Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions through April 15.
Q: Last year I started a personalized book business. I purchased a license agreement and agreed to purchase the raw materials )) from this firm in Texas. The cost of that was about $1,500 and the license fee is $195 every year. Can I deduct all those costs as business expenses or, since basically the main part of what I bought is software, do I have to amortize it over 15 years?
A: The costs of franchises and specialized computer software that you purchase as part of a new business must be amortized over 15 years. It seems that your license agreement qualifies as both. Even though the seller uses the term "license," the IRS would likely consider it a franchise, and the software appears to be customized and essential to the start-up of your business. The $195 license (franchise) fee that you pay each year is fully deductible as a business expense. Keep in mind that computer software is now generally amortized over three years when it is purchased by itself and not as part of a business start-up, as in your case.
The above advice is for general purposes only and is not intended as legal, accounting or tax advice. Specific situations may vary.