ax Accounting for Website Development, Construction, and Maintenance Costs
Today, websites are an essential tool for businesses to be successful and competitive. Even brick and mortar businesses are experiencing a shift to online sales or seeing greater benefit from online promotion strategies. As such, the question of whether they're tax deductible becomes important, which requires a closer look at costs and how they are treated in the eyes of the IRS.
So, what costs are associated with websites? The typical costs incurred for websites include the costs for developing, creating, designing, and programming the website whether you do it yourself or pay someone else for the services. Other costs associated with websites are costs for obtaining a domain name and maintaining, updating, or adding to the website.
As with most tax questions, the answer to how the costs are treated is “it depends.” The treatment depends on what types of costs are incurred. Typically, costs incurred for the development, creation, design, and programming of a website will be treated as a capital asset, which means that they cannot be expensed or deducted immediately. Rather, they must be deducted over a period of time. In contrast, the cost of acquiring a domain name, while considered a capital asset, is not deductible and cannot be depreciated over a period of time.
Although the IRS hasn’t issued any real guidance when it comes to website costs specifically, the IRS has provided guidance for software costs. The costs of creating a website will be treated much like computer software if a business looks to a third party to develop, design, program, and create the website. There are some variations to this rule if the website is developed and created in-house. If done in-house, then the costs may either be deducted in the year the costs are paid or accrued depending on accounting method used or amortized and treated like computer software.
Maintenance, updating, and costs for adding to a website are treated as normal business expenses and are deductible when incurred if these costs are truly maintenance-type costs. Typical maintenance-type costs would include costs to update content, add contacts, and correct minor errors or minor style and formatting changes consisting of font sizes, types, and colors. If, however, the costs incurred are to upgrade the website to add new features such as adding pages to the website, adding sales capability, or adding payment capability, then these costs will be capitalized.
It is also necessary to look at the cost of the content on the website. Some costs may be currently deductible if they are considered advertising-type costs.
If the costs are for the development, creation, and design of the website, then the costs are treated like software costs and are amortized over a 3-year period starting in the month the website is placed in service for use. Section 179 depreciation is allowed for software expenditures which would allow for an immediate deduction of up to $500,000 on up to $2,000,000 of capital expenditures in 2013. If a company is not eligible to take Section 179 in the current year, then these costs would be eligible for a 50% bonus depreciation. Please note that Section 179 and bonus depreciation amounts decrease significantly in 2014.
Costs incurred for the design of a website that are not related to software-type costs are deductible over the useful life of the expenditure, i.e., the number of years it is expected that the non-software portion of the design will be used in the business. Whether costs should be treated as a start-up cost is another factor to keep in mind when determining when to deduct or amortize. If the website costs were incurred before the business or trade actually commenced, there are special rules for these start-up costs.
As with any tax question, you should consult with your tax advisor and provide all pertinent facts and circumstances so that the correct treatment can be determined.
Please be advised that, based on current IRS rules and standards, the advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS should assess related to this matter.
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