Online Software Sales Now Qualify For AJCA Tax Deduction

by Mike Godfrey, Tax-News.com, Washington

26 May 2006

The U.S. Treasury Department and Internal Revenue Service (IRS) have performed a U-turn by including software services in final regulations governing the application of a tax deduction passed under the American Jobs Creation Act 2004 (AJCA).

The section 199 deduction relating to domestic production generally equals three percent of income from domestic production activities for 2005, rising to nine percent by 2010.

The activities eligible for the deduction include not only the manufacture of personal property such as clothing, goods, and food, but also the development of computer software, film and music production, the production of electricity, natural gas, or water, and construction, engineering, and architectural services.

The decision to include online software purchases in the final regulations reverses a decision to omit these services in previous guidelines issued in October 2005. The previous regulations extended only to software that was sold on a disk or some other phsyical medium, and could be stored on the user's computer.

The Treasury revealed that in response to more than eighty comment letters received regarding the proposed regulations, the final regulations provide many additional comprehensive rules, definitions, simplifying conventions, and examples to ease the administrative burden on taxpayers.

The tax break will be worth $76.5 billion over the coming decade.

The Treasury and IRS also intend to issue separate guidance regarding amendments made to section 199 in the recently passed Tax Increase Prevention and Reconciliation Act of 2005.

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