What is amortization and how does it work?

by TurboTax•183• Updated 1 month 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.

Refinancing

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:

After you have entered your Form 1098, TurboTax will ask: Did you pay points in 2022 when you took out the loan?
Select I paid points when I refinanced, purchased a second home, or opened a home equity loan in 2024.
At Tell us about the points you paid, tell TurboTax whether the points were reported on your 1098 or HUD-1 statement, then enter your points.
Enter your refinance info on the Tell us about the points you paid on your mortgage screen.

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

Profit or Loss from Business

Some businesses have amortizable assets. Enter these in Assets.

Open or continue your return in TurboTax by selecting the Continue or Start button on the Tax Home screen.
Search sch c and select Jump to sch c.
On the Your 2024 self-employed work summary screen, select Edit next to your business.
On the Here’s your [business] info screen, select Add expenses for this work.
On the First, select the expenses you know you had screen, select the checkbox for Assets.
Start Assets.
For Any Large Purchases (Depreciable Assets)?, select Yes.
For Did you buy any items for any business, rental property and/or farm that cost $2,500 or less in 2024, select No.
For Did you make improvements to a building you used for this business in 2024?, select No.
For Did you make improvements to a building you used for this business in 2024?, select No.
On the Describe This Asset screen, select Intangibles, Other property.
On the Tell Us a Little More screen, choose Amortizable intangibles.
Enter your asset info for Tell Us About This Asset / Large Purchase.
Enter more info for Tell Us More About This Asset / Large Purchase.
For How would you like to write off this item?, select I’d like to continue entering this item as an asset.
On the Select a Code Section screen, choose the appropriate IRS code section:
1. 163 for most loan fees
2. 169 for pollution control facilities
3. 171 for certain bond premiums
4. 174 for research and experimental costs
5. 178 for the cost of acquiring a lease
6. 194 for qualified reforestation costs
7. 195 for business start-up costs
8. 197 for franchise fees, other
For Recovery Period, enter the useful life in years. 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 and Royalties (Schedule E)

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

Open or continue your return in TurboTax by selecting the Continue or Start button on the Tax Home screen.
Search rental property and select Jump to rental property.
On the Your 2024 rentals and royalties summary screen, tap Edit next to your rental property.
Scroll down and select Add expense or asset.
For What additional expenses and assets did you have for Rental property?, select Improvements, furnishings, and other assets.
If asked Did you buy any assets for a rental property, business, or farm that cost $2,500 or less in 2024?, select No.
For Did you make any improvements to Rental Property in 2024?, select No.
On the Describe This Asset screen, select Intangibles, Other property.
On the Tell Us a Little More screen, choose Amortizable intangibles.
Enter your asset info for Tell Us About This Rental Asset.
Enter additional info for Tell Us More About This Asset / Large Purchase.
On the Select a Code Section screen, choose the appropriate IRS code section.
For Recovery Period, enter the useful life in years.

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