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Software and Depreciation Expense in Japan

Software and Japanese Taxes

Purpose of software and depreciation

The useful life of the software in Japan

Software for sale on the market and depreciation in Japan

Software and Japanese Taxes

When you run a business in Japan, you probably use or purchase software (e.g. accounting software). Therefore, I will try to explain about software and Japanese taxation.

The software you use in your business is an asset of the company. So, depending on the situation, you need to depreciate it. Depreciation means that when you buy that software for 1,000,000 yen, you cannot immediately expense 1,000,000 yen.

You cannot record the 1,000,000 yen you paid as an expense all at once. 

The software is a type of depreciable asset, and you have to capitalize the purchase cost and depreciate it over its useful life.

If you own real estate 🏢 for your business, you depreciate the acquisition cost of the real estate.

In the same way, you should depreciate software.

If you could expense the entire 1,000,000 you paid to buy the software in 2023 all at once, you can reduce your taxable income for the year 2023.
(But it is not allowable, basically)

In the same way, you should depreciate software.

But since the software is an asset (i.e., it remains with you as something of value after you buy it), you need to depreciate it.

🌸Purpose of software and depreciation 

(Example 1)

You purchased software (e.g., accounting software) for ¥1,000,000 for use within your company. In that case, you would record the software as an asset and depreciate it.

On the other hand, if you use cloud-based accounting software, the software is not an asset of yours. You pay a fee for using the accounting software (as if you were renting it), so you do not have to depreciate it.

(Example 2)

You developed software (e.g., a game) to sell to customers. The development cost is 1,000,000 yen.

Therefore, you depreciate the 1,000,000 yen.

(Example 3)

You were requested by ABC Corporation to produce software, and you produced and delivered it to ABC Corporation. You developped the software and delivered it to ABC.

In this case, you do not need to depreciate this software because you have already delivered the software to ABC Inc. and do not have it in your possession.

You’ll record the software you created as inventory, and when you sell it, you’ll record it as sales.

The useful life of the software in Japan 

Regarding the software you purchased for your own use.

For accounting purposes, the useful life of this software is defined as 5 years. (For accounting purposes)

If you purchased the accounting software for 1,000,000 yen, you can expense 200,000 yen each year as depreciation expense.
(1,000,000 yen ÷ 5)

For tax purposes, depreciation is basically for 5 years.

🌤Example of journal entry

Software 1000000 yen / Cash  1000000 yen (when you purchased it)

Depreciation expense 200,000 yen / Software 200,000 yen

However, there are cases where you may purchase software for yourself and still be able to expense it all in one lump sum.

One is when the purchase price of the software is less than 100,000 yen. In other words, if the acquisition cost of the accounting software or other software is less than ¥100,000, depreciation is not required. It can be expensed immediately.

The second is when the purchase price of the software is between 100,000 yen and 300,000 yen and you use the special exception for depreciation.

If you file a blue tax return, you can use the special exception and expense the purchase cost of the software in a lump sum.
(The maximum amount is 3,000,000 yen per year.)

So, if you purchase 299,999 yen worth of accounting software 10 times in one year, you do not need to depreciate the cost of all the accounting software purchases using this special exception.

You can deduct the cost of the software in the year you buy it.

🌸Software for sale on the market and depreciation in Japan 

The accounting depreciation period for software for sale created by you (e.g. game software) is 3 years.

Assume that ¥1,500,000 is recorded as an intangible fixed asset for the development of the game software.

In this case, you can expense ¥500,000 each year as depreciation.

For tax purposes as well, the useful life of software intended for market sale is 3 years.

Example of journal entry

Depreciation expense 500,000 yen / Software 500,000 yen