Deducting the cost of computer software

Your Guide to State, Local, Federal, Estate + International Taxation

computer software, deduction, taxDid you know that if you have purchased or developed computer software for your business you may be able to write off the software expenses you incurred?

Generally, you must amortize the purchase cost of computer software over a period of three years, beginning from the month in which you placed the software into service. If the software is acquired together with the computer equipment, then you should depreciate the cost of the software over the useful life of the computer (separately stated computer hardware costs are depreciated as five-year). However, if you create or purchase software with the purchase of a trade or a business, you must amortize that software over a 15-year period. (I’m sure all of this is clear as mud to you, right?)

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. Thus, qualifying expenditures may be

  • Deducted as a current expense, or
  • Capitalized and amortized using the straight-line method over a period of 36 months beginning in the month that the software is placed in service or over 60 months from the date of completion of development if a Code Sec. 174(b) election is made.

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.

The gist of what I would like you to take away from this is that there are many, different ways computer software can be deducted on your business return, depending on the situation. Make sure you communicate with your accountant so that they can have the best picture possible to ensure you are getting the most deduction possible.

Meghan M. Scott, EA