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Off the shelf Software

loboacounting
Level 1

If you choose to make not take section 179 deduction for off the shelf Software, is it fine to amortize it or does it have to be depreciated? 

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TaxGuyBill
Level 14

It is depreciated.

By default, Bonus depreciation applies, so if you don't want that, you need to elect OUT.

 

Computer software is generally a section 197 intangible and cannot be depreciated if you acquired it in connection with the acquisition of assets constituting a business or a substantial part of a business.

However, computer software is not a section 197 intangible and can be depreciated, even if acquired in connection with the acquisition of a business, if it meets all of the following tests.

  • It is readily available for purchase by the general public.

  • It is subject to a nonexclusive license.

  • It has not been substantially modified.

 

If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance, discussed later. If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months.

https://www.irs.gov/publications/p946#en_US_2019_publink1000107354

Norman_taasc
Level 1
 
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loboacounting
Level 1

What should you do if you amortized an off the shelf software in 2018?  Should you amend the return or leave it?

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TaxGuyBill
Level 14

How many years was it being amortized for?

What is the cost of the software?

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Dtaxacct
Level 1

I'm assuming you use the "MACRS 3-year SL" method (option #35 in Lacerte) for depreciating the off-the-shelf software?

Do you just ignore the diagnostic about making an election statement to support the election to use MACRS straight line method for current year assets?

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