That New Website or App May Provide Unexpected Tax Savings

The following guest blog was written by Denver based public accounting firm ACM LLP in partnership with Neon Rain

When it comes to developing or redeveloping their website or web app, business owners have a lot of tough decisions to make.  In addition to the minute details of design and functionality, there are many considerations regarding budgeting and investment.  While it’s certainly a good idea to get the best bang for the buck, there’s one factor that many businesses often don’t account for – the potential tax savings that could help cover some of the cost.

The biggest opportunity that could provide some cash-flow relief is the Credit for Increasing Research Activities, often referred to as the Research & Development (or R&D) Credit.  Lab coats and test tubes may come to mind when thinking of “research,” but the credit is available for many types of software development, which can include websites and apps.  Each situation is unique and would require the council of a qualified and knowledgeable CPA, but in general sites that are a source of revenue and more than just publicizing marketing information about offline services may qualify.  Recent changes to the tax code also allow the option for certain small businesses to claim the credit against payroll taxes rather than just income taxes, so even pre-profit companies that have employees can see an immediate benefit, despite not yet owing income taxes.  Many states offer some type of R&D credit as well. 

Another tax-savings tool is the deductibility of website development costs.  The tax code generally requires that investments that provide long-term benefits, such as equipment purchases or trade names and customer lists from the acquisition of another firm, be deducted over time rather than all at once.  However, though website and app development should (hopefully) provide benefits beyond the first year, in most cases these costs are fully deductible in the year they are incurred.  These rules prevent the awkward timing difference between cash flow and tax deductibility that businesses frequently deal with, and instead provide immediate tax benefits.  Depending on the structure and profitability of the business and the amount invested, the savings can be substantial.

As promises of a simplified tax code continue to go unfulfilled, it is critical for businesses to take advantage of every potential break they are presented.  We’ve provided two examples of some often-overlooked opportunities, but if you don’t work with a tax accountant with experience and a client-base in your industry, you could be missing out.  If you would like to discuss your specific situation further, I’d love to start a conversation. 

This article was written by Mark E. Lumsden, CPA, CCIFP. He can be reached at MLumsden@acmllp.com or 303-440-0399.

Disclaimer: Neon Rain Interactive does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.