Software Costs and Tax Depreciation: Key Rules and 2026 Changes

Mgr. Daniel Půlpán
Mgr. Daniel Půlpán
4.5.2026 | ARROWS law firm

Every company today is investing heavily in digitalisation and new software. However, the line between an immediate operating expense and the need for lengthy depreciation is thin, and mistakes can result in substantial additional tax assessments. Moreover, from 2026 a radical change to tax legislation is coming that will transform the entire system from the ground up. This article therefore provides a detailed guide to the new rules, all the pitfalls of IT investments, and shows you options for safe optimisation.

In the image, we see an expert discussing the topic of the new rules for software depreciation.

Key takeaways
  • Major change in 2026: The threshold for mandatory tax depreciation for both tangible and intangible assets is increased to a unified CZK 100,000.
  • End of complex categories: There will now be only three depreciation periods (60, 180 and 360 months), with IT falling exclusively into the five-year category.
  • Accelerated depreciation ends: All assets will be depreciated exclusively on a straight-line basis and calculated to specific months, not whole years.
  • Exception for sole traders: Individuals can still book software directly as an expense regardless of its acquisition cost.
  • Watch out for technical improvements: Modifications and enhancements to existing systems are assessed separately from routine repairs and maintenance.

Key differences: When it is an expense and when it is a fixed asset

Correctly classifying a purchase in your accounts determines when you can actually deduct the investment for tax purposes. From a cash-flow perspective, an operating expense is the most favourable option. It reduces your taxable profit immediately in the year of acquisition, saving you money straight away on corporate income tax.

Fixed assets work on a completely different principle. Such an investment must be capitalised in your accounts and its value recognised in tax-deductible costs gradually over several years through depreciation. The state therefore does not allow you to reduce your tax base immediately, but requires you to spread the tax shield over time.

For IT equipment or software to qualify as a fixed asset, it must meet two cumulative conditions. The first is a demonstrable useful life exceeding one year. The second condition is an acquisition cost that must exceed the statutory threshold.

This threshold has undergone many historical changes and often differed for tangible and intangible items. From 2026, however, the system is definitively unified for all assets at CZK 100,000. Anything below this threshold is considered low-value assets and can be expensed directly.

This means that any software, a manager’s laptop or a high-performance server priced up to CZK 99,999 can be claimed as a one-off expense. However, if you exceed this threshold by even one crown, you fall under the mandatory depreciation regime. For more complex IT investments (e.g., a combination of licences, implementation and subsequent support), it is worth verifying the tax implications in advance with the tax law team. In such cases, specialists from ARROWS can help you with lawful tax optimisation.

A revolution in tax depreciation from 2026 in detail

The existing system of eight depreciation groups has been a nightmare for most entrepreneurs and accountants. Unnecessarily complex rules often forced companies to split IT units into nonsensical parts. The new legislation abolishes these old boxes and introduces only three unified depreciation periods.

These new categories are 5 years (60 months), 15 years (180 months) and 30 years (360 months). For technology companies and digitalisation, the first group is key. The vast majority of IT hardware, corporate software and related technologies fall into the shortest, 60-month period.

Tax depreciation will now be calculated strictly by months, not by whole years as before. If you purchase an expensive server and connect it to the company network in April, depreciation starts running for tax purposes from May. This system more fairly and accurately reflects wear and tear on equipment. If you are planning a larger IT modernisation and want your contracts and supplier liability set up correctly, a comprehensive review of IT contracts may also be useful.

The popular option of choosing accelerated depreciation is also definitively abolished. For tax purposes, assets may now only be depreciated on a straight-line basis, meaning exactly the same amount each month. However, for older assets that you started depreciating before 2026, the original rules continue to apply until they are disposed of.

It is important to realise that tax depreciation (set by the state) may—and often must—differ from accounting depreciation (set by the company based on actual wear and tear). In practice, the differences between the accounting and tax perspectives often also affect the setup of internal processes and records, with which accounting services can help. The attorneys and tax experts at ARROWS, a Prague-based law firm, have extensive experience in aligning these two worlds so you can avoid penalties. Contact us at office@arws.cz. 

Technical improvement versus repair: Pitfalls of IT upgrades

Buying a new computer is straightforward from a tax perspective, but what if you are improving an old system? This is where we run into a major tax issue called technical improvement. If you add new functions to existing software or hardware or significantly increase its performance, it is not a routine expense but an improvement.

Technical improvements are aggregated for the entire tax period. If, in total for the given year, they exceed the CZK 100,000 threshold for a specific asset, you must increase its acquisition cost by that amount and continue depreciating it. If you stay within the limit, you can book the improvement as a one-off expense.

By contrast, routine repairs and maintenance are always an immediate tax-deductible expense, regardless of their total cost. A repair means restoring an asset to its previous or operational condition. A similarly “borderline” issue is assessing when certain expenses can be claimed as a one-off tax-deductible cost, which we discuss with examples in our article on unpaid B2B receivables. For example, replacing a burnt-out disk in a server with a new one of the same capacity is a typical repair.

The issue keeps arising in IT practice all the time. For example, the transition to a new, significantly improved version of enterprise software is often classified by the tax authorities as a technical improvement. Whereas regular security patches and routine updates (bug fixes) are readily accepted as standard maintenance.

At ARROWS, our Prague-based law firm will prepare a detailed analysis for you before any major IT intervention. We will assess whether the planned work falls under repairs, or whether it constitutes a technical improvement. This helps you avoid unpleasant additional assessments in the event of a tax audit.

Related questions on IT upgrades and repairs

1. We increased the capacity of our server array by CZK 150,000—how should we depreciate it?
This is a textbook technical improvement of an asset, because you have demonstrably increased its parameters and performance. You must add this amount to the existing value of the servers and reflect it in tax depreciation.

2. We purchased new batteries for all company laptops. Is that an asset?
No, replacing a worn battery with a new one is classified as a standard repair and maintenance of the equipment. You can claim the costs as a one-off expense regardless of the total invoiced amount.

3. A programmer spent a month fixing bugs in our code. Is this an improvement of the software?
If the programmer only fixed errors so that the application works as originally intended, it is a repair and a standard expense. However, if they programmed an entirely new module, you would have to assess it as a technical improvement.

Software and its classification: Purchase vs. in-house development

For software, it is absolutely crucial to assess its actual integration with hardware. If the program is an integral part of a machine (for example, a printer’s control firmware or a router’s operating system), you must not record it separately. It automatically becomes part of the acquisition cost of the equipment and is depreciated together with it.

Standalone programs, such as graphic editors, ERP or CRM systems exceeding CZK 100,000, are recorded as separate long-term intangible assets. However, self-employed individuals (OSVČ) have a very specific position here, as the statutory obligation to depreciate software does not apply to them.

Individuals can expense any software immediately, regardless of whether it costs hundreds of thousands or millions. This rule represents a major tax advantage for IT specialists and freelancers, which legal entities (s.r.o. or a.s.) unfortunately cannot use.

Major confusion arises when software is developed by a company’s own employees for internal use. Its tax acquisition cost must reflect not only the programmers’ direct wages, but also a proportional share of overheads, social security contributions, or licences used. During the development period, these costs are “capitalised”.

Deliberately understating these internal costs (for example, by not including overheads) is a common reason for additional tax assessments. Experts from ARROWS (office@arws.cz) will help you create a robust internal methodology for valuing in-house development so that it is defensible before the authorities.

Development of websites, e-shops and mobile applications

A corporate website is an absolute necessity today, but its tax treatment depends on its nature and functionality. Simple presentation websites (so-called “business cards”) that only provide information about services and contacts are usually considered an advertising and promotion expense. They are therefore expensed immediately.

However, the situation changes dramatically for robust portals and full-featured e-shops. If you have an e-shop custom-developed with a database, payment gateways and user accounts for more than CZK 100,000, an authored work is created. You must classify it as a long-term intangible asset and depreciate it.

Mobile applications for iOS or Android developed for customers fall under the same regime. If you have a company app programmed for which you own the source code and distribution rights, you must carefully track its acquisition cost. Once the CZK 100,000 threshold is exceeded, monthly depreciation will again apply.

Many companies try to avoid depreciation by “renting” a website or e-shop as part of an off-the-shelf solution. If you pay a regular monthly fee to an e-commerce platform provider, you do not own any asset—you are purchasing a service. You can therefore conveniently and legitimately book these invoices directly as ordinary operating costs.

The distinction between purchasing copyright to an e-shop and merely subscribing to a platform is key. Our attorneys in Prague will review your contracts with developers before you sign them. We will determine who actually retains the copyright and set the optimal tax approach accordingly.

Tax treatment of cloud services and infrastructure

Moving to the cloud has completely changed how companies view IT budgets. Instead of expensive one-off purchases of physical servers and perpetual licences, companies now simply rent software and computing power over the internet. From a tax perspective, this shift is a major simplification.

Renting cloud space on servers such as Amazon (AWS), Microsoft Azure or Google Cloud is always accounted for as a purchased service. You are not acquiring any asset, so monthly invoices for these rentals are booked directly as ordinary operating expenses.

The same rule applies to subscriptions to office suites such as Microsoft 365. Even though you use sophisticated software, you do not own a perpetual licence—you only pay for the right to use it. All such subscription fees are therefore an immediate tax expense.

However, you need to be alert with complex cloud migration projects. If you hire an external IT company to migrate old systems to a new environment over several months, these high costs may become a technical improvement of your software and you will have to depreciate them.

Assessing the costs of cloud migration is a complex tax discipline. ARROWS, a Prague-based law firm, will provide you with legal certainty in this area. We will analyse the invoicing from your IT suppliers and clearly determine what is a standard service and what is already subject to mandatory depreciation.

Investments in artificial intelligence and automation

The integration of artificial intelligence and software robots is a trend that the authorities are only learning to work with. If you subscribe for the company to extended licences of AI tools for generating texts or graphics, from a tax perspective this is a standard subscription, i.e., a routine cost service.

However, the situation becomes more complicated if you commission developers to train your own closed language model on your company data. Such a tailor-made AI system, to which you have exclusive rights, represents a highly valuable long-term intangible asset.

If the costs of developing your own AI solution exceed CZK 100,000 and you will use the model for more than a year, it falls into the category of intangible assets. You must therefore put it into use in the standard way and start straight-line depreciation over a five-year, i.e., sixty-month, period.

The implementation of robotic process automation is assessed in a similar way. If you have a software robot programmed that automatically transcribes invoices into the accounting system, you are acquiring software. If the price for its development exceeds the CZK 100,000 threshold, tax depreciation will apply.

At ARROWS, a Prague-based law firm (office@arws.cz), we can address copyright in generated code, set licensing terms, and ensure that you depreciate major investments in artificial intelligence for tax purposes flawlessly and lawfully.

Related questions on software and innovation

1. We purchased a company domain for CZK 120,000. Do we have to depreciate it?
If you purchase a valuable domain from a third party (the previous owner), this is not a standard service but the acquisition of a proprietary right. Since the amount exceeded the CZK 100,000 threshold, you must classify this purchase as long-term intangible assets and depreciate it. Only standard annual maintenance fees for renewal with the registrar fall under direct costs (services).

2. We hired an agency to develop a company mobile e-shop for CZK 300,000.
If the agency transfers the source code to you under the contract and grants you an exclusive licence to the work, you have acquired long-term intangible assets. You may not claim the CZK 300,000 all at once; you must depreciate it evenly over 60 months.

3. We prepay for integration with an AI provider’s API. Is it an expense?
Yes, consumption of API credits with AI model providers is a standard purchase of services. You post these monthly or annual fees directly to operating expenses regardless of how large the invoices from the provider are.

Cybersecurity: Costs of data protection

With the NIS2 Directive approaching, companies are rapidly increasing cybersecurity budgets. Here too, you must distinguish carefully. If you hire ethical hackers to perform penetration testing of your infrastructure, you are purchasing a service. You can therefore claim the security audit as a tax-deductible expense immediately.

The same applies to regular employee security training against phishing and social engineering. These expenses are clearly operational. But what if, based on the audit, you purchase sophisticated hardware firewalls for your server rooms costing a quarter of a million Czech crowns?

In that case, you are purchasing long-term tangible assets. A firewall above CZK 100,000 with a useful life exceeding one year must be depreciated over five years. For tax purposes, you will spread it into 60 equal monthly depreciation charges, which will reduce your tax base gradually.

In addition, installing complex security software may constitute a technical improvement of your original system, especially if you deeply integrate the new security module into your existing corporate ERP. Scrutinise any intervention that changes the original nature of the program.

The ARROWS attorneys will be happy to assist you. Our Czech legal team includes experts not only in tax, but also in technology law and cybersecurity. We will align your investments with NIS2 and at the same time set up your accounting so that you claim security expenses in compliance with Czech tax regulations.

International licence purchases and withholding tax risk

When a Czech company buys software from foreign suppliers (typically from the United States or Ireland), it enters the risky terrain of international taxation. Payments for software licences may very often be subject to so-called withholding income tax collected at source.

If you pay a US company for a licence, the Czech state may require you to withhold a certain portion of that payment (for example 15%) and remit it to the Czech tax authority. You then send only the remaining amount to the foreign company. If you fail to do so, the authority will assess the tax directly against you.

Fortunately, the Czech Republic has concluded double taxation treaties with many countries. These treaties may reduce withholding tax on software licences or even eliminate it entirely. However, applying these treaties is not automatic and requires strict administrative steps.

You must have a certificate of tax residence (domicile) for your supplier available and interpret the relevant international treaty correctly. A distinction is also made between purchasing standard off-the-shelf software (where withholding tax is usually not paid) and acquiring the right to modify and distribute the software (where substantial withholding may apply).

International tax experts from ARROWS, a Prague-based law firm, will guide you through this complex process. We will ensure that you do not pay taxes on behalf of your suppliers due to lack of awareness. We will prepare a legal opinion for you that will defend your approach before Czech tax auditors.

Digitalisation subsidies and their impact on depreciation

Many companies today use generous European subsidies, programmes such as OP TAK, or funds from the National Recovery Plan to purchase IT equipment. The joy of receiving millions is often replaced by a harsh reality when you discover the impact the subsidy has on your tax depreciation.

Tax laws are clear. If you acquire long-term assets partly or entirely from a subsidy, you must reduce the acquisition cost for tax depreciation purposes by the amount of that subsidy. The state will not allow you to depreciate for tax purposes even the portion of money you received from it free of charge under the subsidy scheme.

If you buy a server centre for one million Czech crowns and a subsidy covers half a million, only CZK 500,000 enters tax depreciation. You then spread this reduced amount into 60 monthly depreciation charges. Incorrectly applying the full amount to depreciation is one of the most common subsidy-related violations.

You must also carefully monitor the moment when you are certain that you will actually receive the subsidy. Only at that point is the subsidy recognised against the asset. If the subsidy is granted only in later years, it requires a complex adjustment of the accounting and a recalculation of tax depreciation already claimed.

For subsidy advisory services and subsequent compliance checks, you can confidently turn to ARROWS. We will ensure that you do not breach subsidy conditions and that you correctly reflect the received European funds in your Czech tax return without the risk of future penalties.

Disposal of IT assets: Sale, disposal, and destruction

The life cycle of IT hardware is the shortest of all asset types. Computers and servers often become obsolete in practical and technological terms long before the mandatory five-year tax depreciation period ends. If you decide to sell, dispose of, or scrap obsolete equipment, it has tax consequences.

When you sell a server that has not yet been fully depreciated, you can claim its so-called tax residual value (i.e., the amount you have not yet managed to depreciate) as a one-off tax-deductible expense. This expense is deductible without limitation and is compared with the income you receive from selling the hardware.

But what if you simply throw a broken laptop or old servers into e-waste? Physical disposal of assets also allows you to claim the residual value as an expense. However, you must have a demonstrable protocol confirming environmentally compliant disposal. If the asset simply “disappears”, the tax authority will not recognise the residual value.

Similar rules apply to software for which you purchased a licence but stop using it after two years. The residual value of disposed intangible assets can be recognised as an expense in the year in which you document that you have definitively stopped using the licence and have removed the asset from your accounting records.

At ARROWS, a Prague-based law firm (office@arws.cz), we will teach you how to properly prepare disposal protocols and how to proceed when selling IT equipment to employees. This minimises the risk that the Czech tax authority would challenge the costs related to disposing of non-depreciated assets.

Common mistakes when purchasing IT and how to avoid them

A typical mistake is ignoring the actual status of a completed project. The company has been actively using the software for a long time, the trial operation has ended, but the accountant still records it in the account for assets under construction. The aim is usually to postpone depreciation to later, more profitable years.

In such a case, the Tax Office will uncover the deliberate delay. Inspectors insist that depreciation must start at the moment the asset was objectively capable of serving its purpose. You will lose the tax shield for past years, and on top of that you will be hit with penalties for accounting errors.

Another common trick is the deliberate splitting of one large investment into many smaller invoices below the CZK 100,000 threshold. A company purchases a comprehensive information system for CZK 250,000, but has it billed as five independent invoices for CZK 50,000 and books it straight to expenses.

If it is a single functionally interconnected whole from the same supplier, the authorities will easily uncover this disguised investment. The transaction will be reclassified as the acquisition of an asset above the CZK 100,000 threshold. This is immediately followed by an additional tax assessment, huge penalties, and—if malicious intent is proven—even criminal prosecution for tax evasion.

With experts from ARROWS advokátní kancelář (office@arws.cz), you can easily eliminate these unnecessary rookie mistakes. Before any major IT investment, we will analyse the contracts and the invoicing model with you in detail. We will ensure that any inspection by the Czech Tax Office does not catch you off guard and that you can sleep soundly.

Final summary

Digitalisation represents a huge financial and accounting challenge for any dynamic company. Correctly distinguishing between a one-off operating expense and a long-term asset is absolutely crucial for cash flow optimisation—especially with the arrival of revolutionary tax changes from 2026, which unify the threshold at CZK 100,000 and introduce precise monthly depreciation without unnecessary exceptions.

Deliberately splitting IT purchases into small invoices, incorrect valuation of in-house software development, or naively confusing cloud services with intangible assets unnecessarily attracts the attention of the authorities. These rookie errors and attempts at amateur tax optimisation unfortunately most often end in high penalties, substantial additional tax assessments, and unnecessary investigations of statutory bodies.

If you are planning to purchase a robust information system, a major hardware refresh, or extensive AI integration, involve us right at the beginning. The lawyers and tax experts from advokátní kancelář ARROWS (office@arws.cz) will set up your processes so that you can claim IT investments in a tax-efficient manner, with 100% safety, and in strict compliance with Czech legislation.

FAQ – Most common questions on the tax treatment of IT investments

1. What is the difference in depreciation for a self-employed individual (OSVČ) and an s.r.o. when purchasing software above CZK 100,000?
An s.r.o. must mandatorily classify such software as an intangible asset and depreciate it evenly over 60 months. A sole trader (OSVČ), on the other hand, may include it in expenses in full immediately in the year of acquisition.

2. We bought an American graphics program online for CZK 120,000—how should it be taxed?
Since the program exceeds the CZK 100,000 threshold and you will use it for more than a year, it is a long-term intangible asset intended for depreciation. However, when purchasing licences from abroad, be very careful about a potential obligation to withhold and remit withholding tax in the Czech Republic.

3. Is the purchase of a lifetime multi-licence for the entire company team an asset?
If the total cost of a lifetime multi-licence for one product exceeds CZK 100,000, you must account for it as a long-term asset. If it were only an annual subscription regardless of its high price, it would be booked directly to expenses.

4. Our employees damaged notebooks at work and the repairs cost CZK 150,000. Is that depreciated?
No. Payments for repairs that merely restore an asset to its original operational condition are always treated as an immediate operating expense. The CZK 100,000 threshold for mandatory depreciation is never applied to ordinary repairs and maintenance.

5. Do you also do retrospective corrections if we find out that the previous accountant classified the software incorrectly?
Of course. Our team at ARROWS helps companies review historical accounting, prepare corrective or additional tax returns, and reduce any sanction impacts to an absolute minimum. Contact us immediately at office@arws.cz.

Notice: The information contained in this article is of a general informational nature only and serves for basic orientation in the matter under the legal framework as of 2026. Although we take maximum care to ensure accuracy, legal regulations and their interpretation evolve over time. We are ARROWS advokátní kancelář, an entity registered with the Czech Bar Association (our supervisory authority), and for maximum client protection we are insured for professional liability with a limit of CZK 400,000,000. To verify the current wording of regulations and their application to your specific situation, it is necessary to contact ARROWS advokátní kancelář directly (office@arws.cz). We accept no liability for any damages arising from the independent use of the information in this article without prior individual legal consultation.

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