Tax Deductible | Bloggers Lair | Yakezie Forums

ahhh very good question since that isn't technically a normal "expense item." Will be interested to see if any CPA's in the group know! 

I would think it qualifies as M&A.

Hmmm, I have not dealt with online property, but generally the rule is to amoritize it over the "life" of the property. Software has a 3-year shelf life, but websites are not "off the shelf" software, so I don't think they qualify for that.

With websites, it's all about intent. Did you purchase them for advertising purposes alone (for a product or service you already offer?) Then expense it. But most likely you purchased it for the traffic, therefore qualifying it as an intangible asset, so you would have to amoritize it over 15 years.

From IRS Pub. 946

Computer software. Computer software is generally a section 197 intangible and cannot be depreciated if you acquired it in connection with the acquisition of assets constituting a business or a substantial part of a business.

 So, no depreciation, but yes to amoritization. I would go with 15 years to be safe, but as others have said, consult your local CPA/EA first :)

Also, though posted in 2007, a relevant discussion on the Tax Almanac forums (where I go for tax questions, besides irs.gov, or course  )

Website Depreciation or Expense?

Eric J. Nisall said:

The IRS has yet to issue any rulings on website development costs.  With that in mind, there are no set rules especially when it comes to purchasing a website secondhand.

 

The ability to deduct the cost as an advertising expense would only apply if the website is used as an advertisement for a business.  Essentially, that would be a brochure site for the most part.

 

If you purchased any of the sites for the express purpose of generating income, then it would most likely fall under the general application of software and would be best treated by amortizing the purchases over 3 years.  It's very similar in theory to buying a rental property–a purchase intended to be a generating asset, depreciated over a standard useful life.  In this case, software is a 3-year life intangible asset as it's technically intellectual property.

 

The reason you don't use a useful life basis for amortization is due to the constantly-changing state of the website.  Every time you add, subtract or change any code, you are essentially making it into a new product.  You are pretty much always creating a new intangible asset and would have to reset the amortizable life each time you changed the site.

 

Again,k this is fairly new territory, and very subjective so I would definitely go with what your tax preparer feels most comfortable doing and can most effectively defend if the return was ever selected for review.

 

Plus, you have to remember that you are not paying the development costs, you are buying an already-developed intangible asset, so anything relating to the treatment of a newly-developed site would not apply to this particular situation.

Thanks for the thorough reply! This helps a ton.  Unforunately, I am my own tax preparer, which used to not be so difficult…but this year is going to challenge me.  I got married as well, so I might be a little out of my league this year, but we'll see.

Thanks again!