When it comes to accounting for website development costs, the guidelines are not always clear. Depending on the stage of site development, expenses can be deducted in the period in which they are paid or incurred. At the planning stage and once the website is complete, all costs are counted as expenses. However, during the website development stage, there are certain costs that must be capitalized.
According to the International Accounting Standards Board (IASB), different stages of website creation should have different accounting treatments. The initial planning stage is an expense and is included in the profit and loss account. The creation of the website must be capitalized as an asset in the balance sheet. Updates and improvements to the website can also be capitalized, but only if additional functions are added.
Any subsequent updates made to the content of the website are considered an expense. If a company builds assets for its own use or for sale or lease as discrete projects, GAAP requires that any interest incurred in the production of those assets be capitalized on the balance sheet. The accounting guide for website development costs defines the following project components and recognition criteria. If the purpose of your website is to make a profit from customers buying items through it, then the tax treatment of your website development gets more complicated. Generally accepted accounting principles require capitalization of costs when there is a future benefit from the expense.
Capitalization ends when the asset is nearly complete and ready for its intended use. If a project is no longer likely to be completed, stop capitalizing on associated costs and test for deterioration of already capitalized costs. Before you begin to determine the tax treatment of your website development costs, you should determine what you use your website for. If capital allocations work better than special treatment (allowing you to get a deduction more quickly), you can choose to use them instead.