13.3 Amortization of Intangibles
Key Takeaways
- Purchased §197 intangibles — including goodwill, going-concern value, workforce in place, licenses, covenants not to compete, and franchises acquired in connection with a trade or business — are amortized straight-line over 15 years beginning with the month of acquisition.
- Self-created goodwill and going-concern value are generally not §197 intangibles; anti-churning can also block amortization when a related-party transfer tries to convert pre-1993 nonamortizable goodwill into a 15-year asset.
- Organizational, start-up, and loan costs use §§248, 709, and 195 or the loan term, not 15-year §197; those $5,000 / $50,000 / 180-month buckets were built in Section 12.2.
- OBBBA’s §174A restores current expensing of domestic research or experimental expenditures for taxable years beginning after 2024; REG still tests identification of amortizable intangibles and the §197 computation rather than the full §174A election menu.
- Separately purchased off-the-shelf software is generally 36-month §167(f) property and may be bonus-eligible; software bundled with hardware follows the hardware’s MACRS class.
13.3 Amortization of Intangibles
REG Area III, Group B also asks you to calculate tax amortization for intangible assets and, with the depreciation schedule, to review source data for completeness. MACRS and §179 do not apply to goodwill, going-concern value, or a covenant not to compete. Those costs, when they are amortizable at all, use IRC §197.
Section 197 — 15-year straight-line, monthly convention
A §197 intangible is amortized ratably over 15 years, beginning with the month of acquisition. There is no half-year convention and no 200 percent declining balance. Divide adjusted basis by 180 months. Each month in the tax year that the intangible is held produces one-180th of basis.
Worked: $180,000 of purchased goodwill. In a taxable acquisition of an operating business, $180,000 of the purchase-price allocation is assigned to goodwill. Annual §197 amortization is $180,000 ÷ 15 = $12,000, which is $1,000 per month. If the acquisition closes in January of a calendar year, Year 1 amortization is the full $12,000. If it closes on July 1, Year 1 amortization is six months × $1,000 = $6,000. The same arithmetic applies to going-concern value, workforce in place, and the other purchased §197 intangibles in the allocation.
What is a purchased §197 intangible
Section 197 intangibles, acquired in connection with a trade or business (or a substantial portion of one), include:
- Goodwill and going-concern value
- Workforce in place
- Information bases, know-how, and customer-based or supplier-based intangibles
- Licenses, permits, and other rights granted by a governmental unit
- Covenants not to compete entered into in connection with an acquisition of an interest in a trade or business
- Franchises, trademarks, and trade names
Self-created intangibles are generally not §197 property. A taxpayer who builds a customer list, develops goodwill by operating, or creates going-concern value from scratch does not start a 15-year clock. The clock starts when those intangibles are purchased as part of acquiring a business. Self-created licenses, covenants not to compete, and franchises, trademarks, or trade names can still be §197 assets; the REG distinction that matters is purchased goodwill versus self-created goodwill.
Anti-churning, at REG height
Section 197(f)(9) is an anti-churning rule. In outline, it prevents a taxpayer from converting nonamortizable pre-1993 goodwill or going-concern value into a 15-year asset by a sale to a related person, or by a sale in which the user of the intangible does not change. The statute looks to use of the intangible (or a predecessor trade or business) during the transition period ending August 10, 1993. REG will not hand you a multi-tier attribution diagram and ask for a percentage. It will hand you a related-party “sale” of a long-owned business and ask whether the goodwill is amortizable. If the seller and buyer are related and the business was used before the 1993 effective date, anti-churning is the reason the $12,000-a-year computation never starts.
Organization, start-up, and loan costs — recap and pointer
Organizational expenditures, start-up expenditures, and loan costs already have their own basis and recovery rules in /study-guides/cpa-reg/special-basis/intangible-basis. Do not dump them into §197.
- §248 (corporate organizational), §709 (partnership organizational), and §195 (start-up) share a $5,000 immediate deduction, phased out dollar-for-dollar as the bucket exceeds $50,000, with the remainder amortized over 180 months beginning in the month the business begins. Each statute is its own bucket. Syndication and stock-issuance costs are not amortizable.
- Loan origination fees are capitalized and amortized over the life of the loan, not over 15 years.
A corporation that spends $8,000 of Year 1 organizational legal fees deducts $5,200 in a full first year and carries $2,800 of unamortized organizational-expenditure basis. That $8,000 is not purchased goodwill.
Research and experimental expenditures
The One Big Beautiful Bill Act enacted IRC §174A, which restores current expensing of domestic research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2024. Foreign R&E remains subject to capitalization and 15-year amortization under §174. Software-development costs that are domestic R&E follow §174A, not §197. REG’s tested skill in this group is identifying amortizable intangibles and computing §197, not running the full menu of §174A elections and transition write-offs. If a stem is domestic laboratory wages incurred in 2026, the current-law result is a current deduction, not a 15-year §197 schedule and not five-year TCJA amortization.
Computer software — off-the-shelf versus bundled versus custom
Off-the-shelf computer software that is readily available to the public, subject to a nonexclusive license, and not substantially modified is not a §197 intangible. Separately purchased off-the-shelf software is generally amortized over 36 months under §167(f) and is bonus-eligible and often §179-eligible, as Section 13.2 described. Software bundled with hardware, with no separately stated price, takes the hardware’s MACRS class (typically 5-year computers). Custom software the taxpayer develops is an R&E item, not purchased §197 goodwill.
Completeness on the amortization schedule
The same Blueprint diagnostic that applies to the MACRS schedule applies here. Source data for a business acquisition is the purchase-price allocation (Form 8594 or the equivalent). Completeness errors include omitting goodwill that the allocation assigned, amortizing self-created going-concern value, putting organizational costs on a 15-year §197 line, starting §197 in the wrong month, and treating domestic post-2024 R&E as a §197 intangible. Match the allocation to the schedule, then compute $1,000 a month on the $180,000 of purchased goodwill.
A corporation allocates $180,000 of a taxable business-acquisition purchase price to goodwill. The acquisition closes in January of a calendar year. What is Year 1 §197 amortization?
Which intangible is amortizable as a purchased §197 intangible?
How is separately purchased off-the-shelf computer software — readily available to the public, nonexclusively licensed, and not substantially modified — recovered for tax purposes?