Tax Software-Write Off?

[zeros]

I just got done paying for my tax software which I will use in 2009 for the 2008 tax returns. How do you write this off? I am on a cash basis. In 2009, when I actually use it? 100% write off?

[S T]

Tax Software

As most of us are paying for our tax and accounting software now, May through August,

so see this prior post and it should answer your questions.

Write off in one year as the tax software is only really useable for the year in question.

http://www.thetaxbook.com/forums/showthread.php?t=9019&highlight=depreciation+software

Sandy

[wvtaxguy]

Totally agree with S.T. Tax software is deductible in the year purchased. Other software such as Excel, Word, QuickBooks, etc. is depreciable over several years (depending on exact software).

[erchess]

But wait a minute

I actually read the earlier thread and I agree that it was on point. However, I would like to ask Bees or anyone else why Software does not follow the pattern of insurance and get deducted in the year it is actually used? To me software is closer to insurance than it is to consumable supplies because they generally are used up close to the time of purchase and tracking their purchase and use would not yield enough useful information to justify the effort. On the other hand, with both software and insurance you may pay in advance to get a discount but the matching principle demands that the deduction take place in the year of coverage or the year of use.

[Bees Knees]

TTB, page 8-23:

Prepaid Expenses

In general, an expense cannot be deducted if paid in advance.
This is true for both the cash and accrual methods. Examples
include prepaid interest and prepaid insurance premiums. The
prepaid expense is treated as an asset with a useful life extending
beyond the current year to the year the expense is incurred.

Twelve month rule exception. The prepaid expense rule does not
apply to amounts paid to create certain rights or benefits for the
taxpayer that do not extend beyond the earlier of the following:

• 12 months after the right or benefit begins, or
• The end of the tax year after the tax year in which payment is
made.

Example: Jeff pays an auto insurance policy premium for his business
truck on October 26, 2007 for twelve months insurance coverage
beginning in October of 2007 and ending in October
of 2008. Even though most of the insurance
coverage is for 2008, the twelve month rule
allows Jeff to deduct all of the premium
in 2007.

Under the second bullet above, the tax software is purchased in 2008 and completely used up by the end of 2009 (2009 is the end of the tax year after 2008 which is the year in which payment is made). Thus, the prepaid expense rule for a cash basis taxpayer does not apply.

[Donald Rihn, EA]

But, what about late filers and amended returns?

TTB, page 8-23:



Under the second bullet above, the tax software is purchased in 2008 and completely used up by the end of 2009 (2009 is the end of the tax year after 2008 which is the year in which payment is made). Thus, the prepaid expense rule for a cash basis taxpayer does not apply.

This was brought up in a seminar about expensing the cost of the tax software in the year of purchase.

Invoked lots of thought and discussion.

Instructor wouldn't say yes or no.

All us decided to expense in the year of purchase as there was no way to estimate the number of late filers and amended returns in later years.

[Bees Knees]

Of course this is assuming you take the position that tax software has a useful life of less than one year. Any asset with a useful life more than one year must be depreciated. Thus, the prepaid expense rule is irrelevant for depreciable property. Farmers also have a special rule limiting their ability to deduct pre-paid farm supplies in the year of purchase if the total cost exceeds 50% of all other farm operating expenses.

[Bees Knees]

Another option is to take Section 179 on the tax software and say you placed it in service before the end of 2008 to print out your organizers, or test the software for all the new tax law changes, or run the transfer 2007 files to 2008 feature, or something along those lines. I think most of us install the software when we get the initial disk before the end of 2008 anyway.