Tax smarts: How to deduct web development costs

Website for business? You’re in luck.

“You have to have a website for your business!” You heard this when you first started your business, and if you haven’t launched a website, you’re probably still hearing it. Or maybe you finally broke down and gave your site the facelift it’s been needing. Without a doubt, your business will benefit from a strong online presence.

And that money you put into developing or upgrading your business website can help you out at tax time.

Are you happily surprised that you can deduct web development costs on your taxes? You can use the amounts you spend to put up a website and keep it going to offset the income you bring in from helping your clients.

What website development costs can you deduct?

First things first. You need to have a business purpose for your website. Have a business selling digital family photos on your website? You can deduct the costs of the website. Have an online portfolio of your family photos? Sorry. You can’t deduct the costs associated with a website for personal use. No business use, no deduction.

You’ll face three different situations that will determine when and how you can deduct web development costs.

You develop the website or pay someone to do it before you start your business.

If you are just starting up, the costs associated with a website are considered start-up costs. In this case, you will need to decide whether to

  1. Deduct up to $5,000 of the costs in the year that your business started, and
  2. Amortize (meaning deduct over a period of time) any of the costs beyond the $5,000 over five years, starting with the month that the business starts.

If you don’t decide to do go the start-up route, the expenses are only deductible when you shut down or sell your business.

You buy the website from someone who creates it with sophisticated programming languages.

If this is the case, the website will be considered “software.” You are purchasing the design of your website from the vendor. The costs of the website are amortized over a three-year period starting in the month when you put the website in service.

You buy a website from a vendor, but it doesn’t have complex programming.

In this case, the costs to develop and launch the website are considered an asset. The website would qualify as “section 179 property,” and will be considered eligible for the immediate deduction in the current year. For 2015, the 179 deduction is up to a maximum of $500,000.

Are website hosting costs deductible?

In addition to the web development costs, you might also incur some hosting fees for your website. These would be considered dues and subscriptions, and are deductible on your return.

The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Chris Peden
Chris Peden, CPA, CMA, CFM has spent more than 15 years in the corporate world helping companies meet their regulatory compliance requirements. He also assists small business owners with organizing and making sense of their finance information.