What’s the Difference Between Depreciation and Amortization?

If you’re a small business owner, accounting enthusiast, or self-proclaimed Google aficionado, you’ve likely come across the terms “depreciation” and “amortization” a few times. At first glance, they almost appear to be the same thing, but there are key differences between them that you should know.

What Is Depreciation?

Depreciation is a measurable decrease in the value of a tangible asset from the time of purchase until the end of its usefulness. You might be most familiar with depreciation when it comes to buying a new car. What initially cost you $40,000 at the dealership may only be worth a fraction of that in months. While we all know it’s probably not a great idea to buy a new car, that value-loss process essentially sums up how depreciation works—and amortization isn’t that different.

Examples of Property that Depreciates

The IRS lists the following items as property categories that fall within its guidelines for depreciation and can be used for tax savings.

• Machinery
• Equipment
• Buildings
• Vehicles
• Furniture
• Livestock

What is Amortization?

Amortization is a measurable decrease in the value of an intangible asset over the course of its useful life. Unlike items that depreciate, it’s a little harder to imagine a property that amortizes. Since they’re intangible, you can’t watch them break down or wear out. It’s all a bit more conceptual. However, there are specific examples of amortizing property you or your small business may own. 

Examples of Property that Amortizes

While the qualifications and regulations surrounding amortizing property vary, and we recommend you speak with a professional before doing your taxes, here’s a brief list of items that may fall under the IRS Section 197 amortization of assets umbrella.

•  Copyrights, patents, formulas, and designs
•  Customer bases and client relationships
•  Licenses and permits
•  Trademarks and franchises

It’s important to know that many of the items on this list (and some that aren’t) do not amortize if they were created by your business. The IRS only accepts the amortization costs on your assets if they have been purchased or otherwise acquired, unless “you created them in acquiring assets that make up a trade or business or a substantial part of a trade or business.”

Some More Differences

As we’ve seen, depreciation and amortization are largely the same processes, just applied to 2 different property types. However, as you start utilizing depreciation and amortization to reduce taxable income, there are 2 additional differences of which you should be aware.

Salvage Value

When calculating depreciation, you’ll need to take into account the tangible asset’s salvage value. Salvage value is the amount your property is worth at the end of its useful life. Unlike a piece of property that you can touch, drive, or repair, amortizing assets don’t wear out in the same way and don’t have a salvage value.

Implementation Method

When making your tax deductions for depreciation and amortization, there are some discrepancies. Depreciation allows you to use an accelerated implementation method (which lets you deduct larger amounts early in the asset’s useful life), while amortization primarily uses a straight-line method. A straight-line method means you will deduct the same annual amount on your taxes for the life of the amortizing asset. 

Find a Business Accountant

When tackling taxes surrounding depreciation and amortization, you might want to consider finding a good business accountant. Whether you track one down or purchase an online service that provides one, it’s helpful to have a professional around to guide you through the process and ensure you get the tax savings you deserve on every piece of property you can.