Depreciation vs. Amortization: The Difference, With Examples

Depreciation and amortization do the same job: they spread the cost of something you bought across the years it earns you money, instead of deducting it all at once. The difference is what they cover. Depreciation writes off tangible assets, the things you can touch, like a machine, a truck, or a desk. Amortization writes off intangible assets, the things you can't, like the goodwill you pay for when you buy a business or the startup costs you rack up before you open. Both land on the same IRS form, Form 4562, but in different parts and under different rules. This guide runs one small business's purchases through both so you can see exactly which is which.

The one-line answer

Depreciation is for physical property that wears out; amortization is for intangible property that doesn't. A $10,000 espresso machine is depreciated. The $30,000 of goodwill you paid to buy an existing café is amortized. The machine follows the accelerated MACRS schedule in Publication 946; the goodwill follows a flat 15-year straight line under Internal Revenue Code section 197. Same idea, two rulebooks. Once you know which bucket an asset falls into, the rest is arithmetic.

Why you can't just deduct the whole thing

When you buy a $4 pack of printer paper, you deduct $4 this year. When you buy a $10,000 machine that runs for six years, the IRS says the machine is still an asset next year, so you can't treat the whole cost as this year's expense. You recover the cost gradually over the machine's useful life. That recovery is depreciation for tangible property and amortization for intangible property.

Publication 946 sets four tests for property you depreciate: you own it, you use it in your business or to produce income, it has a determinable useful life, and it is expected to last more than one year. The same publication lists what you cannot depreciate: land (it doesn't wear out), inventory held for sale (that flows through cost of goods sold instead), and property you buy and dispose of in the same year. Land is the classic trap. You depreciate a building, never the dirt under it.

Depreciation, worked

Say you buy $10,000 of computer equipment for the business and put it in service this year. Computers are five-year property under MACRS, the Modified Accelerated Cost Recovery System that Publication 946 lays out. Accelerated means you deduct more in the early years. Using the standard half-year convention, the write-off runs like this:

Six calendar years to recover five-year property, because the half-year convention treats the asset as placed in service mid-year. The percentages come straight from the MACRS tables in Publication 946 and always sum to the full cost. Different asset classes use different periods: office furniture is seven-year property, a residential rental building is 27.5 years, and a commercial building is 39 years.

Most solo owners never build this schedule by hand, because three shortcuts often let you skip it. The Section 179 deduction and bonus depreciation can expense a qualifying asset in full the year you buy it, and the de minimis safe harbor lets you write off items under a set per-invoice amount as a regular expense. Depreciation over years is the default the other rules let you override.

Amortization, worked

Now the intangible side. You buy an existing café, and $30,000 of what you pay is goodwill: the value of the customer base and reputation beyond the physical assets. Goodwill is a section 197 intangible, so section 197 controls it. The rule is a flat straight line: recover the cost "ratably over the 15-year period beginning with the month" you acquire it. No acceleration, no conventions.

$30,000 over 15 years is $2,000 a year, or $166.67 a month. If you bought the café in April and held it nine months that first year, you amortize 9 × $166.67, about $1,500, and then $2,000 in each of the following full years. Section 197 covers a specific list: goodwill, going-concern value, a workforce in place, customer and supplier relationships, patents and copyrights bought with a business, government-granted licenses, covenants not to compete, franchises, trademarks, and trade names. It excludes things you create yourself (with narrow exceptions) and off-the-shelf software available to the public.

Startup costs work on their own timetable. Under section 195, you can deduct up to $5,000 of the costs of investigating and opening the business in your first year, then amortize the rest over 180 months. That first-year $5,000 shrinks dollar for dollar once total startup costs pass $50,000, and disappears at $55,000. Spend $8,000 getting ready to open, and you deduct $5,000 now and amortize the remaining $3,000 over 180 months, which is $200 a year.

The two side by side

The Form 4562 split is the cleanest tell. Section 179 goes in Part I, the special (bonus) allowance and MACRS depreciation in Parts II and III, listed property like vehicles in Part V, and every kind of amortization in Part VI. If your write-off belongs in Part VI, it's amortization.

Which one applies to what you bought

Ask two questions about any purchase. First, can you physically touch it? A laptop, a trailer, a display case, a building: tangible, so depreciation. A client list, a brand name, a non-compete agreement, the cost of forming your LLC: intangible, so amortization. Second, does it last more than a year and keep earning? If not, it's a regular expense you deduct now, not something you recover over time.

Software is the common edge case. Off-the-shelf software you buy separately can be expensed under Section 179 or amortized straight-line over 36 months under section 167(f). But software you get as part of buying a whole business rides along with the other section 197 intangibles and amortizes over 15 years. Same product, different treatment, decided by how you acquired it.

Common misconceptions

"Amortization and depreciation are just two words for the same thing." They share the mechanics of spreading cost over time, but they cover different property under different code sections, and one is straight-line only while the other can be accelerated. Using the wrong one puts the deduction in the wrong part of Form 4562 and, for a machine, gives up the faster early write-off MACRS allows.

"Goodwill isn't deductible because I created it." Goodwill you build in your own business isn't amortizable. Goodwill you buy as part of acquiring another business is, over 15 years under section 197. The line is whether you paid a seller for it.

"I can write off my startup costs the year I spend them." Only the first $5,000, and only once you're open for business. The rest amortizes over 180 months, and even the $5,000 phases out if your startup costs top $50,000. Spend heavily before you open and most of it comes back slowly.

How SparkReceipt fits

Depreciation and amortization schedules live in your accounting software or with whoever prepares your return on Form 4562. What those schedules run on is the underlying record: the invoice for the machine, the closing statement that breaks out goodwill, the receipts for your startup spending, each with an amount and a date placed in service. That paperwork is the substantiation an auditor asks for, and it's exactly what SparkReceipt captures. Photograph or forward the purchase document and the AI receipt scanner pulls the vendor, total, date, and line items, keeps the original image, and files it under a category that maps to your chart of accounts. When it's time to set up the asset, the record is ready and publishes straight to QuickBooks Online or Xero, where the depreciation entries are booked. See pricing to start.

FAQ

Is depreciation or amortization better for taxes? Neither is a choice you make freely; the asset decides. Tangible property is depreciated, intangible property is amortized. Where you do have a choice is on tangible assets, where Section 179 or bonus depreciation can pull the whole deduction into year one instead of spreading it.

Does land get depreciated? No. Publication 946 excludes land because it doesn't wear out or get used up. You depreciate the building on the land, and when you buy both together you split the price so only the building's share is depreciated.

How long is goodwill amortized? 15 years, straight-line, under section 197, starting the month you acquire it. That applies to purchased goodwill; goodwill you generate in your own business isn't amortized at all.

What is the 180-month rule? 180 months is 15 years. It's the amortization period for startup and organizational costs beyond the first-year deduction, and it happens to match the 15-year period for section 197 intangibles.

Where do I report depreciation and amortization? Both go on Form 4562. Depreciation uses Parts I through V; amortization uses Part VI, line 42. The totals then flow to your Schedule C or the relevant business return.

Key takeaways

• Depreciation recovers the cost of tangible property; amortization recovers the cost of intangible property. The asset type decides which you use.
• Depreciation can be accelerated under MACRS (bigger deductions early); amortization is always a flat straight line.
• A section 197 intangible like purchased goodwill amortizes over 15 years; startup costs beyond the first $5,000 amortize over 180 months.
• On Form 4562, depreciation sits in Parts I through V and amortization in Part VI, line 42.
• Section 179, bonus depreciation, and the de minimis safe harbor can let you skip a multi-year depreciation schedule and deduct a tangible asset up front.
• Keep the purchase document for every asset with its amount and in-service date; that record is what any depreciation or amortization schedule is built on.