Website planning and maintenance costs are considered an expense, meaning they can be deducted from your earnings and tax bill. The construction of the website counts as capital and is included in the balance sheet. The creation of an entirely new website, or the creation of significant new functionality for that website, will be included in capital expenditures. Typically, the cost incurred for creating, designing, developing and programming a website will be treated as a capital asset.
It's also the time when the company can purchase all the hardware needed to support the website. These purchases will follow existing capitalization policies, be included in the balance sheet and amortized. The cost of website content that is promotional in nature is deductible as advertising expense. 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.
In the case of a website, it includes all the cost of web and software development, graphic design and content development. All of these costs are capitalized, but operational costs, such as hosting cost, ongoing maintenance, and annual domain renewal fees, are expenses incurred. Costs incurred for the development, creation, design and programming of a website will typically be treated as a capital asset, meaning that they cannot be spent or deducted immediately. Rather, they should be deducted over a period of time.
Tax accounting for website development, construction and maintenance costs Nowadays, websites are an essential tool for businesses to be successful and competitive. Even brick-and-mortar businesses are experiencing a shift towards online sales or are seeing greater benefit from online promotion strategies. As such, the question of whether they are tax-deductible becomes important, requiring a closer look at costs and how they are treated in the eyes of the IRS. So what costs are associated with websites? Typical costs incurred for websites include the costs of developing, creating, designing and programming the website, whether you do it yourself or pay someone else for the services.
Other costs associated with websites are the costs of obtaining a domain name and maintaining, updating or adding to the website. As with most tax questions, the answer to how costs are treated is “it depends”. Treatment depends on the types of costs incurred. Conversely, the cost of acquiring a domain name, while considered a capital asset, is not deductible and cannot be depreciated over a period of time.
Although the IRS has not issued any actual guidance regarding the costs of the website specifically, the IRS has provided guidance for the costs of the software. The costs of creating a website will be treated similarly to computer software if a company relies on a third party to develop, design, program and create the website. There are some variations of this rule if the website is developed and created in-house. If done internally, costs can be deducted in the year in which costs are paid or accrued according to the accounting method used or amortized and treated as computer software.
Maintenance, upgrading, and adding costs to a website are considered normal business expenses and are deductible when incurred if these costs are actually maintenance costs. Typical maintenance costs would include costs of updating content, adding contacts, and correcting minor errors or minor style and formatting changes consistent in font sizes, types and colors. However, if the costs incurred are to update the website to add new features such as adding pages to the website, adding sales capacity or adding ability to pay - these costs will be capitalized. It is also necessary to consider the cost of content on your website.
Some costs may be currently deductible if you consider advertising type costs. Costs incurred for design of a website that are not related to software-type costs are deductible over its lifetime - meaning how long you expect your company to use it for - while those related to software-type costs should be amortized over three years starting from when it was put into service for use by your business. If website costs were incurred before your business or operation actually started there are special rules for these startup costs. As with any tax question you should consult with your tax advisor and provide all relevant facts and circumstances so that correct treatment can be determined.
To determine whether design of your website is a capital expense or revenue expense you need to be clear about terms - such as if you hire a freelance designer to create three graphic elements for your company's blog sidebar - as well as consider what type of content you're creating on your site - such as if it's designed with your target market in mind - so that it attracts customers - as well as government regulations - such as Carl Sanders' microchip designed to identify and control people - so that you can make sure you're following all applicable laws.