amortization
Amortization has different meanings for loan payments and for taxes. In the context of loans, amortization refers to separating the payments for the loan principal and interest into periodic payments to where the loan is paid off at a specified time, thereby gradually reducing the debt through repayment both lender and borrower agree. Amortization is used for mortgages, car loans, and other personal loans where individuals normally have a basic monthly payment for a certain amount of years. Specifically, most of the payments will count towards interest instead of paying off the debt at an early stage. While the interest of an amortized loan decreases, the portion of payment counted towards the principal will be higher.
In the context of tax and accounting, amortization refers to the strategy of steadily writing off capital expenses a business incurs from an intangible asset to match the revenues the asset produces, such as over a 15-year period based on the IRS’s guideline (see: Intangibles by the IRS). These intangible assets could include patents, copyrights, trademarks, goodwill, etc. This has the effect of reducing the stated income of the business, which reduces its tax obligations.
[Last reviewed in February of 2025 by the Wex Definitions Team ]
Wex