Ever hear the term, “amortization?” Besides being a great word to totally dominate scrabble, amortization is a useful concept for any business owner to know about—especially those who work with a lot of intangible assets like trademarks and patents. If you have a presence on the web, you probably have at least one intangible asset, so it’s worth reading on.
Amortization is similar to depreciation in that it allows you to account for the cost of an asset over time. But while depreciation deals with tangible assets, amortization deals with intangible assets.
What’s an Intangible Asset?
Intangible assets are things that provide ongoing value to your business, but that aren’t physical objects. Examples of intangible assets that small business owners may commonly have included:
- Customer lists
- Internet domain names
- Licensing agreements
- Service contracts
- Trade secrets (like a secret recipe)
Created vs. Acquired Intangible Assets
Businesses can either create intangible assets or acquire them. For example, you may spend time and resources slowly building up a customer list over time, or you may purchase a customer list from another company.
For acquired assets, you can amortize the acquisition cost. If you purchase a trade secret off another company to use in your business, the cost of that can be amortized.
For created intangible assets, it can be a little more complex, but for most instances that small business owners deal with—like paying for trademarks and copyrights to protect your intellectual property, purchasing a domain name, or applying for a patent—the costs of creating that asset can be amortized over time. If you’re dealing with a different intangible asset and aren’t sure whether you can amortize it, it’s probably worth chatting with a small business accountant, such as Goldin Group CPAs.
Amortization of an Intangible Asset
When amortizing an intangible asset, the straight-line method is most commonly used, where you spread the cost of the asset over the number of years you expect it to provide value.
To figure out the lifespan of an intangible asset, you use either the legal lifespan of the asset, or the expected useful lifespan (whichever is shorter).
What if you’re amortizing something with indefinite value? How do you determine its lifespan when you plan to use it forever? In situations like this, it’s probably worth checking with us! If you a small business that is looking to outsource your accounting? If you need help managing any aspect of your business’s or nonprofit’s finances, such as amortization, we want to hear from you. Call us at (301) 913-0008 or email email@example.com to make an appointment.