Taxpayers’ section 199 computer software deductions are under attack! The issue is being coordinated within the IRS, and at Exam and Appeals taxpayers are running into a brick wall. A resource-starved IRS is trying to treat all similarly (and not so similarly) situated taxpayers uniformly. Accordingly, there is an effort to resolve all cases on the same basis, despite factual differences.
The Banking App GLAM underscores the IRS’s narrow and antiquated approach to the section 199 deduction for computer software.
Defend Your Deduction!
To defend your section 199 computer software deduction, make strategic decisions. First, argue the facts to distinguish your situation from the published guidance and the examples in the regulations. Focus on the technology, and get into the details. Second, argue the law. Published guidance such as the Banking App GLAM is not binding authority and is merely a position taken by the IRS in that specific case. It should not be afforded any deference. Lastly, argue tax policy. Congressional intent should drive the result. The regulations go far beyond what Congress intended. By providing the narrowest of interpretations of the statute, the IRS is thwarting the objectives of the law and taxpayers are being left caught short.
The IRS has substantial hazards of litigation in advancing the extreme positions we are seeing. Depending upon the size of the benefit from claiming the section 199 deduction, strategically it may make sense to claim the benefit and battle with the IRS on Exam and at Appeals pending a favorable court decision.