IRS issues guidelines on treatment of computer software.
Computer software also includes any incidental and ancillary rights necessary to effect the acquisition of the title to ownership of or right to use the computer software, and that are used only in connection with that specific computer software. Computer software does not include any data or information base described in Regs. Sec. 1.197-2(b)(4) (e.g., data files, customer lists or client files), unless the database or item is in the public domain and is incidental to a computer program. Nor does it include any cost of procedures that are external to the computer's operation.
Except as otherwise expressly provided, under Sec. 446(e) and Regs. Sec. 1.446-1(e); a taxpayer must obtain IRS consent before changing an accounting method for Federal income tax purposes. Regs. Sec. 1.446-1(e)(3)(ii) authorizes the Service to prescribe administrative procedures setting forth the limitations, terms and conditions deemed necessary to permit a taxpayer to obtain consent to change methods.
The revenue procedure does not apply to any computer software subject to amortization as an "amortizable Sec. 197 intangible," as defined in Sec. 197(c) and the regulations thereunder, or to costs that a taxpayer has treated as a research and experimentation expenditure under Sec. 174.
Costs of Developing Software
The costs of developing computer software (whether or not the particular software is patented or copyrighted) so closely resembles the kind of research and experimental expenditures that fall within the purview of Sec. 174 as to warrant similar accounting treatment. Accordingly, the IRS will not disturb a taxpayer's treatment of costs paid or incurred in developing software for any particular project, either for the taxpayer's own use or to be held by the taxpayer for sale or lease to others, if:
1. All of the costs properly attributable to software development by the taxpayer are consistently treated as current expenses and deducted in full in accordance with rules similar to those applicable under Sec. 174(a); or
2. All of the costs properly attributable to software development by the taxpayer are consistently treated as capital expenditures recoverable through deductions for ratable amortization, in accordance with rules similar to those provided by Sec. 174(b) and the regulations thereunder, over a period of 60 months from the date of completion of the development or, in accordance with rules provided in Sec. 167(f)(1) and the regulations thereunder, over 36 months from the date the software is placed in service.
Costs of Acquired Software
For costs of acquired computer software, the Service will not disturb the taxpayer's treatment of:
1. Costs included, without being separately stated, in the cost of the hardware (computer), if the costs are consistently treated as a part of the cost of the hardware capitalized and depreciated; or
2. Costs separately stated, if the costs are consistently treated as capital expenditures for an intangible asset, the cost of which is to be recovered by amortization deductions ratably over a 36-month period beginning with the month the software is placed in service, in accordance with the rules under Sec. 167(f)(1); see Regs. Sec. 1.167(a)-14(b)(1).
Leased or Licensed Software
When a taxpayer leases or licenses computer software for use in its trade or business, the IRS will not disturb a deduction properly allowable under Regs. Sec. 1.162-11 as rental. However, an amount described in Regs. Sec. 1.162-11 is not currently deductible if (without regard to Regs. Sec. 1.162-11) the amount is properly chargeable to capital account; see Regs. Sec. 1.197-2(a)(3).
A change in a taxpayer's treatment of costs paid or incurred to develop, purchase, lease or license computer software to a method described in this revenue procedure is a change in accounting method to which Secs. 446 and 481 apply. However, a change in useful life under the method described is not (Regs. Sec. 1.446-1(e)(2)(ii)(b)).
A taxpayer that wants to change its accounting method under this revenue procedure must follow the automatic accounting method change provisions of Rev. Proc. 99-49 (or its successor), with the following modifications:
1. To assist the Service in processing changes in accounting methods and to ensure proper handling, Form 3115, Application for Change in Accounting Method, filed under this section, must include the statement: "Automatic Change Filed Under Section 8.01 of Rev. Proc. 2000-50." This statement must be legibly printed or typed at the top of any Form 3115 filed under this revenue procedure.
2. If a taxpayer is changing to the method described in "Costs of Developing Software" in this revenue procedure, the taxpayer must attach a statement to the Form 3115, stating whether it is choosing the 60-month period from the completion date of the software's development or the 36-month period from its placed-in-service date.
For tax years ending on or after Dec. 1, 2000, the IRS will not disturb a taxpayer's treament of computer software costs, handled in accordance with the practices described in this revenue procedure. For tax years ending prior to Dec. 1, 2000, the Service will not disturb the taxpayer's treatment of computer software costs, unless its treatment is markedly inconsistent with the practices described in this revenue procedure. The absence of any formal election similar to that required by Sec. 174 or the amortization of capitalized software costs over a period shorter than the five-year period specified in Sec. 174(b) (but not less than 36 months for costs paid or incurred after Aug. 10, 1993 or, if a valid retroactive election has been made under Temp. Regs. Sec. 1.197-1T, July 25, 1991) will not characterize the taxpayer's treatment of the costs as markedly inconsistent with the principles of this revenue procedure. In addition, the amortization of acquired software previously described (i.e., treated as an intangible asset over a period of 60 months or less but in no case less than 36 months for costs paid or incurred after Aug. 10, 1993 (or after July 25, 1991 if a valid retroactive election has been made under Temp. Regs. Sec. 1.197-1T), will not characterize the taxpayer's treatment of these costs as markedly inconsistent with the principles of this revenue procedure.
This revenue procedure is effective for Forms 3115 filed on or after Dec. 1, 2000, for tax years ending on or after that date. The IRS will return any Form 3115 filed on or after Dec. 1, 2000, for tax years ending on or after that date, if the Form 3115 is filed with the National Office pursuant to the Code, regulations or administrative guidance other than this revenue procedure and the accounting method change is within its scope.
REV. PROC. 2000-50, IRB 2000-52
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|Author:||Fiore, Nicholas J.|
|Publication:||The Tax Adviser|
|Date:||Mar 1, 2001|
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