Having a good website can be the difference between staying in business or failure…Having an incredible website can be the difference in making significant profits rather than just keeping the doors open.
As such, we as business owners spend a lot of money purchasing, developing, modifying and updating our websites on a regular basis.
One may think that you simply put your website costs on a line item called “website expenses”, then file your tax return and forget about… regrettably, it’s not that simple.
You may be surprised to learn that the IRS has still not yet issued formal guidance on when Internet website costs can be deducted.
Fortunately, established rules that apply to deducting 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 are a few categories your website costs may fall within and a brief discussion of some relevant principles:
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. For this year, in 2015, the 179 deduction is currently back to a maximum of 25k unless there is future legislation.
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 deductions, 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.
Take away Strategies:
- 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’ loophole. If your site is primarily a ‘landing page’ advertising your product or services, and there isn’t a shopping cart of complex programming, simply write it off as an Advertising Expense.
As you can see there are a lot of complexities when it comes to writing off website costs. If you’re going to spend big money on a business website, I would suggest you get an opinion from your accountant before thinking you can write-off all the expenses as a current deduction this year.
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the book “Lawyers are Liars- The Truth About Protecting Our Assets”, and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.