Can Website Development be capitalized?
What a company or any brand spends in creating or updating its website is known as website development costs. These costs can vary accordingly. A basic website can be put together for the cost of a small program and of writing the content. One may also spend a great deal of money on a website with custom-designed graphics and interactive features.
How much an organization spends on website development costs depends on the total business it can expect from a well-presented website. It will also affect the organization’s reputation and overall profit.
Website Development can be used for both internal and external access
A website designed for external access can be used for various purposes such as promoting and advertise any business’s products and services, provide electronic services, and sell their related products and services. A website is also developed for internal access that can be used to store company policies, customer details, and search for relevant information.
Website Development stages can be described as follows
Planning: includes feasibility studies, defining objectives and specifications, evaluating alternatives, and selecting preferences.
Application and Infrastructure Development: includes a domain name, developing hardware and operating software, installing related applications that are developed.
Graphical Design Development: includes designing the appearance of web pages regarding the requirement.
Content Development: content can be created, prepared, and then further upload the relevant information on the website that can be either textual or graphical.
Now let us look over the Website development costs that are capitalized
1 – Software Costs: If the website is created through an in-house option, the costs can be deducted in the year the costs are paid or depending on the accounting method used and treated like computer software. This also depends on the creation of the website.
2 – Website Functionality: The creation of a completely new website or new functionality, that particular website will fall under capital expenditure. The cost incurred for the creation, design, development, and programming of a website comes under capital assets. It is also included when the business may purchase all the necessary hardware to support the development of the website. These purchases will follow existing capitalization policies.
The cost of any additional enhancements should also be treated as new software that requires certain costs to be capitalized that includes other costs to upgrade the website by adding new features such as pages to the website, adding sales capability, or adding payment capability.
3 – Improvements/Maintenance Costs: In any website, content update, improvements that can be easily implemented, but not functionality, are recurring expenses. They are similar to on-going maintenance and repairs and are considered as revenue expenses.
Typical maintenance-type costs include various costs like to update web pages, correcting minor style or formatting problems, fixing bugs or broken links, making formatting changes consisting of font size, types, and colours. Internal costs for minor upgrades and enhancements can be expensed as maintenance costs if they cannot be reasonably distinguished.
Regarding training and website, maintenance costs creating new links, registering with search engines, analyzing usage, website hosting, and performing routine backups are also considered as expenses.
A top-notch business website can surely grow your audience, increase your conversion rate, and improve your brand. Although professionally designed websites come at a cost, you can deduct several of website development costs.
Certain costs can be deducted that are connected with website development
1 – Outsourced web development: When you purchase a website from a third party who assumes responsibility for the web site’s functionality, the costs are considered as software costs and are spread out for over 3 years.
2 – In-house web development: If you decide to develop your website through in-house, you have the choice of two methods of deduction. You can either choose to deduct the total cost of the website in the year it was paid or can treat your website as software and spread your deductions over three years.
3 – Graphic design: Purchases made for the website that are not classified as software, are the cost of logo design. They can be deductible over the full usage of the item. The full usage of the item refers to the amount of time the designs are to be used by the business.
4 – Promotional web content: The cost of website content that is promotional is deductible comes under advertising expenses. These expenses will be for the creation of content that can be changed regularly if required.
For example, you can deduct the cost of a photoshoot that will promote or advertise a new product on your website. You can claim these deductions in the year the cost was paid, depending on your accounting method.
On the other hand, you cannot claim an expense like hosting or renewal fees as advertising content, since they are considered a regular business expense.
5 – Regular business expenses: Some website-related costs are simply treated as normal business expenses and are deductible when they are incurred. An example of this expense could be the purchase of a licensed font aspect. The changes or editing include adding new pages to the site, or adding a shopping cart functionality, then these do not fall under the regular business expense category. They are mostly capitalized.
The advance of technology and the widespread use of the Internet have provided a very powerful medium for companies to promote their activities to a larger spectrum of people at a much lower cost. Websites enable companies to do what printed brochures do but, in a much more efficient manner as well as in a much shorter period and covering a much larger set of people worldwide.
The requirement to capitalize on website development costs on each company always depends on the nature of the company and the total quantum of development projects undertaken. This all needs proper, brief planning, and a complete formulated strategy to capitalize on the costs in website development. The company can finally decide on its website and its related costs.