The business use of websites by 2015 is obviously widespread, and officially the IRS has not yet issued formal guidance on when Internet website costs can be deducted BUT, fortunately, some rules are indeed established 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 on how to deal…
Here are the highlights:
Expenses incurred “in-house” or by “3rd party” before business begins.
If you haven’t made any money yet (sales) and you are still in the “Start-up” mode, any website costs will be considered a Start-up Cost. As such, you the taxpayer must elect to (1) deduct up to $5,000 of the costs in the year that the business starts and (2) amortize any of the excess costs over a period of 5 years beginning with the month that the business starts. If the special election isn’t made, then the expenses are only deductible only upon the termination or disposition of the business. Bottom line, these website costs would otherwise be currently deductible unless paid for or accrued before a business begins.
3rd Party delivery of website and the Website is considered software.
Generally, the portions of the website’s design that are produced from sophisticated programming languages will qualify as “software.” Thus, 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 website not perform), the design costs are amortized (ratably deducted) by that individual or company over the three-year period beginning with the month in which the website is placed in service.
3rd Party delivery of website and considered an asset like equipment.
If the website doesn’t have complex programming, the costs to develop and launch the website, will be considered an asset. As such, the website qualifies as “section 179 property,” and is thus eligible for the Code Section 179 elective expensing deduction that is generally available only for machinery and equipment. Although, the 179 Deduction was extended in 2014 at the last minute and raised to 500k.
3rd Party delivery of website, considered an asset, and you exceed 25k in asset acquisitions in 2015.
Again, if the design costs that aren’t “software” are deductible as an asset, but then you have exceeded your 179 deduction, you will need to deduct the website costs in accordance with useful life. 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. This would typically be over a 3-year period to be safe and avoid any argument as to what is portions of the website are considered “complex software”. However, if it’s clear that the website doesn’t have any sophisticated programming, and it’s expected that the website will have a useful life of no more than a year (before you have to re-design), then the costs can be currently deducted.
In-house website development.
If, instead of being purchased, the website design is “developed” and designed in-house by the individual or company launching the website, the taxpayer can choose among alternative treatments, including, but not limited to, 1) “currently deducting” the costs in the year that the costs are paid, or accrued, depending on the taxpayer’s overall accounting method, or 2) or amortizing the costs under the three-year rule, discussed above, for a “purchased” design.
Website content that is advertising is generally currently deductible; the treatment of other content costs will vary. Advertising costs are, generally, currently deductible. Thus, the costs of website content that is advertising are, generally, currently deductible. Website content that isn’t advertising will be currently deductible, or amortized over a multi-tax year period, depending on its useful life.
The above principles, and others that effect the deductibility of website costs, suggest ways in which the individual or company launching the website can “take charge” of the treatment of website costs. For instance, an individual or company who contracts for a website design that qualifies as software, and who seeks the favorable tax treatment that applies to the costs of “developed” software, can, if acceptable as a business matter, include, in its written agreement with the developer/contractor, terms that will put the risk that the software won’t perform on the individual or company. Another example of a way to manage the tax treatment of website costs is detailed, descriptive allocations of costs, both in contracts and in internal records.
In recap here is the long story short…
- If you have complex programming on the website, the costs attributed to those portions of the website will need to be amortized or deducted over 3 years.
- If you don’t exceed 25k in asset acquisitions in other areas of your business, simply 179 the costs and write them off in one fail swoop as an asset acquisition expense.
- I like the ‘advertising’ write-off strategy. If your site is primarily a ‘landing page’ advertising or online business brochure of your product / services, and there isn’t a shopping cart of complex programming, simply write it off as an Advertising Expense.