Outsourced web development
While the IRS has not provided much guidance on website-specific deductions, they have provided guidelines for software costs. When you purchase a website from a third party who assumes responsibility for the website’s functionality, the costs are treated much like software costs and amortized (spread out) over three years—unless the total cost of the website and other equipment purchased is less than $25,000, in which case you can expense 100% of the cost in the year it was paid.
In-house web development
If you decide to develop your website in-house, you have the choice of two different methods of deduction. You can choose to deduct the total cost of the website in the year it was paid or accrued (depending on your accounting method), or you can elect to treat your website as software and amortize your deductions over three years. For tax purposes, the distinction between in-house and outsourced development rests on whoever has responsibility for the website’s functionality.
Purchases made for the website that are not classified as software, such as the cost of logo design, are deductible over the “useful life” of the item. The “useful life” of the item refers to the amount of time you expect the design to be used by the business.
For instance, say you hire a freelance graphic designer to create three graphic elements for the sidebar of your business blog. If the designer charges $500 for the graphics, you need to estimate how long these elements will continue to be used to calculate your deductions. If you estimate it to be two years before you’ll want to redesign your blog entirely, then you would deduct that $500 over the course of two years ($250/year).
Note that there is a difference between non-software expenses and regular business expenses (purchasing a font license, for example); regular maintenance tasks do not need to be spread out over the useful life of the product.
Promotional web content
The cost of website content that’s promotional in nature is deductible as an advertising expense without the need for amortization. The IRS states that you can “deduct reasonable advertising expenses that are directly related to your business activities“ and that put your business in front of potential customers.
You can deduct 100% of your advertising expenses for tax purposes. These expenses will be for the creation of content that changes on a regular basis. For instance, you could deduct the cost of a photo shoot that will promote a new product on your website as an advertising expense. You can claim these deductions in the year the cost was paid or accrued, depending on your accounting method. On the other hand, you would not claim an expense like hosting or renewal fees as advertising content, since they’re considered a regular business expense.
Regular business expenses
Some website-related costs are simply treated as normal business expenses and are deductible when they are paid. By and large, you can deduct 100% of regular business expenses for tax purposes. These costs include format changes such as fonts or colors, content updates, and minor additions to the website.
An example of this expense could be the purchase of a licensed font. Keep in mind that if the changes are bigger, such as adding new pages to the site, or adding a shopping cart functionality, then these do not fall under the regular business expense category and are instead capitalized and then amortized over the useful life of the new addition(s).
How Bench can help
Did you know your bookkeeping solution is a tax-deductible expense? The cost of a Bench subscription will immediately cut down your tax bill, but so will our accurate transaction tracking, which ensures not a single deduction is missed.
By connecting your bank, credit card, and merchant accounts, we’ll stay on top of every business transaction and make sure it’s accurately categorized. At year end, we give you everything you need to take to a CPA, tax professional, or do yourself.
Don’t have a tax filing solution in place? Upgrade to our premium package, and we’ll file them for you. You’ll also gain access to unlimited, on-demand consultations with our in-house tax professionals. Learn more.