Whether software is depreciated or amortized depends on how a business obtained it. Off-the-shelf software a company buys is depreciated over 36 months, though most purchases now qualify for immediate expensing. Software picked up as part of buying another business is amortized over 15 years. Software a company develops itself is, as of 2025, fully deductible in the year the costs are incurred when the work is performed in the United States. The method isn’t optional, and choosing the wrong one can misstate a return or leave deductions unclaimed.
Off-the-Shelf Software You Purchase
Commercial software available to the general public — productivity suites, accounting programs, operating systems, design tools sold under a standard license — is depreciated using the straight-line method over a useful life of 36 months, starting from the month it’s placed in service.1Office of the Law Revision Counsel. 26 USC 167 – Depreciation A $9,000 purchase in January produces a $3,000 deduction each year for three years.
To qualify for this treatment, software must meet three tests: it is readily available for purchase by the general public, it is subject to a nonexclusive license, and it has not been substantially modified for the buyer.2Internal Revenue Service. Publication 946 (2025), How To Depreciate Property Most commercial software clears all three without issue. Custom modifications that go beyond basic configuration can push the software into a different category with different rules.
Maintenance and support agreements bought alongside the software are handled separately. Annual fees for updates, patches, and technical support are generally deducted as ordinary business expenses in the year they’re incurred rather than capitalized with the software.
Immediate Expensing: Section 179 and Bonus Depreciation
In practice, most businesses buying off-the-shelf software won’t spread the cost over 36 months at all. Two provisions let a buyer deduct the full purchase price in year one, and at least one usually applies.
Section 179
Section 179 lets a business deduct the entire cost of qualifying off-the-shelf software in the year it’s placed in service. The software must be used in a trade or business and meet the same three tests above. For the 2026 tax year, the maximum Section 179 deduction is $2,560,000, and this limit begins to phase out dollar-for-dollar once total qualifying property placed in service exceeds $4,090,000.2Internal Revenue Service. Publication 946 (2025), How To Depreciate Property Few small or mid-sized businesses will hit those ceilings on software alone.
One limit does matter: the Section 179 deduction cannot exceed the business’s taxable income for the year. A business earning $50,000 that buys $80,000 in software can only deduct $50,000 under Section 179, with the remaining $30,000 carried forward. Some states also cap Section 179 well below the federal number, so a purchase that’s fully deductible federally may still need to be depreciated over time on a state return.
100% Bonus Depreciation
The One, Big, Beautiful Bill Act permanently restored 100% bonus depreciation for qualifying property acquired after January 19, 2025. Computer software is explicitly eligible.3Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System Unlike Section 179, bonus depreciation has no dollar cap and no taxable-income limit. It can create or increase a net operating loss.4Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill
Timing matters at the edge. Software acquired on or before January 19, 2025, but not placed in service until 2026, gets only 20% bonus depreciation under the prior phase-down schedule. Anything acquired after that date qualifies for full 100% expensing. For most current purchases, the 36-month schedule is a fallback rather than the default.
Software Acquired in a Business Purchase
Software that comes packaged inside a business acquisition follows entirely different rules. When software is obtained as part of buying an entire business or a substantial portion of one, it’s classified as a Section 197 intangible. The cost must be amortized ratably over 15 years (180 months), starting with the month of acquisition.5Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles That’s the same recovery period the tax code assigns to goodwill, customer lists, and trade names in a deal.
The 15-year timeline is slow compared to the 36-month schedule for standalone purchases, and there is no way to accelerate it with Section 179 or bonus depreciation. The IRS treats all Section 197 intangibles as a single package, which prevents a buyer from cherry-picking faster write-offs on individual pieces of an acquired business.
One exception matters. Off-the-shelf software acquired in the deal still escapes the 15-year rule if it meets the three tests: readily available to the general public, nonexclusive license, and not substantially modified.2Internal Revenue Service. Publication 946 (2025), How To Depreciate Property A standard operating system or accounting package included in an acquisition can still be depreciated over 36 months or expensed under Section 179. Custom-built software unique to the acquired business is locked into the 15-year schedule.
Software Your Business Develops In-House
The rules for internally developed software changed significantly in 2025, and pre-2025 guidance is likely to point users toward the wrong method now.
Domestic Development
The One, Big, Beautiful Bill Act created new Section 174A, which permanently restores immediate expensing for domestic research and experimental expenditures — including software development — for tax years beginning after December 31, 2024. For 2025 and 2026 returns, a business can deduct the full cost of developing software in the United States in the year those costs are paid or incurred. A business may instead elect to capitalize domestic development costs and amortize them over at least 60 months.
Activities treated as software development include planning, requirements documentation, design, writing source code, converting code to machine-readable form, and testing through the point the software is placed in service.6Internal Revenue Service. Guidance on Amortization of Specified Research or Experimental Expenditures Under Section 174 Notice 2023-63 Programmer salaries, contractor fees, and directly related overhead qualify. Costs that fall outside the development umbrella include loading content into a website, paying for website hosting, and registering a domain name or trademark.
Foreign Development
The Section 174A fix applies only to domestic work. Software development performed outside the United States, Puerto Rico, or U.S. territories still must be capitalized and amortized over 15 years (180 months), beginning at the midpoint of the tax year the costs are incurred.6Internal Revenue Service. Guidance on Amortization of Specified Research or Experimental Expenditures Under Section 174 Notice 2023-63 The IRS looks at where the work is physically performed, not where the company is headquartered. A U.S. company paying a development team in India for software work faces the 15-year schedule on those costs, even while its domestic developers’ costs can be expensed immediately.
SaaS Subscriptions and Cloud Software
Subscription software isn’t depreciated or amortized at all. When a company pays a monthly or annual fee for cloud-based software and never takes ownership of the code or installs anything locally, there’s no asset to recover. Those subscription fees are ordinary business expenses deducted in the period they’re incurred. The same treatment applies to hosted email platforms, cloud storage, project management tools, and similar services billed on a recurring basis.
Implementation work sits in a grayer area. Some businesses spend heavily on configuring, customizing, or integrating a cloud platform. For tax purposes, the treatment depends on whether the arrangement is structured as a license or a service. If it’s a service, configuration and setup costs are generally expensed as incurred alongside the subscription fees.
Software Bundled With Hardware
When software comes pre-installed on a computer and the invoice doesn’t break out the software cost separately, the IRS treats the whole purchase as a single piece of hardware. The combined cost is depreciated under the Modified Accelerated Cost Recovery System (MACRS) using whatever recovery period applies to the hardware, typically five years for computers.2Internal Revenue Service. Publication 946 (2025), How To Depreciate Property That five-year schedule is actually slower than the 36-month schedule for standalone software, so when the purchase price is significant, it can be worth asking the vendor for an invoice that itemizes the software separately.
Hardware also qualifies for Section 179 and bonus depreciation, so businesses expensing the full cost in year one won’t feel the difference. Bundling matters mainly for buyers who stick with standard depreciation or who face state-level limits on immediate expensing.
Quick Reference by Software Type
- Off-the-shelf software purchased on its own: 36-month straight-line depreciation, or immediate expensing under Section 179 or 100% bonus depreciation.
- Software acquired as part of a business purchase: 15-year straight-line amortization under Section 197, unless the software qualifies as off-the-shelf.
- Internally developed software (domestic): Fully deductible in the year costs are incurred under Section 174A, or elect 60-month amortization.
- Internally developed software (foreign): Capitalized and amortized over 15 years under Section 174.
- SaaS subscriptions: Expensed as ordinary business costs in the period incurred.
- Software bundled with hardware: Depreciated with the hardware under MACRS (typically five years), or expensed immediately under Section 179 or bonus depreciation.