The Treatment of Goodwill and Other Purchased Intangibles for Tax Purposes

This note outlines the effect of Section 197 of the IRS Code on goodwill and other intangibles purchased in an acquisition by comparing the treatment of goodwill and other purchased intangibles for tax and financial accounting purposes. The allocation of the purchase price in different taxable asset deal structures, the residual method, contingent payments and recapture taxes are also briefly discussed. These tax laws affect current and future cash flows to the acquirer and target shareholders and as a result can affect the price and optimal structure of a deal.