Do you capitalize software licenses?

Software licenses

Software licenses may be capitalized or expensed, depending on their nature and duration. Licenses that provide long-term value (typically lasting more than one year) are capitalized as intangible assets, while short-term or subscription-based licenses are expensed immediately as operating costs.

What are software licenses?

A software license gives a business the legal right to use software under specific terms. Licenses can be perpetual (owned indefinitely) or time-based (renewed periodically). The accounting treatment depends on whether the license represents a long-term asset or an ongoing service agreement.

How to categorize software licenses

• Capitalize the cost if the license:
  • Is perpetual or valid for more than one year.
  • Provides long-term benefit to the business.
  • Meets your company’s capitalization threshold (commonly $2,500+).
  • Includes significant implementation or setup costs that extend its use.
• Expense the cost if the license:
  • Is subscription-based (SaaS) or renewed annually.
  • Does not transfer ownership or long-term rights.
  • Is part of regular operating activities.
• Capitalized software licenses should be recorded under Intangible Assets on the balance sheet and amortized over their useful life (typically 3–5 years).

Examples of capitalized vs. expensed software licenses

Capitalized:

• Perpetual software licenses purchased outright (e.g., Microsoft Office perpetual version, custom ERP system).
• Multi-year enterprise licenses with long-term usage rights.
• Internally developed or customized software platforms.

Expensed:

• Monthly or annual SaaS subscriptions (e.g., Slack, QuickBooks Online, Adobe Creative Cloud).
• User-based cloud access or temporary usage rights.
• License renewals or minor software updates.

Tax implications for software licenses

• Capitalized software must be amortized or depreciated over its useful life.
• Expensed software (subscriptions or short-term licenses) is fully deductible in the year incurred.
• Capitalized software may qualify for Section 179 or bonus depreciation, allowing immediate expensing of certain intangible assets.
• Only the business-use portion of any software license is deductible if shared with personal use.
• Maintain license agreements, invoices, and payment records for substantiating deductions or capitalization