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What Are Section 197 Intangibles?

An intangible asset is something that has value but no physical form; you can't touch it.

Section 197 of the Internal Revenue Code refers to certain intangible assets acquired in connection with the purchase of a business or income producing activity and the amortization requirement.

Amortization period for Section 197 Intangibles:

Section 197 intangibles acquired after August 10, 1993 (or after July 25, 1991, if elected), must be amortized over a 15 year period regardless of the assets useful life.

Recapture Rules For Section 197 Intangibles

New recapture rules apply to dispositions of Section 197 intangibles after August 8, 2005:

If you dispose of more than one amortizable Section 197 intangible in a single transaction (or a series of related transactions), all of these intangibles are treated as one Section 1245 property.

However, if adjusted basis of any amortizable Section 197 intangible exceeds its fair market value, this rule does not apply to that intangible.

Section 1245 property is property that is depreciable (or amortizable).

The following are Section 197 Intangible assets:

  1. Agreements not to compete
  2. Computer software
  3. Copyrights
  4. Customer-based intangible:
    • Insurance in force
    • investment management contracts
    • Any other intangible attributable to a customer base.
  5. Designs and patterns
  6. Formulas, processes, designs, patterns or formats
  7. Franchises (excluding sports franchises)
    • Renewal costs are amortized over 15 years.
  8. Goodwill (incorporates going concern value).
    • Goodwill is a recognized, amortizable, intangible business asset.
    • It is a Balance Sheet item.
    • Goodwill may only be purchased.
      • In other words, when purchasing a business, if after allocating the purchase price to the assets purchased, the amount of the purchase price that exceeds the market value of the assets purchased (the unallocated purchase price) is recorded in the purchaser's books as goodwill and may be amortized over 15 years.
    • Goodwill represents the expected continued customer/client patronage due to the name, reputation, or other factors of the business.
  9. Going concern value reflects the additional value attributable to assets because of their ability to generate a return on investment in spite of a change in ownership.
    • Going concern value incorporates goodwill.
    • Going concern value for a profitable enterprise is generally higher than its liquidation value.
    • Going concern value for an unprofitable business may be less than its liquidation value.
  10. Information base.
    • Include the cost of acquiring:
      • Subscription lists
      • Customer lists
      • Insurance expirations
      • Patient or client files
      • Lists of newspaper, magazines radio or television advertisers
      • Training manuals or programs, Data files
      • Accounting or inventory control systems
  11. Location contracts
  12. The following items are also Section 197 intangibles only if acquired as part of the acquisition of a business:
    • Copyrights
    • Patents
    • Interests in films, sound recordings, videotapes, books, or other similar property.
  13. Trade marks
    • Are not depreciable
    • Are amortizable if classified as Section 197 intangible
    • Renewal costs are amortized over 15 years.
  14. Trade names
    • Are not depreciable
    • Are amortizable if classified as Section 197 intangible
    • Renewal costs are amortized over 15 years.
  15. Work force in place
    • This is the purchase price attributable to a highly skilled workforce. The cost of acquiring a existing employment contract is also amortizable over 15 years.

Next:

Depreciation: Items Not Section 197 Intangibles

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