When launching a website, it is important to consider the most cost-effective tax treatment. You can choose to deduct the full cost of the website in the year it was paid or accrued, or you can opt to amortize your deductions over three years. A more conservative approach would be to capitalize on the costs of internally developed software and depreciate them for 36 months according to Sec. 197 of the Internal Revenue Code.
If you choose to amortize your website costs, you must do so for a period of 60 months or more beginning from the real start of the company. If your website is primarily used for advertising, you can deduct the internal software development costs as an ordinary and necessary business expense. However, if you dispose of a qualifying timber property within 10 years after incurring qualifying reforestation expenses, any profits must be reported as ordinary income until the amortization is earned. The cost of a pollution control facility that is not eligible for amortization may be depreciated under regular depreciation rules.
If you purchase an intangible asset in a transaction whose primary purpose was any of the following, it cannot be amortized as a section 197 intangible. Your amortization deduction for each year is calculated by amortizing it on a taxable basis over 15 years (180 months). The choice to amortize or capitalize on initial or organizational costs is irrevocable and applies to all initial and organizational costs related to commercial or business activity. Usually, the costs incurred for developing, creating, designing, and programming a website will be treated as a capital asset, meaning that they cannot be spent or deducted immediately.
The employee's travel expenses incurred while performing their duties in the development of the website are also eligible for deduction. The initial amortizable costs for the purchase of an active operation or business include only the research costs incurred in the course of a general search or a preliminary investigation of the company.By planning and incurring website development costs, you can take advantage of the most cost-effective tax treatment available. You can choose to amortize your initial costs by filing a return for any tax year prior to the year in which you started business. The costs of creating a website will be treated much like that of computer software if a company uses a third party to develop, design, program and create the website.
You recover costs by depreciating, amortizing, or costing the goods sold when you use, sell, or otherwise dispose of the property.