The way to be successful in the software world is to come up with breakthrough software, and so whether it’s Microsoft Office or Windows, its pushing that forward. New ideas, surprising the marketplace, so good engineering and good business are one in the same. -Bill Gates
Business Tax Attributes for Costs of Computer Software
Businesses that have purchased or developed computer software programs for internal purposes, the following blog is for your convenience, to provide a concise review of how you may perhaps write-off the software expenses your business incurs.
Generally, you must amortize the purchase cost of computer software and AI developments over a period of three years, beginning from the month in which you placed the software into service. If the software is acquired together with the computer equipment, then you should depreciate the cost of the software over the useful life of the computer (separately stated computer hardware costs are depreciated as 5-year).
However, if you purchase software or artificial intelligence technologies with the acquisition of a trade of a business, you must amortize that software over a 15-year period. For businesses that create their own computer software or artificial intelligence technology with developers, the cost of developing the programs or software may be treated in a manner similar to research and development expenses.
Thus, qualifying expenditures may be A) deducted as a current expense, or B) capitalized and amortized using the straight-line method over a period of 36 months beginning in the month that the software is placed in service or over 60 months from the date of completion of development if a Code Sec. 174(b) election is made.
Additionally, all software development costs are included in the definition of research and experimental expenditures, effective for amounts paid or incurred in tax years beginning after 2021. All research and experimental expenditures must be amortized over 60 months, effective for amounts paid or incurred in tax years beginning after 2021.
For tax purposes, computer software is defined as a program designed to cause a computer to perform a desired function. Computer software tax rules includes programs of all classes in all forms and media and the documentation required to describe and maintain the programs.
If you are investing software implementations or artificial intelligence programs for your business, please discuss the tax attributes with your trusted tax advisor.