Depreciation vs. amortization
What constitutes depreciation is "a measurement of the depreciable asset's wear and tear, consumption, or other value loss due to usage, the passage of time, or obsolescence due to technological and market developments. Depreciation is allocated in order to charge a reasonable percentage of the depreciable value throughout each accounting period for the asset's anticipated useful life. Depreciation comprises amortising assets with specified useful lives ".
Characteristics of depreciation
The following requirements must normally be met in order to qualify:
- There must be a financial stake in the asset for the taxpayer.
If a decrease in the asset's value will have a negative impact on the value of the taxpayer's stake in the asset, then there is said to be an economic interest. The taxpayer's ownership of the asset often indicates an economic interest.
- The asset needs to be detectable. If an asset can be felt or touched and does not reflect an interest in another object, it is considered tangible.
- The asset needs to have a known useful life. If an asset will stop working or become outdated after a certain amount of time, it has a determinable useful life.
- The asset needs a basis that can be determined. Depreciation is calculated based on the taxpayer's basis in the asset, hence determining basis is crucial in this regard.
- The asset must be kept in order to generate money from rentals or use it in a trade or company.
The asset's useful life must be longer than one year.
Definition of Amortization
"Amortization" is the term used to describe the systematic and progressive writing down of an asset or account over a certain period of time.
Author: Sonia María Soriano Marín
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