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The Office of the Chief Counsel recently issued Chief Counsel Advice (CCA) 201549024, which reaffirms the principles of Letter Ruling 200236028 regarding the treatment of software costs.
The IRS Rev. Proc. 2000-50 defined computer software very broadly, simply as "any program or routine that causes a computer to perform a desired function or set of functions." There are several distinctions that the IRS makes in terms of computer software, and the treatment of development costs when a business desires to create custom software for its own use.
In the case of software development, taxpayers can treat software development costs as a current expense and deduct them in full or elect to capitalize the costs and amortize them over 36 months beginning with the month the software was placed in service.
If the cost of computer software is not separately stated from the cost of the computer hardware (such as an example of software that is already bundled into the cost of a new computer), taxpayers must capitalize and depreciate the cost of acquired software over five years.
In Letter Ruling 200236028, The IRS came to the following conclusions on the tax treatment of the computer costs:
Shortly after Letter Ruling 200236028 was released, the IRS issued proposed regulations on the application of Sec. 263(a) to amounts paid to acquire, create, or enhance intangible assets (REG-125638-01).
Because of the IRS’s reliance on Rev. Proc.2000-50 to determine the tax treatment of computer software and its failure to mention the letter ruling in the regulation preamble, the Chief Counsel stated in CCA 201549024, “Some taxpayers are taking the position that Rev. Proc. 2000-50 allows the deduction of all software costs. We disagree... If all software costs are currently deductible, then Letter Ruling 200236028 would be obsolete."
However, the Chief Counsel still takes the position that the costs associated with the acquisition of computer software or any modifications to computer software must still be capitalized under Sec. 263(a) and are not currently deductible under Sec. 162. In other words, the Chief Counsel is reaffirming the conclusions provided in Letter Ruling 200236028. As always, however, PLR 200236028 may not be used or cited as precedent.
Exception for "Off-The-Shelf" Software
For 2015 (and prior years), off-the-shelf computer software still qualifies for Section 179 accelerated depreciation. In this respect, this type of asset it treatment more like a tangible asset, and is subject to MACRS.
"Off-the-shelf" computer software any software that is available to the general public for purchase, not subject to an exclusive license, and is not custom-designed for the taxpayer. Examples of qualifying "off-the-shelf" software would include: Lacerte, Quickbooks, Adobe Acrobat, and Peachtree accounting software.