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What is amortization and how does it work?

by TurboTax•232• Updated 3 months ago

Many taxpayers are familiar with depreciation, which means deducting an asset's value over time, but fewer are familiar with depreciation’s cousin, amortization.

Amortization works like depreciation for intangible (non-physical) assets, like refinance expenses, goodwill, patents, and copyrights.

Unlike depreciation, there are no accelerated or bonus options. Amortized assets are deducted evenly across their useful life using the straight-line method.

Amortization commonly happens when you refinance your home and pay points, own a small business, or rent a property.

The IRS lets you deduct points evenly over the life of the loan. Under certain circumstances you can deduct points in the year paid. When refinancing a mortgage, points are generally deducted over the life of the new loan.

Here’s how to deduct points paid with a refinancing:

  1. After you have entered your Form 1098, TurboTax will ask: Did you pay points in [year] when you took out the loan?
  2. Select I paid points when I refinanced, purchased a second home, or opened a home equity loan in [year].
  3. On the Tell us about the points you paid screen, enter your points and the correct information about your loan.

After you answer the remaining questions, TurboTax will report your deductible points on Schedule A, Line 8c.

Some businesses have amortizable assets. Enter these in Assets.

  1. Open or continue your return.
  2. Navigate to Schedule C:
    • TurboTax Online or Mobile: Go to Schedule C.
    • TurboTax Desktop: Search for sch c and select the Jump to link.
  3. On the Your 2024 self-employed work summary screen, select Edit next to your business.
  4. Follow the onscreen instructions to enter your profit or loss.

For general guidelines on useful life, see Intangible Property in IRS Publication 946.

You'll see an Asset Summary with your amortization. Check the box Show Details to see all the details.

Rental properties may also include amortizable assets, such as refinancings. Like Profit or Loss from Business, enter amortization in Assets.

  1. Open or continue your return.
  2. Navigate to rental property:
    • TurboTax Online or Mobile: Go to rental property.
    • TurboTax Desktop: Search for rental property and select the Jump to link.
  3. On the Your 2024 rentals and royalties summary screen, select Edit next to your rental property.
  4. Scroll down and select Add expense or asset.
  5. For What additional expenses and assets did you have for Rental property?, select Improvements, furnishings, and other assets.
  6. Follow the onscreen instructions to enter your rental properties and royalties.

You'll see this year’s amortization expenses in Asset Summary.