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Saving your P&L by Capitalizing Internal Software Development 🖥️


When a small business develops customized software, the costs associated with that development can be significant. These costs can include the salaries of the developers, the cost of software licenses, and the cost of hardware. In some cases, these costs can be so high that they can have an immediate negative impact on the business's bottom line.


However, there is a way for small businesses to avoid this negative impact. By capitalizing the internal costs related to customized software development, businesses can spread out these costs over a period of time. This can help to improve the business's cash flow and financial performance. There are a few key benefits to capitalizing internal costs for customized software development.


💪First, it can help to improve the business's balance sheet. When costs are capitalized, they are recorded as assets on the balance sheet. This can help to improve the business's financial health and make it more attractive to potential investors or lenders.


💰Second, capitalizing internal costs can help to reduce the business's taxable income in future periods. When costs are capitalized, they are not deducted from the business's income in the year in which they are incurred. Instead, they are deducted over a period of time, which can help to reduce the business's taxable income in future periods.


🔍Third, capitalizing internal costs can help to improve the business's internal controls. When costs are capitalized, they are subject to more rigorous accounting and auditing procedures. This can help to ensure that the business is accurately tracking its costs and that it is in compliance with financial regulations.


Overall, capitalizing internal costs for customized software development can be a valuable tool for small businesses. By spreading out the costs of development over a period of time, businesses can improve their cash flow, financial performance, and internal controls.


Here are some additional tips for small businesses that are considering capitalizing internal costs for customized software development:


  • Make sure that the software development project is likely to be successful. If the project is not likely to be successful, then capitalizing the costs may not be a good idea.

  • Get professional advice from STEWARD & COMPANY or your tax advisor. They can help you to determine whether capitalizing the costs (and which costs to capitalize) is the right decision for your business and can help you to comply with all applicable financial regulations.

  • Document the software scope, development process and included costs carefully. This will help you to justify the capitalization of the costs if you are ever audited by the IRS or another regulatory agency.


By following these tips, your small business could maximize the benefits of capitalizing internal costs for customized software development.

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