recovery periods differ sharply by class — tangible equipment on five or seven years, off-the-shelf software on 36 months, Section 197 intangibles on 15 years — so buyers and sellers often have opposing incentives, which is exactly why the IRS requires consistent reporting from both sides.

Both parties file Form 8594 (Asset Acquisition Statement) with their income tax returns for the year of the sale whenever goodwill or going concern value attaches, or could attach, to the transferred assets. If the allocation later changes because of earn-outs, purchase price adjustments, or resolved contingencies, both parties file an amended Form 8594 for the year the change is taken into account. Missing a correct, timely filing can trigger penalties unless you show reasonable cause.⁵

The annual amortization deduction goes on Part VI of Form 4562 (Depreciation and Amortization) in the year the amortization period begins, attached to your business return.³ For later years, you can report the ongoing deduction on the “Other deductions” line of your return without reattaching Form 4562, unless you’re also claiming depreciation or new amortization that year.⁶ If you later discover an error in your amortization, correct it on an amended return where possible, or file Form 3115 to request a change in accounting method.

Selling or Abandoning One Intangible: The Loss Disallowance Rule

If you sell or abandon one Section 197 intangible but keep others acquired in the same transaction, no loss is allowed. The unamortized basis of the disposed asset is added to the basis of the retained intangibles and continues to amortize over their remaining recovery periods.¹

You can only recognize a loss once every Section 197 intangible from that transaction has been disposed of. The total acquisition cost gets recovered through amortization either way; it just moves among the surviving assets. The rule exists so a buyer can’t allocate heavily to one intangible, declare it worthless the next year for an immediate deduction, and keep enjoying the goodwill it still holds.

Anti-Churning Rules for Related-Party Deals

If you are buying from a related party, read this section carefully before you count on amortization. Before 1993, goodwill and going concern value were generally not deductible at all. The anti-churning provisions stop taxpayers from unlocking Section 197 amortization by transferring those assets to a related person after the statute took effect.

Amortization is denied when the intangible was held or used by the taxpayer or a related person at any time between July 25, 1991, and August 10, 1993, and the post-enactment transaction doesn’t represent a genuine change in ownership.⁷ For this purpose, “related person” uses a more-than-20-percent ownership threshold, broader than the 50 percent threshold used elsewhere in the Code.¹

When the rules bite, the buyer falls back on pre-1993 law — generally no amortization for goodwill or going concern value. One escape hatch: if the seller elects to recognize gain and pays tax on it, the buyer can treat the asset as a regular Section 197 intangible and amortize over 15 years. The election is rarely worth it unless the buyer’s amortization savings substantially exceed the seller’s tax cost.

These rules target transactions between family members, commonly controlled entities, and other related parties. An arm’s-length acquisition from an unrelated seller is almost never caught, because the genuine change in ownership satisfies the statute on its own.

1
Office of the Law Revision Counsel. 26 U.S. Code 197 – Amortization of Goodwill and Certain Other Intangibles
2
Office of the Law Revision Counsel. 26 USC 167 – Depreciation
3
Internal Revenue Service. Instructions for Form 4562 (2025)
4
eCFR. 26 CFR 1.1060-1 – Special Allocation Rules for Certain Asset Acquisitions
5
Internal Revenue Service. Instructions for Form 8594, Asset Acquisition Statement Under Section 1060
6
Internal Revenue Service. Publication 535 – Business Expenses
7
Internal Revenue Service. IRS Revenue Ruling 2004-49