Treatment of software costs to cure Y2K problem.

• Author: Marchbein, Joe
• Position: Year 2000 computer problem, taxation - Brief Article

Since the Supreme Court's issuance of INDOPCO, Inc., 503 US 79 (1992), the IRS has contended that many expenditures previously considered currently deductible must be capitalized, and cannot be depreciated or amortized. The rationale has been that the expenditures created a benefit that had an indefinite useful life.

As the new millennium approaches, companies have been planning to convert their computer systems to accommodate the year change. Taxpayers have been concerned that the Service would take the position that the conversion costs would have to be capitalized under the INDOPCO rationale and no amortization would be allowed. Rev. Proc. 97-50 has alleviated this concern. The IRS has now held that year 2000 (Y2K) costs are similar to research and experimental expenditures; thus, taxpayers may claim current deductions for these expenditures under Sec. 174(a).

Sec. 174(b) allows taxpayers to capitalize and amortize research and experimental expenditures. If taxpayers have previously amortized such costs and...