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

Section 197 intangibles amortization works one way for every qualifying asset: straight-line deductions over 180 months, no matter what the asset’s real useful life turns out to be. You start the clock in the later of the month you acquired the intangible or the month you began actively conducting the trade or business, and you report the annual deduction on Part VI of Form 4562.¹² The uniform 15-year period is the whole point of the statute; it replaced years of fights with the IRS over whether a customer list or a trade name would last five years or twenty.

How the 15-Year Deduction Is Calculated

Take the basis assigned to each Section 197 intangible, divide by 180, and deduct that amount every month the asset is in service during the tax year. The method is straight-line and the period is fixed. A patent with three years of legal life left still amortizes over 15. A three-year non-compete still amortizes over 15. That rigidity cuts both ways, but it eliminates the useful-life argument entirely.

The start date is the later of the acquisition month or the month you begin the business or income-producing activity the intangible relates to. If you buy assets in March but don’t open the doors until June, June is your start month. You file a separate Form 4562 for each business or activity.²

If you deducted the wrong amount in a prior year, correct it with an amended return filed within three years of the original filing date or two years from the date you paid the tax, whichever is later.³

Which Acquired Intangibles Get the 15-Year Treatment

To qualify, the intangible must be acquired (with narrow exceptions discussed below) and held in connection with a trade or business or an income-producing activity, and it must fit one of the statute’s categories:¹

Goodwill and going concern value
Workforce in place, including the composition of the workforce and the terms of employment
Customer-based intangibles and supplier-based intangibles
Business books, records, operating systems, and information bases, including customer lists and proprietary databases
Patents, copyrights, formulas, processes, designs, patterns, formats, and know-how, when acquired as part of a business purchase
Licenses, permits, and other rights granted by a governmental body, whether exclusive or not
Covenants not to compete entered into in connection with acquiring an interest in a trade or business, plus similar arrangements that restrict competition
Franchises, trademarks, and trade names

Goodwill is usually the biggest number in the mix because it absorbs whatever purchase price is left after every identifiable asset gets its allocation. Going concern value is separate: it reflects the fact that an operating business, with trained staff and working supplier lines, is worth more than the sum of its parts.

Franchises carry a specific carveout. Contingent franchise payments that depend on the productivity or use of the franchise and are paid at least annually in substantially equal amounts throughout the transfer agreement can be deducted currently under Section 1253 instead of capitalized.⁴ Lump-sum payments and anything that fails those conditions go into the 15-year pool.

Non-competes have their own quirk on the back end. You cannot treat a non-compete as disposed of or worthless until you dispose of the entire business interest it was connected to, even after the non-compete’s actual term has expired.¹

Assets That Look Like They Qualify but Don’t

Several categories are explicitly excluded from Section 197. Getting these wrong changes both the deduction amount and the recovery period, so it’s worth walking through them.

Interests in corporations, partnerships, trusts, and estates are excluded. Stock and partnership interests aren’t amortized at all; you recover basis when you sell or liquidate. Any interest in land is excluded on the same principle. Interests under existing leases and existing debt instruments are also outside Section 197 and follow their own recovery rules.¹

Software depends on how you got it. Off-the-shelf software available to the general public under a nonexclusive license and not substantially modified is excluded. Software you acquire separately from a business acquisition is also excluded. Both are amortized over 36 months under Section 167(f).⁵ Software that comes bundled with a business acquisition, though, gets swept into Section 197 and stretches to 15 years.

Certain intangibles are Section 197 assets when they ride along with a business acquisition but excluded when purchased on their own. This includes:

Interests in films, sound recordings, books, and similar property
Rights to receive tangible property or services under a contract or a government grant
Interests in patents and copyrights
Certain fixed-duration or fixed-amount contractual rights lasting under 15 years, or recoverable under a production-based method

When separately acquired, these follow their own useful-life or contract-term amortization rather than the 15-year rule.¹

Fees paid to facilitate a business acquisition are not Section 197 intangibles. Treasury regulations require you to capitalize them, but they follow their own recovery rules rather than getting folded into the 15-year pool.⁶ Costs of issuing stock or debt in a corporate reorganization are also outside Section 197.

Self-Created Intangibles

Section 197 is built around acquired assets. If you develop an intangible internally, the general rule is that Section 197 doesn’t apply. Two exceptions cut against that rule.

First, five categories are Section 197 intangibles even when self-created: government licenses and permits, non-compete agreements, franchises, trademarks, and trade names.¹

Second, any intangible you create in connection with a transaction involving the acquisition of a trade or business (or a substantial portion of one) is treated as a Section 197 intangible regardless of category. So the self-created exclusion mainly reaches assets like internally built customer lists, proprietary databases, and internal know-how developed through ordinary operations.

Research and experimental expenditures follow a different regime. Under Section 174, domestic research expenditures paid or incurred after 2021 must be capitalized and amortized over five years using the midpoint convention; foreign research expenditures amortize over 15 years. Software development costs are treated as Section 174 research expenditures, so internally developed software runs on the five-year track rather than through Section 197.⁷

Contingent Payments and Later Basis Additions

Deals with earn-outs or other post-closing payments raise a timing question: what happens when the basis of a Section 197 intangible goes up after amortization has already started?

If the additional payment is added to basis after the first month of the original 15-year period but before that period ends, you amortize the increase over the months remaining in the original 15-year window. The amortization on the added amount begins in the month the basis increase occurs.

If the additional amount isn’t properly added to basis until after the original 15-year period has already expired, you deduct the entire additional amount in the year it’s added to basis. A long-delayed earn-out on an asset whose amortization ended years earlier can produce a substantial one-time deduction.

Selling One Intangible While Keeping Others

On a sale of a Section 197 intangible, gain up to the amortization you’ve claimed is ordinary income under the Section 1245 recapture rules. Any gain above the recapture amount is Section 1231 gain, and a net loss is a Section 1231 loss. When multiple Section 197 intangibles are sold in a single transaction, they’re treated as one asset for recapture purposes.³

The trap sits in partial dispositions. If you sell one Section 197 intangible from an acquisition but keep other intangibles from the same acquisition, you cannot recognize any loss on the disposed asset. The disallowed loss is added to the adjusted basis of the retained intangibles from that transaction, and you amortize that additional basis over what’s left of the original 15-year period.¹

When a related party holds the retained intangibles rather than the taxpayer who took the loss, only the basis of intangibles held by the taxpayer with the loss is stepped up. If the taxpayer who incurred the loss holds none of the retained intangibles, the disallowed loss is deducted ratably over the remaining amortization period, with the balance becoming fully deductible once every retained intangible from the transaction has been disposed of or become worthless.⁸

The loss disallowance rule does not apply when you dispose of every Section 197 intangible from the acquisition. With no retained intangibles left, a realized loss is fully recognized under the normal rules.

Anti-Churning Rules for Related-Party Deals

Before Section 197 took effect in August 1993, goodwill and going concern value generally weren’t amortizable. Congress anticipated related-party sales designed to reset basis on old goodwill so the new owner could start deducting it, and the anti-churning rules were written to shut that down.⁹

The rules apply to goodwill, going concern value, and any other intangible that wouldn’t have been amortizable under prior law. They don’t reach non-competes, government licenses, and other assets that had established amortization treatment before Section 197. An intangible falls under the rules if any of these is true:

The intangible was held or used by the taxpayer or a related person at any time from July 25, 1991, through the statute’s enactment date.
The intangible was acquired from someone who held it during that window, and the person actually using the asset didn’t change as part of the transaction.
The taxpayer grants usage rights back to someone (or a related party of that person) who held or used the intangible during the transition period.¹

When an anti-churning rule bites, the intangible simply cannot be amortized under Section 197. You default to whatever recovery rule existed under prior law, which for goodwill and going concern value typically meant no amortization at all.

The related-party definition here is broader than in most of the code. The usual Section 267(b) and 707(b)(1) threshold of 50% ownership is dropped to 20% for anti-churning purposes. Own 20% or more of a corporation’s stock, or 20% or more of the capital or profits interest in a partnership, and you’re 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).¹

There is one release valve. If the only reason the anti-churning rules apply is the related-party definition, the seller can elect to recognize gain on the transfer and pay tax on it at the highest applicable income tax rate. When the seller pays that tax, 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 has to be made on a timely filed return for the year of the transfer. It’s a straight trade of tax paid now for deductions over the next 15 years, and the math depends on the built-in gain, the buyer’s marginal rate, and the discount rate.

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

Section 197 assumes an asset purchase, where the buyer picks up individual assets and allocates the purchase price among them under the residual method of Section 1060.¹⁰ In a straight stock purchase, no new basis is created in the target’s assets, so there’s nothing at the entity level to amortize.

Section 338(h)(10) offers a workaround. If a 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, buyer and seller can jointly elect to treat the deal as if the target sold all its assets in a single transaction. The target recognizes gain or loss on the deemed sale, and the buyer takes a stepped-up basis in every asset, including goodwill and the other Section 197 intangibles.¹¹

After the election, the price is allocated under the same residual method as in a direct asset purchase, with the residual falling into goodwill. The buyer then amortizes the Section 197 intangibles over 15 years the same way. Whether the election is worth making comes down to comparing the seller’s immediate tax cost against the present value of the buyer’s future amortization deductions.

1
Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
2
Internal Revenue Service. Instructions for Form 4562 Depreciation and Amortization
3
Internal Revenue Service. Publication 535 Business Expenses
4
Office of the Law Revision Counsel. 26 USC 1253 – Transfers of Franchises, Trademarks, and Trade Names
5
Office of the Law Revision Counsel. 26 US Code 167 – Depreciation
6
eCFR. 26 CFR 1.263(a)-5 – Amounts Paid or Incurred to Facilitate an Acquisition of a Trade or Business
7
Office of the Law Revision Counsel. 26 US Code 174 – Amortization of Research and Experimental Expenditures
8
eCFR. 26 CFR 1.197-2 – Amortization of Goodwill and Certain Other Intangibles
9
Internal Revenue Service. Intangibles
10
Office of the Law Revision Counsel. 26 USC 1060 – Special Allocation Rules for Certain Asset Acquisitions
11
Office of the Law Revision Counsel. 26 US Code 338 – Certain Stock Purchases Treated as Asset Acquisitions