An amortization expense is the portion of an intangible asset’s cost that a business deducts each year over the asset’s useful life. Pay $150,000 for a patent with a 15-year life and you record $10,000 per year, reducing both the asset’s book value and your taxable income. The arithmetic is easy. The rules about which assets qualify, what useful life applies, and how to report the deduction are where businesses get into trouble.
Which Assets Get Amortized
Amortization applies to intangible assets: things a business owns that have real economic value but no physical form. Patents, copyrights, trademarks, customer lists acquired in a business purchase, non-compete agreements, franchise rights, and government-issued licenses all qualify. The cost basis includes the purchase price plus whatever the business spent getting the asset ready to use.
These assets get spread across multiple years because their value gets consumed over time. A patent gives a competitive advantage only until it expires. A non-compete protects the buyer only during its contractual term. Matching cost to years of benefit keeps financial statements honest and prevents a single large purchase from wiping out a year’s profits.
Not every intangible qualifies. Assets with no foreseeable end to their useful life receive different treatment, and goodwill is the main example (covered below). Amortization is also distinct from depreciation, which covers tangible assets like equipment and buildings, and from depletion, which covers natural resources and is usually calculated on quantity extracted rather than time. Each follows its own code sections and its own line on a tax return, so mixing them up can trigger rejected deductions on audit.
How to Calculate Amortization Expense
Nearly all intangible assets with a finite life are amortized straight-line. Take the asset’s cost, subtract any salvage value, and divide by the useful life in years.
Salvage value for intangibles is almost always zero. Once a patent expires or a non-compete runs out, there is nothing left to sell. In practice, the full purchase price gets divided evenly across the useful life.
A worked example: a business acquires a seven-year customer relationship for $350,000. Annual amortization is $350,000 รท 7 = $50,000. Each year the business records $50,000 as an expense on the income statement and reduces the asset’s carrying value on the balance sheet by the same amount.
One detail catches people off guard. For tax purposes, the useful life you would expect based on the asset’s real economic value often does not matter. Section 197 of the Internal Revenue Code forces a 15-year period on a broad category of acquired intangibles regardless of their actual lifespan. A five-year non-compete acquired as part of a business purchase still gets amortized over 15 years for tax purposes.
The 15-Year Rule for Acquired Intangibles
When a business acquires certain intangibles, especially in connection with buying another business, IRC Section 197 requires straight-line amortization over exactly 15 years, starting in the month of acquisition.1Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles The 15-year period overrides whatever the asset’s actual legal or economic life might be.
Section 197 intangibles include:
- Goodwill and going concern value
- Customer-based intangibles such as customer lists, market share, and ongoing customer relationships
- Workforce in place
- Covenants not to compete entered into as part of a business acquisition
- Patents, copyrights, formulas, and similar intellectual property acquired in connection with a business
- Government-granted licenses and permits
- Franchises, trademarks, and trade names
Self-created intangibles are generally excluded from Section 197. A patent developed in-house would not be forced into the 15-year schedule. The exclusion does not apply to trademarks, trade names, franchises, government licenses, or covenants not to compete, though. Capitalized costs for developing or defending a trademark still get 15-year treatment.2eCFR. 26 CFR 1.197-2 – Amortization of Goodwill and Certain Other Intangibles
Because amortization begins in the month of acquisition rather than the start of the tax year, the first and last years get prorated. Buy a customer list in October and you claim only three months of amortization that first year; the final year picks up the remaining nine. Track the exact acquisition date for each intangible, because the return depends on it.
Start-Up and Organizational Costs
Costs of forming or launching a business are amortized under a separate framework. Organizational costs for corporations fall under Section 248; start-up expenditures fall under Section 195. Both work the same way.
A business can immediately deduct up to $5,000 of qualifying costs in the year it begins operations. That $5,000 allowance phases out dollar-for-dollar once total costs exceed $50,000. Any remaining balance gets amortized over 180 months (15 years), beginning in the month the business starts.3Office of the Law Revision Counsel. 26 USC 248 – Organizational Expenditures4Office of the Law Revision Counsel. 26 US Code 195 – Start-Up Expenditures
Organizational costs are expenses tied directly to forming the entity: incorporation fees, state filing charges, legal fees for drafting the charter or bylaws. Start-up costs are broader and include market research, pre-opening employee training, and travel to scout business locations. A business that spent $60,000 on start-up costs would lose the $5,000 immediate deduction entirely, because $60,000 exceeds $50,000 by more than $5,000, and would amortize the full $60,000 over 180 months.
Research and Development Costs
R&D treatment has changed twice in recent years. The Tax Cuts and Jobs Act eliminated immediate expensing of domestic research and experimental costs starting in 2022, forcing businesses to capitalize and amortize those costs over five years for domestic research and 15 years for foreign research.
In July 2025, the One Big Beautiful Bill Act (P.L. 119-21) permanently reversed the domestic portion by creating new Section 174A. For tax years beginning after December 31, 2024, businesses can once again immediately deduct domestic research and experimental expenditures.5Internal Revenue Service. Instructions for Form 4562 (2025) A business can instead elect to capitalize domestic costs and amortize them over at least 60 months if it prefers to spread the deduction.
Foreign research did not get the same relief. Costs tied to research conducted outside the United States still must be capitalized and amortized over 15 years.5Internal Revenue Service. Instructions for Form 4562 (2025) Any business with overseas R&D operations should segregate domestic and foreign costs carefully because the treatment diverges sharply.
Software development is a specific case. Coding, software engineering, quality assurance for development projects, and deployment costs are treated as research and experimental expenditures under Section 174. Buying or licensing off-the-shelf software is not. Those costs may be immediately deductible as ordinary business expenses or depreciated as a fixed asset, depending on the circumstances.
Goodwill: Amortized or Not?
Goodwill gets more complicated treatment than any other intangible because the tax rules and the accounting rules diverge.
For federal tax purposes, acquired goodwill is a Section 197 intangible and must be amortized over 15 years on a straight-line basis.1Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles Pay $2 million in goodwill as part of an acquisition and you deduct roughly $133,333 per year for 15 years on your return.
Under generally accepted accounting principles, the answer depends on the type of entity. Public companies do not amortize goodwill. They test it for impairment at least once a year, and if the fair value of a business unit falls below its carrying amount, the company writes down the goodwill and recognizes the loss on the income statement.
Private companies and not-for-profit entities have an option. Under FASB Accounting Standards Update 2014-02, these entities can elect to amortize goodwill on a straight-line basis over 10 years, or a shorter period if they can demonstrate a different useful life is more appropriate. Entities choosing this alternative also only need to test for impairment when a triggering event occurs rather than annually.6FASB. ASU 2014-02 Intangibles – Goodwill and Other (Topic 350)
Where Amortization Shows Up on the Financial Statements
Amortization expense flows through three financial statements.
On the income statement, the annual amount appears as an operating expense. It reduces operating income and net income. Lower net income means lower taxable income, so amortization delivers a real tax benefit even though the cash left the business when the asset was originally purchased.
On the balance sheet, accumulated amortization sits as a contra-asset account below the intangible’s original cost. A $350,000 customer list that has been amortized three years at $50,000 per year shows $350,000 in original cost, minus $150,000 in accumulated amortization, for a net carrying value of $200,000.
On the cash flow statement, amortization gets added back to net income under the indirect method. It reduced net income but did not consume any cash during the period, so adding it back keeps operating cash flow accurate.
If You Abandon or Dispose of an Intangible Early
If a business stops using an intangible before it is fully amortized, the remaining unamortized balance can potentially be written off as a loss. The IRS allows abandonment losses under Section 165 when a taxpayer can demonstrate they owned the asset, intended to abandon it, and took affirmative steps to do so. Letting an asset gather dust does not qualify. There needs to be a clear, documented decision to walk away, and records of when the decision was made, who was involved, and any formal notifications will strengthen the deduction if it is questioned.
Section 197 intangibles carry an additional wrinkle. If a business disposes of one Section 197 asset but retains other Section 197 assets from the same acquisition, the remaining basis of the disposed asset generally gets folded into the basis of the retained assets rather than recognized as a loss immediately. A clean loss deduction typically requires disposing of all Section 197 intangibles from that transaction.
Reporting Amortization on Form 4562
Businesses report amortization deductions on Part VI of IRS Form 4562 (Depreciation and Amortization). For each intangible, the form requires a description of the cost, the date amortization began, the total amortizable amount, the applicable code section (such as Section 197 or Section 195), the amortization period, and the deduction claimed for the current year.5Internal Revenue Service. Instructions for Form 4562 (2025)
Line 42 is for costs where amortization began during the current tax year, meaning newly acquired intangibles or newly incurred start-up costs. Assets that began amortizing in prior years go on line 43. The total flows to the business’s income tax return: Form 1120 for a corporation, Schedule C for a sole proprietorship, or the applicable partnership or S corporation return.
The election to amortize start-up and organizational costs no longer requires a separate statement attached to the return. A business simply claims the deduction on Form 4562. Once made, the election is irrevocable. There is no changing your mind on an amended return if you later decide a different approach would have been more favorable.