This is how digital products quietly create value on your balance sheet
CFOs are used to thinking in terms of hard assets – buildings, equipment, vehicles. Those are the traditional capital expenditures. But increasingly, the software your team relies on every day – from client portals to internal workflow tools – is just as critical to operations, growth, and long-term value creation.
Here’s the kicker: custom software development can often be capitalized, provided it meets the right criteria under GAAP or IFRS.
Software as CapEx, Not Just OpEx
In an enterprise services business, margins can get tight – especially when you’re running people-heavy operations. So when you invest in software – whether it’s a proprietary delivery platform or a backend system to streamline billing – you’re not just spending money. You’re building a long-term asset.
According to ASC 350-40 (Internal-Use Software guidance under US GAAP), costs incurred during the application development stage of internal-use software can be capitalized. These include coding, configuration, testing, and implementation – assuming the project has crossed the threshold of probable completion and use.
Expenses before and after this stage (e.g. planning, training, maintenance) typically remain OpEx.
Why does this matter? Because capitalizing eligible costs means the investment hits your balance sheet first – and gets amortized over time – rather than immediately flowing through your income statement.
The Payoff: A Smoother Income Statement
Capitalized software costs don’t impact your P&L all at once. They’re amortized over the software’s estimated useful life – typically three to five years – preserving EBITDA in the short term.
In other words, you’re aligning expense recognition with the actual value the software provides over time. For organizations investing heavily in digital transformation, this smooths financial optics, supports profitability metrics, and creates a more accurate view of operational leverage.
A Strategic Lever, Not Just Accounting Logic
This isn’t just an accounting exercise – it’s a strategic tool.
Capitalizing software development gives finance leaders room to invest more aggressively in systems that reduce manual overhead, drive efficiency, and scale operations – all without taking a sudden hit to profitability.
In the enterprise services world, where labor is your biggest cost center and delivery is everything, these investments can create:
- Operational leverage through automation
- Stickier client experiences via proprietary platforms
- Enterprise value through intellectual property
Don’t Forget AI – It’s Part of the Capital Conversation
AI is now part of the digital toolkit – but many finance teams haven’t caught up in how they classify and account for it.
If you’re implementing off-the-shelf AI tools (e.g. GPT plugins, copilots, subscriptions), those are typically OpEx. But if your team is developing custom AI models, embedding machine learning into your platform, or building internal automation powered by AI, those costs may fall under the same capitalization rules as traditional software.
Under ASC 350-40, custom AI functionality developed as part of an internal-use system – especially during the application development stage – can be capitalized if it meets the same criteria: technological feasibility, intended use, and probable completion.
The upside? Once deployed, AI can reduce labor hours, speed up decision-making, and even transform your service model. That’s a long-term asset, not just a pilot experiment.
So, before you default to classifying AI initiatives as experimental R&D or “innovation budget,” consider how they may qualify for CapEx treatment and long-term strategic value.
TL;DR for the CFOs
- Capitalize internal-use software when it meets the criteria – especially in the application development stage
- Amortize over 3–5 years to preserve EBITDA and match cost to value
- Evaluate AI initiatives through the same lens – many are eligible for CapEx
- Frame software and AI as long-term enablers of margin expansion, not sunk costs
If you’re evaluating a client portal, a workflow engine, or a proprietary AI feature that reduces delivery friction – don’t just ask “what’s the cost?” Ask: How does this sit on the balance sheet? It might be one of the smartest capital allocations you make this year.
