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Software acquired after August 10 generally will be subject to amortization over 36 months.

Since the issuance of Rev. Proc. 69-21, computer software costs have generally been amortized for tax purposes over five years unless it was established that the particular software had a shorter useful life. The rules concerning intangible assets enacted as part of the Revenue Reconciliation Act of 1993 (RRA) affect the determination of the amortization period for software acquired after Aug. 10, 1993. (In limited circumstances, this treatment can be elected for acquisitions after July 25, 1991.) These rules set out a general 36-month period for the amortization of software.

As with any tax accounting rule, there are several exceptions to the 36-month amortization period. In fact, there are now four different rules for determining the amortization period for software costs.

1. New Sec. 197 establishes a general 15-year amortization period for "section 197 intangibles." Software will be treated as a Sec. 197 intangible if it is acquired in a transaction or series of transactions that involve the acquisition of assets that constitute a trade or business or a substantial portion of a trade or business. The RRA specifically provides that the term "section 197 intangible" does not include computer software (whether acquired as part of a trade or business or otherwise) that (1) is readily available for purchase by the general public; (2) is subject to a nonexclusive license; and (3) has not been substantially modified.

2. When the cost of software is included in the cost of computer hardware or other tangible property without being separately stated, such costs are treated as part of the tangible property and depreciated. This treatment is the same as that provided by Rev. Proc. 69-21.

3. The cost of software currently deductible (i.e., not capitalized) under pre-August 10 tax law continues to qualify for that treatment.

4. For software not described in the three preceding paragraphs, the amount of the deduction is to be determined by amortizing its adjusted basis ratably over a 36-month period beginning with the month that the computer software is placed in service.
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Author:Swails, J. Edward
Publication:The Tax Adviser
Article Type:Brief Article
Date:Jan 1, 1994
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