A September 2024 report by the U.S. Chamber of Commerce entitled The Impact of Technology on U.S. Small Business found some very interesting things:
- 99% of small businesses use at least one technology platform.
- 40% of small businesses said they use generative AI—up from 23% in 2023.
- 91% of businesses actively using AI expect it will help grow their businesses in the future.
- 81% of small businesses plan to increase their use of technology platforms.
- 77% of small business owners plan to adopt emerging technologies, including AI and metaverse.
While there are a number of free options, such as basic ChatGPT, many AI and other technologies cost money. As with other business expenses, there are rules on how to handle these costs for tax purposes.
What are you using in your business?
Today, there’s a wide range of options when it comes to AI and technology. Some involve simple software; others entail complex machinery. Here are some ways in which businesses are using these things today:
- Customer relations (e.g., chatbots)
- Customer experience (e.g., 3D and augmented reality [AR] shopping)
- Marketing (e.g., content creation)
- HR (e.g., recruiting, hiring, promotion decisions)
- Employees (e.g., training)
- Robotics (e.g., in manufacturing; security)
Tax treatment of costs
When it comes to AI or metaverse (interactive 3D space AR), you may be dealing with software and/or hardware. How you write off the cost of acquiring and using the technology depends on what’s involved.
Software. The cost of purchasing off-the-shelf software normally would be depreciated using the straight line method (meaning deducted ratably) over 36 months. But the cost of this software can be written off in full upfront using the Section 179 deduction and/or bonus depreciation (discussed in connection with hardware, below).
For the most part, small businesses likely can’t afford the steep price to develop their customized products.. For example, the development cost of a Metaverse can vary from $10,000 to $400,000 based on several cost factors (e.g., hardware, such as VR headsets; security to protect customer privacy).
Today, many types of software are obtained through subscriptions entailing monthly charges. These monthly payments are fully deductible. Chatbot software can cost a minimal amount to up to $500 a month. Examples of accessible products:
- ChatGPT Premium for content creation costs $20 per month for an individual, with a higher monthly costs for teams.
- HelpCrunch costs $15 a month for 15 chatbot flows.
- Microsoft Mesh costs $4 per month per user for a “copresence” in flexible work arrangements.
- SC Training for employee training is free for up to 10 learners; the cost is $5 per learner per month over this threshold.
- Workable for recruitment, onboarding, and other employee-related tasks costs $189 a month for companies with only occasional hiring.
Hardware. The purchase of robots and cobots (robots that work along side humans) can be deducted in full in the year of placing items in service if the Sec. 179 (first-year expensing) deduction is used. The same is true for metaverse hardware (e.g., headsets). There is a dollar limit on the write-off annually ($1,220,000 in 2024; $1,225,000 in 2025).
Note: Bonus depreciation—another first-year write-off—had allowed for a full deduction, regardless of cost, before 2023. Then, in 2023, the deduction dropped to 80%, and to 60% in 2024 (Congress could restore the 100%). The Sec. 179 deduction may be a better option, although you can combine the two types of write-offs.
If robotics are leased, the full cost of monthly lease expenses is deductible.
Final thought
Think about the ways in which AI and other technology can be deployed in your business to help you run more efficiently, expand your customer base, manage a remote workforce; it will likely save you money in the long run. But consider the initial and/or ongoing costs so you can budget accordingly. Discuss the tax implications for your future plans for using AI and other technology with your tax adviser.
