Maximum Web Tax Deductions
While everyone seems to be developing a presence on the Internet, few drilling contractors or equipment dealers have given any thought to the financial helping hand provided by Uncle Sam in the form of tax breaks. Tax deductions can reduce the drilling or equipment operation's tax bill and sharply reduce the out-of-pocket costs for developing and operating any Web site.
Not too surprisingly, given the complexity of our tax rules, developing and maintaining a Web site involves a variety of costs that should be identified and accounted for separately.
Some costs are immediately deductible as expenses, some are so-called "capital expenses" that can only be deducted over a period of time and some Web costs may not be tax deductible at all.
Few Official Ground RulesNeither our lawmakers nor the Internal Revenue Service have seen fit to address the question of tax deductions for software since 1969. In other words, no regulations spelling out how Web development costs should be treated exist. Fortunately, while there are a lot of questions, there are also a number of precedents which can produce a number of legitimate tax deductions.
Among the questions that have yet to be answered is whether your drilling or equipment operation's foray onto the Internet constitutes a new business. A distributor who opens a retail outlet for the same type of goods it has distributed for years is, for example, considered to have opened a new business. And new business startup costs must be capitalized and written-off over a period of years.
The expenses of a retailer opening another retail outlet or even a distributor opening another warehouse are, usually, considered routine, "ordinary and necessary" business expenses and are tax deductible as "expenses."
Web Site SoftwareSoftware, either purchased or self-created, is considered an "intangible asset" of the drilling or equipment business.
Although the tax rules for purchased software are pretty straightforward, self-created software deductions are more questionable.
Purchased software, which cannot be characterized as an intangible asset acquired as part of a business acquisition, is usually depreciated using the straight-line method over three-years beginning in the month it is placed in service.
The expense of developing software (whether for the dealer or contractor's own use or for sale to others) may be deducted currently or amortized over a five-year period -- so long as such costs are treated consistently.
With each Web site expenditure receiving its own, unique tax treatment, how can anyone differentiate between whether a cost is for software, whether it relates to graphics or whether it relates to content?
Consider DeepHoles, Inc. They created a Web site primarily for advertising purposes, although they have the facilities to actually make sales or request special services on-line. The Web site uses dozens of digitalized photos, some of which are "virtual reality" shots allowing viewers to more fully experience the array of equipment and jobs that can be tackled using it. Thousands of dollars go into creation of these photos. In addition, the drilling-related business pays a designer thousands of dollars to design the "look and feel" of the Web site, including the page layouts and navigational buttons.
The cost of page layouts and navigational buttons will probably be part of the software cost while the photo costs will not.
Those 1969 regulations take no account of non-software elements included in today's software applications such as graphics, sound, video and content.
The Elements -- And Deductions -- Of The WebGraphics integral to a Web page, such as basic design elements and navigational buttons, are generally understood to be part of the software that creates a Web site. Graphics that are part of the content of a Web site are not.
Certain graphics are primarily advertising and are deductible as such. However, for a number of Web sites, most notably adult Web sites, graphics are assets that generate fees. It is questionable whether the costs related to these latter graphics are tax deductible and, if they are, over what period.
ContentStrangely, content is not considered an integral part of the development of a Web site in the same way as are software and graphics. Content is best defined as what is delivered by a Web site. Software might be viewed as the permanent part of the site whereas the content is the material that can be readily changed without affecting the Web site's basic architecture.
Many Web sites are primarily devoted to advertising. Advertising is generally tax deductible as incurred - even when it may result in a long-term benefit to the drilling contractor or equipment dealer. But what about the tax treatment of that non-advertising content?
The content of any Web site includes informational content that is clearly not advertising since what attracts "surfers" to many sites is unbiased advice. Obviously, considerable costs are incurred to develop this content.
Once again, however, the tax rules related to the deduction of such costs is not clear.
Domain NamesWhat is a Web site without a domain name? Today, more and more businesses must pay to acquire an already registered domain name. The rising prices at which domain names change hands begs for a tax deduction. Again, the issue is not a cut-and-dried one.
Section 197 dealing with the acquisition of an intangible asset may apply, resulting in a 15-year life for purchased domain names. Or, a domain name might be classed as one of those intangible assets to which Section 197 does not apply and which has no ascertainable life. In this case, no deduction would be available for the cost of a domain name until it was sold or abandoned.
Fortunately most of the costs of developing and maintaining a Web site for your drilling or equipment business are tax deductible. The argument for breaking down those costs to qualify for the tax deductions that will do your business the most good is bolstered by lack of specific rules over what is deductible, depreciable and not deductible at all.