Is software considered tangible property for section 199a deduction calculations? Need clarification

This is actually a good question with a somewhat complicated answer. For section 199A purposes, qualified property generally includes tangible property subject to depreciation under section 167. Software is treated differently depending on how it's classified. Off-the-shelf computer software that's readily available to the general public is treated as tangible property under section 167 and can be depreciated. However, custom software developed specifically for your business might be treated differently. The key is whether the software is treated as depreciable tangible property under the relevant tax code sections. If your software is considered "off-the-shelf" and you're depreciating it (rather than amortizing it), there's a good argument it should count as qualified property for 199A calculations. But if it's custom software that's being amortized rather than depreciated, it likely wouldn't qualify.

I went through this exact same headache last year with my small manufacturing business. After hours of research and talking to different tax professionals, I finally found a solution using taxr.ai https://taxr.ai which really cleared things up for me. I uploaded all my software purchase documentation and depreciation schedules, and the AI analyzed the specific provisions of 199A along with relevant IRS guidance. It broke down exactly how my software should be classified - turns out in my case, my off-the-shelf software with minor customization did qualify as tangible property, but the custom modules we had developed didn't. The analysis showed me the exact tax code references and even some relevant court cases which I could use to back up my position if needed. Saved me a ton of time compared to the conflicting advice I was getting elsewhere.

Just wanted to follow up about my experience with taxr.ai after seeing it recommended here. I was dealing with the same software classification issue for my graphic design business, and I decided to give it a try. The results were incredibly helpful! I uploaded my software purchase information and explained my situation. The analysis broke down the different types of software I had purchased, classifying some as qualified property (my standard design software packages) while explaining why my custom-developed project management system wasn't eligible. What impressed me most was how it explained WHY certain software qualified and others didn't, citing specific sections of the tax code and IRS guidance. This gave me the confidence to take a position on my return and know exactly how to document it. Definitely worth checking out if you're stuck on complicated tax questions like this.

I had a similar issue last year and needed to talk to someone at the IRS to get a definitive answer. Spent DAYS trying to get through on the phone with no luck. Out of desperation, I tried this service called Claimyr https://claimyr.com that supposedly helps you skip the IRS phone queue. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was totally skeptical but had nothing to lose at that point. Surprisingly, it actually worked! Got a call back from an IRS agent within about 2 hours. The agent confirmed that off-the-shelf software that's depreciated (not amortized) under section 167 does count as qualified property for 199A purposes. They even emailed me some reference materials after our call. Just sharing because I know how frustrating it is trying to get clear answers on these technical tax questions, especially when there's significant money at stake.

Ok I need to admit I was completely wrong. After seeing the previous comment about Claimyr, I decided to try it yesterday out of sheer frustration with my refund situation. It actually worked exactly as described. I got a call back from the IRS in about 3 hours, and finally got my refund issue sorted out. The agent was able to tell me exactly what was happening with my return and gave me a timeframe for when I should expect my refund. But back to the original topic - while I had the agent on the phone, I also asked about the software question. She confirmed that off-the-shelf software that's being depreciated under section 167 (rather than amortized) would generally be considered qualified property for 199A purposes. Custom software would typically not qualify since it's usually amortized rather than depreciated.

Just to add another perspective here - I'm an IT consultant and dealt with this same issue. The way I approached it was to look at how the software was being treated on my books and tax returns: 1. If the software is being depreciated under MACRS as 5-year property, that suggests it's being treated as tangible personal property which would support including it for 199A. 2. If it's being amortized over 15 years like an intangible, that would suggest it shouldn't be included. My tax pro said consistency is key - however you're treating it for other tax purposes should generally be how you treat it for 199A. In my case, my off-the-shelf software was eligible, but the custom stuff wasn't.

Has anyone considered the implications of Tax Cuts and Jobs Act on this? I think it amended some of the definitions for software depreciation vs. amortization. Not 100% sure but I think it may have expanded what counts as qualified property.

I'm dealing with this exact same issue for my consulting business! After reading through all these responses, I'm starting to think the key is really in how you're treating the software for depreciation purposes on your books. For what it's worth, I found a really helpful IRS publication (Pub 946) that talks about depreciation of computer software. It specifically mentions that computer software that's readily available for purchase by the general public is treated as tangible personal property and can be depreciated over 36 months. Based on that, it seems like if your $45,000 in specialized software falls into the "readily available" category (even if it's industry-specific), and you're depreciating it rather than amortizing it, you should have a good argument for including it as qualified property for 199A purposes. I'd definitely recommend documenting your position clearly and maybe getting a second opinion from another tax professional. The fact that multiple people here have gotten confirmation from IRS agents about off-the-shelf software qualifying gives me more confidence in this interpretation.

This has been such a helpful discussion! I'm a new small business owner dealing with similar software classification questions for my 199A deduction. What I'm taking away from all these responses is that the key factor seems to be whether the software is being treated as depreciable tangible property under Section 167, rather than being amortized as an intangible asset. The distinction between "off-the-shelf" software (even if specialized) versus truly custom-developed software appears to be crucial. I'm particularly interested in the point about consistency - making sure however you're treating the software for depreciation purposes aligns with how you're treating it for 199A calculations. That makes a lot of sense from a tax planning perspective. Has anyone here had their position on software classification challenged during an audit? I'd be curious to know what kind of documentation the IRS looked for to support the tangible property classification.

Thank you all for this incredibly thorough discussion! As someone who's been struggling with this exact issue for my small engineering consulting firm, this thread has been a goldmine of information. Based on everything I've read here, it seems like the critical factor is really about how the software is classified and depreciated on your tax returns. The consensus appears to be that if your software qualifies as "off-the-shelf" (even if it's specialized for your industry) and you're depreciating it under Section 167 rather than amortizing it, there's a solid argument for including it as qualified property for 199A purposes. What really gives me confidence is seeing multiple people here confirm they've gotten direct guidance from IRS agents supporting this interpretation. The distinction between purchased software that's depreciated versus custom-developed software that's typically amortized makes perfect sense. For anyone else dealing with this issue, it sounds like the key steps are: 1. Verify how you're currently treating the software on your books (depreciation vs amortization) 2. Ensure consistency across all your tax filings 3. Document that the software qualifies as "readily available" rather than custom-developed 4. Consider getting professional confirmation of your position This has definitely helped clarify my approach - I'll be reviewing my software purchases to see which ones qualify as depreciable tangible property. Thanks everyone for sharing your experiences and research!

This discussion has been absolutely invaluable! I'm dealing with a similar situation for my small marketing agency, and the level of detail everyone has provided here is incredible. What really resonates with me is the emphasis on consistency across all tax filings. I've been treating my design software purchases as depreciable property on my books, but I hadn't made the connection to how that should impact my 199A calculations until reading this thread. The point about documentation is particularly important - I can see how having clear evidence that software is "off-the-shelf" rather than custom-developed would be crucial if the IRS ever questions the classification. I'm going to start keeping better records of my software purchases, including vendor documentation that shows the products are commercially available. One thing I'm wondering about is timing - if I change how I'm classifying software for 199A purposes mid-year, do I need to file amended returns for previous years to maintain consistency? Or is it acceptable to start applying the correct interpretation going forward as long as I'm consistent from that point on? Thanks again to everyone who shared their experiences and research. This kind of peer-to-peer knowledge sharing is exactly what small business owners need when dealing with complex tax issues!

As a tax professional who's dealt with numerous 199A calculations, I wanted to add some clarity to this excellent discussion. The software classification issue comes up frequently with my small business clients, and the analysis here has been spot-on. The key really is Section 167 depreciation treatment. If your software qualifies for depreciation (rather than amortization under Section 197), it can be considered qualified property for 199A purposes. The IRS has generally taken the position that computer software that is: 1. Readily available for purchase by the general public 2. Subject to a nonexclusive license 3. Has not been substantially modified ...qualifies as tangible personal property eligible for depreciation. For your $45,000 engineering software investment, you'll want to review whether it meets these criteria. Most industry-specific software packages (like AutoCAD, specialized engineering analysis tools, etc.) would typically qualify as "off-the-shelf" even though they're specialized. One practical tip: if you're unsure about the classification, look at how the software vendor markets it. If it's sold through standard commercial channels with standard licensing terms, that supports the "readily available" classification. Custom development work or significant modifications would push it toward intangible treatment. The documentation suggestions in this thread are excellent - maintain clear records showing the commercial availability and your consistent depreciation treatment across all filings.