Analyzing Business Website Costs

How should the expenses incurred in launching a business website be treated for income tax purposes? Following is an overview of the federal tax rules and options that may be available.

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. Non-customized software may be deducted currently as a Section 179 expense (subject to limits) and/or deducted under the 50% bonus depreciation rules.

However, if the website design is “developed” in-house — or by an independent contractor who does not remain at risk for performance — costs may be deducted currently or amortized over a three-year period.

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 considered advertising are generally currently deductible.

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.