Website development--how to account for set-up, installation and maintenance costs.

• Author: Moore, Philip E.

What are the likely Federal income tax consequences of Website development costs? Important factors include what was purchased, how it was delivered and invoiced, how it will be used, and exactly what has been developed or acquired. In nearly all cases (and in its simplest form), a Website consists of a combination of computer hardware, computer software and Internet access. Costs associated with each of these elements can (and do) produce different tax effects, depending on the nature, extent, form and substance of the separate steps and underlying transaction(s).

Hardware Costs

Usually, the first step in a Website design is the acquisition of appropriate computer hardware or Web server. This is accomplished through direct purchase of the necessary assets or outsourcing the needs through a lease or right-to-use transaction. For tax purposes, the outright purchase of computer hardware will (almost always) require capitalization and recovery of cost through depreciation deductions. The recovery period for such property is five years. On the other hand, lease payments for the use of such property are traditionally deductible as ordinary and necessary expenses.

Software Costs

The next step in the Website process is the purchase or development (or combination thereof) of computer software, required to operate the Web server and to create the actual Web page. Special code (e.g., HTML) must be created, so that the Website can be accessed by a user's browser to display graphics, text, links and other applications. In this regard, the Website's software needs can be broken down (for tax purposes) into development costs and acquisition costs. While the general rules for software costs tend to follow the tax treatment for hardware costs, there are some subtle (but important) differences.

Other Costs

In addition to hardware and software needs and costs, most Website development or acquisition will require consulting, testing, training and other similar costs attendant to the hardware and software. In most cases, outside third-party specialists perform these types of activities and bill the Website purchaser for such services. Other types of costs may include investigatory expenses, integration/facilitation, implementation and performance analysis. Most of these charges will be separately incurred and stated, even if the same person or entity provides the hardware and/or software.

Standards Applied

The IRS has not issued definitive authority on the...