IRS ANNOUNCES RULES FOR DEDUCTING YEAR-2000 REPAIRS

By Vernon K. Jacobs, Asset Protection Strategies

Even though it seems unlikely that the IRS will get their own computer systems fixed before the year-2000 (Y2K) problem affects their systems, they have issued an announcement (97-50) explaining how the rest of us can treat our Y2K repair or replacement costs. Generally, the cost of buying or modifying any computer systems will be taxed in the same manner as buying or developing new software. Where software is acquired as part of a system that includes hardware, the software can be written off the same way as the hardware. Thus, to the extent that the hardware qualifies for the IRC section 179 deduction of up to $18,000 (for 1997), the software is deductible. Otherwise, it's depreciated along with the cost of the hardware. Software that is purchased separately can be depreciated over five years, or its useful life if that's less than five years. (If it has to be replaced every year, it can be deducted in one year.) Self-developed software can be amortized over its useful life or may be eligible for the special research expense and tax credit rules set forth in Rev. Proc. 69-21. *