The IRS designates certain assets as intangible assets under Section 197 of the Internal Revenue Code. These intangible must usually be amortized(spread out) over 15 years. The classification of Section 197 intangibles is most often used in the valuation of a business for sale.
For purposes of Section 197, intangible assets include:
- Going concern value
- Workforce in place (that is, current employees, including their experience, education, and training)
- Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers
- A patent, copyright, formula, process, design, pattern, know-how, format, or similar item
- A customer-based intangible, including customer base and relationships with customers
- A supplier-based intangible (the value of future purchases due to relationships with vendors)
- Any item similiar to items (3) through (7)
- A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals)
- A covenant not to compete or non-compete agreement entered into in connection with the acquisition of an interest in a trade or business; and
- A franchise, trademark, or trade name
- A contract for the use of, or a term interest in, any item in this list
Certain intangible assets are NOT considered to be Section 197 intangibles, and thus may not be amortized over 15 years:
- Copyrights and patents, interests in films, sound recordings, video tapes, books, or other similar property. Exception: If any of these intangibles are acquired as part of a business purchase, they may be considered Section 197 intangibles.
- Interests in a corporation, partnership, trust, or estate; in land; or in certain financial contracts
- Sports franchises
- Some computer software
- Some corporate transaction costs.