- Purchased websites can be amortized over the course of 3 years or expensed under Sec 179.
- In-house developed websites can be expensed or amortized over the course of 3 years.
- Non-software costs, such as graphics, must be amortized during their useful lives.
- Advertising content can be expensed.
- Costs incurred prior to business start-up can be expensed up to $5,000, if elected, and any excess must be amortized over the course of 180 months.
With the explosion of online businesses, one would think that there would be a standard method of deducting the cost of your business website. But some questions still exist as to what part of a website is considered software, and to date, the IRS has not fully clarified that issue for tax purposes.
Purchased Websites – If the website is purchased from a contractor who is at economic risk should the software not perform, the design costs are amortized (ratably deducted) over the 3-year period, beginning with the month in which the website is placed in service. For 2013, non-customized computer software placed in service during the year can be expensed as Sec 179 property up to the $500,000 limit of this special expense deduction.
In-House Developed Websites – If, instead of being purchased, the website design is “developed” by the company or designed by an independent contractor who is not at risk should the software not perform, the company launching the website can choose among alternative treatments, one of which is deducting the costs in the year that the costs are paid or accrued, depending on the taxpayer’s overall accounting method. Or, as an alternative, the costs may be amortized under the 3-year rule.
Non-Software Expenses – Some website design costs, such as graphics, may not be classified as software and must be deducted over the useful life of the element. Non-software portions of the design with a useful life of no more than a year are currently deductible.
Advertising Content – Advertising costs are currently generally deductible. Thus, the costs of website content that is advertising are generally deductible in the year paid or accrued, depending on the business’ accounting method.
Cost Before Business Starts – Business expenses that are incurred or accrued prior to the actual activation of the business are generally not deductible until the business is terminated or sold. However, a taxpayer can elect to deduct up to $5,000 of the costs in the year that the business starts and amortize the costs in excess of $5,000 over a period of 180 months (15 years), beginning with the month that the business starts.
As you can see, deducting the expenses of a website can be complicated. Please call this office if you have questions.