IRC §197 (Amortization of goodwill and certain other intangibles) requires a 15-YEAR STRAIGHT-LINE AMORTIZATION of acquired intangible assets used in a trade or business, replacing pre-1993 useful-life litigation with a uniform statutory framework. CORE RULE §197(a): the basis of any amortizable §197 intangible is amortized RATABLY over 180 MONTHS beginning with the month in which the intangible was acquired. THE 14 CATEGORIES §197(d) of "§197 intangible" include: GOODWILL §197(d)(1)(A); GOING CONCERN VALUE §197(d)(1)(B); WORKFORCE IN PLACE §197(d)(1)(C)(i); INFORMATION BASE / BUSINESS BOOKS AND RECORDS §197(d)(1)(C)(ii); KNOW-HOW, FORMULAS, PROCESSES, DESIGNS, PATTERNS §197(d)(1)(C)(iii); CUSTOMER BASES, CUSTOMER LISTS, FAVORABLE SUPPLIER RELATIONSHIPS §197(d)(1)(C)(iv)(v); LICENSES, PERMITS, GOVERNMENTAL FRANCHISES §197(d)(1)(D); COVENANTS NOT TO COMPETE §197(d)(1)(E); FRANCHISES, TRADEMARKS, TRADE NAMES §197(d)(1)(F). AMORTIZABLE §197 INTANGIBLE §197(c)(1): (A) acquired after August 10, 1993 (date of enactment), AND (B) held in connection with conduct of a trade or business or §212 income-production activity. SELF-CREATED INTANGIBLES generally EXCLUDED §197(c)(2) - own goodwill developed internally, internally-created customer lists, self-developed software, etc.; EXCEPTIONS for self-created intangibles created in connection with the acquisition of a trade or business (e.g., covenant not to compete given to seller). ANTI-CHURNING RULES §197(f)(9): prevent converting pre-August 11, 1993 non-amortizable intangibles into amortizable §197 intangibles through related-party transactions or §351/§368 reorganizations; disallows amortization for property held or used by related person during transition period. 15-YEAR PERIOD FIXED §197(a) - applies regardless of actual economic useful life (5-year covenant not to compete still amortized over 15 years; 50-year customer relationship same 15 years). DISPOSITION §197(f)(1) - loss disallowed on disposition of single §197 intangible if other §197 intangibles from same acquisition retained; reduces basis of retained §197 intangibles by disallowed loss. NO BONUS DEPRECIATION / NO §179 - §197 intangibles explicitly excluded from both §168(k) bonus and §179 expensing. STOCK SALE - buyer does NOT get amortizable §197 basis without §338(h)(10) or §336(e) election. FORM 8594 - allocation of purchase price among asset classes including §197 intangibles. NOT applicable to financial interests in entities, options to acquire, interests in land, sports franchises (§197(e)(6) repealed for sports franchises acquired after October 22, 2004).
The rule: Acquired intangibles used in a trade or business amortize over 180 months (15 years) on a straight-line basis - regardless of actual useful life. Uniform statutory framework replaced pre-1993 useful-life disputes.
What's covered §197(d): Goodwill, going concern value, workforce in place, customer lists, supplier relationships, know-how, patents and copyrights acquired with a business, licenses and permits, franchises, trademarks and trade names, covenants not to compete.
Must be acquired: §197 applies only to intangibles ACQUIRED after August 10, 1993. Self-created intangibles excluded §197(c)(2), except for self-created intangibles created in connection with acquiring a trade or business (covenant not to compete given to seller).
Anti-churning §197(f)(9): Cannot convert pre-1993 nonamortizable intangibles into amortizable §197 intangibles through related-party transactions or tax-free reorgs. Major audit focus.
Key exclusions: No §168(k) bonus depreciation, no §179. Stock sales (without §338(h)(10) or §336(e) election) do NOT give buyer amortizable basis - intangibles stay at carryover basis. Form 8594 purchase price allocation required.
| Category | Authority | Detail |
|---|---|---|
| Goodwill | §197(d)(1)(A) | Value of trade or business attributable to expectancy of continued customer patronage; residual after allocating to identifiable assets |
| Going concern value | §197(d)(1)(B) | Additional value attached to operating business beyond identifiable assets; ability to continue functioning |
| Workforce in place | §197(d)(1)(C)(i) | Value of having trained employees in place vs hiring/training new workforce; commonly significant in service business acquisitions |
| Information base | §197(d)(1)(C)(ii) | Business books and records, operating manuals, training materials, technical manuals, accounts receivable systems |
| Patents, copyrights, formulas | §197(d)(1)(C)(iii) | Acquired patents, copyrights, formulas, processes, designs, patterns, know-how, formats, similar items - WHEN ACQUIRED with business; not self-created |
| Customer-based intangibles | §197(d)(1)(C)(iv) | Customer lists, customer relationships, market share, customer-related deposit base for financial institutions |
| Supplier-based intangibles | §197(d)(1)(C)(v) | Favorable supplier contracts, supply chain relationships, distribution networks |
| Licenses, permits, governmental rights | §197(d)(1)(D) | Government-issued licenses (liquor, taxi medallions, broadcast licenses), permits, regulatory rights |
| Covenants not to compete | §197(d)(1)(E) | Non-compete agreement given by seller incident to business acquisition; 15-year amortization REGARDLESS of covenant's actual term |
| Franchises, trademarks, trade names | §197(d)(1)(F) | Franchise agreements; trademarks; trade names; brand value; renewals amortize over new 15-year period |
| Exclusion | Detail |
|---|---|
| §197(c)(2) self-created intangibles | Generally not §197 intangibles - internally developed goodwill, customer lists, brand, going concern; depreciated under prior law if at all (typically capitalized with no recovery) |
| Self-created in connection with business acquisition | EXCEPTION - self-created intangibles created in connection with acquiring a trade or business ARE §197 intangibles (e.g., covenant not to compete given to seller as part of transaction) |
| §197(e)(1) financial interests | Stocks, securities, partnership interests, debt interests in entities - excluded; subject to general capital asset rules |
| §197(e)(2) interests in land | Real property interests excluded; depreciated/amortized under real estate rules |
| §197(e)(3) computer software | Off-the-shelf software readily available to general public, not modified, not acquired with business: NOT §197; depreciate over 36 months §167(f)(1); software acquired with business: §197 |
| §197(e)(4) rights to receive tangible property | Rights to fixed amounts under contracts excluded |
| §197(e)(5) interests in patents/copyrights NOT with business | Stand-alone patent or copyright purchase (not with business) excluded; depreciate under §167 over legal life or §168 (intangible rules) |
| §197(e)(6) sports franchises and rights | Sports franchises NOW SUBJECT to §197 (American Jobs Creation Act of 2004 amended; effective post-October 22, 2004); prior exclusion repealed |
| §197(e)(7) mortgage servicing rights | Excluded from §197; amortized under §167 over useful life |
| §197(e)(8) certain transaction costs | Costs of acquiring a §197 intangible included in basis of intangible, not separately deducted |
| Mechanic | Detail |
|---|---|
| Period | 15 years = 180 months; ratable monthly amortization |
| Start date | Later of (A) first day of month of acquisition OR (B) first day of month in which trade or business begins |
| End date | 180 months after start date |
| Method | Straight-line; no acceleration; no useful life analysis |
| Annual deduction | Basis / 180 × 12 = annual; partial-year first/last year prorated |
| No bonus depreciation | §168(k) explicitly excludes §197 intangibles |
| No §179 expensing | §179(d)(1)(B)(ii) explicitly excludes §197 intangibles |
| Renewals | Renewal of franchise, trademark, trade name (or license/permit/governmental right) - costs of renewal amortized over new 15-year period beginning with renewal month |
| Lump-sum vs installments | Cash basis or accrual - basis equals total cost paid or to be paid; installment buyouts add to basis when accrued |
| Form 4562 | Annual amortization reported on Form 4562 Part VI |
| Anti-Churning Element | Detail |
|---|---|
| Purpose | Prevent taxpayers from converting pre-August 11, 1993 nonamortizable intangibles into amortizable §197 intangibles via related-party transactions or tax-free reorganizations |
| Disqualifying transaction §197(f)(9)(A) | Intangible held or used by taxpayer or related person (or successor to that person) during transition period (July 25, 1991 - August 10, 1993) |
| Effect | Intangible NOT amortizable under §197 - taxpayer must use pre-1993 rules (typically NO deduction for goodwill) |
| Related party Reg §1.197-2(h)(6) | §267(b) family/entity relationships, modified; §707(b) partnership relationships; controlled groups under §1563 with >20% ownership |
| Reg §1.197-2(h) - extensive guidance | Determines whether intangible was held during transition period; tracks through entities; deemed-acquisition rules |
| Aggregation rules | Multiple acquisitions from related parties aggregated; cannot circumvent through staggered transactions |
| Acquisition from unrelated third party | Generally safe - first-time acquisition from arm's length seller usually not anti-churning |
| Partnership related-party transfers | Particularly complex; §1.197-2(h)(12) coordinates with partnership rules |
| Stock sale safe harbor | Stock acquisition (not asset acquisition) generally does not trigger anti-churning since corporation retains its own basis history |
| §338(h)(10) / §336(e) elections | Convert stock sale to deemed asset sale; anti-churning analysis applies as if asset transaction; related parties analyzed pre- and post-election |
Facts: AcquirerCo purchases the assets of TargetCo in 2026 for $10,000,000. Form 8594 allocates purchase price:
- Tangible equipment (Class V, §1245): $2,000,000
- Building (Class V, §1250): $3,000,000
- Customer list (Class VI, §197): $1,500,000
- Workforce in place (Class VI, §197): $500,000
- Covenant not to compete (Class VI, §197, 4-year covenant): $400,000
- Trade name and trademarks (Class VI, §197): $600,000
- Goodwill and going concern (Class VII, §197): $2,000,000
§197 intangibles total:
Customer list $1,500K + workforce $500K + non-compete $400K + trade name $600K + goodwill $2,000K = $5,000,000
All amortizable §197 intangibles assuming arm's-length acquisition (no anti-churning)
Annual §197 amortization: $5,000,000 / 15 = $333,333
Monthly: $27,778
Note on covenant not to compete:
Covenant has 4-year contractual term but §197 amortizes over 15 YEARS regardless. Practitioner cannot accelerate covenant amortization to match its actual useful life. The remaining basis after year 4 continues to amortize through year 15.
Tangible asset depreciation separate:
Equipment $2M: §168(k) 100% bonus depreciation (per OBBBA - bonus depreciation permanent at 100% post-1/19/2025 placed-in-service date) = $2,000,000 year 1
Building $3M: §168 39-year nonresidential real property; ~$77K/year SL
§197 intangibles: NO bonus depreciation, NO §179; uniform 15-year amortization
If acquired in stock sale instead:
Stock acquisition without §338(h)(10)/§336(e) election - AcquirerCo inherits TargetCo's historical basis in assets, including any internally-developed goodwill at $0 basis. No §197 amortization available on inherited intangibles. Buyer pays $10M cash but gets ZERO §197 deduction over 15 years - $1.05M of lost annual deductions (at 21% federal rate = ~$220K tax annually = $3.3M over 15 years).
§338(h)(10) election cure:
Stock sale treated as deemed asset sale; AcquirerCo gets stepped-up asset basis including §197 intangibles. But anti-churning §197(f)(9) - if seller-shareholder is "related" to AcquirerCo post-election (e.g., rollover equity 20%+), anti-churning may disallow §197 amortization on portion. Coordinate with §338(h)(10) modeling carefully.
Loss on disposition trap §197(f)(1):
If AcquirerCo later disposes of the customer list (say for $1 nominal salvage in year 5), LOSS NOT RECOGNIZED because other §197 intangibles from same acquisition retained. The disallowed loss INCREASES basis of retained §197 intangibles proportionally. Aggregate amortization continues.
| Loss Disallowance Element | Detail |
|---|---|
| General rule §197(f)(1) | No loss allowed on disposition of ANY §197 intangible if other §197 intangibles from SAME acquisition (or series of related acquisitions) are retained |
| Effect on disallowed loss | Disallowed loss INCREASES adjusted basis of retained §197 intangibles from same acquisition; allocated proportionally based on relative adjusted basis |
| Same acquisition definition | Series of related transactions in connection with single business or substantial portion thereof |
| Purpose | Prevent cherry-picking - claiming loss on declining intangibles while continuing to amortize others; preserves uniform 15-year recovery |
| Customer list churns out | Customer list may have lost all economic value by year 7; cannot recognize loss; continue amortizing remaining basis |
| Sale at gain | Gain on disposition fully recognized; basis recovered; remaining intangibles continue amortizing |
| Complete business disposition | If ALL §197 intangibles from acquisition disposed of simultaneously, normal gain/loss rules apply; §197(f)(1) only applies to partial dispositions |
| Worthless intangible §197(f)(1)(B) | Same rule applies to abandoned or worthless intangibles - loss disallowed if related §197 intangibles retained |
| Form 4797 | Report dispositions on Form 4797; loss disallowance computation; basis allocation to retained intangibles |
| Recordkeeping | Track each §197 intangible separately with acquisition date, original basis, accumulated amortization, current adjusted basis; needed for partial disposition analysis |
Covenants amortize over 15 YEARS regardless of contractual term. 5-year non-compete still amortizes over 180 months. Practitioner trying to match amortization to economic life violates §197(a) mandatory 15-year period.
§197 intangibles excluded from §168(k) bonus and §179. Practitioner claiming bonus on customer list or trademark misapplies recovery rules. These provisions strictly limited to qualified tangible property.
§197(c)(2) excludes self-created intangibles. Internally developed goodwill, internally created customer lists, self-developed software - NOT amortizable under §197. Exception: self-created in connection with business acquisition (covenant not to compete to seller). Practitioner amortizing internal goodwill incorrect.
Stock acquisition gives buyer inherited carryover basis - no §197 step-up. Practitioner expecting buyer §197 amortization in stock deal without election misallocates after-tax economics. Negotiate §338(h)(10) or §336(e) election to convert to deemed asset sale.
Major audit focus. Pre-August 11, 1993 intangibles held by related party during transition period cannot be churned into amortizable §197 status. Family-business succession, related-party reorganizations, leveraged buyouts of long-held businesses - all high-risk. Disallowed amortization at corporate level can be material; §6662 accuracy penalty exposure.
Loss on single §197 asset disallowed if other §197 intangibles from same acquisition retained. Practitioner recognizing loss on abandoned trademark while retaining goodwill misstates current deduction. Disallowed loss increases basis of retained intangibles.
Software acquired in connection with business = §197 (15 years). Off-the-shelf software not acquired with business = §167(f)(1) (36 months). Internally developed software = various rules (§174 R&E and §41 credit interactions). Practitioner defaulting to §197 for all software misclassifies.
§1060 requires buyer and seller to use residual method to allocate purchase price among 7 asset classes; Class VI (§197 intangibles other than goodwill) and Class VII (goodwill/going concern) absorb residual. Practitioner filing inconsistent Form 8594 (buyer/seller mismatch) creates audit exposure.
Renewal of franchise, trademark, trade name - costs amortize over NEW 15-year period from renewal month. Practitioner extending original amortization period instead misstates timing. Trademark renewals every 10 years can create overlapping 15-year periods.
§197(e)(7) - mortgage servicing rights are NOT §197 intangibles; amortized under §167 over useful life with limited UNICAP rules. Practitioner defaulting MSRs to §197 misapplies §167(g) income forecast method.
§197(e)(6) repealed for sports franchises acquired after October 22, 2004 (American Jobs Creation Act of 2004). Post-2004 sports franchises ARE §197. Pre-2004 sports franchise acquisitions used different rules. Practitioner using stale exclusion misclassifies.
Residual goodwill (Class VII) often substantial; IRS scrutinizes valuation. Practitioner failing to obtain contemporaneous appraisal or relying on tax-driven allocations risks reallocation in exam. Asset class allocations affect both buyer (§197 vs faster recovery) and seller (capital vs ordinary gain).
§267(b) and §707(b) related parties; controlled groups under §1563 modified. Family-business acquisitions, partnership-to-corp conversions, inter-affiliate purchases - all high anti-churning risk. Document related-party analysis pre-closing.
Recordkeeping requires per-intangible basis and amortization tracking - essential for §197(f)(1) disposition analysis. Practitioner aggregating §197 intangibles without per-asset tracking cannot properly compute disposition loss disallowance.
Changing from non-amortization to §197 amortization (or correcting prior errors) is accounting method change requiring Form 3115 §481(a) adjustment. Practitioner just starting amortization without filing 3115 risks IRS recharacterization.
Both Class VII for Form 8594 and both §197 intangibles; distinction matters for valuation but not for tax treatment. Practitioner overspecifying allocation between goodwill and going concern unnecessary - same 15-year amortization either way.
Workforce in place §197(d)(1)(C)(i) is identifiable §197 intangible separate from goodwill. Often unallocated in purchase price by smaller transactions - residualized into goodwill instead. Practitioner identifying workforce-in-place separately can support specific valuation for asset planning.
Primary authority: IRC §197 (Amortization of goodwill and certain other intangibles). §197(a) (general rule - 15-year ratable amortization). §197(b) (no other depreciation/amortization allowed). §197(c) (amortizable §197 intangible defined). §197(c)(1) (acquired after Aug 10, 1993 and held with trade or business). §197(c)(2) (self-created intangibles - excluded). §197(c)(2)(A) (exception for self-created in connection with acquisition). §197(d) (Section 197 intangible defined). §197(d)(1)(A) (goodwill). §197(d)(1)(B) (going concern value). §197(d)(1)(C) (additional categories - workforce in place, information base, know-how, customer base, supplier base). §197(d)(1)(D) (licenses, permits, governmental rights). §197(d)(1)(E) (covenants not to compete). §197(d)(1)(F) (franchises, trademarks, trade names). §197(e) (exceptions). §197(e)(1) (financial interests). §197(e)(2) (interests in land). §197(e)(3) (computer software). §197(e)(4) (rights to receive tangible property). §197(e)(5) (interests in patents/copyrights not with business). §197(e)(6) (sports franchises - exclusion repealed for acquisitions after Oct 22, 2004). §197(e)(7) (mortgage servicing rights). §197(e)(8) (certain transaction costs). §197(f) (special rules). §197(f)(1) (loss disallowance on disposition with other retained §197 intangibles). §197(f)(2) (treatment of certain dispositions). §197(f)(3) (treatment as depreciable). §197(f)(4) (treatment of amounts paid pursuant to covenants not to compete). §197(f)(7) (treatment of self-created intangibles - in connection with acquisition). §197(f)(9) (ANTI-CHURNING RULES). §197(f)(9)(A) (disqualifying transaction definition). §197(f)(10) (interaction with §1253). §168(k) (bonus depreciation - excludes §197). §179 (expensing - excludes §197). §167 (depreciation general). §167(f)(1) (off-the-shelf software 36 months). §1060 (special allocation rules for certain asset acquisitions; residual method). §338 (corporate stock purchases treated as asset purchases). §338(h)(10) (election for qualified stock purchase). §336(e) (analogous election for S-corp and consolidated). §483 (imputed interest). §1253 (transfers of franchises, trademarks, trade names). §263(a) (capitalization general). §174 (research and experimental expenditures). §41 (R&D credit). §6662 (accuracy-related penalty - exposure on anti-churning failures). §6662(d) (substantial understatement). §6662(b)(3) (substantial valuation misstatement - goodwill allocations). §267(b) (related party definitions). §707(b) (partnership related party). §1563 (controlled group). Reg §1.197-1 (amortization of §197 intangibles). Reg §1.197-1T (effective dates). Reg §1.197-2 (amortization rules - detailed). Reg §1.197-2(b) (categories). Reg §1.197-2(c) (exceptions). Reg §1.197-2(d) (basis). Reg §1.197-2(e) (acquired in connection with trade or business). Reg §1.197-2(f) (amortization computation). Reg §1.197-2(g) (special rules). Reg §1.197-2(h) (anti-churning rules - extensive guidance). Reg §1.197-2(h)(6) (related parties). Reg §1.197-2(h)(12) (partnerships). Reg §1.1060-1 (special allocation rules for certain asset acquisitions). Omnibus Budget Reconciliation Act of 1993 P.L. 103-66 §13261 (enacted §197 effective Aug 10, 1993). American Jobs Creation Act of 2004 P.L. 108-357 (repealed §197(e)(6) sports franchise exclusion). Rev. Proc. 2004-19 (transition rules). Rev. Rul. 2004-49 (anti-churning analysis). Form 4562 (Depreciation and Amortization - Part VI amortization). Form 8594 (Asset Acquisition Statement - purchase price allocation). Form 4797 (Sales of Business Property - dispositions). Form 3115 (Application for Change in Accounting Method - method changes).