Does Goodwill Depreciate? GAAP, Impairment, and Tax Rules

No, goodwill does not depreciate. Under U.S. GAAP, acquired goodwill sits on the balance sheet at its recorded amount with no annual write-down schedule, and it is reduced only when an impairment test shows the underlying business has actually lost value. Two important exceptions cut against that general rule: eligible private companies can elect to amortize goodwill on a straight-line basis over ten years, and for federal income tax purposes the IRS requires buyers to amortize acquired goodwill over 15 years regardless of how it is carried on the books.

Why Goodwill Is Not Depreciated Like Other Assets

Depreciation and amortization exist to spread an asset’s cost over its useful life. A delivery truck loses value as it accumulates miles. A patent expires on a fixed date. Both have a predictable endpoint, so writing them down on a schedule reflects economic reality.

Goodwill behaves differently. It only appears on a balance sheet after one company acquires another and pays more than the fair value of the target’s identifiable net assets. The premium captures things that don’t fit neatly into other asset categories: reputation, customer loyalty, an assembled workforce, and the expectation that the business will keep generating profits. None of those has an obvious expiration date.

Because no one can reliably predict when or whether that value will fade, GAAP treats goodwill as having an indefinite useful life and does not permit systematic write-offs.¹ The logic is straightforward: if the acquired business keeps performing, the goodwill that justified the purchase price has not lost value, so writing it down on a fixed schedule would misrepresent what the company owns.

One related point often causes confusion. You cannot create goodwill internally. A company that spends decades building a powerful brand records none of that value as goodwill on its own books. The asset exists only through an acquisition, and only for the specific premium the acquirer paid.²

How Goodwill’s Value Gets Reduced Instead

Since goodwill is not amortized, GAAP uses impairment testing to catch declines in value. ASC Topic 350 requires every company carrying goodwill to test it at least once a year, even if the business is thriving. Companies also have to run the test between annual cycles when something happens that suggests value may have dropped: a sustained fall in stock price, a major competitive shift, deteriorating cash flows, or the loss of a significant customer.²

Testing happens at the “reporting unit” level. A reporting unit is either an operating segment or a business one level below it that has its own discrete financial information reviewed by segment management. Goodwill from an acquisition is allocated to these units at the time of the deal, and each unit’s goodwill is tested separately.

The Qualitative Screen

Before crunching numbers, a company can start with an optional qualitative assessment, sometimes called Step Zero. Management looks at macroeconomic conditions, industry trends, cost pressures, the unit’s recent performance, and entity-specific events like management changes or pending litigation. The question is whether it is “more likely than not” (greater than 50 percent) that the reporting unit’s fair value has fallen below its carrying amount.

If the answer is no, testing stops there for the year. A company can also bypass the qualitative screen entirely and go straight to the quantitative test in any period it chooses.¹

The Quantitative Test

The quantitative test is a direct comparison: the fair value of the reporting unit versus its carrying amount, including goodwill. Fair value is determined using standard valuation techniques, most commonly a discounted cash flow analysis. If fair value exceeds the carrying amount, goodwill passes and no write-down is needed. If the carrying amount exceeds fair value, impairment exists and a loss must be recognized.¹

Recording an Impairment Loss

The impairment loss equals the amount by which the reporting unit’s carrying amount exceeds its fair value, with one cap: the loss cannot exceed the total goodwill allocated to that reporting unit. Goodwill can be written down to zero, but never below it.¹

On the income statement, the charge appears as a separate line item before income from continuing operations. A large write-down can dramatically reduce net income for the year, which is why impairment announcements tend to rattle investors. The charge is non-cash. No money leaves the company. The balance sheet is simply adjusted to reflect that the acquired business is worth less than what was originally paid.

The write-down is permanent. Once goodwill has been impaired, it cannot be written back up even if the business recovers in later years. The carrying amount stays at its reduced level until the next impairment event or until the reporting unit is sold.³

When Goodwill Is Amortized: The Private Company Election

Annual impairment testing costs real money. Formal business valuations require outside specialists, and the fees add up quickly for smaller companies. FASB introduced an accounting alternative in ASU 2014-02 that lets eligible private companies elect to amortize goodwill on a straight-line basis over ten years, or a shorter period if the company can demonstrate a more appropriate useful life.⁴

Companies making this election still test for impairment, but only when a triggering event occurs rather than every year. The cumulative amortization period for any unit of goodwill can never exceed ten years, even if the company later revises its estimate of useful life. FASB extended the same option to not-for-profit entities through ASU 2021-03.²

For public companies, this election is not available. Public filers stay with the impairment-only model.

Goodwill Amortization for Tax Purposes

Tax law handles goodwill on its own schedule, and mixing up the book and tax rules is one of the more common mistakes in post-acquisition planning. Regardless of how goodwill is treated on the financial statements, federal tax law requires acquired goodwill to be amortized over 15 years using the straight-line method. The deduction begins in the month the acquisition closes and continues through the fifteenth anniversary month.⁵

Section 197 applies to goodwill acquired in a taxable asset purchase and held in connection with a trade or business. The same 15-year schedule covers a broad category of acquired intangibles beyond goodwill, including going-concern value, workforce in place, customer-based and supplier-based intangibles, covenants not to compete, and franchises or trademarks.⁵

A buyer that pays a $3 million goodwill premium in a qualifying acquisition deducts $200,000 per year for 15 years on the tax return, regardless of whether the goodwill has been impaired or is still carried at full value on the GAAP balance sheet. That mismatch is a routine book-tax difference companies have to track and disclose. Section 197 does not apply to goodwill that was never acquired in a taxable transaction; internally generated goodwill has no tax basis to amortize.

Where the Rules May Change

Whether the impairment-only model is the right approach remains an open question. FASB removed a project on goodwill’s subsequent accounting from its technical agenda in 2022, but revisited the topic in its January 2025 agenda consultation, again asking stakeholders whether improvements to the current model are needed. Critics argue that goodwill is a wasting asset whose value inevitably declines as the synergies from an acquisition are consumed. Defenders say impairment testing better reflects economic reality because it only reduces the asset when evidence supports a decline. For now, both U.S. GAAP and IFRS remain in the impairment-only camp for public companies.

1
Financial Accounting Standards Board. FASB Accounting Standards Update 2017-04 – Simplifying the Test for Goodwill Impairment
2
Financial Accounting Standards Board. FASB Accounting Standards Update 2021-03 – Intangibles, Goodwill and Other (Topic 350)
3
IFRS Foundation. IAS 36 Impairment of Assets
4
Financial Accounting Standards Board. FASB Accounting Standards Update 2014-02 – Intangibles, Goodwill and Other (Topic 350)
5
Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles