Can You Write off Website Development Costs?

Despite the extensive use of the internet for business purposes, the IRS has issued little formal guidance regarding deductions in this area. The following discussion, however, sets forth a brief summary of some of the relevant factors that should be considered with respect to these expenses.

Purpose of Website. If the website itself is the start-up of a new business (i.e., a new “.com” company), the website development costs generally are not deductible, unless an election is made to deduct the first $5,000 of such costs or the expenses otherwise qualify as deductible research and experimental expenditures. The remainder of the website expenses generally should be capitalized and amortized. If the website is created for an existing business, the deductibility of the development costs depends on the type of expense, as discussed below.

Types of Website Costs. The development of a website typically involves several different components, including software and content. Thus, the costs in developing a website may be allocable to a variety of items, such as overall site design, advertising and software creation. Generally, if the costs are associated with the design of the website, the costs may be capitalized and amortized over the useful life of the website. If the costs are associated with the advertising content of the website, they may be deducted as an advertising expense. Finally, if the costs are associated with the development of software, the taxpayer generally has the option of deducting or capitalizing the developments costs.

Review your expenses in light of this analysis and contact us if you want to discuss your particular situation and questions.