When it comes to website costs, some are simply treated as normal business expenses and are deductible when paid. This includes format changes, content updates, and minor additions to the website. On the other hand, costs associated with internally developed software must be capitalized and depreciated over 36 months. Website design costs not considered software costs must be amortized over the number of years in which non-software parts of the design are expected to be used in the business.
If these non-software parts of the design are expected to have a lifespan of no more than one year, the costs can currently be deducted. If the person or company that launches the website purchases the design from a contractor who is at financial risk if the software doesn't work, that person or company amortizes the design costs during the three-year period beginning with the month in which the website service is published. If your website is primarily for advertising, you can currently also deduct the website's internal software development costs as ordinary and necessary business expenses. When website costs that would otherwise be deductible are currently paid or accrued before a business activity begins, the costs are only deductible upon termination or disposal of the business, unless the person or company that launches the website chooses to amortize these costs for a period of 60 months or more, starting with the real start of the company.
The IRS hasn't yet issued formal guidance on when the costs of commercial websites are deductible. Fortunately, there are established rules that generally apply and allow for cost deduction for federal income tax purposes. If you opt for the position that your website is primarily advertising, you can currently deduct the website's internal software development costs as an ordinary and necessary business expense. The appropriate fiscal treatment of website development costs can be supported by detailed and descriptive cost allocations, both in contracts and in internal records.
It is important to understand how to properly treat website costs for tax purposes in order to take advantage of cost-effective tax treatment. By planning and incurring website development costs according to established rules and IRS guidance, businesses can ensure they are taking full advantage of their deductions.