Recovering Computer Software Costs: Where Are We?

By Maples, Larry; Earles, Melanie James | The CPA Journal, April 2002 | Go to article overview

Recovering Computer Software Costs: Where Are We?

Maples, Larry, Earles, Melanie James, The CPA Journal


Muddled Rules for Software costs

Applying Treasury Department and IRS regulations on the deductibility of software costs requires patience. Two Treasury attempts at writing regulations for the deduction of costs under IRC section 174 met with so much criticism that they were abandoned. In the absence of Treasury regulations, the IRS's hard-line temporary regulations on the IRC section 41 credit on deducting internal software development costs are being applied even though their adoption has been delayed indefinitely. The IRS's Industry Specialization Program has issued useful guidance that the IRS has been following consistently, a good indication of the shape the final regulations will take.

Businesses can recover software costs in several different ways. Certain internally developed software costs may be expensed immediately, while other software costs are subject to various amortization periods (three, five, and 15 years). Software development may also qualify for the IRC section 41 research credit.

The IRS recently issued guidance on handling software costs. Revenue Procedure 2000-50 clears up some ambiguities in previous guidance but does not clarify what constitutes internally developed software. The rules for acquired software are now clear, but remain muddled for developed software. Recent court decisions and a regulations project have addressed the standards that must be met for internal-use software to qualify for the research credit.

Acquired Software

Software costs included in the cost of hardware are capitalized and depreciated as part of the cost of the hardware. Thus, non-separately stated software is depreciated over five years using 200% declining balance depreciation under the modified accelerated cost recovery system (MACRS).

Separately stated acquired software can be treated as a capital expenditure amortizable over 36 months starting with the month the software is placed in service, consistent with Treasury Regulations section 1.167(a)-14(b). The recent revenue procedure restates this rule in order to clarify that the rules for acquired software in Revenue Procedure 69-21, which called for amortization over five years unless the taxpayer could establish a shorter period, have been superseded.

The new revenue procedure does not apply to IRC section 197 intangibles. Acquired software that is classified as a section 197 intangible must be amortized over the significantly longer period of 15 years. Taxpayers can, however, use two significant exceptions to remove most acquired software from the reach of this 15-year rule.

IRC section 197(e)(3)(A) and Treasury Regulations section 1.1972(c)(4) provide exception for two types of software that will be amortizable over a 36-month period:

* Software that is acquired separately

* Software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified.

The disparity between amortization periods may create tension between taxpayers and the IRS. For example, taxpayers will be inclined to interpret the definition of computer software as broadly as possible in order to be eligible for one of the exceptions above. IRC section 197 defines computer software as "any program designed to cause a computer to perform a desired function." This broad definition is narrowed to exclude databases or similar items unless they are in the public domain and incidental to operation of the software. According to the 1993 House of Representatives Conference Report [680; and Treasury Regulations section 1.197-2(c)(4)(iv)], under this definition a spell-check feature is computer software, even though it is a database, because it is incidental to the word-processing program. Definitional questions are inevitable, because of the IRS holding that an item which is not computer software must be amortized over 15 years. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)


1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

Cited article

Recovering Computer Software Costs: Where Are We?


Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.