Amortization refers to the gradual deduction of the cost of intangible assets—such as patents, copyrights, or goodwill—over their useful life. Unlike depreciation, which applies to tangible assets, amortization is used for intangible assets that typically have a finite life.
For tax purposes, businesses can deduct a portion of the cost of these intangible assets each year, spreading the expense over the asset’s useful life. Amortization helps reduce taxable income by allowing businesses to write off the costs of acquiring or developing intangible assets.
Examples of intangible assets that can be amortized include:
- Patents
- Trademarks
- Franchises
- Goodwill
The IRS provides guidelines for determining the amortization period, which is typically 15 years for many intangible assets under Section 197 of the Internal Revenue Code. Taxpayers should consult with a tax professional to ensure they are properly calculating and claiming amortization on their tax returns.