Section 197 Intangibles: 15-Year Amortization and Excluded Assets

Intangible assets you acquire with a business — goodwill, customer lists, patents, non-competes, franchises, government licenses, and the other categories listed in the statute — are amortized under Section 197 on a straight-line basis over 15 years, regardless of the asset’s actual useful life. Section 197 intangibles amortization runs 180 months from the later of the month you acquired the asset or the month you began actively conducting the business, and you claim the deduction on Part VI of Form 4562.¹

The uniform 15-year period is the point of the statute. A patent with six years of legal life left, a three-year non-compete, and goodwill with no defined life all recover over the same 180 months once they qualify as Section 197 intangibles.

Which Assets Qualify

Section 197 covers intangibles held in connection with a trade or business or an income-producing activity. With narrow exceptions, the asset must be acquired rather than self-created, and it must fit one of the statute’s enumerated categories.¹

Goodwill and Going Concern Value

Goodwill is the premium paid above the fair market value of a business’s identifiable assets, reflecting the expectation of continued customer patronage. Going concern value is the extra worth of an operating business over the sum of its parts, because trained staff, working systems, and existing relationships already function together. Both are Section 197 intangibles when acquired as part of a business purchase.

Workforce, Customers, Suppliers, and Business Records

An assembled workforce qualifies, including both the composition of the workforce and the terms of employment. Customer-based intangibles cover established buyer relationships, repeat business, and market position. Supplier-based intangibles cover favorable purchasing terms and long-standing vendor relationships. Business books and records, operating systems, and information bases are also covered, which sweeps in customer lists, proprietary databases, and operational know-how embedded in a company’s records.¹

Intellectual Property Acquired With a Business

Patents, copyrights, formulas, processes, designs, patterns, formats, and similar proprietary know-how are Section 197 intangibles when they come with a business acquisition. The 15-year period applies even when a patent has a shorter remaining legal life. If you acquire a patent or copyright separately from a business, it falls outside Section 197 and follows its own recovery rules.

Government Licenses and Permits

Any license, permit, or other right granted by a governmental body qualifies, from liquor licenses and broadcast spectrum to taxi medallions and gaming permits. The 15-year period applies regardless of whether the license is exclusive or nonexclusive, and regardless of its stated legal duration.

Covenants Not to Compete

A non-compete entered into in connection with acquiring an interest in a trade or business is a Section 197 intangible, and so is any similar arrangement that effectively restricts competition. The 15-year amortization period applies even if the non-compete itself lasts only three or five years. A special rule prevents you from treating the non-compete as disposed of or worthless until you dispose of the entire business interest it was connected to.¹

Franchises, Trademarks, and Trade Names

The acquisition cost of a franchise, trademark, or trade name is a Section 197 intangible. Franchise is defined broadly to cover any agreement granting the right to distribute, sell, or provide goods, services, or facilities within a specified area.

There is an important exception under Section 1253 for ongoing royalty-style payments. Contingent franchise payments that depend on productivity or use of the franchise and are paid at least annually in substantially equal amounts throughout the transfer agreement are deductible as current business expenses rather than capitalized and amortized.² Lump-sum payments and any amounts that fail those requirements are capitalized and amortized under Section 197.

How the 15-Year Calculation Works

Every qualifying intangible is amortized straight-line over 180 months. Divide the adjusted basis by 180, and deduct that amount each month. The clock starts on the later of the month you acquired the intangible or the month you began actively conducting the trade or business.

Report the deduction on Part VI of IRS Form 4562, Depreciation and Amortization, then carry the total to your income tax return. A separate Form 4562 is required for each business or activity.³ If you later discover that you deducted the wrong amount in a prior year, you can correct it on an amended return filed within three years of the original filing date or two years from when you paid the tax, whichever is later.⁴

Contingent Payments and Later Basis Increases

Earn-outs and other post-closing payments frequently increase the basis of a Section 197 intangible after the original amortization has started. If the basis increase happens after the first month of the 15-year period but before it expires, you amortize the additional amount over the remaining months of the original window, beginning in the month the basis increase occurs.

If the additional amount is not properly added to basis until after the 15-year period has already ended, you deduct the entire amount in the year you add it to basis. A long-delayed earn-out payment can therefore produce a large one-time deduction years after ordinary amortization has run out.

Allocating the Purchase Price

You do not choose how to divide the purchase price among the acquired assets. Section 1060 requires both buyer and seller to allocate the total consideration using the residual method under Section 338(b)(5). Value is assigned first to cash and cash-equivalents, then to actively traded securities, then to receivables and inventory, and so on through progressively less tangible categories. Whatever purchase price remains after all identifiable assets are valued becomes goodwill and going concern value as the residual.⁵

If buyer and seller agree in writing on the allocation or on the fair market value of specific assets, that agreement binds both parties unless the IRS determines it is inappropriate. Both sides must report the allocation to the IRS, including the amount assigned to Section 197 intangibles and any later modifications.

Assets Excluded from Section 197

Several intangibles are carved out of Section 197 and recover under different rules. Getting the classification right matters because it changes both the deduction amount and the recovery period.

Financial Interests and Land

Interests in corporations, partnerships, trusts, and estates are excluded. Stock and partnership interests recover only on sale or liquidation, not through annual amortization. Any interest in land is also excluded; land is not depreciable, and its cost sits on the balance sheet until disposition.

Computer Software

Software treatment depends on how it was acquired. Off-the-shelf software readily available to the general public under a nonexclusive license and not substantially modified is excluded from Section 197, as is any other software not acquired as part of a business acquisition. Excluded software is amortized straight-line over 36 months under Section 167(f).⁶ Software that comes with a business acquisition, however, is a Section 197 intangible and amortizes over 15 years.

Separately Acquired Intangibles

Certain rights are excluded when acquired outside a business acquisition, even though the same asset would qualify if bundled into a business purchase. These include interests in films, sound recordings, books, and similar property; rights to receive tangible property or services under a contract or government grant; interests in patents and copyrights; and certain fixed-duration or fixed-amount contractual rights with a duration under 15 years or recoverable under a production-based method. Separately acquired intangibles typically follow the recovery rules that would apply without Section 197.

Leases and Existing Debt

Interests under existing leases of tangible property are excluded. A lessee’s acquired interest is amortized over the remaining lease term; a lessor’s acquired interest is generally added to the basis of the underlying property and recovered through depreciation. Interests under existing debt instruments are also excluded, and above- or below-market rates on assumed loans follow the original issue discount and bond premium rules instead.

Transaction Costs

Professional fees and other costs paid to facilitate a business acquisition are generally not Section 197 intangibles. They must be capitalized under Treasury regulations, but they follow their own recovery rules rather than the 15-year pool.⁷ Costs of issuing stock or debt in a corporate reorganization are also outside Section 197.

Self-Created Intangibles

Section 197 generally applies only to acquired intangibles, so most assets you develop internally are outside the 15-year framework. The statute keeps a narrow set of self-created assets inside Section 197 anyway: government licenses and permits, non-competes, franchises, trademarks, and trade names. Any intangible you create in connection with the acquisition of a trade or business (or a substantial portion of one) is also treated as a Section 197 intangible regardless of category. Internally developed research follows Section 174, which requires capitalization and amortization of domestic research expenditures over five years and foreign research over 15 years for amounts paid or incurred after 2021; software development costs are treated as research under Section 174 rather than as Section 197 intangibles.⁸

Selling or Disposing of a Section 197 Intangible

On the sale of a Section 197 intangible, gain up to the total amortization previously claimed is taxed as ordinary income under the Section 1245 recapture rules. Multiple Section 197 intangibles sold in a single transaction are treated as one asset for recapture purposes. Gain above the recapture amount is a Section 1231 gain, and a net loss is a Section 1231 loss.⁴

The Loss Disallowance Rule

If you dispose of one Section 197 intangible but keep others acquired in the same transaction, no loss is recognized on the disposed asset. The disallowed loss is added to the adjusted basis of the intangibles you still hold, and that increased basis amortizes over whatever remains of the original 15-year period.

When a related party retains the other intangibles rather than the taxpayer who incurred the loss, only the basis of intangibles held by the taxpayer with the loss is increased. If that taxpayer holds none of the retained intangibles, the disallowed loss is deducted ratably over the remaining amortization period, with the full balance deductible once all retained intangibles from that transaction have been disposed of or become worthless.⁹ The rule does not apply when you dispose of every Section 197 intangible from the same acquisition; at that point any realized loss is fully recognized under normal rules.

Anti-Churning Rules for Pre-1993 Intangibles

Before Section 197 took effect in August 1993, goodwill and going concern value were generally not amortizable. The anti-churning rules block related parties from selling those assets back and forth to create fresh basis eligible for the 15-year deduction.¹⁰

The rules apply to goodwill, going concern value, and any other intangible that would not have been amortizable before Section 197. They do not apply to assets like non-competes or government licenses, which already had recovery methods under prior law. An intangible is caught by the anti-churning rules if the taxpayer or a related person held or used it at any time between July 25, 1991, and the statute’s enactment date; if it was acquired from someone who held it during that window and the person actually using the asset did not change in the transaction; or if the taxpayer grants usage rights to someone (or their related party) who held or used the intangible during the transition period. When the rules apply, the intangible cannot be amortized under Section 197 at all.

For anti-churning purposes, the related-party threshold is 20% rather than the 50% used elsewhere in the code. Owning 20% or more of a corporation’s stock, or 20% or more of the capital or profits interest in a partnership, makes you related to that entity, tested immediately before or after the acquisition. Businesses under common control are also treated as related, using the same grouping standards applied for the research credit under Section 41(f)(1).

There is one escape. If the anti-churning rules apply only because of the related-party definition, the seller can elect to recognize gain on the transfer and pay tax at the highest applicable income tax rate. When the election is made and the tax paid, the buyer can treat the intangible as a Section 197 asset, but only to the extent the buyer’s basis exceeds the gain the seller recognized. The election must be made on a timely filed return for the year of the transfer.

Stock Purchases and the Section 338(h)(10) Election

Section 197 assumes an asset acquisition. In a pure stock purchase, the buyer acquires shares rather than assets, no new basis is created in the target’s individual assets, and there is nothing to amortize.

Section 338(h)(10) provides an alternative when the buyer makes a qualified stock purchase of at least 80% of a target corporation’s voting power and value and the target was a member of a selling consolidated group. The parties can jointly elect to treat the transaction as if the target sold all of its assets in a single transaction. The target recognizes gain or loss on the deemed asset sale, and the buyer receives stepped-up basis in all assets, including goodwill and any other Section 197 intangibles.¹¹ The purchase price is then allocated under the same residual method required by Section 1060, and the buyer amortizes the Section 197 intangibles over 15 years exactly as in a direct asset purchase.

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
Internal Revenue Service. Instructions for Form 4562 Depreciation and Amortization
4
Internal Revenue Service. Publication 535 Business Expenses
5
Office of the Law Revision Counsel. 26 USC 1060 – Special Allocation Rules for Certain Asset Acquisitions
6
Office of the Law Revision Counsel. 26 US Code 167 – Depreciation
7
eCFR. 26 CFR 1.263(a)-5 – Amounts Paid or Incurred to Facilitate an Acquisition of a Trade or Business
8
Office of the Law Revision Counsel. 26 US Code 174 – Amortization of Research and Experimental Expenditures
9
eCFR. 26 CFR 1.197-2 – Amortization of Goodwill and Certain Other Intangibles
10
Internal Revenue Service. Intangibles
11
Office of the Law Revision Counsel. 26 US Code 338 – Certain Stock Purchases Treated as Asset Acquisitions