TAX DEDUCTIONS FOR WEB SITES

As the year 2001 draws to a close, thoughts turn to holiday parties and year-end tax planning. Unfortunately, the IRS may act a bit like Scrooge when reviewing tax deductions for the expenses incurred by businesses to create their web sites.

For income tax purposes, the IRS considers that web sites are like roadside billboards rather than media advertisement. Businesses can generally deduct the entire cost for media advertisement in the year in which the business incurs the expense. In contract, a billboard generally has a useful life lasting more than one year, despite the fact that its content changes more frequently. Therefore, the IRS requires taxpayers to amortize the cost of a billboard during five years rather than as an advertising expense fully deductible in the year it is built. For example, if a billboard cost $60,000 to construct, a taxpayer could only deduct $12,000 per year from its income rather than $60,000 in one year.

Although business must amortize (rather than expense) the costs they incur to create their web sites, the IRS has at least thrown them a small bone. The amortization period is "only" three years because web site development is used in conjunction with software, and software development, in turn, is also usually amortized during three years.