How much are you spending on business software? Answering this question is often difficult for small business owners. Modern companies subscribe to or buy a host of web applications, accounting platforms, and Software as a Service (SaaS) programs (subscription-based), so the question is, is the cost of this software a business expense, and when is business software tax-deductible? This article explains how to do that. Some key takeaways:
- Software is usually classified as an “ordinary and necessary” business expense.
- SaaS subscriptions vs. one-time purchases have different deduction timelines.
- Section 179 may apply to software bundled with hardware purchases.
- Proper documentation is critical for audit preparedness.
We have to understand the “ordinary and necessary” rule to determine which business software is tax-deductible.
The Internal Revenue Service (IRS) allows businesses to deduct expenses that are “ordinary and necessary” for conducting business; that means you must be paying for a helpful tool deemed appropriate for your business. Software used to run your operations meets both criteria. Here are some examples of business software in this category
- Accounting platforms like QuickBooks and FreshBooks
- Customer relationship management (CRM) systems like Salesforce or HubSpot
- Marketing tools, including Canva, Mailchimp, and social media platforms
- Project management software like Asana or Monday.com
- Communication tools like Slack and Zoom
When software serves both business and personal purposes, we enter a gray area that I’ll address later in this article. But the general principle is straightforward: if the software helps you conduct business, it’s likely deductible. If you recall, cellphone expenses are deductible under the same circumstances.
SaaS subscriptions are deductible.
Monthly or annual subscription fees for software-as-a-service (SaaS) are a straightforward business deduction. They are treated as current operating expenses, meaning you can deduct the full amount in the year you pay for them. There’s no depreciation schedule to worry about and no complex calculations required, and the connection to “ordinary and necessary” is clear:
- SaaS eliminates the need for expensive infrastructure and IT maintenance, lowering costs.
- SaaS is more scalable than traditional legacy software systems, simplifying administrative burdens.
- SaaS improves accessibility and remote work capabilities, which expands opportunities to work with freelancers and geographically dispersed employees.
- SaaS integrates well with other platforms, which is a net benefit for any business.
Business software deductions must be backed by documentation.
As with anything you do with the IRS, make sure you keep receipts, credit card statements, and subscription confirmations. Subscribing to a modern accounting platform, like QuickBooks or FreshBooks, can help with this. It will also give you another deduction.
Deducting software purchases is different than deducting software subscriptions.
Section 179 of the tax code allows businesses to immediately expense qualifying software purchases rather than depreciating them over time. The One Big Beautiful Bill Act (OBBBA) of 2025 increased the deduction limit from $1.25 million to $2.5 million.
Most small businesses fall well below these thresholds, making Section 179 an attractive option for immediate deductions.
Qualifying software includes off-the-shelf programs that are readily available for purchase and haven’t been explicitly custom-developed for your business. The software must be used for business purposes more than 50% of the time to qualify.
The alternative to Section 179 is standard depreciation over 36 months.
Some businesses prefer this approach for tax planning, spreading the deduction over multiple years rather than taking it all at once. This may or may not be a good idea. Please contact my office to make an appointment if you’re considering it. We’ll go over all your options.
When purchasing hardware and software in “bundles,” be aware of the difference between sales language and IRS treatment.
Purchasing fifteen laptops with Windows 11 preinstalled might be marketed by the sales rep as a “bundle package” of two items, but the IRS doesn’t treat it that way. Generally, software costs that are included with hardware purchases become part of the total cost basis for the hardware. Under Section 179, you can deduct the purchase as one expense.
Certain capitalized software costs may require amortization.
Here’s where this can get tricky. Separately purchased software licenses are an exception to this rule. If you buy those fifteen laptops and then purchase separate licenses for specialized software, those licenses follow their own deduction rules.
- Internally developed software
- Custom applications where development costs exceed specific thresholds
- Software development operations at larger businesses
Now, if your business is a small business and purchases commercial software for business use, you’re unlikely to encounter this issue. But we do work with growth-stage firms, and those businesses should expect to commit to significant software development operations in the near future.
Software for business and personal use is standard in remote and hybrid firms, and so are the compliance challenges that accompany it.
Because the IRS requires a reasonable allocation based on actual usage, software used for both business and personal purposes creates a documentation challenge.
You can’t deduct 100% of the cost if you’re also using the software for personal projects, which is why this section of the article is particularly relevant for home-based, remote, and hybrid businesses.
Here’s an example: Assume that you purchase Adobe Creative Suite and use it 70% for business projects and 30% for personal creative work. You can deduct 70% of the cost. The same principle applies to any software with mixed usage.
The burden of proof falls on you, the taxpayer, to demonstrate the business percentage.
To stay compliant, follow these four rules:
- Keep usage logs that document business vs. personal time
- Maintain separate accounts for business and personal work when possible
- Document the business purpose of your software expenses
- Be conservative with your business percentage estimates
Separating business and personal expenses is critical to maintaining “clean” records that can withstand an IRS audit. Business and personal use of equipment isn’t the only area where this is important. It starts with banking and credit cards. You’ll want to use only business accounts when you make company software and hardware purchases.
Proper record-keeping and documentation will provide adequate justification for deductions during an audit, merger, or acquisition.
You’ll need to maintain invoices, receipts, proof of payment, and subscription agreements for your software expenses. These records should be kept for at least three years from the date you file your return. I recommend seven years for significant purchases to be on the safe side.
M&A Note: Records should be kept for at least three years from the date you file your return. I recommend seven years for firms that intend to acquire or seek acquisition. Why? Because the more information we can provide, the greater the confidence potential investors have.
Electronic records are perfectly acceptable to the IRS.
In fact, digital record-keeping often provides better organization and easier retrieval than paper files. You can achieve this by scanning paper receipts and storing them in cloud-based systems for long-term accessibility. QuickBooks allows you to upload them with the transaction.
Here’s what to keep:
- Invoices from software vendors
- Receipts showing payment amounts and dates
- Credit card or bank statements confirming transactions
- Subscription agreements or license documentation
- Email confirmations from software vendors
- Screenshots of subscription management pages
- Annual statements from software providers
Create a dedicated expense category to capture software expenses.
To capture and categorize software expenses correctly and reliably, you need a modern accounting platform. Why? Modern platforms, which are deductible in their own right, allow you to create rules that automatically categorize purchases.
Accurate bookkeeping matters. You’ll need it when you file taxes or if you’re asked to produce documentation during an audit.
Here’s a quick reference guide to common business software categories and examples.
The following software categories cover a wide range of applications that are “ordinary and necessary” for conducting business.
- Accounting & Bookkeeping: QuickBooks, FreshBooks, Xero, Wave.
- These platforms track income and expenses. They also generate financial reports.
- CRM Systems: Salesforce, HubSpot, Zoho, Pipedrive.
- Customer relationship management software helps you manage client interactions.
- Marketing & SEO Tools: Klaviyo, Hootsuite, Buffer, SEMRush
- Digital marketing efforts, from email campaigns to social media management, depend on these subscription-based software solutions.
- Project Management: Asana, Monday, Trello, Jira, Basecamp
- Coordination and task management tools keep teams organized and projects on track.
- Communication: Slack, Zoom, Microsoft Teams, Google Meet.
- Efficient internal and client-facing communication is dependent on industry-standard platforms.
- Design & Creative: Adobe Creative Cloud, Canva Pro, Figma.
- Design software supports marketing materials, product development, and brand management.
- Development Tools: GitHub, AWS, hosting services, and domain registration.
- Technology businesses need specialized platforms for building and deploying products.
- Security Software: Antivirus programs, VPN services, cybersecurity tools.
- Protecting business data and client information is both necessary and deductible.
- Generative AI Platforms: Chat GPT, Claude, Sonnet, Gemini Pro
- A wide and evolving range of use cases. Subscriptions are tax-deductible.
Is this a complete list? Of course not. For example, businesses developing emerging technologies or products may require specialized software, such as Computer-Aided Design (CAD) programs. What I can tell you is this case is simple—if you need it to build it, it’s deductible.
Software deductions can get complicated, quickly.
Tax rules change annually, and staying current on those changes ensures you’re maximizing legitimate deductions while remaining compliant.
The OBBBA made significant changes to Section 179 limits, doubling the deduction cap and raising the phase-out threshold. These changes simplified compliance. But complexities remain, which is why I would recommend consulting a tax professional for the following:
- Mixed-use situations that require allocation between business and personal use
- Capitalization rules for custom or internally developed software
- Required depreciation or amortization schedules
- Bundled hardware and software purchases
- Multi-year licenses and prepaid subscriptions
The bottom line is that business software is tax-deductible, but it’s a complex accounting and tax process.
Get professional help with business software deductions and the complex record-keeping necessary for compliance.
Suppose your business uses mixed-use software or struggles to record and document software expenses properly. In that case, it’s advisable to bring in a team with experience in tackling complex software deductions and accounting practices.
Scale and acquire, or scale and sell. No matter the endgame, we need to start working now to maximize your business’s value.
Schedule a discovery call today for assistance.
Talk soon,
Jeremy A. Johnson, CPA