Writing off Software

Today TaxMama hears from Rodney in Texas who asks. “How do you determine the difference between a deduction that you can take in full in the year of purchase vs the deduction that is spread over many years? I am trying to relate this to software because some software is used without changing for many years and other are only good for a year or less.”

Dear Rodney,

Until a few years ago, it was important to make such a distinction. Now, it’s not nearly as important. Why?

Because the rules have changed. In the past you had to depreciate all software for 3 years.
And software purchases were not subject to Section 179 treatment, allowing you to write of the entire purchase in one year.

The Jobs & Growth Tax Relief Reconciliation Act of 2003
http://www.taxmama.com/IRSnews/053003.html
specified that software is now qualified for Section 179 depreciation.

In 2008, you can write off up to $250,000 worth of qualified asset purchases, including software.

http://www.taxguru.org/incometax/Rates/Sec179.htm

Personally, I feel it’s reasonable to write off software that must be replaced each year as straight expense, without depreciating it at all.

Some people, to be safe, use Sec 179 to write off the cost. What’s the problem with that?

Software has a 3-year life for depreciation purposes. If the software is only used for one-year, you have to recapture 2/3 of the Sec 179 depreciation when you stop using the software – when you replace it with the new year’s edition. I prefer not to open up that can of worms.

Read more about depreciation and Section 179 expenses
http://www.irs.gov/formspubs/article/0,,id=109879,00.html

And remember, you can find answers to all kinds of questions about software, depreciation and other tax issues, free. Where? Where else? At TaxMama.com

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