Businesses often set up websites to sell their products and attract new customers. The proper method for deducting website development costs depends on several factors. Such factors are how the website was created and whether the website was part of the company’s “start-up” costs.
Website designs produced with sophisticated programming languages generally can qualify as software. The IRS has safe harbor rules for deducting software costs. These rules distinguish between software produced by independent contractors and software produced by in-house employees.
Generally, if the design was “purchased” from an outside contractor who remains at economic risk for the performance of the software, the deduction for the design costs must be spread over a three-year period. It may also qualify for the section 179 deduction and the special depreciation allowance. However, if the website design is “developed” in-house — or by an independent contractor who does not remain at risk for performance — the company has several options. One option available in this situation is to deduct the costs in the year they are either paid or accrued (depending on the company’s accounting method).
Website development costs that don’t qualify as software are deducted over their expected useful life. The costs of producing website content that is “advertising” are generally deductible in the year paid or accrued.
Website development costs you incurred before your business begins may be considered start-up costs. A business may elect to deduct up to $5,000 of start-up costs in the year the business begins operations and deduct the remaining costs over 180 months. (The $5,000 deduction is reduced where total start-up expenses exceed $50,000.) Alternatively, a business may capitalize its start-up costs.
You can find additional information on the IRS website.
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