I know what you may be thinking after reading this post’s subhead: Only an accountant, CFO, or colossal nerd would want to read about website amortization, tax deductions, and reported income. While I concede that they may not be the most fascinating or “coolest” of subjects, understanding the value of website amortization is crucial for a business. Consider this post a small holiday gift that could help generate big savings and benefits over the long term.
First, the basics.
As you probably know, depreciation is a method of allocating a fixed asset’s cost over the course of the asset’s “life.” Perfect examples of fixed assets include your property and equipment—physical elements that allow you to operate your business. Similarly, amortization is a method of allocating an intangible fixed asset’s cost over the course of the asset’s “life.” Perfect examples of intangible fixed assets include brand names, copyrights, and trademarks—non-physical elements that allow you to operate your business.
Here’s where things get interesting: You can amortize the creation, development, and design of your business’s website.
That’s right. Your business’s website is an intangible fixed asset. And depending on whom you talk to, the current lifetime for a website is between 3–5 years. So, let’s say in 2015 you create a new website. Instead of expensing the cost of this website in 2015, you can spread, or amortize, the cost of the website over the next 3–5 years. (Please note that basic website updates/maintenance should be treated as traditional business expenses.)
There are different amortization methods you can use. Probably the simplest method is “straight-line amortization,” where you divide an intangible fixed asset’s cost by the asset’s lifetime. So, if the hypothetical website we mentioned above costs you $15,000, and the lifetime of the website is determined to be 3 years, then you would expense the machine $5,000 per year. Makes sense, huh?
Let’s talk about the benefits.
- Most important, website amortization allows you to spread the deduction of a large investment across several years—and to build new tax deductions as your business grows. This is specifically helpful for new businesses, which typically invest heavily in the initial years with little need for additional deductions but often look for deductions in the future when profits begin to increase. Remember the hypothetical website mentioned earlier that cost $15,000? Let’s say a new business created a website that cost the same amount. This company would benefit financially by deducting $5,000 a year over 3 years (a duration of probable growing profits) instead of deducting the entire $15,000 during the first, low-profit year.
- Secondly, website amortization allows more income to appear on P&Ls, which can help businesses in need of investments or bank loans. Less expenses = more reported income. Therefore, spreading the burden of a large expense over multiple years can help reduce the impact of intangible purchases in the eyes of investors and bankers. Website amortization can also help reduce fluctuations in your P&Ls, allow you to identify business growth and possible profitability even in the early stages of your business, and show an increase in assets on your balance sheet.
As you can see, website amortization makes sense (and cents). But remember that I am a Panda in the world of marketing, not a Svengali in the world of accounting—and that the financial rules regarding website amortization are still relatively new and in flux. I recommend using what you might have learned from this post to start a larger conversation about website amortization with your CPA. Good luck, and Happy Holidays from Lion + Panda!