Does the cost of a tax program needed to be depreciated?

[Questionguy101]

I have been thinking about this for a long time. Does anyone of you expense the full amount of your tax program in the first year? The tax program is only good to be used for 1 year and we may never need it again after (unless for an amended tax return once in a while). Thoughts?

[TaxmannEA]

I do the same as you. It's a one-year program and has minimal use at best after that.

[spanel]

I would agree to disagree.. I use my prior year software all the time.. In tax season.. I reference the prior year for customer info... I also do quite a few prior year returns.. amendments, etc.


Chris

[ChEAr$]

I would agree to disagree.. I use my prior year software all the time.. In tax season.. I reference the prior year for customer info... I also do quite a few prior year returns.. amendments, etc.


Chris

Hmm... so,then.... what useful life do you use for depreciation?

[Questionguy101]

I would agree to disagree.. I use my prior year software all the time.. In tax season.. I reference the prior year for customer info... I also do quite a few prior year returns.. amendments, etc.


Chris

I have thought of this too. Usually, 99% of the usage of the tax program is in the first year and 1% of it is in the subsequent years. Your argument is that it has to be depreciated for more than 1 year because of that 1% usage after the first year. But what about other type of assets like an office equipment? You may be able to use it for more than 5 years or even 10 years. But you are still allowed to depreciated it over 5 years.

[S T]

Tax Software

See a prior discussion

http://www.thetaxbook.com/forums/showthread.php?t=16381&highlight=software+depreciation

Sandy

[Roberts]

I know people argue that you are supposed to depreciate your tax software, I don't. The fact I'm buying replacement software every year indicates to me that it is a 1-year life. If I'm rolling depreciating software, there is no economic benefit for the me or the IRS whether I do it all in one year or over three since I'm forever buying replacement software.

While I may purchase a new copy of The Tax Book every year and I reference older versions when handling the returns for previous years, I don't depreciate the books, I expense them. In my mind it's the same situation.

In previous years I've received a 12 month subscription to a research service when I've purchased tax software. Should I have broken down the portion that was research related versus software and depreciated a portion and expensed the remainder?

What if the tax software is actually operating on a website and I'm not downloading a physical piece of software but receive the exact same multi-year benefit for my dollars?

[erchess]

Vexing Question that means nothing

I have simply written off software as a cy expense and let it go at that but since I found out about the general rule that you depreciate software I think it's simpler to depreciate and 179 it. If the auditor won't budge from the assertion that you should have depreciated it it's now too late to 179 and the amount is too small to appeal unless there are other sticking points as well. This strays from OP a little but I normally look at depreciation vs cy from the standpoint of if in doubt depreciate. I and everyone who engages me qualifies for the 179 election for all their depreciation expense but some of us are well served by taking some depreciation to save taxes in future years where higher income and or lower expenses are expected.

[thomtax]

Most of the time you take the full depreciation for a fixed asset in the year purchased (Sec 179). So what would be the big difference in the basically one year software?

LT

[erchess]

hopefully clearer

I have never failed to take a 179 on all my depreciation but at least half of my clients have so I disagree with your premise.

Even if I agreed with your premise, imagine that you are being audited and the auditor won't see past an ironclad rule that software (which you with good reasoning took as a current year expense) gets depreciated. This will be a change that will have you writing a small check since the 179 election to expense must be made timely. On the other hand it's going to be too small a change to go to appeals much less court over unless there is a lot else you and the auditor can't agree on.

The risk of being caught in that predicament is small and the cost will be bearable but there's simply no downside I can see to depreciating a questionable asset unless one is a taxpayer who cannot expense all the depreciation under section 179. I'm not in that situation, none of my clients is in that situation and barring the possibility of a change in the rules I don't expect that to change.

[spanel]

My software lists it as 3 years and will not allow a 179 on it.


Chris

[Bees Knees]

My software lists it as 3 years and will not allow a 179 on it.


Chris

Time to change software. From TTB, page 9-15:

Computer software and databases. Off-the-shelf
computer software is eligible for a Section 179
deduction.

I 179 my software ever year, along with just about everything else that has any possible use beyond one year. With the maximum Section 179 expense limit of $500,000 and the $2 million total investment in depreciable property limitation, I doubt any of us need to worry about using up too much of our 179 deduction on stuff that might qualify as non-depreciable property.

Look at it this way - if the IRS auditor says tax software is not depreciable property because its useful life is not in excess of one year, and therefore cannot use Section 179, then that means it is a current expense. It would still be a no change audit since you can claim a current expense for something on an amended return.

[FEDUKE404]

Worth repeating

(I still stand by the below which I posted in the Feb 2011 thread cited by Sandy)


From IRS Pub 946:

To be depreciable, the property must meet all the following requirements.

It must be property you own.

It must be used in your business or income-producing activity.

It must have a determinable useful life.

It must be expected to last more than one year.

And then:

If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months.

As noted previously, this is a completely separate issue from "regular" software (payroll/accounting/word processing) that certainly does have a useful life of more than a single year.

.....................

While no one here is arguing against the need to depreciate/expense "computer software" that clearly meets the above criteria, I think a reasonable person would envision the tax preparation software as being an annual expense. CERTAINLY the efiling "portion" of that software has a useful life of no more than one year.....how would you adjust for that "non-depreciable" portion of the original cost?? And as others have mentioned, something like TTB is also essentially an annual expense although a copy of TTB "could" be used in later years.

For my 2¢ worth, if push comes to shove I could make a much better argument to an IRS person that the tax software is an annual cost versus making an argument to the IRS person that the tax software has a determinable useful life of more than one year and that it qualifies for any depreciation and/or Sect 179 exclusion.

FE

[dtlee]

FE,

I certainly would agree with you completely if I could feel comfortable deleting or overwriting my tax software each year. As others have stated, it is needed for importing data into the next year, amendments, reports, and year-to-year comparisons.

I also agree that it does become "obsolete" for preparing a current tax return each year.

However, you would likewise not be able to use the "current" software to prepare a prior year (though amendments may be possible depending on the package you use). The software probably never becomes obsolete for preparing the older year (I just prepared returns for 2004 through 2010 for a client). I have also used prior year software for preparing training materials and comparison documents.

For my situation, where I would never delete a package that still runs on my operating system (and I keep equipment with prior operating systems around for older packages), I am so careful to keep working copies available that I could never convince myself that the useful life ends within a year. I have used 36 month straight line (i.e., old straight line depreciation) for most years, but have recently taken advantage of Section 179 and Bonus Depreciation when the law allowed.

[taxea]

I have been thinking about this for a long time. Does anyone of you expense the full amount of your tax program in the first year? The tax program is only good to be used for 1 year and we may never need it again after (unless for an amended tax return once in a while). Thoughts?

Not so. Depreciate for three years because you use it for amended returns. The more the IRS computerizes their procedures the more likely we will be doing more amended returns.