A s the new millennium approaches, more is reported every day about the Year 2000 or Y2K Problem. 1 A similar software compliance problem may also arise with the European conversion to the Euro currency as businesses incur expenses to make their software Euro-compliant. The tax treatment of these software modifications may have a huge impact on the bottom line of many companies.
The principal tax issues concern the time period over which these costs are recovered and whether any of these costs qualify for the research credit. The answer depends on whether the taxpayers develop their own correction for the problem or whether they purchase software to fix the problem. Additionally, the treatment is different depending on whether the purchased software is bundled with hardware. The Internal Revenue Service has provided some guidance on the treatment of Y2K software modifications in the form of a Revenue Procedure. However, savvy taxpayers will also consider other pronouncements in an effort to maximize their tax benefits.
REVENUE PROCEDURE 97-50
Revenue Procedure 97-50 (1997-45 IRB 8) specifically addresses the tax treatment for Y2K expenses. This pronouncement recognized five different approaches that could be used to solve the Y2K problem. A taxpayer could:
- Convert its existing software 2. Purchase new software to replace its existing software 3. Purchase software tools that would assist the taxpayer in converting its existing software 4. Develop software tools which would assist in converting the software 5. Lease new software to replace its existing software. This Revenue Procedure places each of these approaches into one of the three categories it previously addressed in Revenue Procedure 69-21 (1969-2 CB 303). These three categories are: (1) developed software (which includes conversion