---
title: "Capitalizing software costs"
description: "Understanding software cost capitalization rules, tax implications, and the impact of Section 174 on tech company finances."
url: "https://www.rubick.com/wiki/process/capitalizing-software-costs/"
---

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[Wiki](https://www.rubick.com/wiki/) / [Processes & Methodology](https://www.rubick.com/wiki/process/) / Capitalizing software costs

# 💰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](https://lethain.com/capitalize-engineering-costs/) Lethain.
-   [Mastodon thread on the topic](https://mastodon.social/@lethain/109519307428668896) 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](https://news.ycombinator.com/item?id=44226145).
-   It’s possible this will be repealed in 2025.