Code Section 197 Intangibles: 15-Year Amortization and Anti-Churning

Under Internal Revenue Code Section 197, intangible assets acquired as part of a business must be amortized straight-line over exactly 15 years, or 180 months. The rule applies whether the asset is goodwill, a customer list, a trademark, or a five-year covenant not to compete. Every month of the recovery period gets the same deduction, and no accelerated method, bonus depreciation, or shorter useful-life argument is available once Section 197 applies.¹

The trade-off is certainty for flexibility. You avoid the economic-life studies that used to drive litigation, but you’re locked into 15 years even when the asset will realistically be worthless in three.

Which Intangibles Section 197 Covers

An asset falls under Section 197 if it was acquired (not self-created, with narrow exceptions) and is held for use in a trade, business, or income-producing activity.¹ The covered categories are:

Goodwill — the premium paid above the fair market value of identifiable assets.
Going concern value — the extra worth of a business already up and running.
Workforce in place, including the terms of employment.
Information bases: business books and records, operating systems, customer and prospect lists, and proprietary data.
Patents, copyrights, formulas, designs, processes, and other know-how.
Customer-based intangibles, including market share and (for financial institutions) deposit bases.
Supplier-based intangibles.
Government-granted licenses and permits, such as a liquor license or broadcast license.
Covenants not to compete entered into in connection with the acquisition of a business.
Franchises, trademarks, and trade names — these qualify even if acquired separately from a larger business purchase.

Goodwill and going concern value dominate most amortization schedules because any purchase price that can’t be assigned to an identifiable asset lands there by default under the residual method.

Covenants not to compete deserve a closer look. Buyers and sellers routinely negotiate covenants with a stated term of three or five years. That contractual term is irrelevant for tax purposes: Section 197 stretches amortization to 180 months regardless. The statute also blocks you from treating a covenant as disposed of or worthless before the entire business interest tied to it is disposed of.¹ Writing off the remaining basis the moment the covenant expires by its own terms is not an option.

Self-created intangibles generally don’t qualify. Two exceptions: self-created franchises, trademarks, trade names, covenants not to compete, and government-granted licenses are still Section 197 intangibles; and the self-created exclusion disappears entirely when the intangible is created as part of a trade or business acquisition.¹

What Section 197 Does Not Cover

Some intangibles a buyer might assume fall under the 15-year rule are carved out.

Financial interests: stock, partnership interests, trust and estate interests, futures and foreign currency contracts, and similar instruments. Cost recovery happens through basis adjustments or on sale.
Interests in land, including leaseholds and easements, which follow their own rules.
Off-the-shelf computer software that is readily available to the general public, sold under a nonexclusive license, and not substantially modified. Any other software not acquired as part of a business purchase is also excluded.¹
Certain separately acquired contract rights for tangible property or services, which can be amortized over their actual contractual life.

The software carve-out is where the biggest planning opportunity usually sits. Qualifying software is amortized straight-line over just 36 months under Section 167(f)(1).² The same software acquired as part of a business rolls into the 15-year bucket. That gap makes purchase price allocation between software and other intangibles worth attention.

How to Calculate the Annual Deduction

Divide the asset’s adjusted basis by 180. That’s the monthly deduction. Amortization begins in the later of the month the asset is acquired or the month business use begins.³

An example. You allocate $900,000 to goodwill in a deal that closes October 1. Monthly amortization is $5,000. Your first calendar year picks up three months, or $15,000. Every full year after that produces a $60,000 deduction until the $900,000 basis is fully recovered.¹

No half-year convention. No accelerated method. Once Section 197 applies to an asset, no other depreciation or amortization method is available for it.

How Purchase Price Allocation Drives the Numbers

What ends up in the 15-year bucket depends on how the total purchase price gets split among the acquired assets. That split isn’t informal. Section 1060 requires both buyer and seller to use the residual method and report their allocations on Form 8594.

Under the residual method, purchase price is allocated across seven asset classes in order, starting with Class I (cash and cash equivalents) and ending with Class VII — goodwill and going concern value. Whatever is left after identifiable assets are valued lands in Class VII by default.⁴ That residual is why goodwill so often dominates a Section 197 schedule.

Different classes have different recovery periods. Tangible equipment might be five- or seven-year property. Qualifying software is 36 months. Section 197 intangibles are 180 months. A buyer generally prefers allocations to faster-recovering assets; the seller may have opposing incentives depending on the character of gain each allocation produces. Consistent reporting is required precisely because those interests diverge.

Form 8594

Both parties file Form 8594 (Asset Acquisition Statement) with their income tax returns for the year of the sale whenever goodwill or going concern value attaches, or could attach, to the transferred assets.⁵ If the allocation changes later — earn-outs, price adjustments, resolved contingencies — an amended Form 8594 is filed by both parties for the year the change is taken into account. Missing the deadline without reasonable cause can trigger penalties.

Form 4562

The annual amortization deduction goes on Part VI of Form 4562 (Depreciation and Amortization) in the year amortization begins, attached to the business return.³ In later years, the ongoing deduction can be reported directly on the “Other deductions” line without reattaching Form 4562, unless you’re also claiming depreciation or new amortization that year.⁶ An error in prior deductions can be corrected on an amended return, or through Form 3115 to change accounting method when amendment isn’t available.

Two Rules That Trip Up Buyers

No Loss on Piecemeal Disposition

If you sell or abandon one Section 197 intangible from an acquisition while keeping others acquired in the same transaction, you cannot recognize a loss on the disposed asset. The unamortized basis of the abandoned asset shifts to the basis of the retained intangibles and keeps amortizing over their remaining recovery periods.¹ A loss is only available when all Section 197 intangibles from that transaction have been disposed of. The full acquisition cost gets recovered through amortization no matter what; it just shifts among the survivors.

Anti-Churning

The anti-churning rules block Section 197 amortization when the intangible was held or used by the taxpayer or a related person at any point between July 25, 1991, and Section 197’s August 10, 1993 effective date, and the post-enactment transaction doesn’t represent a genuine change in ownership.⁷ For this purpose, “related person” means more than 20 percent ownership, broader than the 50 percent threshold used elsewhere in the code.¹

When the rules apply, the buyer falls back on pre-1993 law, which generally means no amortization for goodwill and going concern value at all. One escape: the seller can elect to recognize gain on the transfer and pay the tax, which lets the buyer amortize the asset as a normal Section 197 intangible. The election rarely pencils out unless the buyer’s savings clearly exceed the seller’s tax cost, which sometimes happens where the seller has offsetting losses or a lower effective rate.

Anti-churning mostly catches transfers among family members and commonly controlled entities. Arm’s-length deals with unrelated sellers almost never get pulled in, because the genuine change in ownership satisfies the statute on its own.

1
Office of the Law Revision Counsel. 26 U.S. Code 197 – Amortization of Goodwill and Certain Other Intangibles
2
Office of the Law Revision Counsel. 26 USC 167 – Depreciation
3
Internal Revenue Service. Instructions for Form 4562 (2025)
4
eCFR. 26 CFR 1.1060-1 – Special Allocation Rules for Certain Asset Acquisitions
5
Internal Revenue Service. Instructions for Form 8594, Asset Acquisition Statement Under Section 1060
6
Internal Revenue Service. Publication 535 – Business Expenses
7
Internal Revenue Service. IRS Revenue Ruling 2004-49