Are There Tax Breaks in The Cloud?

Can reserved instances on cloud computing platforms be treated as physical servers for tax purposes. An interesting discussion has emerged around the topic, prompted by Netflix's use of the EC2 service.

Rich Miller

March 10, 2011

2 Min Read
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An interesting conversation broke out on Twitter yesterday during the Cloud Connect conference, when AT&T's Joe Weinman (via a tweet from Jay Fry) noted that Netflix "treats reserved AWS instances as CapEx and depreciates them over 3 years." Netflix has shifted much of the infrastructure for the streaming video portion of its business to Amazon Web Services, as described by Vice President of Systems Engineering Kevin McEntee in one of the keynotes at the Cloud Connect event.

The discussion highlighted the potential advantages of Amazon's Reserved Instances, a new pricing model for its EC2 compute-on-demand service offering customers the ability to reserve large amounts of capacity for future use. Netflix says it is effectively treating the  reserved server instances as though they were physical servers.

Reuven Cohen of Enomaly operates SpotCloud , an online marketplace bringing together buyers and sellers in a cloud capacity clearinghouse. Cohen blogged about the concept, saying that Netflix probably means amortization rather than depreciation - but expressing appreciation for the potential strategies suggested by how Netflix is approaching the issue.

"Previously I saw the opportunity for 'cloud futures' from the point of view of the provider the capacity," Cohen writes. "Basically allowing the provider a greater level of insight into future capacity consumption, inventory and capacity planning. The missing part of the equation has been on the buy side, other then potentially locking in a future price, (as a hedge) the rationale for buying future computing capacity was fairly limited. With the introduction of amortization to the equation the concept dramatically shifts from not only a capacity planning exercise but also to a tax and accounting strategy for major buyers of computing capacity."

I'm not an accountant. But the notion of depreciating/amortizing reserved cloud instances seems to add another wrinkle to the economic model for large-scale use of the Amazon platform. What's your take? We welcome your comments.

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