If you operate a business in Houston, you're aware of how swiftly things can change. Equipment is replaced, software is updated every few years, and buildings constantly require maintenance. All of these factors influence your financial records. The way you document these changes provides insight into your business’s overall health.

Many business owners find the terms amortization, depreciation, and impairment confusing—they sound technical but essentially describe how assets decrease in value over time. Once you grasp these concepts, your financial statements become clearer, and discussions with your tax professional at year-end are much smoother.

This article is for educational purposes only. It is not legal or accounting advice.

Understanding the Three Terms

Amortization: Applies to intangible assets like software, trademarks, or goodwill from acquisitions, representing items not physically tangible but valuable. According to Section 197 of the tax code, most of these assets are amortized evenly over fifteen years for tax purposes. In accounting, amortization gradually allocates their cost, reflecting their decreasing usefulness over time. However, if you develop your own software, it typically isn't amortized until it’s sold or transferred.

Depreciation: Applies to everyday items you can see and use, like trucks, computers, machinery, and office furniture. The IRS dictates how long you can write these off using MACRS, which is detailed in Section 168. Some assets are considered five-year property, some are seven, and buildings can be depreciated over thirty-nine years. Small businesses often use Section 179 or bonus depreciation to maximize their initial deduction, but this only works if proper paperwork is kept. If you’ve ever wondered why your accountant keeps asking for purchase dates and receipts, this is the reason.

Impairment: Differs slightly from other losses. It occurs when an asset suddenly loses some of its value, such as when machinery breaks or new technology renders your old system outdated. On your financial statements, you might record this loss to keep your balance sheet accurate. However, for tax purposes, you can’t immediately deduct that loss unless specific events occur, like a sale, abandonment, or destruction. IRS Section 165 governs these rules, determining when the loss is recognized as real.

Why This Matters for Bookkeeping

Most small businesses in Houston focus on sales and cash flow. That’s understandable, but your books tell a deeper story. If your assets aren’t recorded correctly, your balance sheet can give the wrong impression. Depreciation and amortization are about timing. They show when and how much of an asset’s value gets used up. Done right, they make your books a reliable reflection of what your business is actually worth.

If you ever get an IRS letter or need a loan, those details matter. Banks, investors, and even insurance companies look at how well you track your assets. Clean records tell them you know your business inside and out.

A Real-World Example

Consider a Houston construction firm that purchases equipment for $100,000. Over time, newer models reduce the machine's usefulness. The company records an impairment on their financial statements, so the balance sheet shows its current value. For tax purposes, they continue depreciating the asset until sold. When they sell the machine for $30,000, the difference between its book value and sale price results in a realized loss, which can then be deducted. This example illustrates how accounting figures and tax figures can differ initially.

Keeping Things Organized

Good bookkeeping is what ties all of this together. A fixed asset ledger, basically a list of everything your business owns that holds value, should show when you bought each item, what you paid for it, how you’re depreciating it, and when it’s sold or scrapped. When that ledger is up to date, everything else falls into place. Your balance sheet looks right, your accountant has what they need for the tax return, and if an auditor ever asks, you have answers ready.

It also helps to review that list once a year. A quick look at what’s sitting unused in the shop or which software subscriptions are still being paid for can save money and headaches later. You don’t need fancy software to do it. Even a spreadsheet can work if it’s consistent.

The Takeaway

Amortization, depreciation, and impairment are part of the story your books tell about your business. They show how your investments lose value and help match expenses to income over time. Understanding how they work won’t just help at tax time. It can also give you a clearer picture of how strong your business really is.

At EZQ Group, we assist Houston business owners in maintaining clean, accurate, and compliant books, allowing them to concentrate on their core activities. If it’s been a while since your asset records were checked, now is a good opportunity to review them. Our team can clarify your current book status and advise on necessary steps before tax season.

This article is provided for informational purposes only. For guidance specific to your business, contact EZQ Group to speak with our tax and bookkeeping team.

FAQ

Is an impairment deductible for taxes? Not until the loss is realized. The IRS requires an identifiable event such as a sale, abandonment, or casualty under Section 165.

How do Section 179 and bonus depreciation differ? Section 179 is an election with annual limits based on income. Bonus depreciation applies automatically unless you elect out, and it phases down each year.

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