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If you’ve never heard the term “amortization” before, we can’t blame you.
Small business owners already have enough problems to worry about every day. The same could be said for larger and more established corporations. However, start-ups often have fewer resources and assets than their older and more well-known counterparts. If you’ve never heard the term “amortization” before, we can’t blame you. This concept becomes even more of a pressing concern when you wish to build or organically expand your business’s web presence.
Items that Qualify as Intangible Assets
First and foremost, you should know what intangible assets are. If you are only familiar with physical assets (such as equipment, printed advertising materials, and company cars), the idea of an intangible asset might seem incomprehensible to you. Intangible assets include customer lists, copyrights, web domains, licensing agreements, patents, trademarks, and proprietary intellectual property such as software or video game design engines.
The Difference Between Created and Acquired Assets
Now let’s examine the distinction between created assets and acquired ones. Creating a membership program or maintaining an email mailing list both count as created assets. Meanwhile, you could also pay another company to purchase theirs. Acquired assets are just as valid as the ones you’ve made. All acquired assets can be amortized; the costs of intangible assets help you determine how much the amortization will play a part.
How Amortization Plays a Part
In any case, you should talk to an accountant. They can answer any thorny questions you have about the process. The straight-line method is the most common way to calculate cost versus lifespan. Consider the legal lifespan and the expected length of time the asset remains valuable. Pick whichever value is smaller. For more indefinite periods (i.e., when you can’t predict how long an investment continues to make money), speak to an accountant. They’ll tell you about the relevant IRS guidelines.
Your Ultimate Takeaway
Think of amortization as similar to depreciation. While depreciation has to do with tangible assets, amortization associates with intangible assets instead. You will be able to track how much your assets cost as time passes. Intangible assets are non-physical assets intended to generate revenue for at least the next year or so. If you need to begin amortizing, it’s time to do some math. Divide how much the asset costs by its value-accruing lifespan.
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