Most businesses have a website today, but the IRS hasn’t provided clear rules on when these costs can be deducted. However, general tax rules can help guide you on how to treat these expenses. Here’s what you need to know:
Tax Differences Between Hardware and Software
Hardware Costs
To run a website, you might need hardware like servers or computers. The cost of these items can be deducted over time, according to standard tax rules. For 2024, you can deduct 60% of the cost in the first year under the “bonus depreciation” rule. The bonus depreciation rate was 100% for property placed in service in 2022 and was reduced to 80% in 2023, 60% in 2024 and it will continue to decrease until it’s fully phased out in 2027 (unless Congress acts to extend or increase it).
Software Costs
If you buy software to operate your website, you might be able to deduct these costs right away, like regular business expenses. However, if the software is leased or licensed, the payments are deductible as ongoing business expenses.
What if You Develop the Website Yourself?
If you design the website in-house (or through a contractor without risk if the software doesn’t perform), you can still apply the bonus depreciation rules mentioned above. If not, you have options:
- Deduct the development costs in the year they’re paid.
- Choose one of several alternative amortization periods over which to deduct the costs, meaning you spread the deduction over time.
Generally, the only allowable treatment will be to amortize the costs over the five-year period beginning with the midpoint of the tax year in which the expenditures are paid or incurred.
If your website is primarily for advertising, you can currently deduct internal website software development costs as ordinary and necessary business expenses.
Hiring a Third Party
If you hire an outside company to build or manage your website, the payments to them are usually deductible as regular business expenses.
Expenses Before Your Business Starts
If you incur website development costs before your business officially starts, you can generally deduct up to $5,000 of those expenses in the year your business begins. However, if your start-up costs exceed $50,000, the $5,000 limit starts to decrease, and you may need to spread out the deductions over several years.
Need Help?
Determining the right way to deduct website costs can be tricky. We’re here to help! Contact us if you need more information.