Websites As Capital Assets

The fact that businesses can capitalize portions of small business websites can change the financial calculus of the project. Although it’s key to their small business marketing efforts, a website is still a significant investment for any small business. The ability to capitalize part of the site acknowledges the long-term value and revenue generation potential it has. Website costs that can and cannot be capitalized generally fall into two groups: costs to develop the site, and costs to operate the site. Usually the former can be capitalized, while the latter should be treated as an expense.
Read more: Website development costs

Website development costs

As previously noted, development costs for the site can generally be capitalized, but there are exceptions. Recommended practices are contained in U.S. GAAP Codification of Accounting Standards, Topic 350-50, Website Development Costs.

For example, in most project accounting, you would consider planning expenses part of project cost, yet recommended practice per American Institute of CPAs SOP 98-1 is to expense all costs (except domain name registration) prior to actual development of the application (the website).

Similarly, post-development operational costs are to be expensed.

Read more: Website operational costs

Website operational costs

Generally operational costs for your website must be expensed per American Institute of CPAs SOP 98-1. This would include web hosting fees.

An interesting exception would be for domain name registration costs, which one might consider an expense. Yet, under the AICPA SOP, it may be capitalized.

Through the life of the site, there may be costs related to upgrades. The SOP makes it clear that these expenses may be capitalized only if the upgrade represents “additional functionality”.

Read more: Words to the wise

Words to the wise

The ability capitalize some portions of your website can make the project expense easier to justify. Like with any financial considerations for your business, you should seek professional advice before making any decisions.

Your website is a significant investment and a critical part of your small business marketing. Make sure you devote as much attention to the financial considerations as you do to the site itself. You’ll be glad you did.

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