I am a website designer, not an accountant. However, I regularly get asked about what costs are deductible and what isn’t. Are design and development costs deductible? Is hosting? What about purchasing graphic design or content writing services? How about advertising?
My answers are always to check with a tax professional. That advice will not change. However, I wanted to have a set list of answers that I could direct people to so they could be more prepared for those conversations with qualified tax preparers. To that end I consulted with several accounting experts from around the country. Here are their responses:
Peter Pappas, Attorney and CPA, Managing Partner Pappas & Associates, P.A.
Costs for designing your businesses website and maintaining it are ordinary and necessary business expenses and, therefore, tax deductible.
ALL costs associate with the business website are deductible. Hosting, graphic design costs, content writing, advertising.
Remember, the standard is “ordinary and necessary.” Clearly, website presence is ordinary and necessary.
James Sutton, CPA, Esq. Founding Shareholder at Windship Homes of Florida, Inc.
Most of the previous answers are very right that “ordinary and necessary” expenses are generally tax deductible. This is the typical excuse for deducting anything a business owner wants. However, ordinary and necessary business expenses that purchase or create tangible or intangible assets may be required to be treated as an asset and depreciated or amortized over the assets useful life. Everyone wants to deduct every dollar they spend right now. But not every dollar is deductible – and a smart business owner knows this. Speaking of which, you apparently have savvy, business minded clients exploring the issue of whether your services are, e.g. advertising, which is usually tax deductible, or, e.g. the creation of a web site asset/software, which may be required to be capitalized and amortized over as much as 15 years.
Purchasing a graphic design is probably the most clear cut answer of capital expenditure. But if the useful life of that graphic is going to be less than a year anyway, then it is tax deductible that year under the IRS’s 12 month safe harbor rules.
If the web page is the creation of a business, then it might be treated as a “start up cost” that is technically a capital asset, but you can make an affirmative election on the business’s first return to deduct what a believe is currently $5,000 of start up costs.
Content writings services hint at capital expenditures to me also, but I’d have to know more about them to give a more clear answer.
Then, to compound the complexity, even if your client follows all the rules and correctly capitalizes the intangible assets from part of your services, then then we run into the fact that the IRS also allows the deduction of a large amount of captial expenditure for business each year under section 179 (up to $125,000 in 2007). So these types of expenditures may be availabe to be deducted anyway under Section 179 if the expenditure is one of those available under Sec. 179 and a deduction is taken on the return.
Aron Sotnikoff, CFE, CPA, Audit Supervisor at Rosen Seymour Shapss Martin & Company LLP
The real answer to whether website development costs (in part or in total) are deductible in the year incurred or must be capitalized and amortized over a longer period is…nobody knows. The IRS has never issued formal guidance and there is divergent practice among tax professionals.
The approaches taken, from most common to least, are:
1) Capitalize and amortize over 3 years (similar to software): this is the position taken by the IRS in its unofficial Industry Specialization Program (ISP) publication.
2) Deduct the entire cost as advertising expense: a taxpayer won against the IRS in court for this position, but his case was unique in that he abandoned the site development in the middle and the site was never finished; there has been much speculation that had he finished, the decision would have gone against him.
3) Capitalize and amortize in part, deduct currently in part: some people break the site development into component parts (planning, construction, content, and maintenance) and treat each component differently; using my examples, planning and construction would most likely be amortized over 3 years similar to software, while content and maintenance would be deducted currently (again, no official guidance, so these treatments are debatable).
4) Capitalize as an intangible and amortize over 15 years: this is a highly controversial position, especially given the dynamic content in today’s websites; this treatment asserts that a website is no different than a patent or trademark, which sits unchanged over its legal life and provides benefit for that period of time. Of course, websites change all the time, often quite substantially, so it’s hard to say that it has the static character of a true intangible asset. I would not recommend this treatment.
As James said, even if the website has to be capitalized, section 179 allows a current year deduction for a substantial amount of these costs, effectively negating the need to amortize. Most small business websites should cost less than the threshold amount, so bottom line, the costs will be currently deductible in almost all cases (with some important exceptions, for instance, if the business also bought lots of expensive equipment or furniture in the same year).