Tax Software

[Unregistered]

I'm seeing a pretty good increase in my tax practice, in fact I'm expecting next year to be pretty good. I'm trying to push my expenses to 2006 instead of wasting them on 2005 when the income isn't going to be so high. What's best way to take my tax software? Is it better to take it as an expense, or is it better to depreciate it?

[Armando Beaujolais]

You amortize tax software over 36 months. You can't take a current expense on an asset if it lasts more than one year. You have to depreciate it, or in this case, amortize it.

Tax software lasts more than one year. The rules don't say "If the asset is used up MOSTLY in one year, it's a current expense."

Show me a tax professional who never uses prior year tax software for work on prior year returns, and I'll show you a tax professional who doesn't exist. Or at least it's a tax professional who doesn't do many returns.

Even if you never access a prior year tax program, if you keep it on your computer in case you do need to access it, that program is still in service. You can't say a tax program lasts less than a year unless you delete it from your computer after tax season.

I love arguing about gray areas. This one isn't even close. Whether it's best for the bottom line or not is irrelevant.

[JG EA]

Disagree

Actually I'd love to depreciatate yearly software. But it is "replaced" each year. What do others do?

[Black Bart]

Getting away with it--aka "Rollo Tomasi"

As a firmly entrenched member of Mr. Scarecrow's group #2 (see his philisophical essay posted under the heading of "Schedule C or Partnership') I feel obliged to encourage J. G. to do it "your way" and write it off. Live a little--after all, we can't wimp out and let the rulemakers rule us entirely. I happen to know a preparer who's been deducting it (tax software) in its entirety since 1987 with nary a ripple of dissent from the Great Father in Washington. So, the hell with 'em--just because it's a tad grayish-white (sorry, Armando) is no reason to suppress one's penchant for adventurous and somewhat foolhardy undertakings. Remember the words of the immortal Conan the Barbarian's spunky girlfriend--"Do you want to live forever?"

Having birthed the above claptrap, conscience constrains me to tell this story which I
recently related to my dentally-challenged comrade, Snaggletooth, about a preacher who was my father's client for many years. The minister filed on Schedule C which was still allowed at that time, but he took the liberty of deducting his charitable donations as a business expense on that Schedule C rather than running it through "A." His position was that, since he was a minster and must set a good example for the congregation, the tithes were a part of his business and should be deductible on "C." Dad had retired and I told him IRS didn't allow it--he couldn't do it. He replied that he'd been doing it for 30 years and nothing had happened yet, he was retiring, and this would be his last return, that he'd pay the penalties, etc. if it didn't fly, so how about one last hurrah? Well, as I happen to agree with him, it made sense to me (I think it should be a business expense and they should still be allowed to use "C" for their mileage so social security tax doesn't kill them),
and besides this was before the advent of preparer penalties. The upshot of it was that I did it. I ran into him somewhere next year--asked him how it went.
"Not so well," he said, "I got audited and had to pay them a lot of money."
"What did you say," I asked.
"Well, it woulda been okay, 'cause he was just making me pay for the current year, but I
decided to argue with him about the precedent I had set before."
"How's that?"
"He said, just like you did, that I couldn't do that and I said that I didn't know why not since
I had been doing it for 30 years."
"And?"
"He made me pay up for another five years worth of tax."

The moral of this story is--buy cheap software (note: I'm reneging on my solemn vow to never again suffer the slings and arrows of outrageous support nincompoops--I'm buying ATX Saber again--it's just so cheap {$550} I can't stand it). If you do that, then the software deduction won't be more than 25% of income and IRS can only go back three years on you instead of six. Is that a consolation prize or what?

Any opinions on ministers? I think they should still be allowed to do a "C" and put their business miles there. The tithes issue is iffy, but, what the hey, why not?

[Bees Knees]

What?

Tax software lasts more than one year. The rules don't say "If the asset is used up MOSTLY in one year, it's a current expense."

You’ve got to be kidding! You are, aren’t you? Tax software lasts more than one year? No way! If it lasts more than one year, why do they give it away for free the following summer? Try selling your 2004 program on eBay.

And even if it did, you could simply take the Section 179 deduction. You do remember that software is now eligible for Section 179, don’t you?

[Armando Beaujolais]

You’ve got to be kidding! You are, aren’t you? Tax software lasts more than one year? No way! If it lasts more than one year, why do they give it away for free the following summer? Try selling your 2004 program on eBay.

And even if it did, you could simply take the Section 179 deduction. You do remember that software is now eligible for Section 179, don’t you?

You are correct, you can take a Section 179 deduction on off-the-shelf software, and that's probably the correct option for many folks.

My point was whether tax software lasts longer than one year and is therefore a depreciable asset. It's a matter of whether the property lasts longer than one year. Do you dispose of your tax program after a year? No, you don't. You use it. It is still in service.

"So, the hell with 'em--just because it's a tad grayish-white (sorry, Armando) is no reason to suppress one's penchant for adventurous and somewhat foolhardy undertakings."

I'm color blind. Everything is grayish-white to me.

"Remember the words of the immortal Conan the Barbarian's spunky girlfriend--"Do you want to live forever?"

And with that line, we all found out why Conan was irresistably drawn to her.

[Unregistered]

software

The IRS says you can deduct your tax preparation software programs on your individual tax return skd. A, see Pub. 529(under Tax Preparation Fees), now why wouldn’t that hold true if you are in business preparing tax return and deduct your program as a expense on sch. C or what ever business form you use. Not using the sec.179 or amortizing the software.

[Armando Beaujolais]

The IRS says you can deduct your tax preparation software programs on your individual tax return skd. A, see Pub. 529(under Tax Preparation Fees), now why wouldn’t that hold true if you are in business preparing tax return and deduct your program as a expense on sch. C or what ever business form you use. Not using the sec.179 or amortizing the software.

It's reasonable to assume that an individual who prepares one return for himself or herself is not going to use that tax software ever again. It's not reasonable to assume that a tax professional who has a client base of hundreds will not use that software ever again.

The individual effectively abandons the property and takes it out of service as soon as their return is filed. Not so with the tax professional.

[Unregistered]

computer paper

I wonder how you write off your computer paper, if you save a copy of your clients return, do you depreciate it over the time you save the files or do you expense it as office supplies. Now the copy that you give your client could be written off, but how about your copy, that last longer then a year.

[Armando Beaujolais]

I wonder how you write off your computer paper, if you save a copy of your clients return, do you depreciate it over the time you save the files or do you expense it as office supplies. Now the copy that you give your client could be written off, but how about your copy, that last longer then a year.

Regulation 1.162-3:

"...If a taxpayer carries incidental materials or supplies on hand for which no record of consumption is kept or of which physical inventories at the beginning and end of the year are not taken, it will be permissible for the taxpayer to include in his expenses and to deduct from gross income the total cost of such supplies and materials as were purchased during the taxable year for which the return is made, provided the taxable income is clearly reflected by this method."

I believe paper would fall under the incidental category. Not software.

[Bees Knees]

The less than one year rule is based on average use

Armando, I think you are alone on this one. The QF on page 10-13 and O-3 both say software with a useful life of less than one year is deductible as a current expense. I think that was implying tax software. What other software do you know of that lasts less than one year?

Also, Kleinrock’s TaxExper CD under section 191.8, practice tip says “Software with a useful life of less than one year, such as tax preparation software, may be currently deductible as a business expense…” Sure, that was their author’s comment, but that just indicates other people who research tax law for a living think tax software realistically has a less than one year life.

There is also an interesting issue mentioned in Rev. Proc. 2002-27 dealing with the less than one year issue. In that ruling, it said tires and tubes on trucks are current business deductions because on average all of the tires and tubes were consumable in less than one year.

Note the term on average. In other words, they acknowledge tires and tubes on trucks do at times last more than a year. Average implies reasonableness. It is not a hard and fast strict rule that the minute you hit one year and one day, it becomes a depreciable asset. You look at the big picture. Tires on trucks tend to last less than a year, even though many can last three or four years, depending on the circumstances. I would say looking at the big picture with tax prep software, 99% of its use on average is less than one year. Under the reasonable factor of Rev. Proc. 2002-27 then, the average life of computer software is less than one year, thus making it a current deduction.

[JG EA]

Daytime post

I usually post at night, but I get a little time off today.

Yearly software:

The depreciation rules orginally were put into place to reflect the actual accounting methods of businesses.(I think.) Accounting on a tax return should follow the ebbs and flows of actual profit and loss. Of course, the IRS gave Magnanimous Gifts - write offs for things that should have been on the books as assets. Cash accounting may not reflect actual profit and loss, but from year to year the differences equal themselves out.

So following the tenet - that real life should be recorded on my tax return - I will continue to list an expense called Yearly Software and my tax program will be there along with CFS and others. (Norton,etc. is on my asset list and depreciation list.)

Before I said I would like to depreciate the tax software. Actually when I thought about it some more, that is not strictly true. I did at one time want to depreciate my tax software. That's when I wanted to look like I made more than I did. Now I don't want to depreciate it, but want to do what fits in the natural business income and expenses of reality.

[Bees Knees]

JG makes an excellent point. The IRS is always talking about accounting methods that clearly reflect income. Depreciating the yearly purchase of tax software over three years would not clearly reflect income.

It is also another way to look at the useful life of an asset. If you always have to buy a newer version once a year, then it seems odd to say the life of the asset is more than one year.

[Unregistered]

How about this argument. As long as you don't change vendors, you're not purchasing software, you're renewing. You don't get a new asset at the renewal price, you're just maintaining the usefulness.

[Armando Beaujolais]

It is also another way to look at the useful life of an asset. If you always have to buy a newer version once a year, then it seems odd to say the life of the asset is more than one year.

Way back in the old days the recovery period was based on the useful life of the specific asset. Under ACRS and MACRS assets are put into classes with an assigned recovery period. The useful life was a factor in how the IRS determined those recovery periods, but you don't get to look at an asset and decide to recover it over a longer or shorter period than the assigned recovery period.

Look at depreciation for appliances used in rental activities. Those assets used to be depreciated over seven years. Then the IRS came along out of the blue and designated a five year recovery period. Nothing changed in the useful life of the assets. The only thing that changed was the class the IRS put them into.

"As long as you don't change vendors, you're not purchasing software, you're renewing. You don't get a new asset at the renewal price, you're just maintaining the usefulness."

That would fly if you were merely buying an update to your tax software on a yearly basis. But you're not. You're buying new software.

There's nothing in the code or regs with regard to depreciable assets that says assets are considered to be taken out of service when they're mostly used up or almost used up or 90% used up. Assets that are in service are in service. There's not a sliding scale.

How about the rule that depreciation begins when an asset is "ready and available" for use in a trade or business? The business doesn't even have to have started yet. The argument that you have the asset but don't use it so therefore it's not in service would be in direct conflict with that rule.