Taxes, and Docs, and Agility, Oh my!

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~380 word | ~1.5 min read

Disclaimer: To be clear, I am NOT a tax professional.
Consult your accountant before acting on anything you learn from this article!

Software Development is not a cheap endeavor. Just a 5 person team can run a company at least $1M a year! That makes even a 6-month software project a sizable investment! And that means some fun with taxes and accounting.

First some terms:

• Capital Expenditure (CapEx) - the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets
• Operational Expenditure (OpEx) - an ongoing cost for running a product, business, or system.

Most maintenance would fall under OpEx, based on this definition. But there are a couple wrinkles. Before 2017, Software Development could be entirely claimed as OpEx. This allowed the company to deduct the entire cost of the project from their profit that year. Now all Software Development, that is NOT Maintenance, is CapEx. This means that the software is an Asset, rather than an expense. for tax purposes.
So, the tax benefit for the project gets spread out out over the lifetime of the product^.

Why does this matter to a software developer?
Your company pays software engineers to write software. And now they have a vested interest in where/how developers spend their time! For taxes, you treat Maintenance differently. But what is ‘Maintenance’ is also tightly controlled. This concern may manifest a sudden, deep interest in time-sheets. Where every developer spending their time?

‘Maintenance’, that is OpEx, may not align with what engineers see as Maintenance. Meaning the stuff we call “maintenance” may need a CapEx project! What’s more, these regulations can encourage the separation of Maintenance and Build Teams. The pattern makes it easier to quantify the CapEx and OpEx number for various projects.

The tax implications of software projects affect your business. Being aware helps you be a better partner.

^ - The lifetime of software in the eyes of the IRS depends on who made it.

Author’s Note: I used Perplexity while researching this topic. The content remains human-written.