Deducting Business Website Costs

Aug 13, 2014

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, including how the website was created and whether the website was part of the company’s “start-up” costs.

 Software 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 performance of the software, the deduction for the design costs must be spread over a three-year period. 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 more flexibility. 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).

Other costs. Website design 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.

Start-up costs. Website costs incurred before a 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 ratably 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.

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