Websites have become such an important part in a company’s ongoing marketing platform. From Mom and Pop blogs that bring in significant revenue by themselves, to Mom and Pop blogs that only point to the official business website, internet properties are as meaningful to a company as they need to be.
But how to handle the tax issues of web properties? Oddly, as of this writing, the IRS has yet to fully address the issue of website deductibility. The internet has been around for 20-something years now? Anyway, we will discuss a few issues that are settled in this post.
The first determination to be made is the question of the purpose of the company website. Does the website have a business purpose? Is the primary purpose of the website to advertise your business? If the answer to both these questions is yes, then go ahead and take an advertising expense in the current year. Sole Proprietors deduct the expense on line 8 Part II on Schedule C in the year of purchase. S Corps deduct the amount on line 16 on their 1120S, and Partnerships take the deduction as an “other deduction” on their 1065.
Website Costs As Startup Costs
Still assuming that your web property is business-related, you will be able to deduct website costs on your business tax return, that are incurred before the business actually begins. For these startup costs, the IRS typically allows a $5,000 deduction in the first year of business, and the remainder to be amortized (incrementally expensed) over the useful life of the website asset. This deduction/amortization method is the default method of handling the deduction for startup costs.
WordPress powers almost 27 percent of the entire internet. (Source: torquemag.io). SmarterSource.org is built on WordPress.
Website Costs Not As Startup Costs
This is where the issue gets trickier, and less certain as defined by the IRS. As for now, we look at many website costs in the same way that we look at software costs. If a company expends web costs from an outside source that are not startup costs, then the cost of the website may be treated as software. And in that case, the development costs can be expensed currently (in the year of purchase) unless the costs are more than $25,000 in that year. In that case, the costs should be amortized over a three-year period.
If, on the other hand, the company expends cash or creates debt to create its own website in-house, there are two possibilities for the company in terms of how to handle on its tax return. The company may expense in the year of payment or accrual, or the company may treat as software and deduct the cost over three years, as if purchased from another company.
Many websites built could easily and simply be classified as advertising expenditures. And if so, they may be deducted in the year of purchase. Other website costs that are not necessarily advertising related (e.g. shopping cart creation or complicated graphic design), may be incurred in house. Those costs may also be deducted in the year of purchase. And costs paid to an outside source that are less than $25,000 may also be expensed in the year of purchase. Startup costs, and costs incurred for non-advertising purposes that are paid to an outside web builder will need to be amortized over time – three years for purchases that are not considered startup costs, and 5 to 15 years for startup costs.