September 13, 2024
If you have purchased or developed computer software for your business, here is a quick review of how you may be able to write off the software expenses on your business.
Definition
For tax purposes, computer software is defined as a program designed to cause a computer to perform a desired function. Computer software includes programs of all classes in all forms and media and the documentation required to describe and maintain the programs.
Purchased Software
Acquired software is amortized using the straight-line method over 3 years beginning on the first day of the month it is placed in service. "Off-the-shelf" software may qualify for section 179 deduction, allowing you to write off the full cost in the year of purchase.
If the software is acquired together with the computer equipment, then you should depreciate the cost of the software over the same useful life as the computer (separately stated computer hardware costs are depreciated as 5-year).
However, if you purchase software with the acquisition of a trade of a business, you must amortize that software over a 15-year period under “section 197 intangibles”.
Developed Computer Software
For taxpayers that create their own computer software, the cost of developing software may be treated in a manner similar to research and development expenses.
All software development costs are included in the definition of research and experimental expenditures under section 174(b), effective for amounts paid or incurred in tax years beginning January 1st, 2022. All research and experimental expenditures must be amortized over 60 months for cost incurred in the United state, cost incurred out of the U.S.A. must be amortized over a 15-year period. For more details on Research and Experimental Expenses, please refer to our June 2023 newsletter article titled “Research and Experimental Expenses.”
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