IRS permits deduction of Year 2000 costs.

Many taxpayers have been incurring, or are planning to incur, costs to make their computer systems accommodate the change of the millennium. The IRS has just released a revenue procedure advising that in most cases, these costs are currently deductible. Taxpayers that have been incurring these costs, but have not deducted them, can change their method of accounting to do so by filing Form 3115, Application for Change in Accounting Method. The change can be made for 1997, if necessary, by attaching a Form 3115 to the Federal income tax return for that year, and filing a copy of it with the IRS National Office no later than the time the original is filed with the return.

Sec. 174(a) permits taxpayers to claim current deductions for research and experimental (R&E) expenditures; Sec. 174(b) permits taxpayers to elect to capitalize and amortize the R&E expenditures.

In Rev. Proc. 69-21, the IRS stated that the costs of developing software were similar enough to R&E expenditures to be accorded treatment similar to that provided R&E costs by Sec. 174; the IRS would not disturb a tax-payer's Sec. 174-type treatment (expensing or capitalizing and amortizing) of the costs of developing, purchasing or leasing software, if the treatment was consistent for all the allocable costs.

Now, in Rev. Proc. 97-50, the Service has announced that it will apply Rev. Proc. 69-21 to the costs businesses are incurring to revise their computer systems to accommodate years after 1999. The new revenue procedure specifies it applies to Year 2000 costs incurred to:

* manually convert existing software,

* develop new software to replace existing software,

* purchase or lease new software to replace existing software or

* develop or purchase software tools to assist in converting existing software to be Year 2000 compliant.

From Lee O'Connor, CPA, Washington, D.C.