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June 15, 2022

Tax Court denies deductions under IRC Section 174 and Revenue Procedure 2000-50 for website developerís costs of customizing preexisting software

The Tax Court has held (Gregg Michael Kellett v. Commissioner, Dkt. No. 21518-18) that a website developer could not deduct engineering expenses under IRC Section 174 because his customization of preexisting software did not qualify the expenses as "research or experimental expenditures" under IRC Section 174's regulations. The Court also held that the developer could not deduct the expenses as a "cost of developing software" under Revenue Procedure 2000-50 because he failed to prove that the Internal Revenue Code authorized that deduction. The developer could, however, deduct some of the engineering expenses as business expenses under IRC Section 162 and treat the rest as start-up expenditures under IRC Section 195, which would be deducted ratably over 180 months.


Gregg Michael Kellett v. Commissioner