Can Consulting Services Be Capitalized?

No, you cannot capitalize consulting services, since the expense is only to speed up the installation of a new software module. When the cost of speed is benefiting future economic periods, it is a cost and not an expense. Costs that are direct and clearly incremental should be capitalized once the project is likely and during the construction phase. Fees must be collected until the project is likely.

Once the project is likely, directly identifiable costs must be capitalized. Research on this topic can be mixed, and it is not always clear if it would fall under the internal use software designation. For example, if a company paid a consulting firm to rebuild their version of Salesforce, this expense cannot be capitalized on or recognized over the life of the software contract. The goal is to match expenses with the revenues that the asset in question is supposed to help generate.

For example, buying a factory to make widgets can generate revenue this year, but generally the goal is for this factory to continue to produce revenue for many more years, and a company generally does not “replace its factory every year”. Since the asset generates income for many years, the idea is that the expenditure of that asset is also spread over many years, or capitalized (in this case, it depreciates). The fees paid to the consultant to determine the amount of the credit are operating expenses and should be recorded as expenses, just like any other charge for accounting services or temporary service. By definition, not all capital expenditures qualify for capital allocations, for example consultant fees or rights land tax. The costs of some specialized services, such as hiring consultants or accountants, are also considered operating expenses.

The types of costs capitalized during the development phase of the application include employee compensation, as well as consulting fees for external developers working on these projects. In a new development, it is common practice to capitalize on elements such as consultant fees which at first glance would appear to be of a short-term nature. If the expense is incurred after the building is put into service, there is no need to capitalize on it.

Dylan Nemecek
Dylan Nemecek

Typical social media ninja. Professional pop culture nerd. Unapologetic bacon advocate. Proud pop culture guru. Incurable social media nerd.

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