8161 / How are costs treated for intellectual property that is acquired by a taxpayer rather than created?

Generally the acquisition of an intangible asset which is held in connection with the conduct of a trade or business must be amortized under IRC Section 197. Section 197 does not apply to self-created intangibles. While most consider “goodwill” as the primary intangible asset subject to Section 197, other intangible assets subject to Section 197 include property that has value but cannot be touched, such as any patent, copyright, formula, process, design, pattern, know how, format, franchise, trademark, or trade name.

Section 197 entitles taxpayers to an amortization deduction with respect to these intangibles. The amount of the deduction is determined by amortizing the adjusted basis (for purposes of determining gain) of such intangible ratably over the 15-year period beginning with the month in which such intangible was acquired.

Computer software is a Section 197 intangible asset if acquired in connection with the conduct of a trade or business. However, computer software is excluded from Section 197 (and therefore may be depreciated), even if acquired in connection with the acquisition of a business, if it: |

• Is readily available for purchase by the general public;
• Is subject to a nonexclusive license; and
• Has not been substantially modified.

Computer software not subject to Section 197 may qualify for the Section 179 deduction and special depreciation allowances.