Newly purchased software: Let's say you buy yourself a program such as Adobe Photoshop or Microsoft Office XP. The IRS used to say that consumer and small-business software purchases generally had to be amortized and depreciated over 36 months, starting with the month when you start using the software. But as of 2004, you can expense the full cost of off-the-shelf software under Code Section 179 that deals with the expensing of business goods and property.

A gray area -- software's "useful life": There is another rule that has loosened the restrictions on software deductions somewhat, and could come in handy again in the future. In order to be depreciable, any property has to have a useful life of more than one year. So, if the software has a useful life of less than a year, it can be written off as a current expense in the year that it's purchased or placed in service. Tax-preparation software that a business buys and is useful only for the year in which it is purchased, for example, would qualify to be expensed.

Software you develop: Some businesses develop their own specialized software, often at considerable cost. If you're considering doing that, be aware that you can treat those expenses as research and development costs and thus expense them.Alternatively, you could choose to treat the cost of developing the software the same way as if it was purchased, and deduct the costs straight-line over 36 months. You also might opt to amortize the costs over 60 months. In any case, the IRS wants to see consistent treatment of these expenses -- which means that you shouldn't have expenses deducted immediately in one year and depreciated in another.

Web site costs: Web site software development gets the same treatment as other software development expenses. That is, you could treat your own expenses as costs as research and development, and deduct them in the year incurred.However, the rules are different for Web software that is developed by a designer who guarantees the product and then sells it to you. The IRS wants this kind of software to get different treatment than your standard off-the-shelf software, and the costs of the Web software must be amortized over 36 months.

Software as part of a business purchase: Finally, let's say you buy a business and, as part of the purchase, you get software. This software is likely to be considered a Section 197 intangible (yes, Section 197, not Section 179 — again, go to the IRS Web site). That means it is either not generally available to the public, is subject to an exclusive license, or has been substantially changed. In this case, you have intangible property. And the property will have to be amortized over not 36 months or 60 months, but 15 years.