Website development costs.

• Author: Maples, Larry

Many companies are spending large sums to develop and launch Websites. These costs include labor-related consultant and Web-page design fees, as well as software and hardware expenditures. The tax treatment of such costs may be mixed. The Code, regulations and proposed regulations appear to provide answers for hardware and software costs. However, to the extent labor costs are not for software development, the tax result is unclear. The IRS has issued no guidance on these costs. Many practitioners are simply writing these costs off as advertising. However, it is hard to imagine the Service not using INDOPCO, Inc. 503 US 79 (1992), to force capitalization of some of these costs.

Websites come in many varieties, from providing information about the company and its products to an interactive store with hyperlinks to all sorts of information. The varieties can be categorized as follows:

* Billboards. Many Websites are just display ads describing the company's products and services and contact information.

* Catalogs. A site with detailed price and product information could be described as a catalog. These catalogs may be static or constantly updated, depending on how much a company wants to spend.

* Database sites. A company can link a database to its Website. This link allows salespeople and customers with a password to check on product availability and can be designed to allow the development of customer profiles and mailing lists. With the right software, the accounting system can be updated for transactions on a site.

* Virtual stores. Customers can view pictures and detailed information on products. Orders can be processed with a password or credit card.

Software Costs

The portion of Website development costs that can be allocated to software is recoverable over various periods, depending on several factors, including whether it is purchased or self-developed. Exhibit 1 is a diagram of the rules under the Code and proposed regulations.

[Exhibit 1 ILLUSTRATION OMITTED]

If software is purchased with a trade or business, is not available to the public and is not substantially modified, the cost will be amortized over 15 years as a Sec. 197 intangible (self-created intangible). If, however, software acquired with a business is publicly available or substantially modified, it is treated as purchased software. Treatment of costs of purchased software depends on whether the costs are separately stated. If a cost is included as part of a hardware...