Millions of businesses use at least one small business software platform to do everything from running payroll to managing customer relationships. Software can simplify processes, save time, and ensure accuracy. But the more systems you use, the greater your costs. Can you take a software tax deduction to offset your expenses?
Tax deductions can save you hundreds or thousands on your small business tax return. Understand what tax deductions are available to take advantage of and reduce your tax bill.
What types of software do business owners use?
There are several types of software on the market, designed to streamline everyday business tasks. You can use subscription-based software or purchase software outright.
Types of software include:
Can you claim a software deduction?
Yes, you can typically deduct software costs as a business expense—granted it meets the necessary qualifications.
The IRS provides a list of tax deductions, including bad debts, insurance, legal and professional fees, and the business use of your home.
According to the IRS, you can deduct business expenses (aka the costs of operating your business) if they are both ordinary and necessary.
Here’s how the IRS defines “ordinary and necessary:”
- Ordinary: An expense that’s common and accepted in your field of business
- Necessary: An expense that is helpful and appropriate for your business
Accounting and payroll software costs, for example, generally qualify for a software tax deduction.
Is software 100% deductible?
Software can be 100% deductible if you use the software exclusively for your business.
If you use the software for both personal and business purposes, only deduct the portion of the software you use for business.
Again, the software must meet the ordinary and necessary expense requirements to qualify for a tax deduction.
How to deduct software subscriptions
Ready to recoup what you spent during the tax year? Use the following tips to learn how to deduct software subscriptions.
1. Make sure it’s ordinary and necessary
Again, the IRS allows business expenses that are both ordinary and necessary. Verify the software expense you want to deduct meets these requirements.
Deductible software expenses that may qualify as “ordinary and necessary” include accounting, payroll, marketing, and project management software.
2. Deduct the cost associated with business use
You can only deduct the portion of the expense that you use for business purposes.
If you use the software exclusively for your business, you can deduct the full cost.
If you use the software for both business and personal reasons, only deduct the portion associated with your business.
3. Report the deduction on your tax return
Claim the software tax deduction on your small business tax return. The type of return you file and where you include the software expense depends on your business structure.
| Business Structure | Business Tax Return | Where to Claim Software Deductions |
|---|---|---|
| Sole proprietorship | Schedule C | “Other expenses” |
| Single-member LLC | Schedule C | “Other expenses” |
| Partnership | Form 1065 | “Other deductions” |
| Multi-member LLC | Form 1065 | “Other deductions” |
| Corporation (and LLC taxed as corporations) | Form 1120 | “Other deductions” |
| S Corp | Form 1120-S | “Other deductions” |
4. Keep supporting documents in your records
Keep all software subscription or one-time software records to back up your software deduction claims.
Records you may need to keep include:
- Software receipts or invoices
- Bank or credit card statements
- Contracts or agreements, if applicable
5. Consult a tax professional
Taxes can be overwhelming and stressful for many business owners. Nobody wants to deal with penalties or a less-than-deserved tax deduction.
Consider consulting a tax professional to help maximize your deductions and verify accuracy. They can help you find credits and deductions and make sense of your accounting records.
What expenses are 100% deductible?
Software isn’t the only expense you can deduct on your business tax return. Several other business expenses can be 100% deductible, including:
- Office furniture
- Office equipment
- Business travel
- Office parties for non-highly-compensated employees
Talk with a tax professional to learn more about which business deductions you may be able to claim.
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This is not intended as legal advice; for more information, please click here.
