Computer Software for a Home Business is Tax
Deductible!

Computer Software can be Depreciated over a 36 month
period or over the same period as the computer it was
included with, but there are exceptions in which you can
expense it all in the first year!  Some software is eligble for
the Section 179 deduction!

Software for business use is deductible.  Examples of software
that would qualify includes; property management software,
accounting software, small business software, etc...  The IRS
allows you to depreciate them as business related expenses

Pre-Installed on Computer vs. Purchased Separately
If you purchase a computer for your business and the software is
included in the price of the computer without being separately
identified, the charge for the software must be consistently treated
as part of the cost of the computer.  This means that it must be
depreciated the same as the computer.  If the price of the software
is separately stated, or the software is purchased separately, it is
supposed to be amortized over 36 months, beginning the month
the software is placed in service.  There is an exception noted
below.

Time-frame for Software Depreciation
If you buy software for business use, such as a database or
spreadsheet program, the treatment of the cost depends on how
you use the software in question.  If you use it for a year or less you
can deduct the cost as a business expense for that year.  An
example would be an annual tax program.  If the useful life in your
business exceeds a year you will need to depreciate it over 36
months.  There is an exception though.  The exception applies to
"off-the shelf" software.  Off-the-shelf  computer software is
eligible for first year expensing if it:
 

Off-The Shelf Software Eligible for Section 179 Deduction
Off-the shelf software includes any program designed to cause
a computer to perform a desired function.  Note that a database or
similar item is not considered computer software unless it is in the
public domain and is incidental to the operation of otherwise
qualifying software.  The IRS defines "off-the-shelf software" as
software that is readily available for purchase by the general public, is
subject to a nonexclusive license, and has not been substantially modified.
This type of software is eligible for the section 179 first year expensing deduction.

You cannot deduct computer software by making a section 179
election (the exception being noted above), because software is
"intangible property", and the section 179 election only applies to
tangible personal property.  Intangible property is something that
lacks a physical existence that does not have value itself, but
represents something else.  Stocks and bonds are examples of
intangible property, as is computer software.

If the three tests above are met however, software that is purchased  in
2003 - 2009 is eligible for first-year expensing.  You may also depreciate
the cost over 36 months if you choose. 

Software Depreciation Example
Example: You purchase Microsoft Office Professional Edition for
$300 and load it onto your computer on July 1, 2007.  If you use it
entirely for a business purpose the amount that is deductible each
year is:

Software That Becomes Obsolete
As stated above, the software must be depreciated over 3 years
but software often does not remain usable for 3 years; it becomes
obsolete.  If this happens to your software, you can deduct the
balance of its cost in the year it is no longer usable.  Using the
example above, let's assume the software becomes obsolete in
2008, you can deduct the balance of the cost, $150 ($300 - $150) in
2008.


 


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