# What is the Difference Between Depreciation and Amortization?

The concepts of depreciation and amortization are confusing to business people who don't work with them every day, but it's important to know about these terms and how they can work to help minimize the tax bill for your business.

### First, Some Background on Cost Recovery

The concept of both depreciation and amortization is a tax method designed to spread out the cost of a business asset over the life of that asset.

The IRS calls this "cost recovery."

Expenses are a benefit to a business because they reduce the amount of taxes the business pays. But there are different kinds of expenses.

If you buy copy paper for your business, you expect its useful life is months, not years. (Yes, I know it sits around for a while before you use it, but copy paper, like other office supplies, is intended to be used quickly.) So copy paper can be counted as a business expense in the year it is purchased. If you buy copy paper in 2016, it's expected (according to the IRS) to be used in 2016 and the expense for that purpose is shown on the business tax form for 2016.

But if you buy office furniture or a piece of equipment, you expect to use it for several years, so the IRS says you can't take the expense in the first year. You must "recover" the cost by taking it as an expense over several years, considered as the "useful life" of that assets.

If you buy a \$1000 desk for your office, the IRS has a specific amount of time you can spread out that cost, not counting any salvage (leftover) value. Let's say the useful life is 9 years, and the salvage value at the end of that nine years is \$100. Your business must spread out the net cost (original cost less salvage value) over the nine years at \$100 a year.

This calculation is over-simplified, but you get the idea.

### What is Depreciation?

Depreciation is the method of recovering the cost of a tangible asset over its useful life. The desk I mentioned above, for example, is depreciated, as is a company vehicle, a piece of manufacturing equipment, shelving, etc. Anything that you can see and touch and that lasts longer than a year is considered a depreciable asset (with some exceptions, of course).

### What is Amortization?

Amortization is the same process as depreciation, only for intangible assets - those items that have value, but that you can't touch. For example, a patent or trademark has value, as does goodwill. To add to the confusion, amortization also has a meaning in paying off a debt, like a mortgage, but in the current context, it has to do with business assets.

The IRS has designated certain intangible assets as eligible for amortization over 15 years, according to Section 197 of the Internal Revenue Code. The only intangible asset that is not amortized is goodwill. That's because goodwill can't be calculated until the business is sold or changes hands.

So, the basic rule-of-thumb is that you depreciate tangible assets and amortize intangible assets.

### Accelerated Depreciation and Amortization

The depreciation method in the example above is called straight-line depreciation, which means that the same amount is depreciated every year.  But in real life, some items depreciate more quickly at the beginning of their life than at the end; cars, for example.

The IRS allows several methods of accelerated (speeded-up) depreciation, to allow business owners to take more deductions from depreciation expense sooner in the life of the asset. This is a tax benefit to the business.

Accelerated depreciation is really just a tax device; in most cases, it has no relationship to how quickly the asset is used up.

Amortization of intangible assets is almost always calculated on a straight-line basis (the same amount every year).