Yes. A non-compete agreement is an intangible asset when it’s acquired as part of buying a business, and it has to be capitalized and amortized rather than expensed. For financial reporting, it sits on the balance sheet at fair value and amortizes over the contract term. For federal tax, it’s a Section 197 intangible that amortizes over 15 years no matter how long the restriction actually runs. A non-compete signed directly with an employee, outside any business acquisition, is treated differently — it’s compensation, not an intangible asset.
Why an Acquisition Non-Compete Is an Intangible Asset
The Financial Accounting Standards Board treats an intangible as “identifiable,” and therefore recordable separately from goodwill, if it arises from contractual or other legal rights, or if it can be separated from the entity and sold or transferred on its own.1Financial Accounting Standards Board. Accounting Standards Update 2019-06 – Intangibles Goodwill and Other (Topic 350) A non-compete clears the first test easily. It exists only because of an enforceable contract, and that contract gives the holder a legal right to control future economic benefits: the seller’s promise not to open a competing shop, poach customers, or take trade secrets across the street.
The identifiability question decides where the asset shows up. Goodwill is a residual that sits on the books indefinitely, tested annually for impairment. An identifiable intangible like a non-compete gets its own line, its own useful life, and its own amortization schedule. Rolling it into goodwill would inflate the residual and distort reported earnings in every subsequent period.
Under the FASB’s codification, non-compete agreements are classified as marketing-related intangibles arising from contractual or legal rights. Because the underlying contract has a finite term, the asset has a finite useful life — unlike a trademark or goodwill, which can carry indefinitely.
Book Treatment: Recognition and Amortization
When one company acquires another, the buyer has to identify and separately recognize every identifiable intangible asset at fair value as of the acquisition date. Non-competes are part of that exercise: they get pulled out of the total purchase price and recorded on their own line rather than lumped into goodwill.1Financial Accounting Standards Board. Accounting Standards Update 2019-06 – Intangibles Goodwill and Other (Topic 350) Dividing the price across acquired assets, liabilities, and intangibles is called purchase price allocation.
Once the asset is on the books at fair value, the company amortizes it over its useful life, which equals the contractual term. A five-year non-compete produces five years of amortization expense. The default method is straight-line unless the company can show the economic benefits are consumed in some other pattern.1Financial Accounting Standards Board. Accounting Standards Update 2019-06 – Intangibles Goodwill and Other (Topic 350) A $1,000,000 non-compete with a five-year term produces $200,000 in annual amortization expense on the income statement and a matching reduction in carrying value on the balance sheet.
Tax Treatment: 15-Year Amortization Under Section 197
The tax code runs on a different clock. Under Section 197 of the Internal Revenue Code, a covenant not to compete acquired in connection with a business acquisition is a Section 197 intangible that must be amortized ratably over 15 years, starting in the month of acquisition.2Office of the Law Revision Counsel. 26 USC 197 Amortization of Goodwill and Certain Other Intangibles The same $1,000,000 five-year non-compete generates only about $66,667 per year in tax deductions, and those deductions keep running for 15 years even if the restriction itself expires in three.
Section 197 also requires that amounts paid under a covenant not to compete be treated as chargeable to a capital account, which forecloses any argument for immediate expensing.2Office of the Law Revision Counsel. 26 USC 197 Amortization of Goodwill and Certain Other Intangibles The IRS’s own guidance confirms the same treatment in its intangibles materials for businesses.3Internal Revenue Service. Intangibles
The Book-Tax Mismatch
The gap between book amortization over the contract term and tax amortization over 15 years is a temporary timing difference. It shows up on the balance sheet as a deferred tax asset. In the early years, book amortization expense exceeds the tax deduction, so reported income on the financial statements is lower than taxable income on the return. Once book amortization ends and the contract expires, the tax deductions continue for years, and the deferred tax asset gradually reverses. Any company allocating meaningful value to a non-compete needs to track this in its tax provision every reporting period.
Why the Allocation Gets Negotiated
The 15-year rule is also why buyers and sellers argue about how much of the purchase price to attach to the non-compete. Buyers generally prefer to steer dollars toward assets with faster write-offs. Sellers receiving amounts specifically attributed to a non-compete covenant may see that portion taxed as ordinary income rather than as capital gain on goodwill. The two sides have opposing incentives, and the IRS scrutinizes allocations that look designed rather than reasoned.
Employment Non-Competes Are Not Intangible Assets
Everything above applies to non-competes that come with a business acquisition. A non-compete an employer negotiates directly with an employee, whether at hiring or as part of a retention deal, follows different rules.
In the employment context, the payment tied to the non-compete is compensation. A signing bonus conditioned on the employee agreeing not to compete is recognized as compensation expense over the service period, not capitalized as an intangible. The agreement exists to secure one person’s services, not to protect the value of an acquired enterprise.
Section 197 only reaches covenants entered into “in connection with an acquisition (directly or indirectly) of an interest in a trade or business or substantial portion thereof.”2Office of the Law Revision Counsel. 26 USC 197 Amortization of Goodwill and Certain Other Intangibles A standalone employment non-compete falls outside that boundary, so it can generally be deducted as an ordinary business expense when paid rather than amortized over 15 years.
The planning difference is real. A company hiring an executive from a competitor and paying $500,000 for a two-year non-compete can deduct that cost over the service period. The same $500,000 non-compete acquired as part of a $10 million business purchase gets stretched over 15 years. Similar economics, very different tax outcomes, and the trigger is whether a business acquisition is involved.
Enforceability Sets the Ceiling on Value
A non-compete that can’t be enforced has no economic value, and an intangible with no value can’t be capitalized. Enforceability is therefore the threshold question in any non-compete valuation. Four states ban non-competes entirely, and more than 30 others impose significant restrictions on scope, duration, or covered workers. If the restricted person operates in a state where the agreement wouldn’t survive a legal challenge, the fair value assigned in the purchase price allocation should reflect that.
Appraisers handling multi-state businesses sometimes assign partial value, discounting for the probability that enforcement fails in certain jurisdictions. A non-compete restricting a seller who operates only in a state that bans them would receive a fair value of zero, and the price that would have been allocated to the non-compete flows to goodwill instead.
The FTC attempted a nationwide ban on non-competes in 2024, but federal courts struck down the rule as exceeding the agency’s authority. After losing in court, the FTC formally removed the Non-Compete Clause Rule from the Code of Federal Regulations on February 12, 2026.4Federal Register. Revision of the Negative Option Rule, Withdrawal of the CARS Rule, Removal of the Non-Compete Rule There is no federal ban currently in place. The FTC retains the ability to challenge specific agreements on a case-by-case basis under Section 5 of the FTC Act, but enforceability is otherwise governed by state law.
Impairment When Circumstances Change
Because a non-compete has a finite life, it isn’t tested for impairment annually the way goodwill is. Testing happens only when events suggest the carrying amount may not be recoverable. Typical triggers: the restricted person retires early, dies, becomes permanently disabled, or leaves the industry entirely, or the competitive environment shifts enough to render the restriction meaningless.
When a trigger occurs, the company estimates the future undiscounted cash flows the non-compete is expected to generate. If those fall below carrying value, the asset is written down to fair value and the difference is recognized as a loss on the income statement.
Anti-Churning Rules for Related Parties
Section 197 also includes anti-churning provisions aimed at taxpayers who might try to convert previously non-amortizable intangibles into amortizable ones through related-party transactions. A Section 197 intangible acquired from a related person doesn’t qualify for the 15-year amortization deduction if the prior holder held the intangible during the transition period and the user doesn’t change as part of the transaction.5eCFR. 26 CFR 1.197-2 – Amortization of Goodwill and Certain Other Intangibles You can’t sell a business to a family member or controlled entity and suddenly begin amortizing a non-compete that wasn’t deductible before. Tripping the rule means losing the amortization deduction entirely on the affected intangible.
The Short Version
- Acquisition non-compete on the books: capitalized at fair value, amortized over the contract term, tested for impairment when triggering events occur.
- Acquisition non-compete on the tax return: capitalized and amortized over 15 years under Section 197, regardless of the contract term.
- Employment non-compete: treated as compensation, generally deductible as an ordinary business expense over the service period.
- Unenforceable non-compete: fair value is zero or heavily discounted, with the residual flowing to goodwill.
The context in which a non-compete is created determines everything that follows — recording, amortization, deduction, and the years of financial statements and tax returns those choices flow through. The classification analysis is where the real work sits.