While the IRS has not provided much guidance on website-specific deductions, they have provided guidance for software costs. When you purchase a website from a third party who assumes responsibility for the website’s functionality, the costs are treated much like software costs and amortized (spread out) over 3 years – unless the total cost of the website and other equipment purchased is less than $25,000, in which case you can expense 100% of the cost in the year it was paid.
Conversely, if you decide to develop your website in-house, you have the choice of two different methods of deduction. You can choose to deduct the total cost of the website in the year it was paid or accrued (depending on your accounting method), or you can elect to treat your website as software and amortize your deductions over three years. For tax purposes, the distinction between in-house and outsourced rests on the responsibility for the website’s functionality.
Purchases made towards the website that is not classified as software, such as the cost of logo design, are deductible over the “useful life” of the item. The “useful life” of the item refers to the amount of time you expect the design to be used by the business.
For instance, say you hire an agency like RiotLabs to create three graphic elements for the sidebar of your business blog. If the cost of the work is $1,000, you need to estimate how long these elements will continue to be used to calculate your deductions. If you estimate it to be two years before you’ll want to redesign your blog entirely, then you would deduct that $1,000 over the course of two years ($500/year).
Note that there is a difference between non-software expenses and regular business expenses (purchasing a font license, for example); regular maintenance tasks do not need to be spread out over the useful life of the product.
The cost of website content that’s promotional in nature is deductible as an advertising expense. The IRS states that you can “deduct reasonable advertising expenses that are directly related to your business activities“ and that put your business in front of potential customers.
You can deduct 100% of your advertising expenses for tax purposes. These expenses will be for the creation of content that changes on a regular basis. For instance, you could deduct the cost of a photo shoot that will promote a new product on your site as an advertising expense. You can claim these deductions in the year the cost was paid or accrued, depending on your accounting method. On the other hand, you would not claim an expense like hosting or renewal fees as advertising content, since they fall under a regular business expense.
Regular Business Expenses
Some costs are simply treated as normal business expenses and are deductible when they are incurred. By and large, you can deduct 100% of regular business expenses for tax purposes. These costs include format changes such as fonts or colors, content updates, and minor additions to your website. An example of this expense could be the purchase of a licensed font. Keep in mind that if the changes are bigger, such as adding new pages to the site, or adding a shopping cart functionality, then these do not fall under the regular business expense category and are instead capitalized (see Software Expenses, above).
Investing in your business’s online presence not only brings in new customers but also provides significant tax breaks if you know what to keep track of and what to deduct. Understanding which common expenses qualify as deductibles might be the push you need to really invest in your business website.
This post is reproduced with thanks to Bench.co and is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.