Tax Treatment of Business Website Expenses

In today’s digital age, most businesses maintain a website, yet the IRS has not provided specific guidance on how these costs should be deducted. However, established rules regarding the deductibility of business expenses offer some clarity, and guidance on software costs can also be applied. Below are key considerations for handling website-related expenses.

Tax Differences Between Hardware and Software

The hardware required to operate a website follows standard depreciation rules for business equipment. For 2024, you can deduct 60% of the cost in the first year the assets are placed in service, thanks to the first-year bonus depreciation allowance. It’s important to note that this bonus depreciation rate will continue to decrease annually, phasing out completely by 2027 unless extended by Congress.

Alternatively, businesses may elect to use the Section 179 deduction, allowing for the immediate expensing of up to $1.22 million in 2024. However, this deduction is subject to a phaseout if more than $3.05 million of qualifying property is placed in service during the year. Additionally, the deduction cannot exceed the taxable income of the business, though any disallowed amounts can be carried forward to future years.

Similar rules apply to purchased off-the-shelf software. However, software license fees are generally treated as ordinary business expenses and are currently deductible.

Internal vs. External Website Development

If your website is developed internally, either by your own team or by a contractor without risk in the software’s performance, the same bonus depreciation rules apply. If bonus depreciation doesn’t apply, you have the option to either deduct development costs in the year they’re incurred or amortize them over a period, typically five years.

If the website primarily serves advertising purposes, internal development costs can be deducted as ordinary and necessary business expenses.

For websites developed by third parties, payments are generally deductible as ordinary and necessary business expenses in the year they are made.

Pre-Business Start-Up Expenses

Website development costs incurred before your business officially begins operations can be categorized as start-up expenses. Up to $5,000 of these expenses can be deducted in the year your business commences. However, if start-up expenses exceed $50,000, the current deduction limit begins to phase out, and any remaining expenses must be amortized over 60 months starting from the month the business begins.

Need Assistance?

Determining the proper tax treatment of website expenses can be complex. Contact us for assistance in ensuring your business handles these costs appropriately.