Capitalizing software costs
Understanding software cost capitalization rules, tax implications, and the impact of Section 174 on tech company finances.
- Usually really worthwhile, but super painful.
- Rules are not usually very clear, and if you’re not careful, can lead to a lot of onerous reporting requirements.
- Capitalizing engineering costs Lethain.
- Mastodon thread on the topic by Lethain
Section 174 of US tax code
- For several years (from 2022 or so?), made the accounting for software development costs be treated not as a cost. So a software startup that made $1MM in revenue, and paid $1MM in software development costs, would have to amortize the salaries. This resulted in a much higher tax burden, and was arguably a large part of the reason we’ve seen tech layoffs so prominently the last few years.
- Here’s a thread on Hacker News about the topic.
- It’s possible this will be repealed in 2025.