If you run a business or work as a self-employed contractor, you can write off most of the expenses you incur in order to run your business, including computer software and Web development. However, you may not always be able to write off the entire expense for the year that you incur it. The key is understanding the subtle difference between current and capital expenses.
Computer Software and Website Development Costs
If you need software or website development for your business, you may write off the costs of those items as business expenses. You may write off both the cost of the product as well as any amounts you pay to contractors for technical help or installation.
In order to claim the expense as a business expense, you must use the software or website for work. In some cases, however, you may be able to change the status of certain software or property from personal use to business use, and thus may be able to write off a portion of the item’s value.
Current Versus Capital Expenses
As a general rule, current expenses are costs incurred for items used the year of purchase. For example, rent, utilities, and inventory are current expenses. Capital expenses, in contrast, are expenses related to items that will continue to provide benefits for several years.
To define the difference between current and capital software expenses in particular, the CRA considers software of an “enduring nature” to be depreciable, meaning it is considered to be a capital expense.
However, the agency has not outlined differences between current and capital website development costs, leaving them open to interpretation based on the principles of Income Tax Folio S3-F4-C1.
Classes of Depreciable Property
To address the fact that different items depreciate at different rates, the CRA has a number of different classes of depreciable property. Depending on the type of software you buy, it may fall into a number of these categories. The category of the software determines how you claim the expense on your tax return.
For example, systems software for photocopiers and fax machines falls into class 8 with a capital cost allowance rate of 20 percent. This means that if you purchase photocopier systems software for $600, you may write off 20 percent, or $120, each year for five years.
However, systems software for computer hardware or data-processing equipment falls into class 10 with a capital cost allowance rate of 30 percent. This means that if you spent $600 on software in this category, you may write off $180 for the year of purchase.
If you dispose of the software before claiming all of its capital cost, you may write off a portion of the unclaimed CCA.
If you purchase software that falls into almost any category besides systems software, the CRA considers it to be a capital cost, but allows you to deduct 100 percent as the software falls into class 12.
References & Resources
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