With most businesses having a website today, it’s important to understand how these costs are treated for tax purposes. While the IRS hasn’t issued specific guidance on website expenses, there are general tax rules that can help guide the treatment of these costs, including considerations for software and hardware expenses.
Tax Treatment of Hardware
Website-related hardware, like servers, falls under the standard rules for depreciable equipment. For 2024, businesses can deduct 60% of the cost in the first year, thanks to bonus depreciation. This rate is set to decrease gradually until it phases out in 2027 (unless extended by Congress).
Alternatively, you may qualify for a Section 179 deduction, which allows you to deduct the full cost of the equipment in the year it’s placed in service, subject to certain limits. For 2024, the maximum Section 179 deduction is $1.22 million, but it phases out if more than $3.05 million of qualified property is placed in service.
Tax Treatment of Software
Purchased off-the-shelf software for your website is generally deductible under Section 179, similar to hardware, but software license fees are treated differently. Payments for leased or licensed software are currently deductible as ordinary business expenses.
For internally developed software, such as if you design your website in-house, bonus depreciation may apply. If not, you can either deduct the development costs immediately or amortize them over a five-year period, starting with the midpoint of the year the costs were incurred. If the website is primarily for advertising, these costs are deductible as ordinary business expenses.
Third-Party Website Services
If your business hires a third party to set up or maintain your website, those payments are typically deductible as ordinary and necessary business expenses.
Start-Up Expenses
Website development costs incurred before your business starts can qualify as start-up expenses. Up to $5,000 of such costs can be deducted in the year your business begins operations. However, if your total start-up expenses exceed $50,000, the $5,000 deduction limit is reduced, and the excess must be capitalized and amortized over 60 months.
How We Can Help
The tax treatment of website-related expenses can be complex. We can help you determine the best approach for your business. Contact us at 203-925-9699 for more information on how to handle website costs for tax purposes.
