# Capitalize vs. Expense Software Costs — How to Decide

How to decide whether a software cost is capitalized or expensed — by the type of work and the stage it's in, with a plain decision table teams can apply.

Every software cost lands one of two ways: capitalized (recorded as an asset and spread over years) or expensed (taken in full now). Get it right and your financials reflect reality; get it wrong and you misstate both profit and the balance sheet. The decision comes down to two questions — what is the work, and what stage is it in.

For the concept itself, see [what software capitalization is](/software-capitalization/what-is-software-capitalization). This page is the decision.

> **Note**
>
> **Changing for FY2028.** The stage-based decision below is the current rule. [ASU 2025-06](/software-capitalization/asu-2025-06) replaces the project stages with a probable-to-complete threshold for fiscal years beginning after December 15, 2027 — though the practical question (is this work building the asset, on a funded and probable project?) stays much the same. Early adoption is permitted now.

**Capitalize**

Record as an asset; amortize over the useful life.

- Application-development-stage work
- Builds new functionality
- Funded, probable to complete

**Expense**

Recognize the full cost now.

- Research, planning, evaluation
- Maintenance and bug-fixing post-release
- Training, admin, overhead

## The decision, by type of work

For internal-use software ([ASC 350-40](/software-capitalization/glossary/asc-350-40)), the stage decides it:

| Work | Capitalize or expense? | Why |
| --- | --- | --- |
| Planning, research, evaluating options | **Expense** | Preliminary stage — too uncertain to be an asset |
| Building new functionality (coding, testing, config) | **Capitalize** | Application-development stage — creates the asset |
| Data conversion, training, admin | **Expense** | Doesn't build the asset, even mid-project |
| Maintenance and bug fixes after release | **Expense** | Post-implementation — keeps it running, doesn't add value |
| Upgrades that add new functionality | **Capitalize** | A new increment of asset |

Software built to sell follows [ASC 985-20](/software-capitalization/glossary/asc-985-20) instead, where the line is technological feasibility rather than the application-development stage.

## The two tests, in order

1. **Has the project crossed the threshold?** For internal-use software, capitalization can't start until the preliminary stage is done, funding is committed, and completion is probable. Before that, everything is expensed.
2. **Does this specific work build the asset?** Past the threshold, capitalize the work that creates or extends functionality; expense the work that supports, maintains, or trains around it.

If both are yes, capitalize. If either is no, expense.

## The Agile complication

In a phased waterfall project these tests are easy — the stages are visible. In Agile they're not: a single sprint mixes capitalizable feature work with expensed discovery, refinement, and bug-fixing, so the decision moves down to the ticket level. [Capitalizing costs in Agile](/software-capitalization/agile) covers how to map it; [Quantify](/software-capex) applies the split automatically from your issue tracker.

## Frequently asked questions

### Should software development costs be capitalized or expensed?

Both, depending on the work and stage. Capitalize application-development-stage work that builds functionality on a funded, probable-to-complete project; expense research, planning, maintenance, and training.

### When can you start capitalizing software costs?

For internal-use software, once the preliminary project stage is complete, management commits funding, and it's probable the project will be completed and used as intended.

### Are software maintenance costs capitalized?

No — post-release maintenance and bug-fixing are expensed. Only upgrades that add new functionality are capitalized.

## Capitalize software development costs in Jira — without the manual work

Quantify turns Jira activity into audit-ready software-capitalization data automatically — no manual timesheets.

[Talk to us about capex](https://www.quantifyhq.com/contact?utm_campaign=capex)