rp-00-50.pdf

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Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.201: Rulings and determination letters.
(Also Part I, '' 162, 167, 197, 446, 481; 1.162-11, 1.167(a)-14, 1.197-2, 1.446-1.)
REV. PROC. 2000-50
SECTION 1. PURPOSE
This revenue procedure provides guidelines on the treatment of the costs of
computer software.
SECTION 2. DEFINITION
For the purpose of this revenue procedure, Acomputer software@ is any
program or routine (that is, any sequence of machine-readable code) that is designed
to cause a computer to perform a desired function or set of functions, and the
documentation required to describe and maintain that program or routine. It includes all
forms and media in which the software is contained, whether written, magnetic, or
otherwise. Computer programs of all classes, for example, operating systems,
executive systems, monitors, compilers and translators, assembly routines, and utility
programs as well as application programs, are included. Computer software also
includes any incidental and ancillary rights that are necessary to effect the acquisition of
the title to, the ownership of, or the right to use the computer software, and that are
used only in connection with that specific computer software. Computer software does
not include any data or information base described in ' 1.197-2(b)(4) of the Income Tax

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Regulations (for example, data files, customer lists, or client files) unless the data base
or item is in the public domain and is incidental to a computer program. Nor does it
include any cost of procedures that are external to the computer=s operation.
SECTION 3. BACKGROUND
.01 In the preamble to the final regulations issued January 25, 2000, under '' 167(f)
and 197 of the Internal Revenue Code (T.D. 8865, 2000-7 I.R.B. 589), the Internal
Revenue Service advised taxpayers that they may not rely on the procedures in Rev.
Proc. 69-21, 1969-2 C.B. 303, to the extent the procedures are inconsistent with
' 167(f) or ' 197, or the final regulations thereunder.
.02 Except as otherwise expressly provided, '' 446(e) and 1.446-1(e) provide that a
taxpayer must obtain the consent of the Commissioner of Internal Revenue before
changing a method of accounting for federal income tax purposes. Section
1.446-1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures
setting forth the limitations, terms, and conditions deemed necessary to permit a
taxpayer to obtain consent to change a method of accounting.
SECTION 4. SCOPE
This revenue procedure applies to all costs of computer software as defined in
section 2 of this revenue procedure. This revenue procedure does not apply to any
computer software that is subject to amortization as an Aamortizable section 197
intangible@ as defined in ' 197(c) and the regulations thereunder, or to costs that a
taxpayer has treated as a research and experimentation expenditure under ' 174.
SECTION 5. COSTS OF DEVELOPING COMPUTER SOFTWARE

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.01 The costs of developing computer software (whether or not the particular software
is patented or copyrighted) in many respects so closely resemble the kind of research
and experimental expenditures that fall within the purview of ' 174 as to warrant similar
accounting treatment. Accordingly, the Service will not disturb a taxpayer's treatment of
costs paid or incurred in developing software for any particular project, either for the
taxpayer=s own use or to be held by the taxpayer for sale or lease to others, where:
(1) All of the costs properly attributable to the development of software by the
taxpayer are consistently treated as current expenses and deducted in full in
accordance with rules similar to those applicable under ' 174(a); or
(2) All of the costs properly attributable to the development of software by the
taxpayer are consistently treated as capital expenditures that are recoverable through
deductions for ratable amortization, in accordance with rules similar to those provided
by ' 174(b) and the regulations thereunder, over a period of 60 months from the date of
completion of the development or, in accordance with rules provided in ' 167(f)(1) and
the regulations thereunder, over 36 months from the date the software is placed in
service.
SECTION 6. COSTS OF ACQUIRED COMPUTER SOFTWARE
.01 With respect to costs of acquired computer software, the Service will not disturb
the taxpayer's treatment of:
(1) Costs that are included, without being separately stated, in the cost of the
hardware (computer) if the costs are consistently treated as a part of the cost of the
hardware that is capitalized and depreciated; or

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(2) Costs that are separately stated if the costs are consistently treated as capital
expenditures for an intangible asset the cost of which is to be recovered by amortization
deductions ratably over a period of 36 months beginning with the month the software is
placed in service, in accordance with the rules under ' 167(f)(1). See
' 1.167(a)-14(b)(1).
SECTION 7. LEASED OR LICENSED COMPUTER SOFTWARE
Where a taxpayer leases or licenses computer software for use in the taxpayer=s
trade or business, the Service will not disturb a deduction properly allowable under the
provisions of ' 1.162-11 as rental. However, an amount described in ' 1.162-11 is not
currently deductible if, without regard to ' 1.162-11, the amount is properly chargeable
to capital account. See ' 1.197-2(a)(3).
SECTION 8. APPLICATION
.01 A change in a taxpayer=s treatment of costs paid or incurred to develop, purchase,
lease, or license computer software to a method described in section 5, 6, or 7 of this
revenue procedure is a change in method of accounting to which '' 446 and 481 apply.
However, a change in useful life under the method described in section 5.01(2) or
6.01(2) of this revenue procedure is not a change in method of accounting. Section
1.446-1(e)(2)(ii)(b).
.02 A taxpayer that wants to change the taxpayer=s method of accounting under this
revenue procedure must follow the automatic change in method of accounting
provisions in Rev. Proc. 99-49, 1999-52 I.R.B. 725 (or its successor), with the following
modifications:

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(1) In order to assist the Service in processing changes in method of accounting
under this section and to ensure proper handling, section 6.02(3)(a) of Rev. Proc. 99-49
is modified to require that a Form 3115, Application for Change in Accounting Method,
filed under this section include the statement: AAutomatic Change Filed Under Section
8.01 of Rev. Proc. 2000-50.@ This statement must be legibly printed or typed at the top
of any Form 3115 filed under this revenue procedure.
(2) If a taxpayer is changing to the method described in section 5.01(2) of this
revenue procedure, the taxpayer must attach a statement to the Form 3115 stating
whether the taxpayer is choosing the 60-month period from the date of completion of
the development of the software, or the 36-month period from the placed-in-service
date of the software.
.03 For taxable years ending on or after December 1, 2000, the Service will not
disturb the taxpayer's treatment of costs of computer software that are handled in
accordance with the practices described in this revenue procedure.
.04 For taxable years ending prior to December 1, 2000, the Service will not disturb
the taxpayer's treatment of costs of computer software except to the extent that the
taxpayer=s treatment is markedly inconsistent with the practices described in this
revenue procedure. For the purpose of applying the preceding sentence to costs
described in section 5 of this revenue procedure, the absence of any formal election
similar to that required by ' 174 or the amortization of capitalized software costs over a
period shorter than the 5-year period specified in ' 174(b) (but not less than 36 months
for costs paid or incurred after August 10, 1993, or, if a valid retroactive election has

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been made under ' 1.197-1T, July 25, 1991) will not characterize the taxpayer's
treatment of the costs as markedly inconsistent with the principles of this revenue
procedure. In addition, the amortization of acquired software described in section 6 of
this revenue procedure treated as an intangible asset over a period of 60 months or
less, but in no case less than 36 months for costs paid or incurred after August 10,
1993 (or after July 25, 1991, if a valid retroactive election has been made under '
1.197-1T) will not characterize the taxpayer=s treatment of these costs as markedly
inconsistent with the principles of this revenue procedure.
SECTION 9. EFFECT ON OTHER DOCUMENTS
.01 Rev. Proc. 69-21, 1969-1 C.B. 303, is superseded.
.02 Rev. Proc. 97-50, 1997-2 C.B. 525, is modified by deleting all references to Rev.
Proc. 69-21 and replacing them with references to this revenue procedure. Section 3 of
Rev. Proc. 97-50 is modified by deleting references to section 3, section 4, and section
5 of Rev. Proc. 69-21, and replacing them with references to section 5, section 6, and
section 7 of this revenue procedure.
.03 Rev. Proc. 99-49 is modified and amplified to include this accounting method
change in the APPENDIX.
.04 Section 1.02 of the APPENDIX of Rev. Proc. 99-49 is modified by deleting all
references to Rev. Proc. 69-21 and replacing them with references to this revenue
procedure.
SECTION 10. EFFECTIVE DATE
This revenue procedure is effective for a Form 3115 filed on or after December

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1, 2000, for taxable years ending on or after December 1, 2000. The Service will return
any Form 3115 that is filed on or after December 1, 2000, for taxable years ending on
or after December 1, 2000, if the Form 3115 is filed with the national office pursuant to
the Code, regulations, or administrative guidance other than this revenue procedure
and the change in method of accounting is within the scope of this revenue procedure.
DRAFTING INFORMATION
The principal author of this revenue procedure is John Huffman of the Office of
the Associate Chief Counsel (Passthroughs & Special Industries). For further
information regarding this revenue procedure, contact Mr. Huffman at (202) 622-3110
(not a toll-free call).