Intangible Property — 2025 Publ 946 (PDF)

Generally, if you can depreciate intangible property, you usually use the straight line method of depreciation. However, you can choose to depreciate certain intangible property under the income forecast method (discussed later).

Caution: You cannot depreciate intangible property that is a section 197 intangible or that does not otherwise meet all the requirements discussed earlier under What Property Can Be Depreciated .

Straight Line Method

This method lets you deduct the same amount of depreciation each year over the useful life of the property. To figure your deduction, first determine the adjusted basis, salvage value, and estimated useful life of your property. Subtract the salvage value, if any, from the adjusted basis. The balance is the total depreciation you can take over the useful life of the property.

Divide the balance by the number of years in the useful life. This gives you your yearly depreciation deduction. Unless there is a big change in adjusted basis or useful life, this amount will stay the same throughout the time you depreciate the property. If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use.

Example. In April, you bought a patent for $5,100 that is not a section 197 intangible. You depreciate the patent under the straight line method, using a 17-year useful life and no salvage value. You divide the $5,100 basis by 17 years to get your $300 yearly depreciation deduction. You only used the patent for 9 months during the first year, so you multiply $300 by ⁹ /12 to get your deduction of $225 for the first year. Next year, you can deduct $300 for the full year.

Patents and copyrights. If you can depreciate the cost of a patent or copyright, use the straight line method over the useful life. The useful life of a patent or copyright is the lesser of the life granted to it by the government or the remaining life when you acquire it. However, if the patent or copyright becomes valueless before the end of its useful life, you can deduct in that year any of its remaining cost or other basis.

Computer software. Computer software is generally a section 197 intangible and cannot be depreciated if you acquired it in connection with the acquisition of assets constituting a business or a substantial part of a business.

However, computer software is not a section 197 intangible and can be depreciated, even if acquired in connection with the acquisition of a business, if it meets all of the following tests.

It is readily available for purchase by the general public.
It is subject to a nonexclusive license.

Publication 946 (2025) Chapter 1 Overview of Depreciation 9

It has not been substantially modified.

If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance, discussed later in chapters 2 and 3. If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months.

Tax-exempt use property subject to a lease. The useful life of computer software leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership) cannot be less than 125% of the lease term.

Certain created intangibles. You can amortize certain intangibles created on or after December 31, 2003, over a 15-year period using the straight line method and no salvage value, even though they have a useful life that cannot be estimated with reasonable accuracy. For example, amounts paid to acquire memberships or privileges of indefinite duration, such as a trade association membership, are eligible costs.

The following are not eligible.

Any intangible asset acquired from another person.
Created financial interests.
Any intangible asset that has a useful life that can be estimated with reasonable accuracy.
Any intangible asset that has an amortization period or limited useful life that is specifically prescribed or prohibited by the Internal Revenue Code, regulations, or other published IRS guidance.
Any amount paid to facilitate an acquisition of a trade or business, a change in the capital structure of a business entity, and certain other transactions.

You must also increase the 15-year safe harbor amortization period to a 25-year period for certain intangibles related to benefits arising from the provision, production, or improvement of real property. For this purpose, real property includes property that will remain attached to the real property for an indefinite period of time, such as roads, bridges, tunnels, pavements, and pollution control facilities.

Income Forecast Method

You can choose to use the income forecast method instead of the straight line method to depreciate the following depreciable intangibles.

Motion picture films or videotapes.
Sound recordings.
Copyrights.
Books.
Patents.

Under the income forecast method, each year’s depreciation deduction is equal to the cost of the property, multiplied by a fraction. The numerator of the fraction is the

current year’s net income from the property, and the denominator is the total income anticipated from the property through the end of the 10th tax year following the tax year the property is placed in service. For more information, see section 167(g) of the Internal Revenue Code.

Films, videotapes, and recordings. You cannot use MACRS for motion picture films, videotapes, and sound recordings. For this purpose, sound recordings are discs, tapes, or other phonorecordings resulting from the fixation of a series of sounds. You can depreciate this property using either the straight line method or the income forecast method.

Participations and residuals. You can include participations and residuals in the adjusted basis of the property for purposes of computing your depreciation deduction under the income forecast method. The participations and residuals must relate to income to be derived from the property before the end of the 10th tax year after the property is placed in service. For this purpose, participations and residuals are defined as costs, which by contract vary with the amount of income earned in connection with the property.

Instead of including these amounts in the adjusted basis of the property, you can deduct the costs in the tax year that they are paid. To elect a method for the treatment of participations and residuals, attach a statement to the timely filed (including extensions) return for the tax year the income forecast property is placed in service providing a description of the property to which the participations and residuals relate, the date the property was placed in service, and how you elect to treat the participations and residuals for that property.

Videocassettes. If you are in the business of renting videocassettes, you can depreciate only those videocassettes bought for rental. If the videocassette has a useful life of 1 year or less, you can currently deduct the cost as a business expense.