Tax Software

[Bees Knees]

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.

Reg. Section 1.167(a)-1(b), Depreciation in general, useful life.

The reg says: “For the purpose of section 167 the estimated useful life of an asset is not necessarily the useful life inherent in the asset but is the period over which the asset may reasonably be expected to be useful to the taxpayer in his trade or business or in the production of his income.”

Note the concept that we are not talking about how long it will last. It could last forever. For tax purposes, we are talking about the life that it is useful to a business.

Now I know this applies to pre-MACRS and ACRS rules where you had to estimate the useful life to determine the depreciation period. But the same principal should apply for the rule that an asset must have a useful life of more than one year before it is a depreciable asset.

The reg goes on to say: “Some of the factors to be considered in determining this period are (1) wear and tear and decay or decline from natural causes, (2) the normal progress of the art, economic changes, inventions, and current developments within the industry and the taxpayer's trade or business, (3) the climatic and other local conditions peculiar to the taxpayer's trade or business, and (4) the taxpayer's policy as to repairs, renewals, and replacements. Salvage value is not a factor for the purpose of determining useful life.”

Now that is interesting. One of the factors in determining the useful life of something is renewals and replacements. Tax software is renewed and replaced on an annual basis. That is a factor that indicates a one year useful life. I think you are on shaky grounds to continue your argument, Armando.

[Jiggers]

Software

I write off my annual tax software.

My bookkeeping software I write off over 3 years. Annual updates are expensed yearly.

[JG EA]

Business does have to be started.

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.

"Ready and available". Hard to be available if there is no business. See the e.g. after this rule. The word "installed" is used.

[Armando Beaujolais]

O.K. All you folks who say tax software is obsolete after one year. You say you never do prior year returns?

[crickets chirping]

If it's worthless and obsolete, delete it from your computer. Of course no one will do that. Why? Go ahead. Hit the delete button. Don't want to do that? Why not?

Do any of you do amended returns? Does everybody with tax software do amended returns by hand because their prior year software is worthless and obsolete?

My prior year tax software is worthless and obsolete (except when I want to look up client information from a prior year, do a prior year return, transfer information to my new program, or do amended returns).

Now if you'll excuse me, I have to go to some tax returns. A client came in who hasn't filed since 2001. I wish my 2002 and 2003 software wasn't obsolete, that would make it a lot easier. It's going to be a pain to do those returns by hand. But at least my 2004 software is still in service.

[Armando Beaujolais]

"Ready and available". Hard to be available if there is no business. See the e.g. after this rule. The word "installed" is used.

I'm not sure what your citation is.

Mine is IRS Publication 946. Under "Placed in Service:"

"You place property in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Even if you are not using the property, it is in service when it is ready and available for its specific use."

Am I missing something?

[Unregistered]

disagree

Originally Posted by Unregistered
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.

Quote:
Armando Beaujolais

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.

The individual could just as well keep the software and use it to amend his return as well as the professional.

[Black Bart]

Defender of the faith

Hey! Give the guy (Armando) a break! He's just trying to advocate doing the right thing (what a travesty to be required to defend that stance). I was just spouting off, but he's telling us to play strictly by the rules. The rest of us are just arguing for the position of doing the easiest, most convenient, and most beneficial thing for ourselves. He's alone (so was Moses for a while), but that doesn't mean he's wrong (sorry again, Armando--I know you don't need anybody to defend you, but I'm always sympathetic to the underdog).

Yeah, we can 179 it, but strictly speaking he's right. I've got programs from 1999 forward still on my computer and actually a client came in this week who hasn't filed in five years and wants me to catch her up on all of them. Am I going to use those old programs? Of
course I am! Granted, 99% of the use might be in a current tax year, but that other one percent still lives. As I recall, one continues to depreciate idle assets over the allowable life even if they aren't currently being used.

Now, you barbarians (Conan and his cohorts aren't completely extinct); leave that theologian alone! Where'll we be if we exterminate our consciences?

[Bees Knees]

The time period an asset actually will last is not the whole picture. Why does IRS say we depreciate cars over 5 years? I assume some of you have driven vehicles that were older than 5 years.

The life of an asset according to the regulations is determined by considering the following:

1) wear and tear and decay or decline from natural causes,

2) the normal progress of the art, economic changes, inventions, and current developments within the industry and the taxpayer's trade or business,

3) the climatic and other local conditions peculiar to the taxpayer's trade or business, and

4) the taxpayer's policy as to repairs, renewals, and replacements.

The fact that tax software is renewed and replaced on an annual basis suggests the life of it for depreciation purposes is one year or less. Using it three years later for an amended return is relatively minor in comparison to the need for using newer updated software for the majority of your business.

[Armando Beaujolais]

The individual could just as well keep the software and use it to amend his return as well as the professional.

I haven't seen this much stretching since watching Jack LaLane on TV when I faked sick as a kid and stayed home from school.

An individual taxpayer using a prior year tax program to do an amended return would be a freak event. I don't even think those consumer programs are capable of doing that.

Would it be as highly unlikely that a tax professional would use a program to do an amended return? Of course not. We use those prior year programs all the time. Invalid comparison.

"The fact that tax software is renewed and replaced on an annual basis suggests the life of it for depreciation purposes is one year or less. Using it three years later for an amended return is relatively minor in comparison to the need for using newer updated software for the majority of your business."

"Using it three years later for an amended return" suggests that you almost never use prior year tax software and if you do it's only once in a blue moon. That's not true (see above about stretching). You use it for transferring information, amended returns, looking up prior year information, etc., etc., etc. That's a lot more than once every three years.

"Relatively minor in comparison." For one, it's not minor in comparison. You'd consider it a major pain in the comparison if you came into the office and your prior year software had disappeared from your computer. You'd get a headache. You need it. You use it. It is still in service. I don't see anything in the code or regs that says anything about "if use is relatively minor in comparison the asset is no longer considered to be in service."

I do, however, see this in Reg. 1.167(b)(2), "Useful life:"

"For the purpose of section 167 the estimated useful life of an asset is not necessarily the useful life inherent in the asset but is the period over which the asset may reasonably be expected to be useful to the taxpayer in his trade or business or in the production of his income..."

A prior year program is useful in your trade or business. The regs don't say "mostly useful," or "relatively useful."

Everyone's pretending that they hardly ever use prior year tax software and it's not useful. Such is not the case, however.

"Granted, 99% of the use might be in a current tax year, but that other one percent still lives."

Even that 99% figure is off (I'm not arguing your number, I know you were just trying to make a point). But think about it. Say you do 300 returns a year. Are only three going to be prior year? No, the figure is probably going to be in the dozens. In my practice I'd say 5 to 10% of my returns are for prior years. And dangit, it's tough doing all those returns by hand because I deleted my prior year software because it was obsolete.

[Lion]

When I have to replace it

I don't think the point is when I might use it again for amended returns, late filers, etc. I think the point of a specific year's tax software is that I HAVE to replace it with the next year's tax software in about a year. I can't do 2005 taxes efficiently with my 2004 software. I HAVE to buy new tax software every year whether or not I keep my old software. It IS a consumable. (I might not use up that gross of copier paper within a year, either, but it will get used up and I will have to buy more. I'm not going to count the remaining sheets to depreciate them.) I know exactly when I have to buy more tax software; it's before I have to start preparing returns for the next tax year. I might replace any book on 2004 taxes with a new book on 2005 taxes, also. But, I don't have to replace a book about bookkeeping, for instance, every year.

[JG EA]

Pub 946

I'm not sure what your citation is.

Mine is IRS Publication 946. Under "Placed in Service:"

"You place property in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Even if you are not using the property, it is in service when it is ready and available for its specific use."

Am I missing something?

Same publication. My take is it can only be ready for a business activity if there is a business activity!!! How can it be ready for its specific use otherwise.

[Gene V]

Question

I agree with Lion, but I have a question for Bees Knees and Armando; does the Tax software that we buy qualify for the Off-the-shelf software? I understand that

Off-the-shelf computer software is
eligible for first year expensing if it:

1. Is readily available to the general public. (which it is not)
2. Is not subject to an exclusive license. (which it is )
3. Has not been substantially changed or modified. (?)

I think it should be expense each year. I don't think there is any tax codes that related specifically to tax preparation software.

Some of you say it can be use more then 1 year, will so can your office furniture, but we have class life for furniture of 7 years and yet we use the furniture for 10 or more years, should we depr. the furniture for 10 years or go by the tax code. I just don't think tax software is related to the software that off-the-shelf computer software that everyone is talking about.

I could be off base, just thinking out loud.

Gene

[Armando Beaujolais]

I agree with Lion, but I have a question for Bees Knees and Armando; does the Tax software that we buy qualify for the Off-the-shelf software? I understand that

Off-the-shelf computer software is eligible for first year expensing if it:

1. Is readily available to the general public. (which it is not)
2. Is not subject to an exclusive license. (which it is )
3. Has not been substantially changed or modified. (?)
Gene

#1. Not available to the general public? Of course it is. To say it's not available to the general public you're saying your next door neighbor couldn't go out and buy the software if he wanted. The rule says "available to the general public." It doesn't say "desired by the general public."

#2. "Exclusive license?" We could open up a can of worms here that would disqualify massive numbers of software programs if we wanted, but no. Tax software is not subject to an exclusive license. That means your next door neighbor could register the software. You'd sue your next door neighbor claiming you had an exclusive right to that software? What kind of neighbor are you?

The rules you quoted mean that "off the shelf software," as opposed to software that some hotshot code head comes in and develops exclusively for your company from scratch and signs you to an exclusive agreement so you can't go out and sell it on the secondary market. If tax software doesn't fall into the category of "off the shelf," you're eliminating about 90% of the software on the market.

Tax software is eligible for a Section 179 expense. It's a silly argument to quibble about whether you take a Section 179 expense or take it as "materials and supplies." And that's what this argument is all about. It's silly, but we tax folks can't find anybody down at the corner bar to argue tax law with. We're just having some fun.

It's an argument about the principle of whether tax software lasts longer than one year, which of course, it does.

[Gene V]

Thanks

Thanks Armando for explaining this to me, I don't see why I couldn't see it that way.
I think I need to go down to the local bar and clear my head.

[Lion]

Software

I worked for a firm who had software written for them about 1980 and amortized it over three years; they were still paying off the $30,000 loan eight years later when I went to work for them. Software developer could not sell it to anyone else per contract. But, when I go online and order my tax software, so do many of you. Company can sell to anyone it chooses. We pay hundreds of dollars and not tens of thousands. I usually 179 tax software but amortize other software such as QuickBooks. (Although, even with QB, I'm forced to update everytime I have a client with a new version. But, that's a different topic for discussion.)