Guides
Amortization vs Depreciation: What’s the Difference?
Amortization vs depreciation comes down to the asset type: depreciation spreads the cost of a tangible asset (equipment, buildings, vehicles) over its useful life, while amortization spreads the cost of an intangible asset (goodwill, patents, trademarks) over its life. Both are non-cash expenses that convert a capitalized cost into periodic deductions, but they follow different rules, methods, and tax forms.
The distinction matters for two separate systems. For book (GAAP) accounting, it drives how an asset shows up on the balance sheet and income statement. For tax, it decides whether you use MACRS depreciation or the fixed 15-year amortization schedule under Internal Revenue Code Section 197. Getting the classification wrong can misstate income and trigger a change-in-method filing to fix.
The core difference: tangible vs intangible
Depreciation applies to tangible (physical) assets; amortization applies to intangible (non-physical) assets. That single split governs which method, useful life, and tax treatment attaches to a capitalized cost. Both allocate cost over time and reduce reported income without a cash outflow in the expense year.
A tangible asset has a physical form and often retains resale value: machinery, computers, furniture, buildings, and business vehicles. Its cost is recovered through depreciation.
An intangible asset has value but no physical substance: purchased goodwill, patents, copyrights, trademarks, customer lists, franchise rights, and covenants not to compete. Its cost is recovered through amortization.
Land is the notable exception. It is tangible but is neither depreciated nor amortized because it does not wear out or expire.
Amortization vs depreciation at a glance
The table below contrasts the two across the attributes that most often decide treatment. Book rules (GAAP) and tax rules diverge, so the “tax” rows reflect federal income tax mechanics, which can differ from financial-statement reporting.
| Attribute | Depreciation | Amortization |
|---|---|---|
| Asset type | Tangible (physical) | Intangible (non-physical) |
| Common examples | Equipment, buildings, vehicles, furniture | Goodwill, patents, trademarks, customer lists |
| Typical method (book) | Straight-line or accelerated (declining balance, units of production) | Almost always straight-line |
| Salvage (residual) value | Usually factored in | Usually assumed to be zero |
| Tax method | MACRS (accelerated), often with Section 179 or bonus | Straight-line under IRC Section 197 |
| Tax recovery period | 3 to 39 years, set by asset class | 15 years (180 months) for Section 197 intangibles |
| Governing book standard | ASC 360 (property, plant, equipment) | ASC 350 (intangibles and goodwill) |
| Tax form | Form 4562, Parts II to V | Form 4562, Part VI |
| Contra-asset account | Accumulated depreciation | Accumulated amortization |
How the methods differ
Depreciation supports multiple methods and often front-loads deductions; amortization is nearly always straight-line and even. This is the practical divergence you feel in the numbers, because an accelerated method pulls expense into early years while straight-line spreads it evenly.
Depreciation methods include straight-line, declining balance (including double-declining), and units of production. For federal tax, the Modified Accelerated Cost Recovery System (MACRS) is the default and is accelerated by design, letting a business recover more of an asset’s cost in the first years.
Amortization of Section 197 intangibles is fixed: straight-line over 180 months, with 1/15 of the adjusted basis deducted per full year. There is no accelerated option and no salvage value in the calculation, because most acquired intangibles are assumed to have no resale value at the end of their term.
Section 197: the 15-year intangibles rule
For federal tax, most purchased intangibles are amortized straight-line over 15 years (180 months) under IRC Section 197, starting in the month of acquisition. The rule applies to intangibles acquired after August 10, 1993 in connection with acquiring a trade or business or a substantial portion of one.
Section 197 intangibles include goodwill, going-concern value, workforce in place, patents, copyrights, trademarks and trade names, customer-based intangibles, licenses and permits, franchise rights, and covenants not to compete. The 15-year period applies even when an asset’s economic or legal life is shorter or longer, which is a frequent surprise: a covenant not to compete lasting 3 years is still amortized over 15 years for tax.
A key limit: Section 197 generally covers acquired (purchased) intangibles, not those you create internally. Self-created goodwill and internally developed brand value usually are not amortizable under Section 197. Separately, research and experimental costs follow their own capitalization regime, discussed in Section 174 R&E capitalization. In an acquisition, how much basis lands in each intangible class is set through purchase price allocation, which directly drives the amortization deduction.
How each hits the financial statements
Both appear as expenses on the income statement and as contra-asset accounts that reduce book value on the balance sheet, but the labels and lines differ. Neither is a cash outflow in the period recorded, so both are added back in the operating section of the cash flow statement and both sit inside the D&A of EBITDA.
On the income statement, depreciation and amortization can appear within cost of goods sold, operating expenses, or a combined “depreciation and amortization” line, depending on how the assets are used. On the balance sheet, tangible assets are reported net of accumulated depreciation; intangible assets are reported net of accumulated amortization.
Goodwill is treated differently under book rules. Under ASC 350, goodwill is not amortized on GAAP financial statements; it is tested for impairment at least annually. For federal tax, that same acquired goodwill is amortized over 15 years under Section 197. This creates a book-tax difference that flows through deferred tax accounting.
To see where these lines land, review how to read an income statement and how to read a balance sheet.
Reporting both on Form 4562
Depreciation and amortization are reported on the same IRS form, Form 4562, but in different parts. Depreciation, Section 179 expensing, and bonus (special) depreciation go in Parts I through V; amortization goes in Part VI.
In Part VI, a business enters the intangible’s description, the date acquired, the cost or basis, the amortization period or percentage, the code section (usually 197), and the current-year deduction. The straight-line result carries to the appropriate income line of the business return.
If a business has been treating an asset under the wrong method (for example, depreciating something that should be amortized, or vice versa), correcting it often is an accounting method change requiring Form 3115 with a Section 481(a) adjustment, rather than a simple amended return.
FAQ
Is amortization the same as depreciation?
No. They serve the same purpose, spreading a capitalized cost over time as a non-cash expense, but depreciation applies to tangible assets like equipment and buildings, while amortization applies to intangible assets like goodwill, patents, and trademarks. The methods, useful lives, and tax forms differ, though both reduce reported income without a cash outflow.
What is the 15-year rule for amortization?
Under IRC Section 197, most purchased intangibles acquired in connection with a business are amortized straight-line over 15 years (180 months), starting in the month acquired. The 15-year period applies even if the asset’s legal or economic life is shorter or longer. It generally covers acquired intangibles like goodwill, patents, and customer lists, not self-created ones.
Is goodwill depreciated or amortized?
Goodwill is amortized, not depreciated, because it is intangible. For federal tax, acquired goodwill is amortized over 15 years under Section 197. For book (GAAP) reporting under ASC 350, goodwill is not amortized at all; it is tested for impairment at least annually. That difference between book and tax treatment can create a deferred tax item.
Does amortization use salvage value?
Usually not. Amortization typically assumes zero salvage value because most intangible assets, like a covenant not to compete or a customer list, have no resale value at the end of their term. Depreciation, by contrast, often factors in a salvage or residual value for tangible assets that can be sold or scrapped when retired.
Where are depreciation and amortization reported for taxes?
Both are reported on IRS Form 4562. Depreciation, Section 179 expensing, and bonus depreciation appear in Parts I through V. Amortization of intangibles, including Section 197 assets, appears in Part VI, where you list each intangible’s description, date acquired, cost or basis, code section, and current-year deduction.
Can you amortize a patent or a trademark?
Yes, when purchased. A patent, trademark, copyright, or similar intangible acquired as part of buying a business is generally a Section 197 intangible amortized straight-line over 15 years for tax. A separately purchased intangible not acquired with a business may instead be amortized over its actual useful life. Internally created intangibles often follow different rules.
Reviewed by The Ledgerism Editorial Team. Last reviewed: July 2026.