Is software a fixed asset?

Software as a fixed asset

Software can be treated as a fixed asset when it provides long-term value to a business, typically used for more than one year and owned outright rather than accessed through a subscription. In these cases, software is capitalized on the balance sheet and its cost is gradually expensed over time through amortization or depreciation.

When is software considered a fixed asset?

Software qualifies as a fixed (or intangible) asset if it:

• Is purchased outright or developed internally, not licensed on a short-term basis.
• Has a useful life exceeding one year.
• Provides measurable long-term benefit to the business.
• Meets your company’s capitalization threshold (often $2,500 or more).

Internally developed or custom-built software often meets these criteria and must be recorded as an asset rather than an immediate expense.

How to categorize software as a fixed asset

• Record under Intangible Assets or Fixed Assets on your balance sheet.
• Use an “Intangible Assets – Software” or “Capitalized Software” account in your chart of accounts.
• Amortize the cost over its useful life (commonly 3–5 years) instead of expensing it immediately.
• Include all directly related costs (development, implementation, and testing) in the capitalized amount.
• For upgrades or enhancements, capitalize only if they extend the software’s functionality or lifespan.
• Routine maintenance or minor updates should be expensed as incurred.

Examples of software treated as fixed assets

• Custom-built software developed for internal use.
• Perpetual software licenses purchased for business operations.
• ERP (Enterprise Resource Planning) systems installed on company servers.
• Major CRM or accounting platforms purchased outright.
• Capitalized costs for in-house software development teams.

Tax implications for software as a fixed asset

• Capitalized software must be amortized or depreciated over its useful life.
• The IRS generally allows a 3-year amortization period for most software, though some may qualify for Section 179 or bonus depreciation for immediate expensing.
• Software acquired with hardware (e.g., pre-installed systems) may be depreciated as part of the total equipment cost.
• Cloud-based or subscription software (SaaS) typically does not qualify as a fixed asset and should be expensed annually.
• Maintain invoices, development records, and implementation documentation to substantiate capitalization and depreciation.