Can Custom Software Be a Capital Asset on Your Balance Sheet?

The Short Answer

Often, yes. When a business pays to develop software for its own internal use and owns the result, US accounting standards generally allow qualifying development costs to be capitalized, recorded as an intangible asset on the balance sheet, and then amortized over the software's useful life. A subscription to someone else's software works differently: those fees are generally expensed as you pay them, because you're buying a service rather than acquiring an asset.

The Standard: ASC 350-40

In US GAAP, the main guidance for software a company builds or buys for its own use (rather than to sell) is ASC 350-40, Internal-Use Software. A business hub that runs your operations is a textbook example of internal-use software: you use it to run the business, and you don't sell licenses to it.

Historically, ASC 350-40 has sorted software projects into three stages, and the stage determines whether a cost is expensed or capitalized:

1. Preliminary project stage. Evaluating alternatives, defining requirements, selecting a vendor. These costs are generally expensed.
2. Application development stage. Designing, building, configuring, and testing the software. Qualifying costs, such as fees paid to outside developers and payroll for employees working directly on the build, are generally capitalized.
3. Post-implementation and operation stage. Training, routine maintenance, and ongoing support once the software is in use. These costs are generally expensed. Upgrades that add significant new functionality may be capitalized.

Once the software is substantially complete and ready for its intended use, amortization typically begins, commonly on a straight-line basis over the expected useful life.

The 2025 Update

In 2025 the Financial Accounting Standards Board issued an update to ASC 350-40 (ASU 2025-06) that removes the stage-based model. Under the update, capitalization generally begins once management has authorized and committed to funding the project and it's probable the project will be completed and used as intended. The update has a future effective date with early adoption permitted, so which version applies to your company is a question for your CPA. The broad principle is unchanged: qualifying costs to develop owned internal-use software can be capitalized.

What Usually Doesn't Qualify

Even on a capitalizable project, some costs are generally expensed as incurred:

• Early planning, requirements gathering, and vendor selection (under the stage model).
• Training your staff to use the new system.
• Data conversion and cleanup, in most cases.
• General and administrative overhead.
• Routine maintenance, bug fixes, and support after launch.

This is why good project records matter. Your CPA will want to see which costs went to building functionality and which went to everything else.

Owned Software vs. SaaS Subscriptions

The key difference is ownership. A SaaS subscription gives you the right to use someone else's software for as long as you pay. Under US GAAP, most of those arrangements are treated as service contracts, and the subscription fees are expensed over the term. Certain implementation costs for a cloud service can be capitalized and expensed over the contract term under separate guidance, but the subscription itself doesn't become your asset.

Put simply:

• SaaS: a recurring operating expense. When the subscription ends, you're left with no software and whatever data you manage to export.
• Owned custom software: qualifying build costs may become an asset on the balance sheet, amortized over time. When a vendor relationship ends, the software and source code are still yours.

Why It Matters Beyond the Books

Capitalization changes how the investment shows up in your financial statements, and that can matter in practical ways:

• Operating results. Amortizing a capitalized asset over several years spreads the cost, rather than hitting operating expenses all at once.
• Valuation. Proprietary software the business owns can be part of what an acquirer or investor evaluates, especially when it encodes workflows competitors don't have.
• Control. Owning the source code means you decide when to add features, change vendors, or bring development in-house.

None of these are guarantees. Lenders, acquirers, and auditors each look at software assets in their own way. But owned software gives you options that a subscription can't.

Book Treatment vs. Tax Treatment

How software costs are treated for financial reporting and how they're treated for income tax are separate questions with separate rules. US tax rules for software development and research costs have changed several times in recent years. Don't assume the book answer and the tax answer are the same, and ask your tax advisor how current law applies to your project.

Questions to Ask Your CPA

1. Does our planned software qualify as internal-use software under ASC 350-40?
2. Which version of the guidance will we apply, and when does capitalization begin under it?
3. Which of our vendor's invoices and internal payroll costs qualify, and how should we document them?
4. What useful life and amortization method are appropriate?
5. How will ongoing enhancements be treated compared with maintenance?
6. What is the tax treatment, and how does it differ from the book treatment?

How IFX Hub Approaches This

Every IFX Hub is custom software built for one client, and the client owns it: the source code, the data, the documentation, and the deployment access. That's the fact pattern that makes capitalization a possibility, as opposed to a per-seat subscription that disappears every month. Infraxio can share project and invoice detail to support your CPA's analysis, though the accounting decision is always yours and your advisor's.

Read more about what owning your hub means, or see how a hub can complement or replace your ERP.