Overview: Amortization of Section 197 Intangibles for 2026
The amortization of Section 197 intangibles is a crucial tax deduction for businesses that acquire certain intangible assets. Enacted to simplify the tax treatment of acquired intangibles, Section 197 of the Internal Revenue Code allows taxpayers to amortize the capitalized costs of these assets ratably over a 15-year period. This guide provides a comprehensive overview of Section 197 intangibles for the 2026 tax year, covering what they are, who qualifies, how to claim the deduction, relevant limits and rates, common mistakes to avoid, and the pertinent IRS code references.
What are Section 197 Intangibles?
Section 197 intangibles are a specific category of intangible assets acquired in connection with the conduct of a trade or business or in an activity engaged in for the production of income. These assets are amortized over a fixed 15-year (180-month) period, regardless of their actual useful life. This standardized amortization period was established to eliminate disputes between taxpayers and the IRS regarding the useful life of such assets.
Examples of Section 197 Intangibles include:
- Goodwill and going concern value
- Workforce in place, including its composition and terms and conditions (contractual or otherwise) of its employment
- Business books and records, operating systems, or any other information base (including lists or other information with respect to current or prospective customers)
- Any patent, copyright, formula, process, design, pattern, know-how, format, or other similar item
- Any customer-based intangible
- Any supplier-based intangible
- Any license, permit, or other right granted by a governmental unit or an agency or instrumentality thereof
- Any covenant not to compete (or other arrangement to the extent such arrangement has substantially the same effect as a covenant not to compete) entered into in connection with an acquisition (directly or indirectly) of an interest in a trade or business or substantial portion thereof
- Any franchise, trademark, or trade name
It is important to note that Section 197 generally applies to acquired intangibles. Self-created intangibles are typically excluded unless they are created in connection with a transaction involving the acquisition of assets constituting a trade or business or a substantial portion thereof [LII].
Who Qualifies for the Amortization of Section 197 Intangibles?
To qualify for the amortization deduction under Section 197, a taxpayer must meet specific criteria:
- Acquisition after August 10, 1993: The intangible asset must have been acquired after August 10, 1993.
- Connection to Trade or Business: The intangible must be held in connection with the conduct of a trade or business or an activity engaged in for the production of income.
- Amortizable Section 197 Intangible: The asset must fall under the definition of an amortizable Section 197 intangible, as outlined above.
Anti-Churning Rules:
The anti-churning rules are a critical aspect of Section 197 eligibility. These rules prevent taxpayers from amortizing goodwill or going concern value that was held or used by the taxpayer or a related person at any time during the period beginning on July 25, 1991, and ending on August 10, 1993. The purpose of these rules is to prevent taxpayers from converting existing non-amortizable intangibles into amortizable Section 197 intangibles through related-party transactions [RSM US].
How to Claim the Amortization Deduction
Taxpayers claim the amortization deduction for Section 197 intangibles on Form 4562, Depreciation and Amortization. The deduction is calculated ratably over a 15-year period, beginning in the month the intangible was acquired. Businesses should maintain detailed records of the acquisition date, cost, and nature of each Section 197 intangible.
2026 Limits, Amounts, or Rates
For the 2026 tax year, the core principle of Section 197 remains consistent: qualifying intangible assets are amortized ratably over a 15-year (180-month) period. There are no specific annual limits on the amount of Section 197 amortization that can be claimed, other than the capitalized cost of the intangible itself spread over 15 years. However, recent IRS guidance, such as Notice 2026-7, has addressed the interaction of Section 197 amortization with the Corporate Alternative Minimum Tax (CAMT) for applicable corporations. While this notice primarily impacts corporate taxpayers, it highlights the ongoing attention to the proper treatment of intangibles.
Common Mistakes That Cost Taxpayers Money
Taxpayers often make several common mistakes when dealing with Section 197 intangibles:
- Misclassifying Assets: Incorrectly classifying an intangible asset as a Section 197 intangible when it does not meet the criteria, or vice-versa.
- Ignoring Anti-Churning Rules: Failing to apply the anti-churning rules correctly, leading to disallowed deductions for pre-1993 intangibles acquired from related parties.
- Incorrect Amortization Period: Using an amortization period other than the mandatory 15 years.
- Inadequate Documentation: Not maintaining thorough records of the acquisition, cost, and nature of Section 197 intangibles.
- Overlooking Exceptions: Failing to recognize certain self-created intangibles that may qualify for Section 197 amortization if acquired in connection with a business acquisition.
IRS Code Section Reference
The primary legal authority for the amortization of goodwill and certain other intangibles is found in 26 U.S. Code § 197.
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