DEDUCTING WEBSITE EXPENSES
If you’re having trouble deciding how to categorize your company’s website costs for tax purposes, you’re not alone. The IRS hasn’t given official guidance on deducting website expenses yet, so you can apply the guidance they currently have on other business costs to your website.
The hardware that you need to create and maintain a website falls under depreciable equipment. If these assets are placed in service before 2023, you can deduct 100% of the first year’s costs. For later years, under Section 179 you may be able to deduct the total cost in the initial year your assets were placed in service. Section 179 is subject to limitations that can determine how much in deductions you will be able to claim.
Beginning with the 2019 tax year, the maximum deduction is $1.02 million. This amount is subject to a phase out rule with the threshold of $2.55 million. Your deduction also can’t be greater than your business’ taxable income. If you have a Section 179 deduction that you can’t deduct right away, that amount can be carried forward and deducted in applicable later years.
If you purchased software off the shelves, similar rules to hardware apply. The major difference is that the license fees are treated differently if you purchase or lease the software. These costs are currently categorized as necessary and ordinary business expenses and can be deductible as such.
Software Developed Internally
You can also deduct internal software development costs for your website as necessary and ordinary business expenses if your website is used for advertising. If your expenses represent deductible research and development costs, you must incur the costs by December 31, 2022 in order to qualify as deductible. You can capitalize on the cost of your internally developed software and depreciate them over 36 months.
Payments to Third Parties
If a third party has created and runs your company’s website, payments to the third party are also currently deductible as necessary and ordinary business expenses.
Website costs can be included in start-up expenses. Within the year that your business begins, you can deduct up to $5,000 of expenses unless they exceed $50,000. At that point, the $5,000 deduction starts to reduce. If your start-up costs are more than $50,000, you must capitalize a certain amount and amortize them over 60 months once business begins.
Properly deciding how to treat these expenses can be tricky. Contact us for help on how to categorize these deductions or if you have any questions.