Startups Stack Exchange Archive

Is paying for free software a deductible business expense?

• posted by: user2844240 on 2014-08-22
• tagged: united-states, taxes, accounting
• score: 10

I’m using some free software that I’d like to support. Its developer does not have 501(c)(3) status. If I supported the developer out of personal funds, the contribution would not be tax-deductible. Unlike paid commercial software, if I paid out of business funds, it wouldn’t be a deductible business expense either, right?

I could try to put the amount as an expense under the category of the equivalent commercial software, but I don’t think this is legitimate.

Now if I asked the developer for a trivial amount of support and he sent me a bill for the support, in the amount of the desired contribution, I’d be fine, right?

Answer 467

• posted by: qdot on 2014-08-22
• score: 6

I believe your reasoning is correct.

In fact, many opensource developers do offer support services (partially precisely for this reason) - basically as long as the business has received some benefit in consideration for the expenses paid (for instance, readiness to provide support, priority in being responded, guarantee that your emails would be read, etc) - which the business would in turn use to increase revenue.. it would be a business expense.

(Mind you, most of my experience is UK based, IANAL, etc.)

Answer 478

• posted by: Nick Wilde on 2014-08-24
• score: 1

Different taxation departments can be different in terms of stringency.

From my dealings with the CRA (Canada Revenue Agency), you could probably claim that in Canada. Basically the question would be ‘is it a reasonable expenditure?’ You might have to argue it but saying that you need to make sure that x software will be available when you upgrade to version x and this expenditure helps ensure that. Most of the reviewers would just accept that. Yes some might not and once a decision has been made re-reviewing can be chancy.

However the negative is very minimal; one discrepancy and they’ll just minorly adjust your taxes to factor out that - usually with no penalty except for the interest on the now due amount. One semi-questionable entry also will not get flags put on to your account; it basically requires a pattern of questionable expenses that are a lot more questionable than that.

So that boils down to:

• If you can easily get a receipt from the developer: (saying pretty much anything - i.e. even a paypal receipt should work fine if it at leasts references the software name and your business name) you can claim it with surety.
• If you can’t get a receipt for some odd reason: If you have it in your accounts you are probably safe to claim it but if it did get reviewed you’d have to explain it which depending on your jurisdiction could be problematic or not.

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