Goodwill Amortization for Tax: Section 197 and the 15-Year Rule

Goodwill amortization for tax purposes runs on a single fixed rule: when you buy a business and pay more than the fair market value of its identifiable assets, the excess is goodwill, and you deduct it in equal monthly installments over exactly 15 years (180 months) under Section 197 of the Internal Revenue Code.¹ The schedule doesn’t flex with how long the goodwill actually keeps its value, and it doesn’t match how goodwill is treated for financial accounting, where the asset sits on the balance sheet until an impairment test writes it down.

Which Goodwill You Can Actually Deduct

Only goodwill you purchase as part of acquiring an existing trade or business qualifies. Goodwill you built yourself, through years of customer service, marketing, or reputation, generates no deduction at all.¹ The deduction exists because you paid someone else for their business.

Section 197 sweeps in more than goodwill in the ordinary sense. The statute pools a broad set of acquired intangibles onto the same 15-year schedule:

Goodwill and going concern value.
Customer-based intangibles: customer lists, established relationships, market share.¹
Supplier-based intangibles, such as favorable vendor terms.
Government licenses and permits acquired with the business.
Covenants not to compete signed by the seller.

The 15-year period applies to every item on that list regardless of the intangible’s real economic life. A licensing agreement with five years left still amortizes over 15. A covenant not to compete that expires in two years still amortizes over 15. One schedule fits all.

A few intangibles sit outside Section 197 and can be recovered on a shorter schedule. Off-the-shelf computer software, if it’s widely available under a nonexclusive license and hasn’t been substantially modified, falls outside the section. Custom software acquired as part of the deal stays in the 15-year pool. Software bought separately from any business acquisition also falls outside. Self-created intangibles are generally excluded, though self-created covenants not to compete, franchises, and certain government licenses remain inside Section 197.¹ The classification matters in dollars: an intangible outside Section 197 may qualify for a three- or five-year recovery period.

How Much of the Purchase Price Becomes Goodwill

The goodwill you get to amortize is whatever’s left over after the rest of the purchase price is allocated to identifiable assets. Federal tax law requires the residual method: you work through seven asset classes in order, assigning fair market value to each, and only what remains at the end lands in goodwill.²

The order runs from cash and near-cash items through securities, receivables, inventory, and tangible property, then to identifiable Section 197 intangibles other than goodwill (customer lists, patents, covenants not to compete), with goodwill and going concern value in the final class, Class VII.³ Because goodwill is at the bottom, every dollar assigned to a higher class is a dollar that doesn’t reach goodwill. Buyers usually want a larger goodwill allocation for the amortization it creates. Sellers may want a different mix depending on their own tax picture, which is why purchase price allocation is negotiated in most deals.

If buyer and seller agree in writing on the allocation, that agreement binds both parties for tax reporting.² The IRS is not bound and can challenge an allocation it considers unreasonable. Both sides report the allocation on Form 8594 (Asset Acquisition Statement) with the return for the year of the purchase. Failing to file a correct Form 8594 by the due date exposes you to information-return penalties under Sections 6721 through 6724.⁴

Transaction Costs Get Rolled In

Legal fees, accounting bills, and due diligence expenses paid to close the deal don’t disappear as current deductions. Treasury regulations require you to capitalize costs that facilitate the purchase of a trade or business and add them to the basis of the acquired assets.⁵ Fees for structuring the transaction, negotiating terms, obtaining tax advice on deal structure, and preparing or reviewing the purchase agreement are treated as inherently facilitative and must be capitalized regardless of when they were incurred. Because the residual method spreads the total consideration across the seven classes, much of that capitalized cost ends up in goodwill basis and amortizes over 15 years alongside it.

Running the 15-Year Calculation

The arithmetic is simple. Divide the goodwill basis by 180 to get the monthly deduction. Amortization begins on the first day of the month you acquire the intangible, even if closing happens on the last day of that month.¹

Say you close on March 15 with $1,800,000 allocated to goodwill. Your monthly deduction is $10,000. In the first calendar year you get ten months (March through December), or $100,000. Each full year after that produces $120,000. In the final year, 15 years and two months out from the start date, you deduct the remaining two months. The number stays flat; it doesn’t move with revenue or with any change in the goodwill’s perceived worth.

Report the amortization on Form 4562 (Depreciation and Amortization).⁶ All Section 197 intangibles from a single acquisition are treated as one pool for amortization. That pooling looks like bookkeeping until you try to sell or abandon one intangible early, at which point it drives everything.

No Section 179, No Bonus Depreciation

If you were hoping to write off acquired goodwill faster, the statute closes both usual doors. Section 197(b) states that no depreciation or amortization other than the 15-year amortization is allowable for an amortizable Section 197 intangible.¹ Bonus depreciation under Section 168(k) and the Section 179 election are both forms of depreciation, so both are shut out. Fifteen years is the floor and the ceiling.

Stock Deals and Partnership Interests

A straightforward stock purchase produces no new goodwill to amortize. The buyer acquires shares, the target’s asset basis carries over unchanged, and there’s nothing to allocate. Two elections can change that result.

A Section 338(h)(10) election, made jointly by the buyer and the selling group when the target was part of a consolidated group or was an S corporation, treats the stock purchase as if the target sold all its assets in a single transaction.⁷ The purchase price then runs through the seven-class residual method, and whatever lands in Class VII amortizes as goodwill over 15 years. The election is reported on Form 8594. A Section 336(e) election reaches broader situations: shareholders of an S corporation or members of a consolidated group selling more than 80% of the target’s stock in a qualified stock disposition within 12 months. The mechanics parallel 338(h)(10).

Buying into a partnership creates a different path. Without action, the premium you pay for a partnership interest is trapped; the partnership’s inside basis stays put and your share of deductions reflects the old, lower basis. A Section 754 election lets the partnership adjust its inside basis under Section 743(b) to match what you actually paid.⁸ The portion of that adjustment allocated to goodwill and going concern value follows a residual approach and amortizes over 15 years under Section 197.⁹ Only the purchasing partner benefits from the deduction; the other partners’ economics are unaffected. The election is made by attaching a statement to the partnership’s timely filed return for the year of the transfer, and once made it applies to all subsequent transfers and distributions until revoked.

The Anti-Churning Trap

The anti-churning rules in Section 197(f)(9) deny amortization when goodwill is acquired from a related person who held it before August 10, 1993 (the effective date of Section 197) and the user of the intangible doesn’t change.¹⁰ The point is to stop taxpayers from creating amortizable goodwill by shuffling assets between related parties.

The related-person test is broader than the usual one. It borrows the definitions in Sections 267(b) and 707(b)(1) but lowers the ownership threshold from more than 50% to more than 20%, tested immediately before or after the transaction. A minority stake can be enough to kill the deduction outright. Deals between genuinely unrelated parties are unaffected, but any overlapping ownership is worth analyzing closely; getting it wrong means losing 15 years of deductions.

Selling or Losing an Intangible Before 15 Years End

The pooling rule becomes the central issue on any early disposition. If you dispose of one Section 197 intangible but keep others from the same acquisition, you cannot recognize a loss on the one you sold.¹ The unamortized basis of the disposed asset shifts to the basis of the intangibles you kept, and your future amortization deductions increase to reflect it. The same rule applies when a Section 197 intangible becomes worthless: no current loss, basis rolls forward.¹¹ Loss recognition waits until the last intangible from the pool is gone.

Selling goodwill at a profit produces a split. Gain up to the amount of amortization you previously claimed is recaptured as ordinary income under Section 1245. Any additional gain is capital, assuming the goodwill is a capital asset in your hands. When you dispose of multiple Section 197 intangibles from the same acquisition in a single transaction, they’re treated as one asset for recapture, so you can’t isolate one with a large gain against another with a loss to game the calculation. An intangible whose basis exceeds its fair market value is carved out and handled separately.¹²

The takeaway on the exit: amortization deductions aren’t free money. They’re a timing benefit, and part of the benefit comes back as ordinary income when you sell the business at a gain.

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 1060 – Special Allocation Rules for Certain Asset Acquisitions
3
eCFR. 26 CFR 1.1060-1 – Special Allocation Rules for Certain Asset Acquisitions
4
Internal Revenue Service. Instructions for Form 8594
5
Federal Register. Guidance Regarding Deduction and Capitalization of Expenditures
6
Internal Revenue Service. About Form 4562 – Depreciation and Amortization
7
Office of the Law Revision Counsel. 26 USC 338 – Certain Stock Purchases Treated as Asset Acquisitions
8
Internal Revenue Service. FAQs for Internal Revenue Code Sec 754 Election and Revocation
9
eCFR. 26 CFR 1.755-1 – Rules for Allocation of Basis
10
eCFR. 26 CFR 1.197-2 – Amortization of Goodwill and Certain Other Intangibles
11
Internal Revenue Service. Field Attorney Advice 20111101F – Deductibility of Worthless Goodwill
12
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property