When assets suffer a permanent decrease in value, companies may choose to deduct a large portion of the cost of the asset now rather than deducting a more modest portion of the asset using the depreciation system. These large deductions are called impairments.
Some reasons for impairments are a large decrease in fair market value, change in the way the asset can be used, legal issues that affect the way the asset can be used, a forecast of continuing losses associated with the use of the asset, or large costs associated with the acquisition or construction of the asset. For instance, let’s say a Colorado company pays $100,000 for a patent on a machine that rolls marijuana cigarettes. Then Colorado passes new legislation banning the sale of marijuana in their state. The patent would then have little value. The company would deduct the cost of the patent in one year as impairment.
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