Are App Development Costs Capitalized?
When it comes to app development, budgeting is essential. One of the most important decisions you will make when developing an app is how much money you will spend on its creation. However, there are some questions that arise regarding the capitalization of these costs. Are app development costs capitalized? Should they be capitalized or expensed? In this article, we will explore the different perspectives and arguments surrounding this topic and provide insights into what the best practice is for your project.
What are App Development Costs?
Before we delve into the capitalization of these costs, it’s important to define what they entail. App development costs include all the expenses incurred during the design, development, testing, and maintenance of an app. This includes salaries for developers, designers, testers, project managers, as well as software licenses, hardware equipment, and other operational expenses related to the project.
Capitalization vs Expensing: What’s the Difference?
Capitalization refers to the process of allocating costs over a longer period, usually several years, in order to spread out the financial burden. In the context of app development, capitalization means that the costs of creating an app are spread out over its expected lifetime. This can be beneficial for small businesses or startups with limited cash flow as it allows them to invest more heavily in their project while also managing their expenses.
Expensing, on the other hand, refers to the process of deducting the full amount of a cost from your taxable income in the year that you incurred it. This means that you can immediately write off the costs of creating an app against your revenue and profits for that year. However, expensing may not be feasible for some businesses or projects that are expected to have a longer lifespan as it requires immediate payment for all expenses incurred during the development process.
The Capitalization Debate: To Capitalize or Not to Capitalize?
There is no one-size-fits-all answer to whether app development costs should be capitalized or expensed. The decision will depend on a variety of factors, including the size and scope of your project, the expected lifespan of your app, and your business’s financial needs. However, there are some arguments that favor one approach over the other.
Those in favor of capitalization argue that it can help businesses spread out their expenses over a longer period, making it easier to manage cash flow and invest in other areas of their business. Additionally, capitalizing costs may be beneficial for startups or small businesses with limited cash reserves as it allows them to invest more heavily in their project without immediately depleting their resources.
On the other hand, those in favor of expensing argue that it provides immediate relief from the financial burden of app development and can help businesses manage their expenses more effectively. Additionally, expensing may be beneficial for projects with a shorter expected lifespan as it allows businesses to write off expenses against revenue in the year they are incurred.
Real-Life Examples: How Capitalization and Expensing Have Worked in Practice
To better understand the pros and cons of capitalizing app development costs, let’s look at some real-life examples of how this decision has played out for businesses.
Example 1: Company A develops a new app that is expected to have a relatively short lifespan. The company decides to expense all the costs of creating the app in the year it was developed. As a result, the company is able to write off all expenses against revenue immediately, which helps them manage their cash flow and invest in other areas of the business.
Example 2: Company B develops a new app that they expect to have a longer lifespan. The company decides to capitalize all the costs of creating the app over a five-year period.