Is Amortization the Same as Depreciation?

Amortization and depreciation are not the same thing, though they do the same job in different lanes. Both spread the cost of a long-lived asset across the years it produces value, but depreciation applies to tangible property like equipment, vehicles, and buildings, while amortization applies to intangible assets like patents, trademarks, goodwill, and certain start-up costs. The tax rules, recovery periods, and calculation methods differ enough that treating one as the other can cost you deductions or create problems in an audit.

What Each One Covers

Depreciation covers tangible property used in a business or held to produce income. Federal law allows a deduction for the wear, exhaustion, and obsolescence of these physical assets.¹ Machinery, office furniture, delivery trucks, computers, and buildings all qualify, provided the asset has a useful life longer than one year. Land itself cannot be depreciated because it does not wear out. Structures on the land can.

Amortization covers intangible assets: patents, copyrights, trademarks, franchises, customer lists, goodwill, workforce agreements, and covenants not to compete.² These have real economic value but no physical form. When you acquire them in connection with buying a business, they fall under a single federal rule.

Recovery Periods and How the Math Works

The clearest split between the two is how long you have to spread the cost, and how much choice you get in doing it.

Business depreciation today follows the Modified Accelerated Cost Recovery System, or MACRS. This assigns every type of depreciable property to a specific recovery period based on its classification rather than its actual expected lifespan.³ Common periods include:

5 years for automobiles, light trucks, computers, and peripheral equipment
7 years for office furniture, fixtures, and most general-purpose machinery
27.5 years for residential rental buildings
39 years for commercial and industrial buildings

MACRS also lets you choose between the straight-line method and accelerated methods like the 200-percent or 150-percent declining balance, which front-load larger deductions into the early years when equipment tends to lose value fastest.³ A $100,000 piece of 7-year property produces much larger first- and second-year deductions under declining balance than under straight-line.

Which convention governs the first and last year also matters. Most property uses the half-year convention, which treats the asset as though it was placed in service at the midpoint of the year regardless of the actual purchase date. If more than 40 percent of all depreciable property placed in service during the year goes into service in the final quarter, the mid-quarter convention applies instead and spreads the first-year deduction more precisely across quarters.⁴

Amortization under Section 197 is far simpler. Whatever the asset, the recovery period is a flat 15 years, and the cost is spread ratably across those years starting in the month you acquire it.² A patent that expires in 8 years still gets amortized over 15. Goodwill with no expiration date also gets 15 years. A $300,000 intangible produces a $20,000 deduction every year, with no accelerated methods and no acceleration options. Congress designed it this way to eliminate disputes over the useful life of intangibles that are inherently hard to value.

Not every intangible follows the 15-year rule. Software that does not qualify as a Section 197 intangible, typically because it was purchased off the shelf rather than acquired as part of a business purchase, gets depreciated using the straight-line method over 36 months.⁵ That is a much faster write-off and one businesses frequently overlook.

One more distinction worth flagging: under MACRS, salvage value plays no role. You depreciate the full cost without subtracting what the asset might be worth at the end of its life.⁶ This surprises people who learned depreciation from an accounting textbook, where salvage value is typically subtracted before calculating the annual expense. Financial accounting rules (GAAP) use salvage value; the federal tax system under MACRS does not. Intangibles amortize down to zero as well, with no salvage adjustment.

First-Year Expensing Applies Only to Depreciation

Two provisions let businesses deduct the full cost of qualifying property in the year it is placed in service, bypassing the multi-year recovery schedule. Both apply only to depreciation. Neither applies to Section 197 intangibles.

Section 179 lets you elect to treat the cost of qualifying equipment, vehicles, and certain improvements as an immediate expense. For 2026, the maximum deduction is $2,560,000, phasing out dollar-for-dollar once total qualifying property placed in service during the year exceeds $4,090,000.⁷ A separate $32,000 cap applies to certain sport utility vehicles. The property must be used more than 50 percent for business, and the deduction cannot exceed your taxable income from the business for that year.

Bonus depreciation is separate. It provides an additional first-year deduction on top of regular MACRS depreciation, with no dollar cap. Following changes enacted through the One, Big, Beautiful Bill, qualified property acquired after January 19, 2025, is eligible for a permanent 100-percent additional first-year depreciation deduction.⁸ Unlike Section 179, bonus depreciation can create or increase a net operating loss, and it does not require the property to be used more than 50 percent for business. Many businesses use both provisions together, taking Section 179 first, then applying bonus depreciation to the remaining cost.

Passenger vehicles are a notable exception to full first-year expensing. Regardless of Section 179 or bonus depreciation, the IRS caps the first-year depreciation deduction on most cars. For vehicles placed in service in 2026, the first-year limit is $20,300 with bonus depreciation, or $12,300 without it.⁹ Heavy SUVs and trucks over 6,000 pounds gross vehicle weight escape these caps but remain subject to the separate $32,000 Section 179 SUV limit.

What Happens When You Sell

Selling a depreciated or amortized asset triggers a tax rule that catches people off guard. When you sell property for more than its depreciated book value, the IRS does not let you keep all that gain at favorable capital gains rates. The tax code “recaptures” some or all of the depreciation you previously deducted and taxes it as ordinary income. The logic is straightforward: you got an ordinary income deduction when you took the depreciation, so the government wants ordinary income tax back when the asset sells above its written-down value.

For personal property like equipment, vehicles, and machinery, the entire gain attributable to prior depreciation is taxed as ordinary income. The recapture equals the lesser of the total gain or the total depreciation previously allowed.¹⁰ Sell a $50,000 machine you have depreciated down to $10,000 for $35,000, and the $25,000 gain is ordinary income rather than capital gain. Section 179 deductions and bonus depreciation count toward this recapture calculation. The bigger the up-front deduction, the bigger the potential recapture if you sell later at a profit.

Real property like commercial buildings follows a more favorable rule. Depreciation recapture on real estate is taxed at a maximum rate of 25 percent rather than your full ordinary income rate.¹¹ Any gain above the original cost basis is taxed at the standard long-term capital gains rate of 0, 15, or 20 percent. Businesses report these calculations on Form 4797.¹²

Amortized intangibles face recapture too. When you sell a Section 197 intangible for more than its remaining basis, the gain attributable to prior amortization deductions is treated as ordinary income under the same framework that governs personal property.¹⁰ This catches people who buy a business, amortize the goodwill for years, and then sell without planning for the tax hit on recaptured amortization.

Loan Amortization Is a Different Concept

If you searched this question wondering about your mortgage or car loan, the word “amortization” means something else in that context. Loan amortization refers to paying down a debt through scheduled installments that split each payment between principal and interest. Early in the loan, most of your payment covers interest. As the balance drops, the ratio shifts until the final payments are almost entirely principal. This has nothing to do with writing off the cost of a business asset on your taxes. The two share a name because both involve spreading a cost over time, but the mechanics and tax treatment are unrelated.

How Both Appear on Financial Statements

On the income statement, depreciation and amortization both show up as operating expenses that reduce net income. Because neither involves an actual cash payment during the period, both are added back when calculating cash flow from operations. A company reporting thin profits but heavy depreciation may be generating far more cash than the income statement suggests.

On the balance sheet, neither expense directly reduces the asset’s listed cost. Instead, they accumulate in contra-asset accounts, accumulated depreciation for tangible assets and accumulated amortization for intangibles, that appear just below the original cost. The difference between purchase price and accumulated depreciation or amortization is the book value, sometimes called carrying value. When book value reaches zero, the asset is fully depreciated or amortized even if it is still in use.

Companies often use straight-line depreciation on their financial statements but accelerated depreciation, Section 179, or bonus depreciation on their tax returns. That creates a timing difference: the tax return shows a bigger deduction now and a smaller one later, while the financial statements spread the expense evenly. The result is a deferred tax liability on the balance sheet, which unwinds over the remaining life of the asset as book depreciation catches up to the tax deductions already claimed.

1
Office of the Law Revision Counsel. 26 USC 167 – Depreciation
2
Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
3
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
4
eCFR. 26 CFR 1.168(d)-1 – Applicable Conventions, Half-Year and Mid-Quarter Conventions
5
Office of the Law Revision Counsel. 26 USC 167 – Depreciation – Section: Computer Software
6
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
7
Internal Revenue Service. Rev. Proc. 2025-32 – Section: Election to Expense Certain Depreciable Assets
8
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill
9
Internal Revenue Service. Rev. Proc. 2026-15 – Depreciation Limitations for Passenger Automobiles
10
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
11
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed – Section: Maximum Capital Gains Rate
12
Internal Revenue Service. Instructions for Form 4797