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

[FEDUKE404]

Upon further review...

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.

Apparently the expressed "justification" for the tax software having a useful life of more than one year is getting ready for any amended returns which might follow.

Perhaps - but a rather thin argument.

Why?

You can perfectly well prepare an amended return with the current year software. In fact, as you may know, the federal (and many state) amended return forms/formats have been changed. "Old" software likely would not recognize those required Forms 1040X et al.

And while I'm here: What do you do for your costs for TTB and related "reference" material? Deduct one way for "regular" use, another way for expected amended returns, and a third way for any very late ( = fraudulent ) returns you may encounter?

Time to go watch some football. In the meantime, I can ponder over what I should do for some of this depreciable office furniture I have that has been around for more than a decade. I may not be able to sleep soundly tonight knowing I obviously used the "wrong" depreciation period some time in the distant past.

FE

[thomtax]

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.

Don't know why you took 3 long paragraphs to basically end up with same conclusion as what I said, unless it was for some reason just to take a dig at me. However, I find your comments about having to write a check if audited assumes a lot of things that I find nit picky and not in the real world. You assume that the auditor, for some unexplained reason, agrees with your revisions and this is not a given. Face it, auditor's often disagree among themselves on all sorts of things, even in the face of the opposite being in writing, so you run this risk any time you complete a return, not just on software.

I stand by, for myself, what I said. Others may disagree and this is a right and privilege that fortunately we have in this country. And I would not fault them for taking another viewpoint. I wish them well, but just do not chose that route.

LT

[erchess]

Apology to Roberts

I misunderstood your first post and thought we were in disagreement. I had no intention of taking a dig at you. You are one of the more knowledgeable posters on this board and I esteem you highly.

[Edward]

QF Depreciation Manual (2010) page 11-4 says that for "Off the Shelf Software that is readily available for sale to the public will be depreciated straight-line over 36 months starting with the month placed in service. It is also eligible for 179 expensing if placed in service in a tax year beginning after 2002 and before 2012".

[taxea]

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

The rules say 3 years and this appears to be applicable since one can amend three years back. Thats how I do it.

[veritas]

If an individual buys

turbotax, they must depreciate it over 3 years?

[Bees Knees]

turbotax, they must depreciate it over 3 years?

The cost of tax preparation software is deductible for individuals preparing their own return. It cannot be depreciated because depreciation only applies to property placed in service by a trade or business or for the production of income. The useful life of an asset placed in service by an individual is irrelevant. A good example of this is capital improvements to a home for medical purposes. To the extent it does not increase the value of the home, the cost is deductible in the year purchased, regardless of how long the thing will last.

Another example is charity. I've seen other tax preparers try to depreciate a computer used for volunteer work for a charity. No no no. Volunteer work is not a trade or business, therefore, no depreciation is allowed. If the computer qualifies as an out of pocket charitable expense, its deductible in the year purchased, regardless of how long the thing will last.

[taxxcpa]

To depreciate or not to depreciate

Suppose your software costs $1000 every year.
If you depreciate it you take:
$333.33 for the software purchased two years prior
$333.33 for the software purchased one year ago
$333.33 for the current year sofware
Total = $ 999.99

If you write it off every year, the deduction is $ 1000.

An auditor may assess the tax you owe for that extra penny you wrote off if you didn't depreciate it.

[Gary2]

Suppose your software costs $1000 every year.
If you depreciate it you take:
$333.33 for the software purchased two years prior
$333.33 for the software purchased one year ago
$333.33 for the current year sofware
Total = $ 999.99

If you write it off every year, the deduction is $ 1000.

An auditor may assess the tax you owe for that extra penny you wrote off if you didn't depreciate it.

No, he won't, since the proper depreciation for the software purchased two years ago would be 333.34. (Of course, this ignores that the half-year convention, or more likely, the mid-quarter convention will apply.)

[dtlee]

No, he won't, since the proper depreciation for the software purchased two years ago would be 333.34. (Of course, this ignores that the half-year convention, or more likely, the mid-quarter convention will apply.)

The depreciation for off-the-shelf software follows the straight line rules, not the straight line MACRS rules, and thus there would be no half year or mid-quarter convention. However, if a penny remained, you could always argue that the extra penny remaining was the salvage value.

[DonPriebe]

... However, if a penny remained, you could always argue that the extra penny remaining was the salvage value.

Under the new "Every Penny Counts" regulation, you are required to affix the extra penny to the front of the 1040 in the "For IRS Use Only" box. However, this may cause a problem with e-filing unless you have a really broadband ISP.

[Gary2]

The depreciation for off-the-shelf software follows the straight line rules, not the straight line MACRS rules, and thus there would be no half year or mid-quarter convention. However, if a penny remained, you could always argue that the extra penny remaining was the salvage value.

Good point, thanks for the correction.

But as far as I can tell, regardless of whether it's under MACRS or just standard s/l amortization, the percentage in the last year is always 100%, i.e. the last year takes the full amount remaining.

[PIGLEE]

Here is another twist. My Software Contract says that I am purchasing a "license to use". I DID NOT BUY THE SOFTWARE,

[dtlee]

That is why it is depreciated over 3 years rather than being subject to MACRS. It is an intangible asset.

[Y2KEA]

Another twist

I have been thinking about the pros & cons of expense vs depreciate arguments in this discussion. It has just now dawned on me, (after a couple of drinks, which is when I do my best "thinking") that when you buy/license/rent the software, you generally know you will only do about xxx number of returns.
Therefore the logical method is units of production.