IRS sticking it to small business once again – Websites must be capitalized

If you have a business, odds are you also have a website. They aren’t free. You probably had a number of costs associated with the development, design, programming, start-up, and maintenance of the site and you would like to recoup some of those costs when you file your taxes this year. Which expenses are deductible can be tricky…Be careful.

Let’s start with domains. A domain name acquired from a secondary market is considered a capital asset; it is not deductible. The domain name is considered an intangible asset which must be capitalized and amortized over time. You are required to capitalize the costs regardless of whether the domain name is generic or non-generic. According to a recent IRS decision, it does not seem to matter how the domain will be used, but the rule applies to any new domain purchased to increase market share or generate advertising revenue.

Costs related to your website will be treated differently. If a third party is “creating” a new website for you, the associated costs will be considered the same as computer software costs. The website will be considered a capital asset and cannot be expensed or deducted immediately. They must be deducted over a period of time. If the website development and creation is done in-house rather than by a third-party, the costs may either be deducted in the year they were paid or accrued, or amortized and treated like computer software.

Maintenance, updates, and additions to a website will probably be considered just that—maintenance—so they can be deducted as normal business expenses. Even here you have to be careful. Updating content, formats, minor corrections, etc. are considered maintenance. Costs related to major revamping, including new features, pages, and reader access capabilities would require that the costs be capitalized.

Confused? Contact Esquire Group to help you muddle through the internet tax maze.

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