The Difference between Depreciation and Amortization

If you are a freelancer or small business owner, you have probably noticed a tax form for reporting business equipment called Depreciation and Amortization. But what exactly does this mean?

Basically, when you invest in a piece of equipment, real estate, or other property for you business, the IRS is assuming that it is only going to last a certain amount of time (depreciation). Therefore for more expensive items, the expense is spread out over the life of the item (amortization). Therefore the shorter an item's life (for tax purposes), the more of a deduction you get to claim on it each year.

Deciding the length of your property's life is the tricky part. Cost segmentation services can help you determine the shortest possible lifespan of your property, therefore accelerating the depreciation. This process, also known as cost segregation or just cost seg, allows you to amortize the expense over a shorter period of time, maximizing your deductions as much as possible — and thereby lowering your net income each year.

Understanding depreciation and amortization is an important part of minimizing the income taxes for a small business owner or freelancer — but even the most financially savvy business owner can't know all the ins and outs of classifying business equipment and property. Therefore you will probably benefit greatly from hiring someone to handle this for you.