Trying to figure out the best category for software,cloud expenses, website hosting, etc. Seems like these would be a pretty standard expenses in 2016 for my business and can't find it in any of the examples!
While your expenses are definitely becoming increasingly common, the IRS doesn't have a special "category" listed on Schedule C. You may enter them as Other Expenses; create your own description and enter the amount.
There are special rules, however, for computer software.
* If the software is purchased by itself, rather than being part of the hardware cost, it is treated as an intangible asset and must be capitalized (depreciated).
* If the cost is bundled and not separately stated, it's part of the hardware and depreciated as part of the cost of the hardware over five years. However, under Section 179, you can write off a whole computer system (including bundled software) in the first year of purchase.
* If you lease a software, it is considered as rent expense on your business.
https://www.irs.gov/publications/p535/ch08.html#en_US_2014_publink1000208981
While your expenses are definitely becoming increasingly common, the IRS doesn't have a special "category" listed on Schedule C. You may enter them as Other Expenses; create your own description and enter the amount.
There are special rules, however, for computer software.
* If the software is purchased by itself, rather than being part of the hardware cost, it is treated as an intangible asset and must be capitalized (depreciated).
* If the cost is bundled and not separately stated, it's part of the hardware and depreciated as part of the cost of the hardware over five years. However, under Section 179, you can write off a whole computer system (including bundled software) in the first year of purchase.
* If you lease a software, it is considered as rent expense on your business.
https://www.irs.gov/publications/p535/ch08.html#en_US_2014_publink1000208981
According to the above, I'd say if you're paying a monthly fee for something like Dropbox, then you'd enter it as a rent expense. The reason being that if you stop paying your fee, you don't own any software or have access anymore.
Since there is not a direct expense for cloud-based software you can categorize it as Rent Expense if you pay a monthly fee and do not own the software. This is because if you stop paying the monthly fee you no longer have access to the service.
The other option is to create your own category for Software and Cloud Expenses.
Link to MargaretL's response for category for software and cloud expenses
Is this true for other SaaS as well that aren't cloud related? For example, I run a yoga studio and I'm wondering how to categorize my CRM (we use MindBody) or how to categorize the studio subscription to Spotify (an online music streaming service). So they aren't things I'm holding documents on, but the service does stop if I don't pay monthly.
Is there a disadvantage or advantage tax-wise to putting them in the chart of accounts under "Other expenses" or under "Rent"?
Thank you!
Morgan
It is not critical what expense categories you put them in as they will be deductible anyways. I suggest if you are unsure, just set up a new expense category and give it a descriptive name.
You will just need to add an account named "Software and Cloud Expenses"
I think it could make a significant difference as to how one categorizes cloud/online software, apps and storage, etc. For example, under the first Paycheck Protection Program rent expenses and certain utilities were eligible for forgiveness under the Small Business Administration's rules. Of course, as the program was designed to keep people employed and businesses operating, the rules also required that a certain percentage of loan proceeds be dedicated to payroll.
I have always thought of the monthly fee SAS stuff as "Dues & Subscriptions", since they seem to fit the concept of a subscription. Is there a reason I should not do that?
No there is no reason you cannot put the monthly subscription payments for electronic access to items needed in your business in the subscription category. Originally the category was for magazines, newspapers, etc but these days that is now electronic.
Just wondering what the best category is for software and cloud expenses for 2021
I put these expenses in as rent when I did my PPP loan request.
You indicated we could use Subscriptions but here is what turbo tax states in Explain this:
(Online subscriptions for business programs like Craftsman Appraisal Estimator, Alamode for Appraisal programs, and many others that we subscript to and pay months fees for use for my business) they do not seem to fit these) Are you saying this is no longer correct?
Dues/Subscriptions
You can deduct these types of subscription fees when they are business-related:
Examples include:
- Professional journals
- Technical journals
- Trade journals
You can deduct these types of membership dues when they are business-related:
- Trade boards
- Business leagues
- Chambers of commerce
- Civic or public service organizations
- Real estate boards
- Trade associations
- Professional organizations (e.g., bar and medical associations)
You cannot deduct membership dues for any club organized for business, pleasure, recreation or social purpose including:
- Business
- Social
- Athletic
- Luncheon
- Sporting
- Airline
- Hotel
The Explain This is correct, but it is just a small sample of what you can include in that section. If you have software business subscriptions, the fees would go under subscription.
If you would prefer to enter them in more detail, you can enter them as miscellaneous expenses and enter each one with details and cost. It will not make a difference if you enter them in Miscellaneous or Subscriptions on the final result of the return.