Intro
Have you ever wondered whether that new tool your team built should be capitalized or simply expensed? You’re not alone. For many CTOs, product managers, and engineers, sorting out what counts as a capital investment versus an operational expense can be confusing - but it’s also crucial for sound business planning and smooth audits.
In this post, I’ll walk you through a straightforward framework for categorizing technology spend. With just a little extra clarity, your engineering, product, and finance teams can make smarter decisions and avoid unnecessary headaches.
Let’s start with a quick refresher. Operational expenses (Opex) are the costs required to keep your business running on a day-to-day basis - think maintenance, support, and small fixes. Capital expenses (Capex), on the other hand, are investments in work that creates long-term value, such as building new products or implementing significant upgrades. The way you categorize these costs can have a big impact on your tax situation, financial reporting, and ultimately your business strategy.
Table Of Contents
Four Categories for Tech Investment
To simplify things, I use my investment framework with four types of work: Keeping The Lights On, Improve Existing, New Things, and Productivity Improvements. Although “Keeping The Lights On” is always operational expense, the other three categories may qualify as capitalizable, depending on the details and the relevant accounting standard.
Keeping The Lights On
This category refers to routine operations, maintenance, and support activities that keep existing systems running as intended. Routine maintenance and support are always expensed under both IFRS/IAS 38 and US GAAP/ASC 350. For example, tasks like applying security patches, fixing bugs in production software, and monitoring systems are all considered operational expenses and should not be capitalized.
| Example | IFRS/IAS 38 | US GAAP/ASC 350 | Capitalizable? |
|---|---|---|---|
| Applying security patches | Expense | Expense | No |
| Fixing bugs in production | Expense | Expense | No |
| Monitoring systems/responding to outages | Expense | Expense | No |
Improve Existing
When you’re enhancing or changing current systems or products, only some of that work may be capitalized. Significant improvements - such as adding major new features or upgrading systems for new regulatory compliance - can be capitalized if they meet the criteria set out in the relevant standards. Minor tweaks, routine refactoring, or small fixes, however, are treated as maintenance and must be expensed. The distinction here rests on whether the work adds substantial new capability or extends the useful life of the asset.
| Example | IFRS/IAS 38 (Development) | US GAAP/ASC 350 (Post-implementation) | Capitalizable? |
|---|---|---|---|
| Adding a major new feature | Capitalize | Capitalize | Yes |
| Refactoring code (no new features) | Expense | Expense | No |
| Upgrading for new regulatory compliance | Capitalize (if substantial) | Capitalize (if adds functionality) | Yes |
| Minor UI/UX tweaks | Expense | Expense | No |
New Things
Building entirely new products, systems, or major product features typically qualifies as a capital investment - provided you’re past the research or ideation phase. Costs incurred during research and feasibility analysis are expensed, but once you move into development (with feasibility established and a clear commitment to complete the project), those costs can be capitalized under both IFRS and US GAAP.
| Example | IFRS/IAS 38 | US GAAP/ASC 350 | Capitalizable? |
|---|---|---|---|
| Building a new software application | Capitalize | Capitalize | Yes |
| Creating a new customer portal | Capitalize | Capitalize | Yes |
| Prototyping/feasibility (research phase) | Expense | Expense | No |
Productivity Improvements
Investments in automation, internal tools, or process changes aimed at boosting efficiency can sometimes be capitalized, but only if they create substantial, long-term value. For example, developing a significant internal tool to automate manual processes is often capitalizable, while a small script or a simple process tweak is usually expensed. Updates to documentation or training materials are always expensed.
| Example | IFRS/IAS 38 (Asset Criteria) | US GAAP/ASC 350 (New Software) | Capitalizable? |
|---|---|---|---|
| Developing an internal automation tool | Capitalize | Capitalize | Yes |
| Scripting to automate report generation | Expense (if minor) | Expense (if minor) | Maybe |
| Updating documentation or training materials | Expense | Expense | No |
Bringing It All Together
Here’s a quick summary to help you keep these distinctions clear:
| Category | Typical Capitalizable Costs | Typical Non-capitalizable Costs |
|---|---|---|
| Keeping the lights on | None | Maintenance, minor fixes |
| Improve existing | Major enhancements, system upgrades | Minor tweaks, refactoring, small fixes |
| New things | New products, major modules, new systems | Prototyping, research phase |
| Productivity improvements | Significant internal tools/automation | Minor scripts, documentation updates |
Conclusion
Accurately categorizing technology investments isn’t just about keeping the finance team happy - it’s a strategic move that helps maximize value, improve tax outcomes, and ensure a smoother audit process. By applying this framework and building shared understanding across your teams, you’ll be well positioned for smarter decision-making and long-term success. If you’re ever in doubt, reach out to your finance team early and keep the conversation going. They will be more than happy to support you!
