Deducting Business Website Costs

Businesses often set up websites to sell their products and attract new customers. The proper method for deducting website development costs depends on several factors, including how the website was created and whether the website was part of the company’s “start-up” costs.

 Software costs. Website designs produced with sophisticated programming languages generally can qualify as software. The IRS has safe harbor rules for deducting software costs. These rules distinguish between software produced by independent contractors and software produced by in-house employees.

Generally, if the design was “purchased” from an outside contractor who remains at economic risk for performance of the software, the deduction for the design costs must be spread over a three-year period. However, if the website design is “developed” in-house — or by an independent contractor who does not remain at risk for performance — the company has more flexibility. One option available in this situation is to deduct the costs in the year they are either paid or accrued (depending on the company’s accounting method).

Other costs. Website design costs that don’t qualify as software are deducted over their expected useful life. The costs of producing website content that is “advertising” are generally deductible in the year paid or accrued.

Start-up costs. Website costs incurred before a business begins may be considered start-up costs. A business may elect to deduct up to $5,000 of start-up costs in the year the business begins operations and deduct the remaining costs ratably over 180 months. (The $5,000 deduction is reduced where total start-up expenses exceed $50,000.) Alternatively, a business may capitalize its start-up costs.

Documenting Business Expenses

Most ordinary and necessary business expenses are deductible as long as you have the proper documentation. If your return is audited, the IRS may require that you show the type of item purchased and that payment was made. Here are some examples of acceptable documentation.

Checks. A canceled check can be used as proof of payment if it has the name of the payee and shows the cancellation on the back. The IRS also accepts highly legible images of checks if you don’t have your checks returned.

Credit/debit card transactions. You must have an account statement that shows the amount of the charge, the transaction date, and the name of the payee.

Electronic funds transfers. The IRS requires an account statement that shows the amount of the transfer, the date the transfer was posted to the account by the financial institution, and the name of the payee.

Invoices. You must have an invoice or some other form of documentation showing what you purchased. Canceled checks, credit/debit card statements, and records of electronic funds transfers only provide proof of payment.

Cash register receipts. If you receive a receipt with no details of the items purchased, write a description of the items on the slip. As long as the purchase is for a relatively small amount, the IRS should accept it.

If it’s not self-explanatory, make sure you write the business reason for your purchase on the invoice or receipt so you’ll be prepared for any questions from the IRS. And be aware that there are separate substantiation rules for travel, entertainment, and auto expenses.

Business Deductions 101: Business, entertainment, or charitable expense?

There are many instances where your business activities intermingle with entertainment, charitable expenses, or both.  Potential client meetings, mixers, and charity events or fundraisers could fall into several of these categories.  So, how should the expense associated with these events be handled from a tax perspective?  The appropriate response, given that these expenditures are truly unique and each situation must be evaluated for the correct treatment, is “it depends.”  Consequently, the following example and general rules are offered to give some guidance as you’re incurring these types of expenses.

Let’s say that you own a business and, in your capacity as the owner, attend a charity event and invite potential clients to attend with you.  The event offers a meal and a speaker.  Is this a charitable contribution, a marketing event and promotional expense, or entertainment?  The charity will often provide you with information regarding the portion of the ticket which supports the charity – the amount of the payment in excess of the value of the meal and other items received at the event. In general, this is the amount that you should claim as your charitable contribution.  The remaining amount for the fair value of the meal will most likely be a business entertainment expense subject to a 50% deductibility limit.  You might also incur marketing expenses that are directly attributable to your efforts exclusive of the entertainment or charitable activity at the event, such as the price of print advertisement, and these could be deductible in full.

Under Internal Revenue Code Section 274, you should document the amount of your expenses, the business purpose, and the parties in attendance (including relationship) in order to claim a deduction for business-entertainment related expenses.  In addition, you can fully deduct (exception from 50% limitation) amounts for food and beverages provided on the premises of the taxpayer primarily for the benefit of all employees.  Business meetings (employee, stockholder, and/or directors), items available to the public (trade show costs, receptions, or seminars), and recreational activities offered to employees also are fully deductible and exempt from limitations.

As illustrated, the character of your business expenditures is not always clear cut, and can be subject to several different classifications and limitations.  Consequently, it is imperative that you document your business related activities to support expense classifications and deductions claimed.  Please contact your William Vaughan Company representative for further guidance and information.

By Nate Bernath, CPA