Tax savings may be available for year 2000 modifications

by S. Scott Hickman

for the Business Journal

The potential computer problems associated with the year 2000 (Y2K) have been widely documented. These tales of woe include everything from traffic lights not working, to ATM machines closing down, to planes falling from the sky.

The problem is worldwide, and according to estimates

by Lloyds of London, it will cost in excess of $1 trillion to fix.

Who will bear the burden of these costs? Virtually everyone governments, businesses and ultimately, consumers. For business owners, there is some relief in the form of tax deductions. However, the tax breaks will vary depending on the nature of the business-related costs.

The big picture. The Y2K bug was born about 30 years ago, when computer programmers saved precious data storage space by dropping the "19" in front of the year. As Y2K approaches, computers that still maintain years as two digits may not recognize that the year 2000 is greater than the previous year.

As a result, it may not be able to

process data correctly. This could affect a business' cash flow, inventory, taxes,

interest calculations, financial forecasting, customer relations and many other areas.

Unfortunately, there is no single fix, no single solution. Since each system processes data in different ways, using different software, each system must be assessed and corrected to make it Y2K compliant. Even the Internal Revenue Service is spending millions of dollars making sure all its systems will be Y2K compliant.

Steps for small businesses. If your system is not programmed to recognize the year after 1999 as 2000, there are important steps to take now to make it Y2K compliant.

The IRS has provided guidance on these steps so that businesses know how to handle the expenses of converting.

?Convert your software. The cost of developing software to convert existing systems to make them Y2K compliant can be treated as a current expense and depreciated over five years. The cost of purchasing stand-alone software to convert can be amortized over five years.

?Buy new software and equipment to replace old, dated software and equipment. The costs of buying stand-alone software can be amortized over five years. A shorter period can be used if it can be shown that the software's useful life is less than five years.

?Lease software and equipment. The costs of leasing software to update your computer system are deductible over the period of the lease.

The right solution for your business depends on current and future plans for your business, and your current and future plans to use technology to meet your business goals. When addressing the Y2K issue, it's important to take a look at your entire system to determine if you need to make other modifications in your equipment.

For example, upgrading software may be a good option if your system is not that old and is capable of meeting your needs over the next several years. On the other hand, if you were thinking about replacing equipment overall to speed data processing or meet other needs, you may want to buy the new software as part of a total purchase.

How you treat these business expenses also will depend on your business' overall tax situation. Generally, it's wise to claim the deductions in years when you anticipate having the greatest revenue.

Finally, keep in mind that, generally, you cannot claim a tax credit for research associated with helping your business become Y2K compliant.

Businesses may claim the credit when the research is undertaken for the purpose of discovering information that is technological in nature and involves experimentation.

(Scott Hickman is a CPA and senior consultant with the Springfield office of Baird, Kurtz & Dobson, certified public accountants.)

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When addressing the Y2K issue, it's important to look at your entire system to determine if you need to make modifications.[[In-content Ad]]