Section 197 Intangibles: 15-Year Amortization for Goodwill, Customer Lists, and Non-Competes

You just closed on an $800,000 acquisition of a regional HVAC company. The seller's books showed $200,000 in equipment, $50,000 in inventory, and $30,000 in receivables. So what about the other $520,000? That's goodwill, customer relationships, the workforce you inherited, and the non-compete you negotiated — and almost every dollar of it is deductible on your tax return. The catch: you'll deduct it across exactly 180 months, whether your business lives that long or not.

This is Section 197 territory. It governs how buyers in a taxable asset acquisition recover the cost of the intangible assets bundled into the deal. It's also one of the most misunderstood provisions in the code, because the rules flip the usual intuitions of accounting on their head: self-created goodwill gets no deduction, related-party deals can be poisoned forever, and selling part of the acquired intangibles produces no loss. Get this wrong and you'll either miss six figures of deductions or get a deficiency notice when the IRS reverses your amortization schedule.

Here's how Section 197 actually works in practice, the elections you need to make at closing, and the traps that snag buyers who try to wing it.

Why Section 197 Exists

Before 1993, taxpayers and the IRS spent decades fighting over whether you could amortize the intangible assets you bought when acquiring a business. Goodwill was the headline issue. The IRS said goodwill had an indefinite useful life and was not amortizable. Taxpayers argued that specific intangibles — customer lists, workforce-in-place, covenants not to compete — were separable from goodwill, had finite useful lives, and could be depreciated. The result was litigation chaos. Two landmark Supreme Court cases (Newark Morning Ledger in 1993 being the most famous) blew the door open and forced Congress to act.

The Omnibus Budget Reconciliation Act of 1993 added Section 197 to bring order. The deal Congress struck: virtually every intangible you acquire in connection with buying a business gets the same treatment — straight-line amortization over 15 years. No more disputes about useful life. No more carve-outs. One rule for everything.

The trade-off is real. A patent that economically expires in 7 years still gets amortized over 15. A non-compete that lasts 3 years still gets amortized over 15. The mismatch is intentional. It buys certainty at the cost of perfect economic accuracy.

What Qualifies as a Section 197 Intangible

Section 197 covers nine categories of intangibles when acquired as part of a trade or business. The list is broad on purpose:

• Goodwill — the residual value above identifiable assets, representing the going-concern premium and brand reputation
• Going-concern value — the additional value because the business is operating, not just a pile of assets
• Workforce in place — the trained employee base, including experience and employment relationships
• Information base — customer lists, subscriber lists, technical manuals, training programs, accounting records, and other business records
• Know-how and patents — formulas, processes, designs, patterns, copyrights, and similar items
• Customer-based intangibles — customer contracts, deposit relationships, and core deposit intangibles for financial institutions
• Supplier-based intangibles — favorable supply contracts and distribution rights
• Licenses, permits, and other rights granted by a government unit
• Covenants not to compete entered into in connection with the acquisition
• Franchises, trademarks, and trade names — including renewals

That covers nearly everything an acquirer hands money over for that isn't a tangible asset or a financial instrument.

What's Excluded

The exclusions are equally important because they preserve faster or different cost recovery for specific items:

• Financial interests — stocks, bonds, partnership interests, futures contracts
• Land
• Off-the-shelf computer software acquired separately (not as part of a business purchase) — amortized over 36 months under Section 167
• Self-created intangibles — if you build it yourself rather than buying it, you get no deduction at all
• Interests in films, sound recordings, books, and similar property acquired separately
• Mortgage servicing rights
• Professional fees for the acquisition itself (these are capitalized into basis, not amortized as a separate intangible)
• Existing leases of tangible property

Note especially the self-created exclusion. The goodwill your business has built up over 20 years of customer service — the reputation, the brand, the relationships — produces zero tax deduction. Only goodwill you purchase qualifies. That asymmetry has driven entire industries of M&A planning.

The 15-Year Amortization Mechanics

Once an asset qualifies, the rules are mechanical. You amortize the adjusted basis ratably over 180 months, starting in the month of acquisition. The half-year and mid-quarter conventions that apply to tangible property under MACRS do not apply here.

Take a $300,000 customer list acquired on March 1. Annual amortization is $300,000 ÷ 15 = $20,000. For the year of acquisition you get 10 months (March through December) of amortization, or $20,000 × (10/12) = $16,667. You'll claim $20,000 in each full year that follows, and a final $3,333 in the 16th calendar year to round out the 180 months.

The math is the easy part. Where it gets hard is establishing the basis in each intangible — and for that, you need Form 8594.

Form 8594 and the Residual Method

When you buy substantially all the assets of a trade or business, Section 1060 requires both buyer and seller to file Form 8594 (Asset Acquisition Statement) with their tax returns. The form forces the parties to allocate the total purchase price across seven asset classes using the residual method.

The classes, in order, are:

You allocate to each class at fair market value in order — Class I first, then II, then III, and so on. When you reach Class V, you allocate up to FMV of those assets. Class VI gets allocated based on the FMV of the identifiable intangibles. Whatever's left over after Classes I through VI is the residual — and that residual lands in Class VII as goodwill and going-concern value.

The result is that goodwill is whatever the buyer overpaid for the rest of the assets. That's not a critique — it's literally the definition for tax purposes.

Why Buyer and Seller Care About the Allocation

The allocation matters because buyer and seller want opposite outcomes:

• The buyer wants more allocated to tangible assets and Class VI intangibles that depreciate or amortize faster. Equipment depreciates over 5–7 years. A covenant not to compete amortizes over 15 years. Goodwill amortizes over 15 years. The buyer wants Class IV inventory (immediate cost recovery), then Class V equipment (5–7 years), then identifiable intangibles, with goodwill last.
• The seller wants more allocated to capital assets (goodwill, land, stock) taxed at long-term capital gains rates, and less to depreciation recapture and ordinary income items like inventory and equipment subject to Section 1245 recapture.

Buyer and seller must report the same allocation on their respective Forms 8594. The IRS uses Form 8594 specifically to catch inconsistent positions. If you allocate $200,000 to a covenant and the seller reports $50,000, expect a letter. The two parties typically negotiate the allocation as part of the purchase agreement, and it survives as a contractual commitment to file consistent forms.

The Anti-Churning Rules: A Trap for Family and Private Deals

The biggest pitfall in Section 197 isn't the math — it's the anti-churning rules in Section 197(f)(9). Congress was worried that taxpayers would simply "sell" their non-amortizable goodwill to a related party after the 1993 effective date and start a new 15-year amortization clock. So the statute disallows amortization for goodwill or going-concern value that:

1. Was held or used by the seller (or a related party) between July 25, 1991 and August 10, 1993, AND
2. Is acquired in a transaction where there is no real change in the user

"Related party" for this purpose uses the rules of Sections 267(b) and 707(b), but with a 20 percent threshold instead of 50 percent. So if you buy a business from your brother's company and your brother retains a 25 percent stake in the buyer, you're related. If a private equity sponsor rolls over equity into the acquirer and ends up with more than 20 percent, anti-churning is triggered.

In practice, the anti-churning rules are less catastrophic in 2026 than they were 20 years ago because most pre-1993 goodwill has long since been amortized into oblivion in subsequent fully taxable deals. But they still bite in three scenarios:

• Family successions — when a parent who founded the business sells to a child, and the parent stays involved or retains equity
• Roll-over equity in private equity deals — when sellers reinvest a slice of proceeds into the buyer
• Internal restructurings — when goodwill moves between commonly controlled entities

The penalty is harsh: you simply don't get to amortize the tainted goodwill. Ever. That can turn a "no harm, no foul" family share transfer into a permanent loss of the deduction.

Planning Around Anti-Churning

Two main escapes exist:

1. The gain-recognition exception — if the seller recognizes gain on the transfer and the buyer's basis is determined by reference to that gain, anti-churning may not apply. In practice, this means the seller actually paying tax on the goodwill transfer.
2. Drop the 20 percent ownership — restructure the deal so that no related party owns more than 20 percent of the buyer after the transaction.

If you're planning an intra-family business transfer or any deal with significant rollover equity, run the anti-churning analysis before closing, not after.

Dispositions: The No-Loss Rule

Section 197 contains an unusual rule for what happens when you sell or abandon an intangible asset. If you acquired a basket of Section 197 intangibles in the same transaction (which is almost always the case in an acquisition) and you dispose of one of them, you cannot recognize a loss. Instead, the disallowed loss is added to the basis of the remaining Section 197 intangibles from the same transaction.

That means if your $300,000 customer list turns out to be worthless after a year, you don't get to write off the unamortized $280,000 of remaining basis. You spread that basis across the other intangibles from the deal — goodwill, the trademark, the workforce in place — and continue amortizing.

This rule prevents taxpayers from gaming Section 197 by allocating purchase price to specific identifiable intangibles, abandoning them quickly, and writing off the cost. It's also why some buyers prefer not to over-allocate to identifiable intangibles like covenants and customer lists — if those assets prove worthless, the basis just sits in the rest of the pool until the 15 years run out.

Reporting: Form 4562 Every Year

Once you're amortizing, you'll claim the deduction on Form 4562, Part VI (Amortization). You list:

• Description of the intangible (e.g., "Goodwill — XYZ Corp acquisition")
• Date acquired
• Amortizable amount (basis)
• Code section (197)
• Amortization period (15 years)
• Amortization for the year

You complete a Form 4562 for the year of acquisition. In subsequent years, the amortization continues on Form 4562 only if you're claiming new amortization or depreciation that year, or if it's required for the underlying business form (sole proprietors on Schedule C, partnerships on Form 1065, corporations on Form 1120, etc.).

Special Situations to Watch

Stock Acquisitions

Section 197 doesn't apply to stock purchases. When you buy the stock of a target company rather than its assets, the target's existing basis in its intangibles carries over. There's no step-up. You're buying the company with all its existing (potentially long-since-amortized) basis intact.

The exception is the Section 338(h)(10) election — a joint election by buyer and seller that treats a qualified stock purchase as an asset purchase for tax purposes. This gets the buyer a step-up and a fresh Section 197 amortization stream, at the cost of the seller often paying more tax. The economics typically only work when the target is an S corporation or a subsidiary of a consolidated group.

Partnership Acquisitions

Buying a partnership interest is also stock-like — Section 197 doesn't directly apply to the buyer's outside basis. But a Section 754 election lets the partnership make Section 743(b) basis adjustments that effectively give the incoming partner a step-up in their share of inside basis, including in intangibles, which then get amortized under Section 197.

Renewals and Extensions

Costs of renewing a Section 197 intangible (most often a franchise, trademark, or license) are treated as a new acquisition and start a new 15-year clock for the renewal cost — separate from any unamortized basis still running on the original.

Software

Software is a perennial source of confusion:

• Off-the-shelf software acquired separately — 36-month straight-line amortization under Section 167(f)
• Software acquired as part of a business acquisition — Section 197, 15-year amortization
• Internally developed software — generally Section 174 research and experimental expenditures (note: rules around domestic R&D capitalization shifted again with OBBBA — check current treatment)

A licensed software product bundled into the business you bought gets the slow 15-year treatment, even though buying the same software on its own would be 3 years. That's the price of bundling.

A Worked Example

Suppose you buy a small marketing agency for $1,200,000. After due diligence and an appraisal, the parties agree on the following allocation on Form 8594:

The Class V equipment ($90,000) is depreciated under MACRS over 5 years. Everything in Classes VI and VII — a total of $990,000 in intangibles — is amortized under Section 197 over 15 years.

Annual amortization: $990,000 ÷ 15 = $66,000 per year for full years. If you closed on July 1, the first year's deduction is $66,000 × (6/12) = $33,000.

Note the trap with the covenant. Economically, it expires after 5 years. But you must amortize it over 15. If the seller violates the covenant in year 3 and the agreement becomes worthless, you cannot write off the remaining unamortized basis as a loss. It just shifts to the other intangibles from the same acquisition under the no-loss rule.

Common Mistakes to Avoid

A few patterns I see repeatedly:

• Forgetting Form 8594 entirely. Some smaller deals close without anyone filing the form. Both parties are technically required to file. Penalties can apply, and inconsistent reporting risks an audit.
• Treating start-up intangibles as Section 197. Costs to set up a new business are Section 195 start-up expenditures (15-year amortization but different rules and a $5,000 first-year deduction). Section 197 only applies when you acquire intangibles in connection with the acquisition of a trade or business.
• Trying to use Section 197 for stock purchases without a 338(h)(10) election. Without the election, you don't get the step-up, and you don't get a fresh Section 197 amortization.
• Ignoring the anti-churning rules in family deals. A "sale" to a child or sibling where the parent retains operational control or significant ownership can poison goodwill amortization permanently.
• Trying to write off a worthless customer list. The no-loss rule under Section 197(f)(1) prevents this. The basis stays in the pool.
• Improperly allocating to a covenant not to compete to accelerate deductions. The IRS scrutinizes large covenant allocations — they must be supported by economic reality. A $400,000 covenant on a $1 million deal where the seller is 78 years old and retiring is not credible.

Keep Clean Records From the Date of Closing

The Section 197 amortization stream lives in your tax records for 15 years. You'll need to support every year's deduction with:

• The closing statement showing total purchase price
• Form 8594 with the agreed allocation
• The appraisal or valuation memo supporting the allocation
• Year-by-year amortization schedules
• Documentation if any intangible is disposed of, abandoned, or shifted

If you sell the business 6 years in, the buyer's new Form 8594 has to dovetail with what you've been reporting. Sloppy records make a clean exit messy.

Simplify Your Financial Records From Day One

Buying a business is the moment your books deserve a serious upgrade. You're tracking new asset classes, a 15-year amortization stream, and a tax basis that will follow you for nearly two decades. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — every asset, every amortization entry, every disposition is fully auditable in version-controlled files you actually own. No black boxes, no vendor lock-in, no painful migration when your accounting firm changes platforms. Get started for free and see why developers and finance professionals are switching to plain-text accounting.