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IRS offers write-offs for Y2K expenditures
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August 24, 1998 by Blaise Zerega |
From...
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(IDG) -- A little-known Internal Revenue Service procedure may send a sigh of relief through those members of the IT community looking for ways to maximize expenditures on year-2000 projects.
Effective for 1998 filings, companies will be able to write off some costs for repairing computer systems due to year-2000 problems, according to IRS Revenue Procedure 97-50. The procedure was issued by the IRS in 1997 to help companies clarify accounting procedures for the problem.
According to the IRS, companies will be permitted to write off for tax purposes software development costs associated with year-2000 projects; if they previously capitalized and amortized such costs, they should do so again. But companies purchasing software to gain compliance can only claim an expense.
"The distinguishing factor is whether you're making your software compliant or whether you're purchasing software," said Ken Hubanek, a representative for the IRS, in Washington.
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Some attorneys said this distinction is fuzzy for companies seeking to use year-2000 projects as a way not only to gain compliance, but also a way to improve systems. For example, a company replacing legacy systems with SAP R/3 enterprise resource planning software will have to be careful about whether to treat the project as a capitalized or deductible expense.
"If you've got an existing asset, repairs are deductible, but improvements are capitalized," said Brian Wainwright, an attorney at Pillsbury Madison & Sutro, in Palo Alto, Calif.
Small companies will have the ability to write off expenses either way -- as a repair or an improvement -- if a bill introduced in June, H.R. 314, becomes law.
In general, companies would rather treat their year-2000 costs as an expense to get a full deduction.
"Coors would be extremely interested in being able to capitalize their year-2000 costs," said Byron Ferguson, a developer at Coors Brewing, in Golden, Colo. However, some IT directors questioned the idea of providing tax relief for year-2000 expenses.
"I think it makes good sense to capitalize investments that have future value, and fixes for year-2000 system problems really are short-term tactical expenses," said Jeff Winston, vice president of IS technology and operations at Allergan, in Irvine, Calif. "It's a cost of doing business as opposed to an investment that has a future lifetime."
Blaise Zerega is a senior writer for InfoWorld. Lynda Radosevich contributed to this article.