The short answer: Under Section 197, a buyer amortizes acquired goodwill and other intangibles straight-line over 15 years (180 months), starting the month the business is acquired. It covers goodwill, going-concern value, customer lists, trademarks, licenses, and covenants not to compete, all on the same 15-year clock, regardless of their real-world lifespan. You get this only for purchased intangibles in an asset deal (or a 338(h)(10) deemed asset sale), not self-created goodwill. Educational only, confirm with a CPA.
What Section 197 covers
When you buy a business, the price above the value of the tangible assets is intangible value. IRC § 197 sweeps nearly all of it into one bucket and applies a single rule: divide the cost by 180 months and deduct 1/180th each month, i.e., 1/15th per year, straight-line.
- Goodwill, the premium for a going, profitable business (Class VII).
- Going-concern value, value of the business as an operating whole.
- Customer & supplier lists, workforce in place (Class VI).
- Trademarks, trade names, franchises, licenses, permits.
- Covenants not to compete entered into with the acquisition.
Section 197 asks one question, not fifteen: what did you pay for the intangible? Then it hands you 1/15th a year.
The 15-year schedule
Say your purchase price allocation puts $600,000 into goodwill and $150,000 into a customer list and non-compete, $750,000 of Section 197 intangibles. The annual deduction is fixed:
| Item | Cost | Annual (÷15) | 15-yr total |
|---|---|---|---|
| Goodwill (Class VII) | $600,000 | $40,000 | $600,000 |
| Customer list (Class VI) | $100,000 | $6,667 | $100,000 |
| Covenant not to compete | $50,000 | $3,333 | $50,000 |
| Total intangibles | $750,000 | $50,000/yr | $750,000 |
That's $50,000 of deductions every year for 15 years, a steady shield against the acquired income, on top of any first-year bonus depreciation on the equipment. The deduction is reported on Form 4562.
The 15 years is fixed, even for a 3-year non-compete
A covenant not to compete might legally bind the seller for only three years, but Section 197 still stretches its deduction over the full 15. The statutory period ignores the asset's real economic life. That cuts both ways: goodwill you'd expect to fade faster than 15 years still amortizes slowly.
Why the goodwill number is negotiated
Here's the tension. Buyers are relatively indifferent between goodwill (Class VII) and other 15-year intangibles (Class VI), both write off over 15 years, but strongly prefer shifting dollars to fast-write-off equipment (Class V). Sellers love goodwill because it's taxed as long-term capital gain, and they hate a covenant not to compete because that payment is ordinary income to them. So the allocation across these buckets is a real negotiation, settled inside the purchase agreement and reported identically by both sides on Form 8594.
Anti-churning rules exist
Section 197 has "anti-churning" rules that can deny amortization if you acquire intangibles from a related party or in certain deals that merely reshuffle existing ownership. If your seller is a relative or you're restructuring something you already own, get a CPA's read before assuming a 15-year write-off.
Goodwill starts with the price you pay
Learn to value the business, and the intangibles inside it, before you allocate.
Frequently asked questions
Straight-line over 15 years (180 months) under Section 197, starting the month you acquire the business. It's a fixed statutory period, you use it even if the goodwill's real economic life is shorter or longer.
An intangible acquired in connection with buying a trade or business, goodwill, going-concern value, customer lists, workforce in place, trademarks, licenses, franchises, and covenants not to compete. Almost all amortize straight-line over the same 15 years.
No, Section 197 amortization applies only to goodwill and intangibles you acquired by purchasing a business. Self-created goodwill generally can't be amortized. That's one reason buying an existing business creates deductions that starting one from scratch does not.
Yes. A covenant not to compete tied to acquiring a business is a Section 197 intangible amortized straight-line over 15 years, even if the non-compete itself only lasts three to five years. The statutory period governs regardless of the actual term.
Keep reading
- Asset sale tax treatment, how goodwill lands in Class VII.
- Bonus depreciation & cost seg, the fast side (Class V).
- Tax benefits of buying a business, the whole picture.
- 338(h)(10), creating amortizable goodwill in a stock deal.
- Valuation, where the goodwill number comes from.
Sources
- IRC § 197, amortization of goodwill and certain intangibles over 15 years; see IRS Rev. Rul. 2004-49.
- Reporting amortization, IRS Form 4562; allocation on Form 8594.
- Business intangibles overview, IRS.gov Intangibles.
