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Capitalization of Software


Edsel

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Ever since software packages came in "vogue", we have fashioned a treatment for capitalization.

The initial purchase of the software package, including installation, would be capitalized and depreciated, and subsequent license renewals would be expensed in the years to follow.  This would sorta make sense since the software package would be "owned."

As software has migrated to the "cloud", initial purchases of software are much cheaper, software updates are done within the "cloud", and the customer in effect "rents" the software, even to the extent of being charged for access time and data.

With this new and increasing pattern, should we:

  1. Capitalize the first year of software cloud costs, and expense the charges in succeeding years.
  2. Do not capitalize at all, but expense the charges as incurred.

Feel free to comment for both GAAP and Tax purposes.

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It really depends on the software. Let's say ATX, you kind of "own" it but it is almost useless after the second year, so I would expense it even the first year.

AutoCAD for example might be a good piece of software that requires depreciation because it might cost 10K the first year and that program will continue to produce high demanded drawings even after 7 years.

To be technical, I think you have always rented it ever since MS DOS first floppy version. I think we might have to depart from useful life vs owning it or renting it.

How about turbo tax, will you depreciate it? Of course not... it is not useful after the first year.

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