This is a guest post by Shauna Wortinger, an experienced Certified Public Accountant who specializes in small and growing businesses. Visit her website by clicking here.
With the explosion of online businesses, one would think that there would be a standard method of deducting the cost of your business website. But some questions still exist as to what part of a website is considered software, and to date, the IRS has not fully clarified that issue for tax purposes. In general, most all design and development costs of website creation can be deducted 100% in the year of purchase.
Depending on your business structure and income tax bracket, the cost involved in designing a website can provide a tax deduction of 10% - 40% of your costs. So, if your tax bracket is 30% and you spend $1,000 on website development you save $300 in taxes so the true out of pocket cost is $700 for the website work. When you consider the costs and the added benefit of improving your presence on the web, the costs should pay for itself in new clients and retention of current clients.
Below is more detail of the tax treatment of website expenses:
If the website is purchased from a contractor who is at economic risk should the software not perform, the design costs are amortized (ratably deducted) over the 3-year period, beginning with the month in which the website is placed in service. For 2014, non-customized computer software placed in service during the year can be expensed as Sec 179 property up to the $25,000 limit of this special expense deduction. So, basically if the purchase price of the website and all other equipment purchases is under $25,000 you get to expense 100% of the cost in the year of purchase. (The Sec 179 has been $500,000 in the past, so the $25,000 limit could be changed by the government before the end of the year.)
Websites Developed "In-House"
If, instead of being purchased, the website design is “developed” by the company or designed by an independent contractor who is not at risk should the software not perform, the company launching the website can choose among alternative treatments, one of which is deducting the costs in the year that the costs are paid or accrued, depending on the taxpayer's overall accounting method. Or, as an alternative, the costs may be amortized under the 3-year rule.
Some website design costs, such as graphics, may not be classified as software and must be deducted over the useful life of the element. Non-software portions of the design with a useful life of no more than a year are currently deductible.
Advertising costs are currently generally deductible. Thus, the costs of website content that is advertising are generally deductible in the year paid or accrued, depending on the business’ accounting method.
Cost Before Business Starts
Business expenses that are incurred or accrued prior to the actual activation of the business are generally not deductible until the business is terminated or sold. However, a taxpayer can elect to deduct up to $5,000 of the costs in the year that the business starts and amortize the costs in excess of $5,000 over a period of 180 months (15 years), beginning with the month that the business starts.
I personally have found the ‘out-of-pocket’ cost of website development has paid for itself in a few months in new business and providing service to my current clients. A website is like an online storefront and the professional look is enticing to the public just like a retail storefront in a nice part of town. That ‘aha’ moment that people get in the first impression coming to your website is just like the ‘aha’ feeling you get walking into a nice store. Investment of money is necessary to appeal to new and existing customers. Calculating the cost of website development should include the tax deductions and the increased revenue to your business.
If you have additional questions about deducting the cost of a website design on your taxes, consult an experienced tax advisor. For more small business tax advice, be sure to stop by Shauna Wortinger's website. If you're looking to refresh your website, be sure to browse our cost-effective website design services and send us a note, we're here to help.