Can You Depreciate Computer Software?

Denise Wilkinson

As a business owner, you may have invested a significant amount of money into purchasing computer software for your company. While these purchases can be expensive, they are essential tools that help your business operate efficiently.

But what happens when it comes time to file your taxes? Can you depreciate computer software?

The answer is yes! Computer software can be depreciated over time, just like other tangible assets such as buildings and vehicles. However, there are specific rules and guidelines that must be followed in order to do so.

Firstly, it’s important to understand the different types of computer software. Generally speaking, there are two categories: off-the-shelf software and custom software.

Off-the-shelf software refers to pre-packaged programs that are available for purchase by anyone. This includes popular programs such as Microsoft Office and Adobe Creative Suite. Custom software, on the other hand, is created specifically for a particular business or organization.

When it comes to depreciation, the rules differ slightly for each type of software. Off-the-shelf software is generally depreciated over three years using the straight-line method. This means that the cost of the software is divided equally over three years and deducted from your taxes in each year.

Custom software, however, can be depreciated over a longer period of time – up to 36 months using the straight-line method or up to 60 months using the income forecast method. The income forecast method takes into account expected revenue generated from the use of the software over its useful life.

It’s important to note that in order to depreciate computer software, it must meet certain criteria. Firstly, it must be used in your business or income-producing activity – this means that if you purchased a program for personal use only, you cannot depreciate it on your taxes.

Additionally, the useful life of the software must be determinable – this means that you must have an idea of how long you expect to use the software before it becomes obsolete or needs to be replaced.

In conclusion, computer software can indeed be depreciated on your taxes. However, it’s important to follow the rules and guidelines set forth by the IRS in order to do so properly. If you’re unsure about whether or not you can depreciate a particular program, it’s always best to consult with a tax professional who can help guide you through the process.