How to Expense Software in the Year of Purchase for Tax Purposes

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Businesses have many expenses, and tax time can be a confusing, stressful time. Determining whether an expense can be turned into a tax deduction can seem almost impossible. Business owners must keep all receipts and present them to their accountant at the end of the fiscal year. The accountant will then go through the receipts and determine which expenses are tax deductible and which are not.

Make sure that your software expense qualifies as a lump sum deduction. A business owner can take this guessing game into his own hands by searching the Internal Revenue Service (IRS) website to find qualified deductions. Along with finding whether a particular expense is deductable, the owner can discover whether the item is to be expensed in a lump sum or as a depreciated expense. A depreciated expense is the purchase of an item, used primarily for business purposes, that can be depreciated over a certain number of years.

Understand IRS requirements. The IRS defines computer software as all programs used to make a computer perform a desired task or tasks. It also adds the procedure of maintaining these programs. This includes operating systems, antivirus, accounting software, translators, monitors and any program that would be used to properly maintain a place of business.

Prepare your return as you would normally do. Enter the amount of the acquired software into schedule C of your return. If the software was purchased and modified or if it was developed as a custom program, the cost of the software must be depreciated over a five-year period. This means the cost of the software will be divided by five years and depreciated each year in the owner's tax return.

Keep all receipts for proof of expense in case of audit. The IRS Sec. 179 states that computer software can only be expensed in the same year if the program was purchased from a store and used without any modifications. In other words, if you purchase computer software from your nearest office supply store and use it straight from the box, you can expense it in the year of purchase as a lump sum. Expensing software as a lump sum is only one option. You can also choose to depreciate it over a three-year period.