Software Purchase and Amortizing Intangible Property

[ndc24075]

In the end of 2022, my company made a significant transaction, which involved purchasing a package of software programs that includes title transfer and all rights, such as copyright. The transaction accounts for approximately 70% of the company's equity value. I am having trouble figuring out how to recognize this purchase in TurboTax.

After some research, it seems like the software package should be classified as "intangible, other property," and then "amortizable intangibles." However, I am confused about the amortization process that TurboTax is requesting, especially which code to choose. Should I choose code "195: business start-up costs" since the software package will become a significant part of the company's business? Or should it be "174: research and experimental costs"?

In addition, TurboTax requires the life of the asset to be determined. How should I determine this, and is it purely based on my judgement?

Furthermore, when entering the details of the purchase, the closest option available is "I purchased this asset" since it is the company that made the purchase. Can you please confirm if this is the correct option to select to accurately reflect the purchase in TurboTax?

[PatriciaV]

Per IRS Pub 535, computer software acquired with the purchase of a business is considered a Section 197 intangible and is amortized over 15 years. This is not a start-up cost or research & development.

Instead, enter this as an Intangible >> Amortizable Intangible that was purchased, code Section 197, useful life 15 years.

Also, if this software is inventory to be sold to the public, the amortization expense would be included in Cost of Goods Sold.

[ndc24075]

@PatriciaV Thanks for your explanation but this is not a purchase of a business. It is just a transaction with a quite significant value. It is just that the transaction value is about 70% of my company. Does this imply that it is a section 197 intangible asset? In the IRS Pub 535 "Computer software. Section 197 intangibles don’t include the following types of computer software.", I think this purchase does not satisfy the first category. But I am not sure whether it satisfies the second one: "Software that isn't acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business."  (which is probably what you are referring to). Perhaps "trade" in the sentence is equivalent to transaction or purchase?

[PatriciaV]

If you did not acquire the software in conjunction with the purchase of a business, it may not qualify under Section 197. I apologize for the misunderstanding.

Most computer software is not a section 197 intangible and can be depreciated, even if acquired in connection with the acquisition of a business, if it meets all of the following tests.

1. It is readily available for purchase by the general public,
2. It is subject to a nonexclusive license and
3. It has not been substantially modified.

If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance. If you can depreciate the cost of computer software, use the straight-line method over a useful life of 36 months (per IRS Pub 946 Intangible Property). 

In this case, choose "Other Property" >> "Other Asset Type" instead of "Amortizable Intangibles" under Assets in TurboTax. You will need to enter the useful life of 3 years (36 months). Section 179 deduction is available for computer software, which allows you to write off the entire purchase price in the first year. This option is limited to your business profit for the year.

If the software doesn't meet the above tests, enter it as Computer (software) >> Computer software. Again, you'll have the option to take Section 179, again limited to your business profit for the year. The useful life defaults to 5 years for computer software.

[ndc24075]

@PatriciaV Thanks. But could you please explain a little more about what it means by "Software that isn't acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business."? My question is more about what it means by "a trade". I am just worried that it may mean "a transaction" which is very broad as my situation does not satisfy the 3 conditions you mentioned:

1. It is readily available for purchase by the general public,
2. It is subject to a nonexclusive license and
3. It has not been substantially modified.

So I would like to make sure it at least satisfies the "Software that isn't acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business."

[RobertB4444]

In this case a trade refers to a skilled professional trade.  Lawyers, accountants, plumbers, etc. are all trades.  'Computer Sales Company' is a business.

As I understand the software package that you purchased - you bought an exclusive use of some software to include ownership of that software.  So it is unique to your company, yes?  In that case you will follow @TurboTaxVal's last instruction above -

If the software doesn't meet the above tests, enter it as Computer (software) >> Computer software. Again, you'll have the option to take Section 179, again limited to your business profit for the year. The useful life defaults to 5 years for computer software.

@ndc24075 

[ndc24075]

@RobertB4444 Correct. It is unique to my company. Thanks for the explanation.