Tax Treatment of Website Costs
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When building a new website, most focus on selecting a site framework that offers the most features and flexibility. The easier it is for the marketing team to add content, make changes, and administer the site, the better it is for the organization. At the same time, attention needs to be given to the overall design to ensure branding guidelines are followed and messaging is on point. Websites used to be an online brochure about a business, but those days are long gone. To be competitive, it’s essential to have an information-rich website that builds trust, establishes credibility, and encourages potential customers to reach out to the company. In other words, it’s about generating new business for your organization.
As technology has become more robust and automated, companies are able to build a site with virtually any feature imaginable active on the site. Of course, this comes at a cost and one that should be carefully weighed when considering overall project costs. Whatever site design, functionality, and features a site needs, it’s important to understand the tax treatment of website development costs and how they can be managed. Since the IRS has not released specific guidance on website costs, the answers to these questions can be gleaned from other guidance.
Most websites will have a hardware component in the development and ongoing functionality of the site. Assuming the company owns the servers and other hardware needed to manage the site, then there is an opportunity to depreciate the cost of the asset. The good news is once the server is purchased, configured and online, the company can deduct 100% of the asset cost in the year it’s placed in service (before 2023).
If the asset is placed into service after 2023, there is still an opportunity to realize some tax savings through the Section 179d deduction. Unfortunately, there are several limitations when attempting to capture a 179d deduction, but this should not discourage businesses. One such limitation is the requirement that the deduction can’t exceed the businesses’ taxable income for the year. In other words, a 179d deduction can not be used to create or increase a tax loss.
In most cases, a company will be required to purchase some off-the-shelf software to make it easier for the development team to create/implement special functionality. While this makes the development process move more quickly, it does add an extra expense. The good news is any payments for leased or licensed website software are deductible as an ordinary business expense.
Internally Developed Software
If the company’s website is focused on advertising, there are various options which can be pursued in the treatment of expenses. The first is to deduct the related costs as part of ordinary business expenses. If the software is complex and meets the qualifying criterion for the Research & Development (R&D) tax credit, it’s possible an additional savings opportunity may be waiting. The determination on whether the R&D tax credit is appropriate should be made by a JLK Rosenberger team member.
It’s common to retain an agency to maintain a company’s website, make small design changes, and ensure its security features are up to date. The last thing a company needs is a website that has security issues or has been compromised. The good news is these expenses are also deductible as an ordinary business expense.
While the website is a window into the world of your business, it’s important to understand the tax treatment of the related development, design, and implementation expenses. If you have questions about how to manage website costs, JLK Rosenberger can help! For additional information please call us at 949-860-9889 or click here to contact us. We look forward to speaking with you soon.