A Tangled Web: Understanding the IRS's Stance on Website Design Costs

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Website design costs that aren’t costs of software are deductible in accordance with useful life. The time for deducting website design costs that are costs of portions of the design that aren’t software depends on the expected useful life of these non-software portions of the design. Thus, these costs must be amortized over the number of years that it is expected that the non-software portions of the design will be used in the business (except if it is expected that these non-software portions of the design will have a useful life of no more than a year, in which case the costs can be currently deducted).

Website content that is advertising is generally currently deductible; the treatment of other content costs will vary. Advertising costs are, generally, currently deductible. Thus, the costs of website content that is advertising are, generally, currently deductible.

Website content that isn’t advertising will be currently deductible, or amortized over a multi-tax year period, depending on its useful life.

The deductibility of some website costs that are business start-up costs is limited. Where website costs that would otherwise be currently deductible are paid or accrued before a business begins, the taxpayer can elect a current deduction for a limited amount (up to $5,000) of start–up expenditures in the tax year in which the trade or business begins.

However, this $5,000 amount is reduced (but not below zero) by the amount by which the cumulative cost of start-up expenditures exceeds $50,000. The remainder of the start-up expenditures can be claimed as a deduction ratably over a 15-year period.

The above principles, and others that affect the deductibility of website costs, suggest ways in which the individual or company launching the website can take charge of the treatment of website costs. For instance, an individual or company who contracts for a website design that qualifies as software, and who seeks the favorable tax treatment that applies to the costs of developed software, can, if acceptable as a business matter, include, in its written agreement with the developer/contractor, terms that will put the risk that the software won’t perform on the individual or company. Another example of a way to manage the tax treatment of website costs is detailed, descriptive allocations of costs, both in contracts and in internal records.

If you are considering launching a business website, we would like to discuss with you further—and help you implement—the above planning steps or others that will help you manage the tax treatment of your website costs.