Can You Depreciate Online Software That Had Initial Purchase Fee?

jdgriffin86 · ‎March 4, 2021

Just to provide some background: I run an online, Amazon business. I purchased some online software this year that, essentially, searches Amazon for profitable books to sell and cross references those items to sources for purchase. The software works via web browser and integrates with Amazon as noted above.

This software had a large initial purchase price along with a monthly fee. I know the monthly fee would be treated as an expense. I'm fairly certain the software is legally depreciable given that it is: (1) Used for an income producing business activity, (2) Is readily available for purchase by the general public, (3) Is subject to a nonexclusive license, and (4) Has not been substantially modified.

These things being true, I believe this qualifies the initial purchase price to be depreciated over 36 months (according to IRS depreciation guidelines for computer software). Does anyone have a different or confirming opinion?

Carl · ‎March 4, 2021

You're spot on correct, with one caveat.

If you have physical possession of the software installation media (which includes downloading the installation program and burning it to CD) then the software is (I think) amortized and deducted over 36 months, instead of being capitalized and depreciated.

With depreciation, you have to recapture that depreciation and pay taxes on it at some point in time (such as when you sell or dissolve the business). Where as with amortization, the cost of the software is actually deducted over time (36 months in your case) and remains a deduction forever, that never has to be recaptured/taxed.

The monthly fees you pay could be reported/claimed as a professional fee, a subscription expense, or a rental expense; whichever is more appropriate for your situation.

Anonymous_ · ‎March 5, 2021

@Carl wrote:
Where as with amortization, the cost of the software is actually deducted over time (36 months in your case) and remains a deduction forever, that never has to be recaptured/taxed.

See https://www.irs.gov/publications/p544#en_US_2019_publink100072567