Section 197 Amortization: 15-Year Schedule, Sales, and Recapture

Under Section 197 of the Internal Revenue Code, acquired intangible assets held in a trade or business are amortized straight-line over 15 years, beginning in the month of acquisition. The tax amortization rules under Section 197 are rigid on purpose: one recovery period, one method, and a defined list of what qualifies. Getting the classification right at the front end determines your deduction schedule for the next decade and a half.

Intangibles That Qualify

To fall inside Section 197, an asset must be acquired (rather than self-created, with narrow exceptions) and held in connection with a trade or business or an income-producing activity.¹ The eligible categories are:

Goodwill and going concern value — the premium paid for a business’s reputation, customer relationships, and the advantage of buying an operation already running
Workforce in place — the value of having trained, experienced employees already on staff
Information bases such as customer lists, subscription records, and technical reference materials
Patents, copyrights, formulas, processes, and designs
Licenses, permits, and other rights granted by a government agency
Franchises, trademarks, and trade names
Contractual rights to use software or receive services

The common thread is that these assets carry legal rights or competitive advantages rather than physical form. A customer list has no wear and tear, but its value fades as customers leave and contracts expire, which is what the 15-year recovery is meant to reflect.

What Section 197 Does Not Cover

Several categories of intangibles are specifically excluded, and misclassifying one of them means applying the wrong deduction method entirely.¹ The major exclusions:

Ownership interests in corporations, partnerships, trusts, and estates, along with futures contracts and similar financial instruments
Any interest in land, regardless of how it was acquired
Off-the-shelf software available to the general public under a nonexclusive license and not substantially modified
Interests under existing leases of tangible property or existing debt obligations
Interests in films, sound recordings, books, and similar creative works when acquired separately from a business
Patents and copyrights bought on their own rather than as part of a business acquisition

The “separately acquired” line matters a lot in practice. A patent purchased as part of buying an entire business qualifies under Section 197. The same patent bought in a standalone deal does not, and its cost is recovered under different rules, typically tied to the patent’s remaining legal life.

Self-Created Intangibles

Intangibles you build yourself generally fall outside Section 197. A customer list developed through years of your own marketing is not an amortizable Section 197 asset because you did not acquire it from someone else.¹ Three exceptions bring self-created assets back inside the section:

Government-granted licenses and permits you apply for and receive
Covenants not to compete entered into as part of acquiring a business
Franchises, trademarks, and trade names you develop yourself, where creation, registration, and defense costs are amortized over 15 years²

The self-created exclusion also does not apply when an intangible is created in connection with the purchase of a trade or business. A noncompete negotiated as part of an acquisition is amortizable even though you technically “created” it during the deal.

The 15-Year Recovery Schedule

Every qualifying Section 197 intangible follows the same schedule: the adjusted basis is amortized ratably over 15 years, starting the month you acquire the asset.¹ Ratably means straight-line. You divide the cost evenly across 180 months. No accelerated methods, no bonus deductions, no flexibility.

The rigidity cuts both ways. A patent with only seven years of legal life left still rides the 15-year track. A trademark with no expiration date gets the same 15 years. Market value swings after purchase change nothing about the deduction.

Partial years use the exact number of months held. Buy a customer list in April and you claim nine months of amortization for that first tax year, covering April through December. Each full year that follows produces a deduction equal to one-fifteenth of the original basis. The final year picks up whatever months remain to complete the 180-month period.

Selling or Abandoning a Section 197 Intangible

Disposing of a Section 197 asset before the 15 years run out triggers two rules that catch a lot of buyers off guard.

Loss Disallowance When Related Assets Remain

If you dispose of one Section 197 intangible but still hold others acquired in the same transaction, you cannot recognize a loss on the asset you gave up.¹ Its remaining basis is reallocated to the intangibles you kept, and you recover it through continued amortization of those retained assets.

A common scenario: you buy a business and allocate the price across goodwill, a customer list, a trademark, and a covenant not to compete. Two years later the customer list is worthless. No loss deduction is available, because you still hold the goodwill, trademark, and covenant from the same deal. The customer list’s remaining basis folds into the other three. A loss becomes available only when you have disposed of every Section 197 intangible from that original acquisition.

Section 1245 Recapture on Gains

Sell an amortized intangible at a gain and the amortization deductions you previously claimed are recaptured as ordinary income under Section 1245.³ Gain is ordinary income up to the total amortization taken; anything above that amount is capital gain. If you sell multiple Section 197 intangibles from the same transaction at once, they are treated as a single property for recapture purposes, though the grouping rule does not reach any individual intangible whose adjusted basis exceeds its fair market value.

Reporting on Form 4562

Amortization deductions are reported in Part VI of IRS Form 4562, Depreciation and Amortization.⁴ For each intangible, the form asks for a description of the asset (trademark name, patent number, and so on), the date amortization begins, the amortizable amount, the code section authorizing the deduction (Section 197 for acquired intangibles), the amortization period of 180 months, and the current-year deduction based on months in service.

The completed Form 4562 attaches to the annual income tax return.⁵ Sole proprietors file it with Schedule C on Form 1040, partnerships attach it to Form 1065, S corporations to Form 1120-S, and C corporations to Form 1120. The Part VI deduction flows onto the main expense lines of whichever return applies.

Keep the supporting paperwork, including purchase agreements, allocation schedules, appraisals, and legal invoices, for at least three years after the final amortization deduction. Because the deductions span 15 years, that means retaining records for as long as 18 years from the acquisition date. Incomplete documentation is the fastest way to lose the deduction on audit.

Fixing Missed Amortization

If amortization was never claimed in prior years, amending those returns is not the fix. Instead, you file Form 3115, Application for Change in Accounting Method, to switch from an impermissible method (not deducting amortization) to a permissible one (properly amortizing the asset).⁶

Most missed-amortization corrections qualify for the automatic change procedures under Designated Change Number 7, which means no user fee and no need to request advance IRS permission. The original Form 3115 attaches to a timely filed return for the year of change, with a copy sent to the IRS National Office by the same deadline.

The correction produces a Section 481(a) adjustment that accounts for all the deductions that should have been taken but were not. A negative adjustment (a catch-up owed to you) is taken entirely in the year of change. A positive adjustment, less common in this context, is spread over four tax years. Schedule E of Form 3115 asks for details about the property, including when it was placed in service and how it is used in the business.

What Section 197 Does Not Govern

Several categories of business expenses that people often lump in with intangibles have their own amortization regimes and do not run through Section 197. Startup expenditures are governed by Section 195, corporate organizational costs by Section 248, and partnership organizational costs by Section 709, each with a $5,000 immediate deduction phased out above $50,000 and the rest amortized over 180 months. Research and experimental expenditures live under Section 174, with domestic R&E deductible in the year paid or incurred for tax years beginning after December 31, 2024, and foreign R&E capitalized and amortized over 15 years from the midpoint of the tax year. Those rules are separate from Section 197 and apply on their own terms.

1
Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
2
eCFR. 26 CFR 1.197-2 – Amortization of Goodwill and Certain Other Intangibles
3
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
4
Internal Revenue Service. Form 4562 – Depreciation and Amortization
5
Internal Revenue Service. Instructions for Form 4562
6
Internal Revenue Service. Instructions for Form 3115