• Honey Hive Bookkeepers

Depreciation Vs Amortization

If you have done research into business expenses you may have heard about depreciation and amortization, but what are they and how are they different?

They both have to do with assets which are something of value that a business owns. Fixed assets are expected to provide a benefit to the business over a time period longer than a year. Such as over 5 years for a piece of equipment. These are not immediately expensed, rather they sit on the balance sheet as an asset. But realistically they are costing the business money and should be reflected on the income statement. This is done through depreciation. Depreciation allocates the cost of the asset over it's expected useful life by applying a certain part of the cost as depreciation expense.

Amortization is a similar concept except it is applied to nontangible assets. Nontangibles are assets you cannot physically touch such as a patent, trademark, and Goodwill. The IRS has standard tables for the life expectancy of assets. There are also accelerated forms of depreciation which allow you to take more than the designated depreciation amount the first year the asset is placed into service. Only certain assets are eligible for these accelerated methods which are called bonus depreciation and section 179 depreciation. Using these forms of depreciation is one of the easiest ways to take advantage of tax planning, but should be done after careful consideration on losing the benefit of depreciation in later years.