Understanding the Capitalization of Software Development

Software capitalization means treating your development-related costs as long-term assets rather than expenses for the duration of a product's development phase. This enables you to scale your business, accelerate time-to-market for your software, and generate more profit. This method allows you to delay the moment the expenses become taxable, making it easier to invest money in the development phase instead of worrying about taxes.

Waydev can offer you a set of features that help you keep track of your costs. This will give you a better understanding of resource planning and an overview of your expenses. Having a good grip on your project costs can enable you to make better decisions on where you can apply software capitalization methods.
Not all costs can be capitalized, as they need to meet certain criteria according to the Generally Accepted Accounting Principles (GAAP). It's important to remember this from both a legal and a business strategy point of view.
Here is a breakdown of the types of costs that you can capitalize on in a software development environment:
1. Software for internal use only - this refers to software developed within the company for employees to use to complete their tasks. This sort of product is for internal use only, so it's not meant for reselling or bringing profit. You can capitalize on the costs related to developing software for this purpose, as they are considered resources for your company's use.
2. Software for external use - the matter of capitalizing software for this area is not as easy as the previous one. Software developed for external use is meant for selling to customers and making a profit. So, in this case, you can only capitalize on the costs involved in the technological feasibility stage, meaning the initial phase where you gather requirements and test before starting the actual development. Costs that can be capitalized at this phase include coding, consulting fees from outside collaborators, adding features to the product, and programmer compensation.

While software capitalization can present its set of challenges, this practice can bring many advantages to your entire organization, such as:
1. Reducing the impact on the company's expenses - you can do this with amortization or depreciation to get less impact on the company's cash flow.
2. Less impact on the company's profit and loss statement over the current year with capitalization.
3. Higher net income - gain a better financial image for investors by taking these expenses out of the equation for a while.
4. Investing in other areas - use the money left from not paying taxes immediately to invest in new hires or outside consulting to drive the project forward.

Software capitalization can provide advantages for your company's net income through amortization or depreciation of costs. While these fall under strict GAAP rules and must be thought out carefully, the practice can play an essential role in your company's financial situation if done correctly.
Waydev can help navigate the intricacies of choosing what costs you can capitalize instead of expenses. Using our resource planning feature, you can track how your fees are allocated through the duration of a project and decide what stage of the product development phase they fall under.