Amortization vs. Depreciation vs. Impairment: What Every Houston Business Owner Should Know

Houston businesses face constant asset changes—equipment replacement, software updates, and building maintenance—all affecting financial records. The way you document these changes provides insight into your business’s overall health.

Understanding the Three Terms

Amortization

Amortization applies to intangible assets like software, trademarks, or goodwill. These represent items not physically tangible but valuable. Most assets are amortized over fifteen years per Section 197 of the tax code. Self-developed software typically isn’t amortized until sold or transferred.

Depreciation

Depreciation covers tangible assets: trucks, computers, machinery, and office furniture. The IRS uses MACRS (Section 168) to dictate write-off periods—five-year, seven-year, or thirty-nine years for buildings. Small businesses often utilize Section 179 or bonus depreciation to maximize initial deductions, requiring proper documentation.

Impairment

Impairment occurs when assets suddenly lose value due to breakage or obsolescence. It’s recorded on financial statements but isn’t immediately tax-deductible. You can’t immediately deduct that loss unless specific events occur, like a sale, abandonment, or destruction per IRS Section 165.

Why This Matters for Bookkeeping

Clean asset records matter for loan applications, investor relations, and insurance companies. Banks examine how well businesses track assets as an indicator of operational competence.

Real-World Example

A Houston construction firm purchases $100,000 equipment. As newer models emerge, they record impairment on financial statements while continuing tax depreciation. Upon selling for $30,000, the difference becomes a deductible loss.

Keeping Things Organized

We recommend maintaining a fixed asset ledger documenting purchase dates, costs, depreciation methods, and disposal dates. Annual reviews can identify unused items and unnecessary subscriptions.

The Takeaway

These accounting concepts help match expenses to income and clarify business strength. EZQ Group offers assistance with accurate, compliant bookkeeping.

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Frequently Asked Questions

Is an impairment deductible for taxes? Not until realized. Section 165 requires identifiable events like sales, abandonment, or casualty.

How do Section 179 and bonus depreciation differ? Section 179 has annual income-based limits; bonus depreciation applies automatically unless elected out and phases down yearly.

How long do I amortize intangibles? Most acquired intangibles amortize over fifteen years under Section 197, with exceptions.

Ready to get your asset tracking in order? Contact EZQ Group for a consultation.