Can engineer salaries and payments to development firms all be expensed immediately? For SaaS and app businesses, the answer affects profit, taxes and cash flow. No revenue yet, a project labelled development, or an accounting entry as R&D expense does not determine tax treatment. First distinguish what is being built, who uses it, how it is used and the activities generating the cost.
1. Start with how the software is used, not who receives payment
Work by the same development firm can produce commissioned software delivered to a customer, a master copied for sale, infrastructure for the company's services or an internal efficiency system. Each starts from different considerations. Combining everything in one app-development account leaves the necessary distinctions invisible.
A SaaS company operating software to provide services to customers does not necessarily have software held for market sale simply because customers pay for the business's offering. Establish whether copies of the software itself are sold or the company uses it to earn service fees. Accounting treatment as internal-use software can include the latter. ASBJ: Q&A on R&D costs and software accounting
Summarize deliverables, ownership of rights, service delivery and planned use on one page instead of relying on contract titles or team names. The business team should explain what is sold to whom, development should explain what is built, and finance should explain how costs are collected. This reduces last-minute rework at year-end.
2. Do not transfer accounting capitalization criteria directly to tax
Under Japanese accounting standards, R&D costs are generally expensed as incurred. For internal-use software, certainty of future revenue generation or cost savings matters to capitalization. ASBJ: Practical guidance on R&D costs and software accounting
For tax, the acquisition cost of self-developed software generally includes materials, labor, other production costs and expenditure directly needed to put it into business use. Employee development time, not only contractors' invoices, must therefore be considered. NTA: Software acquisition cost and useful life
A particularly important distinction concerns R&D expenditure that may be excluded from the acquisition cost of internal-use software. NTA guidance refers to cases where it is clear that the software will not generate future revenue or cost savings. That is different from an accounting conclusion that future benefits are not yet certain. Corporation Tax Basic Circulars 7-3-15-2 and 7-3-15-3
| Situation | Accounting focus | Tax focus |
|---|---|---|
| Internal-use development costs | Certainty of future revenue or cost savings, among other matters | Acquisition costs and requirements for exclusion |
| Uncertain revenue outlook | May result in expensing | Uncertainty alone does not establish full deductibility |
| Development already paid for | Payment date alone does not determine expense timing | Capitalization and depreciation may need consideration |
Consequently, tax adjustments may reduce a tax loss or create taxable income despite an accounting loss. Automatically capitalizing everything is equally inappropriate. Separate the research activities, redundant prototype work and expenditure unrelated directly to production, and document which rules were applied.
3. Separate new features, maintenance and abandoned prototypes
Distinguish fixes that remove defects and preserve existing functionality from enhancements that add functions or improve performance. For tax, the former are generally repairs and the latter capital expenditure. Separate consideration is needed where work qualifies as R&D or other rules apply. NTA: Software capital expenditure and repairs
Fixing a defect preventing existing users from logging in serves a different purpose from adding a new identity-verification feature, even within the same sprint. An invoice saying only “development services” should be supported by specifications, tickets or activity reports explaining its components. Whether a major redesign creates new software or constitutes capital expenditure on an existing asset is another question.
The NTA lists costs of production failures clearly made redundant by changes in development plans as amounts that may be excluded from acquisition cost. NTA: Costs that may be excluded from software acquisition costA business pivot does not erase all earlier development costs. Distinguish code or shared infrastructure still used from work that has become wholly redundant.
For management, categories such as new development, enhancements, maintenance, technical testing and potential abandonment help connect monthly employee hours and contractor charges. The labels themselves do not settle tax treatment, but they provide traceable facts. Even if perfect daily detail is impractical, establish reasonable allocation criteria and apply them consistently.
4. Capitalization separates payment from expense recognition
Software tax useful lives are three years for masters copied for sale and software used for R&D, and five years for other software. Service-delivery software is not automatically a three-year asset. NTA: Software useful lives
As an illustration, assume internal-use software costs ¥12 million, is depreciated straight-line over five years and enters business use at the start of a twelve-month fiscal year. The basic annual tax depreciation limit is ¥2.4 million. The ¥12 million payment is therefore different from that year's deduction. This assumes the necessary accounting recognition and other deductibility requirements are satisfied.
Undepreciated balance after year one: 12 − 2.4 = ¥9.6m
Starting use during the year requires adjustment for months of use. The business-use date depends on when the asset starts serving its intended purpose, not simply its invoice or payment date. NTA: Date placed in business useIf test release, paid launch and internal use start on different dates, preserve the facts and reasoning supporting the chosen treatment.
Capitalization does not restore cash already spent. Reported profit may improve without increasing payment capacity. Board reporting should therefore show development cash spending, accounting expenses and tax deductions alongside one another. Separating these in monthly budgets makes year-end tax revisions easier to manage.
5. Connect development decisions to tax evidence
Useful records include development plans, specification changes, employee hours, outsourcing contracts, acceptance documents, commencement-of-use records and minutes documenting abandonment. Connecting existing project records to accounting entries through reference numbers is often more practical than recreating everything for tax. Avoid costs that cannot be traced to products or features.
R&D tax credits are assessed separately from expense recognition and capitalization. Accounting R&D expense, tax-deductible expenditure and eligible expenditure for a tax credit are different concepts. Tax capitalization alone does not establish that expenditure is outside the R&D credit regime. NTA: Relationship with R&D tax reformSpecific eligibility and filing schedules require separate review.
When setting development budgets, have the founder, engineering lead, finance team and tax adviser review the same facts. This supports treatment based on actual activities rather than choosing research expense to reduce profit or capitalization to improve fundraising presentation. Our domestic tax consultation can organize the issues around development stages and cost allocation.
Can all development costs be deducted before revenue begins?
No revenue alone does not decide the treatment. Examine what was acquired or produced, the software's use, the expenditure and requirements for exclusion. Some expenditure may constitute a tax asset.
Can engineers' salaries form part of software cost?
Labor used in production is relevant to acquisition cost. But do not capitalize every salary automatically; allocate reasonably to actual development, maintenance, administrative and other activities.
Can the entire balance be written off immediately when development stops?
The label “cancelled” is insufficient. Disposal of existing assets, redundant prototype costs and portions still in use may receive different treatment. Assess prospects for use or reuse and retain evidence of abandonment.
Rules and sources checked as of October 31, 2026. Numerical examples are illustrative assumptions.
本稿は2026年10月31日時点の法令に基づく一般的な解説です。実行の前に必ず個別にご相談ください。
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