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Tax Tidbit 8/09: Deducting Business Website Costs

The business use of websites is widespread, but the IRS has not yet issued formal guidelines regarding when Internet website costs can be deducted.

Fortunately, established rules that apply to the deductibility of business costs in general, and formal IRS guidance that applies to software costs in particular (the “software guidelines”), provide a taxpayer launching a business website with some guidance as to the proper treatment of the costs. Here is a brief discussion of some relevant principles:

• The time for deducting website design costs (i.e., costs of the website's overall structure, functionality and appearance) depends on whether the costs are costs of “software” within the meaning of the “software guidelines.” Generally, the portions of the website's design that are produced from sophisticated programming languages will qualify as “software.” On the other hand, there is some doubt as to the extent to which the portions of a design produced from HTML will qualify as “software.”

• Website design costs that are “software” costs are deductible under “safe-harbor” rules. The deductibility of website design costs that are “software” costs is governed by the following “safe-harbor” rules.

Generally, if the individual or company launching the website “purchases” the design (i.e., acquires the design from a contractor who is at economic risk should the software not perform), the design costs are amortized by that individual or company over the three-year period beginning with the month in which the website is placed in service. Also, non-customized computer software placed in service in tax years beginning before 2011 qualifies as “Section 179" property. Non-customized software acquired and placed in service during calendar years 2008 and 2009 is also eligible for a 50%-of-cost depreciation deduction in the year that the software is placed in service (bonus depreciation).   

If, instead of being purchased, the website design is “developed” (designed in-house by the individual or company launching the website or designed by an independent contractor who is not at risk should the software not perform), the individual or company launching the website can choose among alternative treatments, including, but not limited to, “currently deducting” the costs or amortizing the costs under the three-year rule, discussed above, for a “purchased” design.

Website design costs that aren't costs of “software” are deductible in accordance with useful life. The time for deducting website design costs that are costs of portions of the design that aren't “software” depends on the expected “useful life” of these non-software portions of the design. Thus, these costs must be amortized over the number of years that it is expected that the non-software portions of the design will be used in the business.

The deductibility of some website costs that are business start-up costs is limited. Where website costs that would otherwise be currently deductible are paid or accrued before a business begins, the costs are deductible only upon the termination or disposition of the business, unless the individual or company launching the website elects to amortize these costs over a period of 60 months or more beginning with the actual start of the business.

If you are considering launching a business website, I will be pleased to discuss this with you further, and help you implement the above planning steps or others that will help you manage the tax treatment of your website costs.  Please contact Andrew D. Ross, CPA of Bedard, Kurowicki & Co., CPA's, PC (908) 782-7900 x 113, adr@bkc-cpa.com, or visit www.bkc-cpa.com.