Comment by jncfhnb

Capitalized means it’s treated as an investment into an asset rather than just a cost of doing business. The reason we do this is because we want revenue and expenses to reasonably match the time period where their value comes into play.

For example, if you build 100 widgets for $1M this year, the labor and materials cost of those widgets are capitalized into inventory. Next year you sell them all for $2M.

Capitalization rules would say you had no profit or loss in the first year, and $1M profit in the second year because the cost of the inventory gets expensed when the inventory is sold.

Fixed assets like buildings, machinery, and now software have pre defined lifetimes that the expense is realized over. In the case of software, it’s 5 years.

Tech companies don’t like this because they want to front load recognition of expenses to pay less taxes today.