Accounting
Amortization
The systematic expensing of an intangible asset's cost over its useful life — depreciation's counterpart for assets you can't touch.
Where depreciation spreads the cost of physical assets, amortization does the same for intangibles: goodwill and customer lists from an acquisition, purchased software, patents, trademarks, and franchise rights. For tax purposes, most acquired intangibles are Section 197 assets amortized straight-line over 15 years.
Amortization also describes how a loan is repaid — the amortization schedule splitting each payment between interest and principal. Same word, different concept; context tells you which one is meant.
On the P&L, amortization is the 'A' in EBITDA. After buying a business in an asset deal, the buyer's books carry substantial amortization expense that depresses net income for years without touching cash — one reason acquirers and lenders look at EBITDA rather than bottom-line profit.
Common pitfalls
- Missing the 15-year amortization deduction on acquired goodwill and customer relationships after buying a business — real money left unclaimed
- Confusing book and tax treatment — GAAP no longer amortizes goodwill for public companies (it's impairment-tested), while tax amortizes it over 15 years
- Forgetting that self-created intangibles (your own brand, your own customer list) generally have no amortizable basis — only purchased intangibles do
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