IRC Section 197 Amortization of Intangibles: 15-Year Rules and Recapture

Under Section 197 of the Internal Revenue Code, the amortization of intangibles acquired with a trade or business follows one rule: divide the cost by 180 months and deduct that amount straight-line over 15 years. No accelerated methods, no bonus depreciation, no Section 179 expensing. If the asset qualifies, you use the 15-year schedule, and that is the exclusive way to recover the cost.¹

Which Intangibles Qualify

Section 197 covers non-physical assets a business typically acquires when buying another company or a substantial portion of one. The statute names these categories:¹

Goodwill, meaning the premium paid above the fair market value of a company’s identifiable assets.
Going concern value, the extra value of a business that is already operating.
Workforce in place, including trained employees and their existing employment terms.
Information bases such as customer lists, business records, operating systems, and technical manuals.
Patents, copyrights, formulas, and know-how, when acquired as part of a trade or business purchase.
Customer-based and supplier-based intangibles, including favorable contract terms.
Government-granted licenses and permits, even those with indefinite or renewable terms.
Covenants not to compete, amortized over 15 years even if the covenant itself runs only three or five years.
Franchises, trademarks, and trade names.

The common thread is acquisition. In most cases the intangible must be bought as part of purchasing a trade or business, not developed internally.

Assets That Do Not Qualify

Several categories are barred from Section 197 treatment even when they change hands in a business purchase:¹

Financial interests: stock in corporations, partnership interests, trust and estate interests, futures contracts, and foreign currency contracts.
Land, which cannot be depreciated or amortized under any provision.
Off-the-shelf computer software that is readily available to the public under a nonexclusive license. This is depreciated over 36 months straight-line under Section 167(f). Custom software acquired as part of a business purchase does go through Section 197.²
Separately acquired films, sound recordings, books, patents, and copyrights bought outside a business acquisition.
Existing lease and debt instrument interests.
Mortgage servicing rights, unless acquired as part of a larger trade or business.
Certain transaction costs tied to tax-free corporate reorganizations.

A government license with a fixed duration under 15 years can also fall outside Section 197 if acquired in the ordinary course of business rather than as part of buying a company.³ Bought standalone, that same permit might be recoverable over its actual life; bought inside an acquisition, it gets locked into 15 years.

Self-Created Intangibles

Section 197 generally excludes intangibles you create yourself. Homegrown goodwill, an internally built customer list, and a workforce you hired and trained over time are not amortizable under this section.¹ Three exceptions qualify even when self-created:

Government-granted licenses and permits, such as a liquor license or broadcast license obtained through your own application.
Covenants not to compete, which arise from acquisitions by definition.
Franchises, trademarks, and trade names, including the costs to register or secure them.

There is also a transaction-based carve-out. If you create an intangible as part of acquiring a trade or business, for example by compiling a customer database during the acquisition process, the self-created exclusion does not apply and the asset can still be amortized.

How the 15-Year Math Works

Take the cost basis, divide by 180, and deduct that monthly amount until basis is fully recovered.¹ The clock starts in the month you acquire the intangible or the month your business activity begins, whichever comes later.⁴ Mid-year acquisitions are prorated: buy in October and you get three months of amortization that year.

The schedule does not bend to match an asset’s actual useful life. A three-year covenant still gets 15 years. A patent with eight years of remaining life still gets 15 years. Section 197(b) makes the straight-line 180-month method the exclusive way to recover the cost of a qualifying intangible, which catches buyers off guard when they realize they cannot immediately expense goodwill the way they might expense equipment.

Allocating the Purchase Price

Buyers rarely pay a separate price for each acquired asset. You pay a lump sum, and how that sum gets split among asset categories decides how much basis lands in Section 197 intangibles in the first place.

Section 1060 requires both buyer and seller to use the residual method and to file Form 8594 with their returns reporting the same allocation.⁵ The price fills seven asset classes in order, each up to fair market value, before anything spills into the next:

Class I: cash and bank deposits.
Class II: actively traded securities and certificates of deposit.
Class III: debt instruments and accounts receivable.
Class IV: inventory.
Class V: other tangible assets, including equipment, vehicles, buildings, and land.
Class VI: Section 197 intangibles other than goodwill and going concern value, such as workforce in place, customer lists, covenants not to compete, and trademarks.
Class VII: goodwill and going concern value.

Whatever purchase price remains after Classes I through VI lands in Class VII, which is why goodwill often absorbs the largest share of an acquisition price. Buyers usually prefer more allocation to short-recovery assets like equipment and less to 15-year intangibles; sellers may want the opposite. Inconsistent allocations between the two returns invite IRS scrutiny.

Selling or Disposing of a Section 197 Intangible

You Cannot Recognize a Loss on a Single Intangible

If you acquired multiple intangibles in one transaction and later dispose of just one while keeping the others, no loss is allowed. The remaining basis of the disposed intangible gets added to the basis of the intangibles you still hold, and you recover it through continued amortization of those retained assets.¹

Suppose you paid $200,000 for a customer list and $500,000 for goodwill in the same deal. Three years in, the customer list becomes worthless. You cannot write off its remaining basis. The unamortized portion rolls into the goodwill basis, and you keep amortizing the combined amount on the original schedule. A loss becomes possible only when you dispose of every Section 197 intangible from that same acquisition. Covenants not to compete are stricter still: a covenant is treated as neither disposed of nor worthless until the entire business interest connected to it is sold.

Gain Is Recaptured as Ordinary Income

Sell a Section 197 intangible at a gain and prior amortization deductions come back as ordinary income under Section 1245. Multiple Section 197 intangibles from the same acquisition sold in a single transaction are treated as one asset for the recapture calculation, except that any intangible whose adjusted basis exceeds its fair market value at sale is excluded from that grouping.⁶ If you amortized $300,000 of goodwill over seven years and then sold the business, the portion of gain tied to those prior deductions is taxed at ordinary rates rather than capital gains rates.

Anti-Churning Rules

Congress anticipated that related parties might shuffle intangibles between themselves to generate fresh amortization on assets held before Section 197 existed. The anti-churning rules in Section 197(f)(9) block that. They prevent amortization when a taxpayer or a related person held or used the intangible during the transition window running from July 25, 1991, through August 10, 1993, and the transfer does not produce a real change in ownership.³

Three scenarios trigger the rules: the taxpayer or a related person held the intangible during the transition period; the seller held it during that period and the user of the intangible does not change after the sale; or the buyer grants the right to use the intangible back to a person who held or used it during the transition period.

The definition of “related person” here uses a 20% common ownership threshold, lower than the 50% threshold that applies under Sections 267(b) and 707(b)(1).⁷ That lower bar catches transactions that would otherwise slip through. When an anti-churning rule applies, the intangible cannot be amortized under Section 197 at all.

Renewals Start a New 15-Year Clock

Renewing a franchise agreement, trademark registration, or government-issued license is treated as a new acquisition. Renewal costs start their own 180-month amortization period rather than folding into the remaining schedule of the original asset.¹

Reporting the Deduction

Amortization is reported on Part VI of Form 4562. For each intangible you list a description (such as “goodwill” or “acquired customer list”), the date acquired, the cost basis, the code section, and the current-year amortization amount, which is cost basis divided by 180, multiplied by the number of months held during the year.⁴

Where the total lands next depends on the entity:

Sole proprietors put the amount in Part V (Other Expenses) of Schedule C, flowing to line 27b.⁸
C corporations report on Form 1120.⁹
Partnerships generally include amortization in ordinary business income or loss in Box 1 of Schedule K-1 (Form 1065). If the amortization relates to an activity outside the partnership’s main trade or business, it may be separately stated in Box 13.¹⁰

Both buyer and seller also file Form 8594 for the acquisition year, reporting the price allocation across the seven asset classes.⁵ Keep a permanent file for each acquired intangible with the purchase agreement, the allocation, and the full 15-year schedule. Misclassifying an excluded asset as a Section 197 intangible or claiming the wrong amount can trigger the 20% accuracy-related penalty under Section 6662 when the understatement exceeds the greater of $5,000 or 10% of the tax that should have been reported.¹¹

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 US Code 167 – Depreciation
3
eCFR. 26 CFR 1.197-2 – Amortization of Goodwill and Certain Other Intangibles
4
Internal Revenue Service. Instructions for Form 4562
5
Internal Revenue Service. Instructions for Form 8594
6
Office of the Law Revision Counsel. 26 US Code 1245 – Gain from Dispositions of Certain Depreciable Property
7
Office of the Law Revision Counsel. 26 US Code 197 – Amortization of Goodwill and Certain Other Intangibles
8
Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040)
9
Internal Revenue Service. Instructions for Form 1120
10
Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065)
11
Internal Revenue Service. Accuracy-Related Penalty