We prepaid a software build and the developer disappeared. Can we write off the entire deposit?
Software Vendor Fails Before Delivering the System. A specific owner scenario, the facts that change the answer, and the records needed for a tax review.
By AE Tax Advisors Team · Updated October 28, 2026
Establish what right or asset the payment acquired, whether any code was delivered and the prospects of recovery. A missing developer does not automatically make the entire project budget a current deductible loss.
A specific business-owner situation
A business prepays a system build. The developer stops responding after delivering partial code, and the business considers a legal claim. The remaining code, refund right and unfinished work need separate evaluation.
Illustrative example, not a client result.
What to establish before filing
- Reconcile paid amounts and delivered work.
- Document refund and ownership rights.
- Assess abandonment and recovery prospects before selecting treatment.
Which fact changes the answer?
A refundable service deposit differs from ownership of partially completed code. Preserve the contract's rights and actual deliverables so the advisor can classify both the remaining asset and any failed claim.
A mistake to avoid
Writing off the full deposit while continuing to use valuable delivered software can overstate the loss.
Records that support the decision
- Development contract.
- Code and delivery records.
- Payment history.
- Demand and recovery correspondence.
The decision to document
Ask for a component-level closeout schedule and supported loss timing. Track later refunds or recoveries against the original workpaper rather than treating them as unrelated receipts.
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Sources and editorial context
General educational information prepared with AI assistance. No individual professional review is claimed. Apply the relevant tax-year rules to the actual records. Editorial policy · AI disclosure.