In today’s world, most businesses will develop a website and the costs involved can vary greatly depending on the complexity of the site. Website development can be complex and understanding the appropriate tax treatment of the costs can be similarly complex. Do website development costs fall under the “intangible” category of tax section 197 to be amortized over 15 years, or should the expense be deducted immediately as an advertising expense? Is there another way to account for the expense? While there has been massive growth in website development costs over the past few years, the IRS has not issued formal guidance to answer these questions.
Since a website is continuously changed and updated, a 15-year life seems out of line. In several internal publications, the IRS takes the position that a website should be primarily viewed as an item of software amortizable over a 36-months period. Additionally their audit manual acknowledges that some content costs are appropriately deducted currently as an advertising expense.
There are a host of component costs associated with a company’s website including: planning, construction, content and maintenance. Each of these component costs should be analyzed to determine the best potential tax treatment. While planning and construction would generally fall under the 36-months rule, content and maintenance might be deductible in the current period. Some prior elections by the company may even require certain treatment that would not necessarily apply to other companies.
If you would like help with understanding the tax treatment of your website costs, please reach out to your tax consultant at MKS&H.
Article Provided By Anca Stradley, Senior Accountant
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by advising them regarding their financial, technology and human capital management needs. Please visit www.MKSH.com for more information.