What expense category is Point-of-Sale (POS) System Costs?

For any retail or service business, a Point-of-Sale (POS) system is the central hub for processing sales, tracking inventory, and managing customer data. These systems involve both hardware (like card readers and terminals) and software, each with its own specific tax treatment.

Understanding how to correctly categorize these costs is crucial for accurate bookkeeping and tax compliance. The hardware is typically a capital asset that must be depreciated, while the recurring software fees are a currently deductible operating expense. This guide will clarify the IRS rules for both components of your POS system.

Point-of-Sale System Fees/Software Category

The costs associated with a POS system are not a single expense category. They must be broken down into their core components: the hardware you purchase and the software you subscribe to.

Hardware & Purchased Software (Capital Expenditure) 

The physical equipment you buy—such as cash registers, card readers, receipt printers, and barcode scanners—is a business asset. According to IRS Publication 946, you cannot deduct the entire cost of these assets in the year you buy them. 

Instead, they must be capitalized and depreciated over their useful life. The same rule applies if you purchase a perpetual software license outright.

Recurring Software Fees (Operating Expense) 

Most modern POS systems operate on a subscription model where you pay a monthly or annual fee for the software. 

Based on the principles in IRS Publication 535, these recurring fees are treated as a rent or lease expense or as dues and subscriptions because you are paying for the use of software you do not own. These are currently deductible.

Important Considerations When Classifying Point-of-Sale Costs

The primary consideration is whether you are buying an asset or subscribing to a service.

Hardware vs. Software

You must separate the costs of your POS system.

• Hardware is tangible property that you own and must be depreciate over time.
• Software subscriptions are ongoing operating costs that can be deducted as they are paid or incurred.
• If you purchase software outright, that cost must be capitalized and depreciated, typically over a 36-month period.

Payment Processing Fees

The per-transaction fees that you pay to a payment processor (e.g., a percentage of each credit card sale) are a separate business expense. These are not part of your POS system cost but are generally deductible as bank fees or merchant processing fees.

Tax Implications and Recordkeeping

The tax reporting for POS costs depends entirely on whether they are capitalized or expensed.

Depreciating Purchased Hardware and Software

• Depreciation: The cost of purchased POS hardware is recovered through depreciation, typically as a 5-year property under MACRS, using Form 4562, Depreciation and Amortization.
• Section 179 Deduction: You may be able to elect to deduct the full cost of the qualifying hardware and off-the-shelf software in the first year using the Section 179 deduction, subject to annual limits.

Deducting Subscription Fees

For a sole proprietor filing a Schedule C (Form 1040), recurring POS software subscription fees are deducted in Part II. They can be included on Line 20a (Rent or lease - Vehicles, machinery, and equipment) or listed under Line 27a (Other expenses).

What Records to Keep

You must maintain meticulous records to substantiate all POS-related costs.

• For purchased hardware, keep the purchase invoice and proof of payment as a record.
• For software subscriptions, retain the service agreement and monthly or annual invoices.
• For processing fees, keep all merchant account statements.

How Fyle Can Automate Tracking for Point-of-Sales System Costs

Fyle helps you capture and correctly categorize all components of your POS system costs, from the initial hardware purchase to the recurring monthly software fees.

• Capture Hardware Invoices: Instantly capture the receipt for a new card reader or terminal purchase using the Fyle mobile app.
• Track Recurring Subscriptions: Fyle’s real-time credit card feeds automatically record every monthly POS software fee through corporate card transactions.
• Centralize Key Documents: Attach hardware warranties and software subscription agreements directly to the expense records in Fyle.
• Automate Your Accounting: Fyle syncs costs to the right GL account in QuickBooks, Xero, or NetSuite—either as a fixed asset for depreciation or a subscription expense for deduction.