Section 199 – Online Software Ruling – Domestic Manufacturing Deduction

The IRS has recently ruled in GLAM – General Legal Advice Memorandum 2014-008 that a banking taxpayer who provides an app to access a customer’s bank accounts did not meet the exceptions to the Section 199 Domestic Production Activities Deduction online software regs and thus, online software does not qualify for 199; in this case the app or a portion of revenues associated with banking services using that app did not qualify as qualified production activities income under Section 199.

The taxpayer, a bank, allows customers to download the app for use in mobile banking, although a separate fee was not charged. First, the IRS ruled that although there was a software download, this did not meet the intent behind the ‘downloadable software’ rule in the online software regs because the online banking app didn’t have any functionality without having a connection to the Internet and to the bank’s servers. The IRS contrasted Example 4 in┬áReg. sec. 1.199-3(i)(6)(v) where there was a qualified disposition of the software because the tax preparation software in Example 4 could work without a connection to the Internet (stand-alone).

Secondly, the taxpayer’s argument that there was comparable third party software that performed identical functions from competitors that was licensed and downloaded for a fee did not persuade the IRS. Thus, having no comparable software per the IRS, the taxpayer failed to meet the online software exceptions of Section 199 and Regs.

 

This entry was posted in Blog and tagged , , , , , , , . Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *