PLR 9934016: Four software projects approved for deferred expense method

Plain-English summary

A taxpayer that currently deducted software development costs asked to use a deferred expense method for four named projects. The IRS approved a change for costs paid or incurred from the first day of the year of change. The costs would be amortized over 60 months, or a shorter period if the taxpayer established a shorter useful life. Approval required the taxpayer to keep its books and records on the new method, use it in later years unless another change was approved, and attach the letter to its return for the year of change. The permission covers only the four listed projects.

Ruling snapshot

• Question: May the taxpayer change to a deferred expense method for four software projects?
• Outcome: Approved, subject to the stated accounting and return conditions.
• Key authorities: IRC § 174.

Full text (IRS public release)

INTERNAL REVENUE SERVICE
Index No. 174.05-01
Number: 199934016
Release Date: 8/27/1999

CC:DOM:IT&A:9 PLR-103425-99
June 1, 1999
In re:

X = .
A =
B =
C =
D =

Dear

This is in reference to a request filed on behalf of X for permission to change to the deferred expense method of deducting software development costs relating to four computer software
projects, for the taxable year beginning
(year of
change).
It is represented that under the present method of accounting, the taxpayer is currently deducting software development costs. The taxpayer is proposing to capitalize the research and experimental expenditures related to the following computer software projects:

A
B
C
D

The change in accounting method will only apply to the projects listed above for software development costs paid or incurred by the taxpayer on or after the first day of the year of change. The amortization period will be 60 months from the date of completion of each project or over a shorter period (e.g. 36 months in certain cases) where the taxpayer can establish that such costs have a useful life if less than 60 months.
 -2-

Permission is hereby granted the taxpayer, pursuant to the facts presented, to change to the deferred expense method of deducting software development costs for the four projects listed above, paid or incurred on or after the first day of the year of change, and to amortize over a period of 60 months or less, beginning with the year of change, provided:

(1) the taxpayer keeps its books and records for the year of change (provided they are not closed for that year on the date the taxpayer receives this letter) and for later tax years on the method granted in this letter.
(2) that the taxpayer uses the method granted in this letter for the tax year of change and for all later years unless the taxpayer secures permission to change to another recognized method.

(3) that the taxpayer attaches a copy of this letter to its tax return for the year of change as evidence of its authority for making the change.

In accordance with the provisions of a power of attorney currently on file, we are sending this letter to the taxpayer’s representative. A copy will be sent to the taxpayer.

The accounting method change granted in this letter is directed only to the taxpayer who requested it. Section 6001(j) provides that it may not be used as precedent.

Sincerely yours,

Assistant Chief Counsel
(Income Tax and Accounting)

By
J. Charles Strickland
Chief, Branch 9
Identification Number 50-07044