Software Capitalization FAQ

Owned by Parker Ennis, created
Feb 16, 2024
2 min read

Find answers to common questions and better understand the methodology for calculating software R&D reports in Allstacks.

 The basics 

  1. What are the benefits of tracking the portion of development committed to software R&D?

    1. Gives visibility into the type of effort engineers are working on for two use cases:

 

Tax Credit

Financial Auditing (Cap. & Amort.)

Requirement

The Internal Revenue Code (“IRC”)

Small, unprofitable companies: depends on stage

Large companies or IPO’d companies: required

Legislation

Section 174

US GAAP (“Generally Accepted Accounting Principles”)

Sign Off  (Most Common)

3rd Party tax advisors working with CTO. Potentially Independent Financial Statement Auditors

 

Independent Financial Statement Auditors

Frequency

Submitted annually on Federal & State returns (where applicable); estimated quarterly with payments

Monthly

Eligibility/Details

  • Required under the IRC

  • For tax credit, there is no “materiality”

  • Standard requires capitalizing and amortizing 

  • Includes a materiality threshold for “cleaning up” data as well as adherence with GAAP.

Customer Goal

Maximize defensible R&D claim. Limit exposure to IRS audit

Accuracy and presentation of the Financial Statements

  1. What’s the difference between capitalizable and non-capitalizable costs? 

    1. Capitalizable Development costs for internal-use software include development labor as well as third-party costs for software development or purchase.

    2. Non-capitalizable Development costs include, but are not limited to, small bug fixes, ongoing training, and maintenance.

  2. Is Software Capitalization included in my Allstacks app subscription already?

    1. Software Capitalization can be enabled within the app, but requires a separate purchase. Software Capitalization can be purchased as a standalone offering or bundled in combination with a Premium tier or Enterprise tier platform purchase for a volume discount.

Walking through the process

https://docs.google.com/presentation/d/1BFMPrvn4SV1Mu6zzSmtvGKSBoJHIbyO77mEAHw2MwJg/edit?usp=sharing

What’s supported

  • Velocity based reporting

  • Story-point based reporting

  • Default salary estimates (configurable)

  • Splitting credit across assignees evenly

What’s not supported

  • Splitting credit across assignees unevenly

  • Data extracted from source code management tools

  • Direct integrations with HR systems or payroll tools are not supported

 

Note, we’re always looking for feedback and opportunities to improve our Software Capitalization product. If you have feedback, ideas, or specific use cases to consider, please let us know.