Section 197 Intangibles: 15-Year Amortization Explained
Goodwill, customer lists, franchises, and non-competes — what is amortized over 15 years, what isn't, and the anti-churning rule
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Section 197 intangibles are intangible assets acquired as part of buying a business — goodwill, going-concern value, customer lists, workforce in place, franchises, trademarks, licenses, and covenants not to compete. Their cost is amortized ratably over 15 years (180 months) from the month of acquisition regardless of actual useful life, and the amortization is recaptured as ordinary income on sale.
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What is a section 197 intangible?
Before 1993, buyers and sellers fought over whether purchased goodwill (non-amortizable) could be recharacterized as customer lists or covenants (amortizable over an estimated life). Section 197 ended the argument by putting nearly every acquired business intangible into one category with one fixed life. The category includes:
| Section 197 intangible | Typical source |
|---|---|
| Goodwill and going-concern value | Any business acquisition |
| Workforce in place | Acquired business with trained staff |
| Business books and records, operating systems, information base | Acquired business |
| Customer lists and customer-based intangibles (routes, subscriber lists, accounts) | Service routes, pool or landscaping routes, practices, agencies |
| Supplier-based intangibles | Favorable supply contracts |
| Patents, copyrights, formulas, designs, know-how (when acquired with a business) | Acquired business |
| Licenses, permits, and rights granted by a government | Liquor licenses, taxi medallions, broadcast licenses |
| Covenants not to compete entered into with a business acquisition | Any acquisition |
| Franchises, trademarks, trade names | Franchise fee, brand acquisition |
The 15-year life applies even when the asset's economic life is obviously shorter (a three-year non-compete) or longer (a franchise with a perpetual term).
What is excluded?
Intangibles not acquired in connection with a trade or business — an individually purchased patent or copyright not part of a business acquisition (amortized over its legal life or useful life instead); interests in a corporation, partnership, or trust; financial instruments; interests in land; most computer software (off-the-shelf software readily available to the public is depreciated over 36 months; software acquired with a business is section 197 unless it is off-the-shelf); leases of tangible property; and — the largest exclusion — self-created intangibles. A business that builds its own goodwill or customer base has no section 197 asset (the capitalized cost of registering its own trademark is an exception): the marketing and effort that created them were deducted as incurred, and there is nothing to amortize. Section 197 applies to purchased intangibles.
How does the amortization work?
Straight line over 180 months from the first day of the month of acquisition (or, if later, the month the business begins). A US$450,000 route purchased in April amortizes at US$2,500 a month — US$22,500 in year one (nine months), US$30,000 in each full year. The amortization is reported on Form 4562. Franchise renewal fees start a new 15-year period; contingent payments (royalties based on sales) are deducted as paid rather than amortized (the franchise fee guide).
What is the anti-churning rule?
Section 197 cannot be used to convert goodwill that was non-amortizable under pre-1993 law into amortizable goodwill through a related-party transaction. Goodwill and going-concern value held or used by the taxpayer or a related person at any time from July 25, 1991 through August 10, 1993 remains non-amortizable if it is transferred within the related group. The rule catches a founder who has owned a business since the 1980s and "sells" it to an entity they control: no step into section 197. It does not affect arm's-length acquisitions from unrelated sellers, which is nearly every small-business purchase today.
What happens on sale?
Amortization taken on a section 197 intangible is recaptured as ordinary income under section 1245 when the intangible is sold at a gain, with gain above original cost as section 1231 (capital) gain. A route bought for US$84,000, amortized US$16,800, and sold for US$100,000 produces US$16,800 of ordinary recapture and US$16,000 of capital gain. On the seller's side of a business sale, self-created goodwill is a capital asset with zero basis — all capital gain — while a covenant not to compete is ordinary income to the seller regardless (it is compensation for not working). And if one section 197 intangible from an acquisition is disposed of at a loss while others from the same deal are retained, the loss is not deducted; it is added to the basis of the retained intangibles.
Worked example
A pool service company buys a competitor's route for US$130,000 in June: the purchase agreement allocates US$110,000 to the customer list, US$12,000 to a three-year non-compete, and US$8,000 to a truck and equipment. The customer list and non-compete are both section 197 intangibles amortized over 180 months from June (US$122,000 ÷ 180 = US$678 a month; US$4,744 in year one) — the non-compete's three-year term is irrelevant to its tax life. The truck and equipment are depreciated (or expensed) under their own MACRS classes. The seller reports the US$110,000 as capital gain on a self-created list and the US$12,000 as ordinary income. Seven years later the buyer sells the enlarged route for US$400,000: the amortization taken on the US$122,000 is recaptured as ordinary income, and the rest is capital gain.
Frequently asked questions
What are section 197 intangibles?
Intangible assets acquired in connection with buying a business — goodwill, going-concern value, workforce, customer lists, licenses, franchises, trademarks, and covenants not to compete — all amortized over 15 years.
Can I amortize self-created goodwill?
No. Section 197 applies to acquired intangibles. Goodwill and customer relationships a business builds itself have no basis and nothing to amortize; the costs that created them were deducted as incurred.
How is a non-compete agreement amortized?
A covenant not to compete entered into with a business acquisition is a section 197 intangible amortized over 15 years regardless of its stated term. To the seller, the payment is ordinary income.
What is the anti-churning rule?
It prevents pre-1993 goodwill from becoming amortizable through a transfer among related parties. It does not affect purchases from unrelated sellers.
Official sources
The IRS states: “You must generally amortize over 15 years the capitalized costs of "section 197 intangibles" you acquired after August 10, 1993. You must amortize these costs if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income.” — Internal Revenue Service, Intangibles, https://www.irs.gov/businesses/small-businesses-self-employed/intangibles
Publication 544 states: “You cannot deduct a loss from the disposition or worthlessness of a section 197 intangible you acquired in the same transaction (or series of related transactions) as another section 197 intangible you still hold. Instead, you must increase the adjusted basis of your retained section 197 intangible by the nondeductible loss.” — Internal Revenue Service, Publication 544, Sales and Other Dispositions of Assets, https://www.irs.gov/publications/p544
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