You Asked: Can You Explain Amortization to Me Like I Am a Child?

YOU ASKED: I still don’t really understand how amortization works over time when it comes to large equipment purchases and so on… Can you explain it to me like I am a child?

WE ANSWER: You’re not alone. Amortization and depreciation are terms that get thrown around by accountants and most practice owners nod along without fully understanding.Let’s break it down simply.

When you buy a large piece of equipment—say a $100,000 IPL—the IRS doesn’t usually let you deduct the full $100,000 as an expense in one year (unless you use Section 179 or bonus depreciation). Instead, they assume that machine will help you make money for several years. So instead of deducting $100,000 this year, you “spread” it over time.

Think of it like this: If the equipment is expected to last five years, the IRS might let you deduct $20,000 a year for five years. You still paid $100,000 upfront. But for tax purposes, you only get to reduce your taxable income by a portion each year.

That spreading out of the deduction is called depreciation (for tangible assets like equipment) or amortization (for intangible assets like goodwill).

Now here’s where people get confused: Amortization has another, separate meaning that applies to loans your practice has to pay back and how interest is assessed by the lender.

If you borrow money to buy that IPL, your monthly payment includes:

• Interest (the cost of borrowing)
• Principal (paying down the loan)

In the early years of a loan, most of your payment goes toward interest. Over time, more of it goes toward principal. That shifting breakdown over time is called an amortization schedule.

So in simple terms:

• Depreciation (tax side) = Spreading a tangible asset’s deduction over time.
• Amortization (tax side) = Spreading an intangible asset’s deduction over time.
• Amortization on practice loan (bank side) = How a lender applies interest charges to a loan that is paid down over time.

The key takeaway? Cash flow and tax deductions are not the same thing.

You might spend $100,000 today, but your tax benefit could be spread over years. Or you might have a monthly loan payment that changes how much goes toward interest versus principal.

If you want to truly understand how this affects your practice, work with an accounting team that specializes in eyecare. They can show you exactly how equipment purchases impact your profit, taxes, and long-term strategy.