IRS issues guidelines on treatment of computer software.

• Author: Fiore, Nicholas J.

Computer software includes any program or routine (i.e., any sequence of machine-readable code) that performs a desired function or set of functions, and the documentation required to describe and maintain that program or routine. It includes all forms and media in which the software is contained, whether written, magnetic or otherwise. Computer programs of all classes (e.g., operating systems, executive systems, monitors, compilers and translators, assembly routines and utility programs, as well as application programs) are included.

Computer software also includes any incidental and ancillary rights necessary to effect the acquisition of the title to ownership of or right to use the computer software, and that are used only in connection with that specific computer software. Computer software does not include any data or information base described in Regs. Sec. 1.197-2(b)(4) (e.g., data files, customer lists or client files), unless the database or item is in the public domain and is incidental to a computer program. Nor does it include any cost of procedures that are external to the computer's operation.

Except as otherwise expressly provided, under Sec. 446(e) and Regs. Sec. 1.446-1(e); a taxpayer must obtain IRS consent before changing an accounting method for Federal income tax purposes. Regs. Sec. 1.446-1(e)(3)(ii) authorizes the Service to prescribe administrative procedures setting forth the limitations, terms and conditions deemed necessary to permit a taxpayer to obtain consent to change methods.

Scope

The revenue procedure does not apply to any computer software subject to amortization as an "amortizable Sec. 197 intangible," as defined in Sec. 197(c) and the regulations thereunder, or to costs that a taxpayer has treated as a research and experimentation expenditure under Sec. 174.

Costs of Developing Software

The costs of developing computer software (whether or not the particular software is patented or copyrighted) so closely resembles the kind of research and experimental expenditures that fall within the purview of Sec. 174 as to warrant similar accounting treatment. Accordingly, the IRS will not disturb a taxpayer's treatment of costs paid or incurred in developing software for any particular project, either for the taxpayer's own use or to be held by the taxpayer for sale or lease to others, if:

1. All of the costs properly attributable to software development by the taxpayer are consistently treated as current expenses...