How Long Is Goodwill Amortized for Tax Purposes: 15 Years

Goodwill acquired when you buy a business is amortized over 15 years for tax purposes, using the straight-line method under Internal Revenue Code Section 197. That works out to 180 months of equal deductions, and the schedule is mandatory: you cannot shorten it if the goodwill loses value faster, and you cannot lengthen it either. The same 15-year period applies to every other intangible Section 197 covers, including customer lists, trademarks, covenants not to compete, and going concern value, regardless of how long each one would actually last in the real world.

When the 15-Year Clock Starts and Stops

The 180 months begin in the month you acquire the intangible or the month you begin operating the business, whichever comes later.¹ You get the full first month regardless of the closing date. Buy a business on October 28, and your amortization period starts October 1.

Disposition works the opposite way. You get no amortization deduction for the month you sell or otherwise dispose of the intangible.¹

The 15-year period cannot be adjusted. A five-year noncompete signed as part of the deal still amortizes over 15 years. A customer list that turns out to be worthless in year three still amortizes over 15 years, subject to the loss rules discussed below. The uniformity is deliberate; it prevents buyers from cherry-picking shorter lives on individual intangibles to accelerate deductions.

How to Calculate the Annual Deduction

Divide the cost allocated to goodwill by 180. That is your monthly deduction, and it stays the same every month for the full 15-year period. In the first and last tax years, multiply the monthly amount by the number of eligible months in that year.

Say you buy a business on March 15 and $900,000 of the purchase price gets allocated to goodwill. Monthly amortization is $5,000. Your first calendar year covers 10 months (March through December), so you deduct $50,000. Every full year after that, you deduct $60,000, until the 180 months run out.

Where the Goodwill Number Comes From

The dollar figure you divide by 180 is the amount assigned to goodwill under the residual method required by Section 1060. The total purchase price is allocated first to cash and cash-equivalent assets, then to actively traded securities, then to accounts receivable, then to inventory, then to all other tangible and intangible assets at fair market value. Whatever is left over becomes goodwill and going concern value.² Buyer and seller can agree in writing on the allocation, and that agreement binds both sides unless the IRS finds it inappropriate.

Which Goodwill Actually Qualifies

Only purchased goodwill qualifies for the 15-year deduction. Goodwill you built yourself, through years of running the business, serving customers, and developing a reputation, is not amortizable. The statute specifically excludes intangibles created by the taxpayer rather than acquired from someone else.³ A narrow exception exists for intangibles created as part of the purchase of a trade or business, such as a newly signed noncompete tied to the acquisition, but organically developed goodwill does not qualify.

Asset Purchase vs. Stock Purchase

Whether you can amortize goodwill at all depends on how the deal is structured. In an asset purchase, the buyer gets a tax basis in each acquired asset equal to the allocated price. Goodwill is amortizable from day one.

A stock purchase is different. When you buy shares of a corporation, the corporation’s internal asset basis does not change. Its goodwill keeps whatever basis it had before, which for self-created goodwill is zero. The buyer’s basis sits in the stock, not the underlying assets, and no amortization is available.

A joint Section 338(h)(10) election by buyer and seller can solve this. It recharacterizes the stock purchase as a hypothetical asset sale for tax purposes, stepping up the basis in all assets, including goodwill, and starting a fresh 15-year clock. The trade-off is that the target recognizes gain on the deemed asset sale, so the election only makes sense when the present value of 15 years of amortization deductions outweighs the immediate tax cost.

Where to Report the Amortization

You claim the annual deduction on Part VI of IRS Form 4562, Depreciation and Amortization, attached to your income tax return.⁴ Enter the date placed in service, the cost basis, and 180 months as the amortization period.⁵

Separately, for the year of the acquisition itself, both buyer and seller must file Form 8594, the Asset Acquisition Statement, showing how the purchase price was allocated across the seven asset classes, including goodwill. The two sides’ allocations must match. If the numbers change later because of earnout payments, purchase price adjustments, or resolved contingencies, file an amended Form 8594 covering the changed portions.⁶

What Happens If You Sell or an Intangible Becomes Worthless

You Usually Cannot Deduct a Loss on One Intangible Alone

If you dispose of one Section 197 intangible from an acquisition but still hold others from the same deal, you cannot recognize a loss on the disposed asset. Its remaining tax basis instead gets added to the basis of the intangibles you kept, and you continue amortizing that combined basis over the rest of the original 15-year period.³

Suppose you allocated $200,000 to a customer list and $500,000 to goodwill. Three years in, the customer list becomes worthless. You cannot write off its remaining basis; that basis rolls into the goodwill, which now amortizes at a higher monthly rate. The full loss is only recognized when you dispose of every Section 197 intangible from that original acquisition.

Recapture on Gains

Section 197 intangibles are treated as depreciable personal property, which makes them Section 1245 property. When you sell goodwill at a gain, the portion of the gain equal to prior amortization deductions is recaptured as ordinary income rather than taxed at capital gains rates.⁷ Any additional gain above total amortization taken qualifies as Section 1231 gain, which may receive capital gains treatment depending on your overall Section 1231 results for the year.¹ When multiple Section 197 intangibles are disposed of in one transaction, the recapture calculation treats them as a single combined asset.⁵

Watch Out for the Related-Party Trap

Buying goodwill from someone you’re related to, or from an entity that overlaps in ownership with yours, can permanently disqualify the goodwill from amortization. Section 197’s anti-churning rules block the 15-year deduction when the goodwill was held or used by the taxpayer or a related person between July 25, 1991, and the date Section 197 was enacted, and the transaction does not involve a real change in who uses the asset.

For this rule, “related person” is defined more broadly than in other parts of the tax code. The usual 50-percent ownership threshold drops to 20 percent, sweeping in far more transactions between parties with overlapping ownership. Family relationships, including spouses, children, and ancestors, also count.³ When the rules apply, the goodwill is non-amortizable in the buyer’s hands. A seller election to recognize gain at the highest rate can partially unlock amortization for the buyer, but the immediate tax cost usually makes the election impractical. If your acquisition involves family members or closely held entities with shared owners, get the anti-churning analysis done before you close.

1
eCFR. 26 CFR 1.197-2 – Amortization of Goodwill and Certain Other Intangibles
2
Office of the Law Revision Counsel. 26 USC 1060 – Special Allocation Rules for Certain Asset Acquisitions
3
Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
4
Internal Revenue Service. About Form 4562 – Depreciation and Amortization
5
Internal Revenue Service. Instructions for Form 4562
6
Internal Revenue Service. Instructions for Form 8594
7
Internal Revenue Service. Publication 544 – Sales and Other Dispositions of Assets