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How to Depreciate Software

Writing Off Arts and Crafts Business Expenses


In a recent article, I explain the difference between arts and crafts costs versus tax deductible expenses. One of the differences I discuss is the treatment of arts and crafts fixed assets. Fixed assets are any long-term assets you use in the normal course of business. So, when you purchase these items for your arts and crafts business, the price you pay or promise to pay, is a cost. Then as you use the fixed assets in the normal course of your business, you depreciate them.

Getting down to the practical, in this article I explain how to depreciate software you purchase for your arts and crafts business - including creative, business and modified. Ready to get started? Let's depreciate these assets!

Defining Three Year (36 Month) Depreciable Computer Software

You can generally depreciate computer software you buy for your arts and crafts business over three years, if it meets all of the following tests:

  • It is readily available for purchase by the general public - for example QuickBooks, Peachtree, modeling design software such as Rhinoceros, etc.
  • It is subject to a nonexclusive license.
  • It has not been substantially modified from the way it works right out of the box.

For tax purposes, these types of software products are depreciated evenly over three years (although, please note, this article does not address any special expensing depreciation). If you purchase QuickBooks for $180, your monthly depreciation expense is $5. So, if you bought it in July 2012, your total depreciation expense for 2012 is $30 ($5 x six months).

Defining Five Year Depreciable Computer Software

Now if you hire someone to write customized software for your or to modify "off the shelf" software, you have to depreciate the total cost of the software (buying the software plus any labor) over five years. Please note, setting up your company yourself or hiring someone to do it in QuickBooks or the like doesn't count as modifying the software.

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