Capitalization of software development costs

What is Capex?

Capex stands for capital expenditures, as opposed to Opex or operational expenditures. Capex is incurred when a business acquires assets that could be beneficial beyond the current tax year.

Benefits of capitalizing software

In financial terms

Increase of net income

Capitalized software leads to lower reported expenses and therefore higher net income. As a result, companies can show higher net income for book purposes.

GAAP compliance

Capitalization is often required to be in harmony with generally accepted accounting principles. Businesses have to provide GAAP-compliant financial reports to investors, creditors or government.

Tax implications

Expensing may lead to low taxes in the first year, however, it can substantially increase in the following years. Capex will spread the tax savings over more than one year so you don’t run in fluctuating budget.

Costs that qualify for software capitalization

Main cost driver is employee compensation.

  • Software development
  • Software testing
  • Other direct costs

Learn more about how Quantify makes software capitalization easier