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
Related service
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Have a Amortization situation in your business?
Monthly close, accrual-basis financials, and a ledger that holds up when a lender, a buyer, or an examiner asks to see it.