These days, most businesses have websites. But surprisingly, the IRS isn’t issuing any formal guidance deducting website costs.
Fortunately, established rules that generally apply to the deductibility of business costs provide business taxpayers launching a website with some guidance as to the proper treatment of the costs. Plus, businesses can turn to IRS guidance that applies to software costs.
Let’s start with the hardware you may need to operate a website. The costs fall under the standard rules for depreciable equipment. Specifically, once these assets are operating, you can deduct 100% of the cost in the first year of placement in service (before 2023). This favorable treatment is allowable under the 100% first-year bonus depreciation break. Note: The bonus depreciation rate will begin phasing down for property in service after calendar year 2022.
In later years, you can probably deduct 100% of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. However, Sec. 179 deductions are subject to several limitations.
For tax years beginning in 2022, the maximum Sec. 179 deduction is $1.08 million, subject to a phaseout rule. Under the rule, there is a phasing out of the deduction if more than a certain amount ($2.7 million for 2022) of qualifying property is placed in service during the year.
There’s also a taxable income limit. Under it, your Sec. 179 deduction can’t exceed your business taxable income. In other words, Sec. 179 deductions can’t create or increase an overall tax loss. However, any Sec. 179 deduction amount that you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable limits).
Similar rules apply to purchased off-the-shelf software. However, treatment of software license fees are different from the software costs purchases for tax purposes. Payments for leased or licensed software used for your website are currently deductible as ordinary and necessary business expenses.
If, rather than purchasing a website, its design and development is in-house by the taxpayer launching the website. Or, the completion of the website is by a contractor who isn’t at risk if the software doesn’t perform. Both of these scenarios are for tax years beginning before calendar year 2022, and the bonus depreciation applies to the extent described above. If bonus depreciation doesn’t apply, the taxpayer can either:
For tax years beginning after calendar year 2021, generally the only allowable treatment will be to amortize the costs over the five-year period. This is beginning with the midpoint of the tax year in which the expenditures are paid or incurred.
If your website is primarily for advertising, you can currently deduct internal website software development costs as ordinary and necessary business expenses.
Some companies hire third parties to set up and run their websites. In general, payments to third parties are currently ordinary and necessary tax deductible website costs.
Start-up business expenses can include website development costs. Incurring up to $5,000 of otherwise deductible expenses before your business commences are generally be deductible in the year business commences. However, if your exceeding $50,000 of your start-up expenses, the $5,000 current deduction limit starts to decrease. Above this amount, you must capitalize some, or all, of your start-up expenses and amortize them over 60 months, starting with the month that business commences.
We can determine the appropriate treatment of business website costs. Contact us if you want more information.