IRC Section 197 Intangibles: Amortization, Recapture, and Anti-Churning

Under 26 U.S.C. § 197, when you acquire intangible assets in connection with buying a trade or business, you recover their cost by amortizing them on a straight-line basis over 15 years, or 180 months, beginning in the month of acquisition.¹ The rate is fixed, the method is uniform, and the recovery period does not shorten to match how long the underlying asset actually lasts. That last point is where the rule catches buyers off guard, so it helps to work through what qualifies, how the math runs, and what happens when one of these assets is later sold or abandoned.

Which Intangibles Get the 15-Year Treatment

Section 197 reaches a broad list of intangibles, but only when they are acquired in connection with a trade or business. The main categories are goodwill; going concern value; workforce in place; information bases such as customer lists, technical manuals, and subscription databases; customer-based intangibles; supplier-based intangibles; government-granted licenses and permits; covenants not to compete entered in connection with the acquisition; and franchises, trademarks, and trade names.¹

The franchise category is wider than the word suggests. Under the cross-referenced definition in 26 U.S.C. § 1253, a franchise includes any agreement giving one party the right to sell goods, provide services, or operate facilities within a specified area.² Renewal costs for franchises, trademarks, and trade names are treated as new acquisitions and start their own 15-year clock.³

Self-Created Intangibles Usually Don’t Qualify

You generally cannot amortize an intangible you developed internally. A brand you built through your own marketing, or a customer list you grew organically, is not amortizable under Section 197. The exception is narrow: self-created intangibles qualify only if they fall into one of three categories — government licenses and permits, covenants not to compete, or franchises, trademarks, and trade names — or if they were created as part of a transaction involving the acquisition of a trade or business.³

What Section 197 Does Not Cover

Several categories look like intangibles but follow different tax rules. Ownership interests in corporations, partnerships, trusts, and estates are out, along with financial contracts like futures and notional principal contracts. Land is excluded because it does not depreciate. Off-the-shelf software — software available to the general public under a nonexclusive license and not substantially modified — is excluded, though custom or proprietary software that comes with a business acquisition can still qualify. Interests in films, sound recordings, books, patents, and copyrights are excluded when purchased on their own. Existing leases of tangible property, existing debt instruments, most mortgage servicing rights, and certain transaction costs from tax-free reorganizations are also outside Section 197.¹

The creative-works exclusion catches people off guard. Buy a patent by itself at auction, and Section 197 does not apply. Buy that same patent bundled into a business acquisition, and it becomes a Section 197 intangible amortized over 15 years. The context of the purchase controls the treatment.

Running the Numbers

The calculation is simple. Divide the adjusted basis of the intangible by 180 months to get a monthly deduction. Amortization starts on the first day of the month you acquired the asset, so you take the full month of acquisition no matter what day the deal closed.⁴ No salvage value is subtracted.

Take a customer list acquired for $180,000 on March 15. The monthly deduction is $1,000 ($180,000 ÷ 180). For that first tax year you deduct $10,000, covering March through December. Each full year after that yields $12,000 until the basis is fully recovered. A short tax year of fewer than 12 months uses the actual number of months rather than a default of 12.

No Bonus Depreciation, No Section 179

The statute explicitly forbids any depreciation or amortization deduction on a Section 197 intangible except under the 15-year straight-line method.¹ Bonus depreciation is off the table. Section 179 expensing is off the table. A buyer who pays $2 million for goodwill cannot accelerate that deduction; it plays out at roughly $133,333 per year for 15 years.

A Short Covenant Still Runs 15 Years

A covenant not to compete may only restrict the seller for two or three years, but the amortization period is still 15. The covenant cannot be treated as disposed of or worthless until the buyer disposes of the entire business interest connected to the acquisition.¹ A $150,000 payment for a three-year noncompete is still generating deductions a decade after the restriction expires.

Contingent Payments and Earnouts

Deals often include earnouts. When an additional payment increases the basis of a Section 197 intangible during the original 15-year period, you amortize the additional amount over the remaining months of that window, starting on the first day of the month the basis increase happens.⁴ If the payment does not become fixed until after the 15-year period ends, the entire amount is deducted immediately when it is added to basis. That is one of the few situations where a Section 197 deduction lands all at once.

Getting to Basis: The Residual Method

Before you can amortize anything, you need to know how much of the purchase price belongs to each intangible. Both buyer and seller must use the residual method, which distributes the total consideration across seven asset classes in a strict priority order. Cash comes first, then actively traded securities, then debt instruments and receivables, then inventory, then other tangible property, then Section 197 intangibles other than goodwill, and finally goodwill and going concern value as the residual.⁵

Within each class the consideration is allocated in proportion to fair market value. Any amount that exceeds the fair market value of the assets in a lower class flows to the next. Because Class VII is the catch-all, buyers who pay a significant premium often find a large portion of the price landing in goodwill whether they want it there or not, which locks that portion into the 15-year schedule.

Selling or Abandoning a Section 197 Intangible

You Cannot Recognize a Loss on a Partial Disposition

If you acquired multiple Section 197 intangibles in the same transaction and later sell or abandon just one while keeping the others, no loss is allowed on the disposed asset. The remaining basis of the abandoned intangible is added to the basis of the retained intangibles and recovered through their continued amortization.¹ A loss can be recognized only once every Section 197 intangible from that acquisition has been disposed of. A buyer who paid separately for goodwill, a customer list, and a noncompete in one deal cannot write the customer list off as worthless five years later while still holding the goodwill.

Gain Gets Recaptured as Ordinary Income

When you sell a Section 197 intangible at a gain, prior amortization deductions are recaptured as ordinary income under Section 1245. The gain is ordinary up to the amount of amortization previously deducted; only the portion exceeding total prior deductions qualifies for capital gains treatment. If you dispose of more than one Section 197 intangible from the same acquisition in a single transaction or a series of related transactions, they are treated as a single asset for recapture purposes, with an exception pulling out any intangible whose adjusted basis exceeds its fair market value at the time of sale.⁶

Anti-Churning: Mostly a Related-Party Concern

Section 197 was enacted in 1993 with anti-churning rules aimed at preventing taxpayers from generating new amortization deductions on intangibles that were not amortizable before the law existed. Amortization is denied for goodwill, going concern value, and previously non-depreciable intangibles if the buyer or a related person held the intangible during the transition period (July 25, 1991 through August 10, 1993), if the seller held it during that period and the user does not actually change as part of the transaction, or if the buyer grants the intangible back to someone who held it then.¹

The related-person threshold here is 20 percent ownership rather than the 50 percent used elsewhere in the Code, and it is tested immediately before or after the acquisition.¹ For most arm’s-length acquisitions today, these rules are a non-issue. They still bite in related-party deals involving businesses that predate the statute, particularly intra-family transfers.

Reporting and Records

Both buyer and seller file Form 8594, the Asset Acquisition Statement, when goodwill or going concern value attaches (or could attach) to the acquired assets and the buyer’s basis is determined solely by the purchase price.⁷ Both sides report how they allocated the total consideration across the seven asset classes. Mismatched allocations invite IRS attention on both returns.

The annual amortization deduction is claimed on Form 4562 (Depreciation and Amortization). Intangible descriptions, acquisition dates, and amortization amounts go in Part VI.⁸ Form 4562 is attached to the business’s return, whether that is Schedule C on Form 1040, Form 1065, or Form 1120.⁹

The IRS’s general three-year record-retention window is far too short for these assets. You need the original acquisition documents, the purchase price allocation, and Form 8594 to support the deduction on every return through the end of the 15-year period. The practical minimum is the full 15 years plus at least three years after the final deduction, roughly 18 years from acquisition.¹⁰ If you later file a claim involving a loss on disposition, the retention period stretches to seven years from the date of that claim.

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 1253 – Transfers of Franchises, Trademarks, and Trade Names
3
Office of the Law Revision Counsel. 26 US Code 197 – Amortization of Goodwill and Certain Other Intangibles
4
eCFR. 26 CFR 1.197-2 – Amortization of Goodwill and Certain Other Intangibles
5
Internal Revenue Service. Instructions for Form 8594 – Asset Acquisition Statement Under Section 1060
6
Office of the Law Revision Counsel. 26 US Code 1245 – Gain From Dispositions of Certain Depreciable Property
7
Internal Revenue Service. About Form 8594 – Asset Acquisition Statement Under Section 1060
8
Internal Revenue Service. 2025 Instructions for Form 4562
9
Internal Revenue Service. About Form 4562 – Depreciation and Amortization
10
Internal Revenue Service. How Long Should I Keep Records