In response to the unceasing advance in technology, multiple business owners are now developing websites for promotions and marketing. We believe that in future time’s websites will do what flyers and paper marketing did in the past. Digital marketing will become a major role player even for small businesses.

These expenses are very substantial. It may come as a relief to those business owners that expenses on websites and software are deductible expenses. But how do we treat this expenditure? Is it day to day business expenditure or capital expenditure?

This depends on the intent behind this expenditure.

Here intent refers to the purpose of the website i.e. whether it’s used to carry on the day to day business activity or it’s just a tool for marketing. Such intent would become a determining factor for the purpose of accounting and taxation matters.

Let’s understand this with some examples-

When the website is for the purpose for revenue generation through operational activities as in case of travel business like Make My Trip or Yatra.com then the intent of the website would operational activities. In such cases the expenditure relating to website would be categorized under revenue expenditure and the same would be charged to the debit of Profit and Loss account to the tune of expenditure incurred during the year.
If you spend Rs.5 lacks on the website, then this would be debited as expenditure bringing down the profit.

On the other hand if you create a website for marketing purposes i.e. promotion of your business, attracting attention of the public towards you then the same would be treated as capital expenditure. So now do we get the benefit of tax deduction in this case? Of course we do!

In such a scenario amortization comes into play. Amortization is the deduction of capital expenses over a specific period of time usually over the asset’s life. More specifically, this method measures the consumption of the value of intangible assets.
The treatment would be as follows- Suppose XYZ Ltd spends Rs. 5 lacks on the website for promotion and advertising. Then this deduction would be available over a period of time and not in the same year. Lets’ assume over 5 years. So every years for the next 5 years a deduction of Rs. 1 lack would be available.

While amortization and depreciation are often used interchangeably, technically this is an incorrect practice because amortization refers to intangible assets and depreciation refers to tangible assets.
Use your website expenses as an effective tax weapon.
To read more about expenses relation to website please click here - How can website expenses reduce your tax liability

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