Amortization

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.

The IRC §174 rule change matters more than most small businesses realise: since 2022, domestic research and experimentation costs (including a lot of internally-developed software) can no longer be deducted in the year incurred and must be amortized over 5 years (15 for foreign R&D). For a service or software business with even modest engineering payroll, this converts what used to be a straight deduction into a multi-year amortization schedule — with a real cash-tax hit in the year the switch takes effect. Congress has debated repeal in every year since; check the current-year status before assuming immediate expensing is back.

For loans, the amortization schedule is the diagnostic tool. Early in a mortgage or long-term loan, almost every dollar of payment is interest; principal reduction only accelerates in the back half. Small businesses evaluating whether to make an early payoff should read the remaining amortization schedule first — paying down principal on a note that's mostly principal already saves less interest than the sticker rate suggests.