Here is how goodwill impairment testing works under US GAAP in one sentence: at least once a year, and again whenever a triggering event appears, you compare the fair value of each reporting unit with its carrying amount, and if the carrying amount is higher, you write goodwill down by the shortfall, never by more than the goodwill assigned to that unit. Since ASU 2017-04, that single comparison is the whole quantitative test. The old second step, which rebuilt an implied value for goodwill, is gone.
The details depend on who you are and what you bought. A public company follows the general ASC 350-20 model. A private company can elect to amortize goodwill over 10 years or less and test only when something goes wrong. The IRS ignores the book charge entirely and keeps deducting tax-basis goodwill over 15 years. This guide explains how goodwill impairment testing works under US GAAP from acquisition to footnote, with a worked example and the tax side.
Goodwill is the residual left after an acquirer measures the identifiable assets and liabilities of a business it buys. If you pay $10 million for a company whose identifiable net assets are worth $7.5 million at fair value, roughly $2.5 million lands in goodwill. The mechanics of that purchase price allocation are covered in our guide to accounting for business combinations under ASC 805.
Under the general model, goodwill is never amortized. It sits on the balance sheet at cost until a test shows the business it belongs to is worth less than its book value.
Testing happens at the reporting unit level. PwC's guide puts the definition plainly: "A reporting unit is the same as, or one level below, an operating segment" as defined in ASC 280. Reportable segments, which can aggregate several operating segments, do not decide the answer.
Every dollar of acquired goodwill has to be assigned to one or more reporting units as of the acquisition date. It goes to the units expected to benefit from the deal, even if those units did not receive any of the acquired assets.
Allocation decisions made on day one shape every later test. Practitioner guidance: document the allocation method and the inputs behind it in the acquisition file, because auditors will ask for it at the first impairment test. The M&A due diligence checklist is a good place to start collecting that support before closing.
You must test each reporting unit at least annually. PwC notes that the annual test can happen "at any time during the year, as long as the test is consistently performed at the same time every year" for that reporting unit. Different units can have different dates.
Between annual tests, ASC 350-20-35-30 requires an interim test if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. "More likely than not" means a likelihood of more than 50 percent. PwC lists examples of events that can trigger an interim test, including:
A long-lived asset write-down under the ASC 360 impairment test for assets held and used has to be recorded before the goodwill test, because PwC's guide says the reporting unit's carrying amount is measured "after all of the reporting unit's other assets (excluding goodwill) have been adjusted for impairment." A new allowance against deferred tax assets, which we cover in our piece on assessing the need for a valuation allowance, is also a signal to look at goodwill.
Before running numbers, an entity may first assess qualitative factors to decide whether a quantitative test is needed. This is commonly called Step 0. The factors in ASC 350-20-35-3C cover macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other entity-specific events, events affecting a reporting unit and, where relevant, a sustained decrease in share price.
If the weight of the evidence says it is more likely than not that fair value is below carrying amount, you move to the quantitative test. If it does not, you are done for that unit and that period. You can also skip Step 0 for any reporting unit in any period and go straight to the quantitative test, then return to the qualitative route in a later year.
Practitioner guidance: Step 0 works best for units with a large cushion at the last quantitative test and stable results since. It is a poor fit for a unit that barely passed last year, because the documentation needed to support a "no" conclusion can take as long as the valuation itself.
The quantitative test compares the reporting unit's fair value with its carrying amount, including goodwill. In PwC's words, "the goodwill impairment loss is the difference between the reporting unit's fair value and carrying amount, not to exceed the carrying amount of the goodwill." The same page confirms that once a loss is recognized it cannot be reversed later, even if the unit recovers.
Fair value is usually built from an income approach (a discounted cash flow model), a market approach (multiples of comparable companies or transactions), or a weighting of both. Our guide to financial modeling for business valuation walks through a DCF that can serve as the starting point.
The tax wrinkle sits inside the measurement. When a reporting unit carries tax-deductible goodwill, writing down book goodwill changes the deferred tax balance, which changes the carrying amount again. PwC notes that this can require an iterative calculation, often called the simultaneous equations method, to find the final loss and the related deferred tax adjustment. Our plain-English guide to ASC 740 covers the deferred tax mechanics in more depth.
The following figures are illustrative. Harbor Components, a calendar-year company on the general model, bought a fabrication business in April 2024 in an asset purchase. It assigned $2,500,000 of goodwill to its Fabrication reporting unit. Its annual test date is 1 October. In 2026 a major customer leaves, and the unit misses its forecast for the third straight quarter, so the team skips Step 0 and runs the quantitative test.
| Fabrication reporting unit, 1 Oct 2026 | Amount |
|---|---|
| Net working capital | $1,100,000 |
| Property, plant and equipment (after any ASC 360 write-down) | $3,400,000 |
| Customer relationships | $1,700,000 |
| Goodwill | $2,500,000 |
| Carrying amount | $8,700,000 |
| Fair value (weighted DCF and market approach) | $7,400,000 |
| Shortfall | $1,300,000 |
Scenario A, basic measurement. The shortfall of $1,300,000 is below the $2,500,000 of goodwill, so the impairment loss is $1,300,000. Goodwill falls to $1,200,000, and that becomes its new basis.
Scenario B, the cap. If fair value were $5,800,000, the shortfall would be $2,900,000. The loss is capped at the $2,500,000 of goodwill. The remaining $400,000 gap is not recorded against goodwill.
Scenario C, deferred tax gross-up. Assume the $8,700,000 carrying amount already reflects deferred taxes, a flat 21 percent rate, and that the full write-down produces a deferred tax benefit. The loss solves the equation $8,700,000 minus L plus 0.21L = $7,400,000. That gives L = $1,300,000 / 0.79 = $1,645,569.62, with a deferred tax benefit of $345,569.62. Check: $8,700,000 minus $1,645,569.62 plus $345,569.62 = $7,400,000. The assumption holds here because Harbor's tax basis in the goodwill on 1 October 2026 ($2,083,333.33 after 30 months of section 197 amortization) is above the post-impairment book goodwill of $854,430.38. The loss is still below the $2,500,000 cap.
The tax return. None of these book charges is deductible. Harbor keeps amortizing its tax-basis goodwill at $2,500,000 / 15 = $166,666.67 a year ($13,888.89 a month). Through December 2026 it has claimed 33 months, or $458,333.33, leaving tax basis of $2,041,666.67.
Private companies have had a simpler path since ASU 2014-02, issued in January 2014 as a consensus of the Private Company Council. An entity that elects it "should amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates that another useful life is more appropriate." It must also make a policy election to test at either the entity level or the reporting unit level, and it tests only "when a triggering event occurs that indicates that the fair value of an entity (or a reporting unit) may be below its carrying amount." The alternative is now open to private companies and not-for-profit entities. Public business entities cannot use it.
ASU 2021-03, issued in March 2021, added a second option. An eligible entity that elects it "is not required to monitor for goodwill impairment triggering events during the reporting period" and instead evaluates facts and circumstances as of the end of each interim or annual reporting period.
A private Harbor that had elected amortization would have expensed $250,000 a year. By the 1 October 2026 date it would have recorded 30 months of amortization, or $625,000, leaving book goodwill of $1,875,000. ASU 2014-02 measures any loss as the amount by which the carrying amount of the entity or reporting unit, including goodwill, exceeds its fair value, capped at the carrying amount of goodwill. If the customer loss counted as a triggering event and fair value were still $7,400,000, the carrying amount would be $8,075,000 and the loss $675,000 (ignoring tax effects).
The election has costs. A private company planning an IPO or a sale to a public acquirer may have to unwind it and rebuild its goodwill history under the general model. Changing the testing level later is a change in accounting principle under ASC 250, which our article on accounting changes and error corrections explains.
| Point of comparison | General ASC 350-20 model | Private company alternative | Federal tax (section 197) |
|---|---|---|---|
| Amortization | None | Straight-line, 10 years or less | 15 years, ratably |
| Testing frequency | Annual plus interim triggers | Only on a triggering event | No test |
| Testing level | Reporting unit | Entity or reporting unit (policy election) | Not applicable |
| Impairment write-down | Yes, capped at goodwill | Yes, capped at goodwill | No deduction |
| Reversal allowed | No | No | Not applicable |
For federal tax, goodwill acquired in a taxable asset purchase is a section 197 intangible. The statute says the deduction is found "by amortizing the adjusted basis ... ratably over the 15-year period beginning with the month in which such intangible was acquired." The IRS instructions for Form 4562 list goodwill and going concern value among the intangibles that "must be amortized over 15 years (180 months)," reported in Part VI.
There is no tax deduction for a book impairment. Section 197(b) allows no other depreciation or amortization deduction for an amortizable section 197 intangible, and section 197(f)(1) blocks a loss on the disposition or worthlessness of one intangible while other intangibles from the same acquisition are retained. The unrecognized loss is added to the basis of the retained intangibles instead. The practical result is a growing book-tax difference that has to be tracked in the deferred tax accounts every year. Our guide to section 197 amortization covers the tax mechanics in full.
In a stock purchase with no section 338 or similar election, the target generally keeps its existing tax basis in its assets, so book goodwill from the deal often has no tax basis at all. A section 338 election changes that. The IRS instructions for Form 8883 explain that the target is then "deemed to sell its assets to a new corporation," and goodwill is allocated basis as a Class VII asset. Confirm the tax basis from the deal documents before the first test.
Under ASC 350-20-45-2, the aggregate goodwill impairment loss appears as a separate line item in the income statement before the subtotal for income from continuing operations, unless it relates to a discontinued operation. The broader income statement rules are in our article on ASC 220 presentation and disclosure.
Deloitte's summary of the ASC 350-20 disclosure requirements sets out what the notes must contain for entities on the general model:
An impairment is non-cash but still reduces net income and equity, which can affect loan covenants. Our guide to business loan preparation covers how lenders review those figures.
How often does a company have to test goodwill for impairment? Under the general model, at least once a year on a consistent date, plus an interim test whenever an event makes it more likely than not that a reporting unit's fair value has fallen below its carrying amount. Private companies that elect the alternative test only when a triggering event occurs.
What is the difference between Step 0 and the quantitative test? Step 0 is an optional qualitative review of factors such as economic conditions, costs and financial performance. If it suggests impairment is more likely than not, or if the company skips it, the quantitative test compares fair value with carrying amount and measures the loss.
Can a goodwill impairment be reversed if the business recovers? No. Once recognized, the reduced carrying amount becomes the new basis and later recoveries are ignored.
Is a goodwill impairment deductible for tax purposes? No. Tax-basis goodwill from an asset purchase is amortized over 15 years under section 197 regardless of the book write-down, and the difference is tracked as a deferred tax item.
Does a private company have to use the 10-year amortization option? No. It is an election. A private company can stay on the general model, which keeps its statements comparable with public peers.
Goodwill testing pulls together valuation inputs, deferred tax calculations and disclosure drafting, usually during year-end close. Madras Accountancy supports businesses and CPA firms with bookkeeping, financial reporting, tax preparation, CFO advisory and audit support for work like this. To talk through your next impairment cycle, contact our team.
The section 4960 excise tax is 21% of nonprofit pay over $1M. From 2026 it covers all employees. See the medical carve-outs, Form 4720 and a worked example.
The paid family and medical leave tax credit is permanent from 2026. See the 12.5% to 25% rates, the premium option, the 6-month rule and how Form 8994 works.
Opportunity zones become permanent in 2027 under the One Big Beautiful Bill. See the new deferral, rural bonus, and the 2026 handoff.
