Accounting practices for software development costs

August 15, 2019 1:28 PM

I have vague memories of reading about some changes in accounting requirements around development costs for software products. As I remember it, these had some sort of tax implication that is part of the reason why many companies have switched to a subscription model in recent years. Did something like this actually happen, or am I misremembering?

A more general question might be, "How are software development costs accounted for?". Is there a significant difference when the software being developed is a subscription service, vs. a product sold for a one-time fee?

I do not sell software or work for a company that does, so I definitely will not try to use this as actual accounting advice. The motivation is pure curiosity.

posted by vogon_poet to Law & Government (4 answers total)

I work in software and software financing, and generally the software that we produce is categorized from an accounting perspective as "research and development" and gets associated tax breaks if it creates new components or does something in a new or novel way. Sustainment work (bug fixes, hardware maintenance, and operational efforts) are "sustainment" and get no positive tax treatment. This is audited regularly and we have to justify if we have done something in a novel way to auditor/contractors for various tax breaks.

To answer your other question "Is there a significant difference when the software being developed is a subscription service, vs. a product sold for a one-time fee?"
if there is, I've never heard of it. A subscription service creates the MBA gold 'recurring revenue', which is more valuable than 'one time revenue', as it it 'sticky' in that it creates a bond between company and customer which can be marketed to and managed, which enables the selling of other products.
posted by The_Vegetables at 2:03 PM on August 15, 2019 [2 favorites]

You might be thinking of states charging sales tax on software while many do not charge for SaaS.
posted by Candleman at 2:06 PM on August 15, 2019 [1 favorite]

You may be thinking of ASC606 which effects companies transitioning from a perpetual license model to a subscription model.
posted by Fidel Cashflow at 2:37 PM on August 15, 2019 [3 favorites]

Are you thinking of the FASB standards change of 2016, in which a software subscription is a capital expense amortized over the length of the contract, rather than an operating expense (as though it were a service contract?)
posted by chesty_a_arthur at 3:12 PM on August 15, 2019