I have expensed software development and maintenance costs of a web-based information provider start-up LLC (sole owner) throughout its first three years of operation. The sole-owner LLC doesn't sell or license software per se. Its IT expenditures are primarily for the purpose of housing and refreshing a database that changes every month. But I'd truly appreciate critiques and suggestions if my thought process is flawed. Here we go:
My small business "B2B" client company offers its customer business entities web-based access to a database it has created and updates monthly. This database is presently the United States' only compilation of certain publicly owned data collected from state government agencies around the nation.
My client does not own the data, which can change at any time at the discretion of the agencies that do own it. These agencies freely provide anyone an opportunity to reference their data at no cost other than the interested party's time and effort. What my client does is centralize lots of sources' faithfully mirrored original data. When the originating agency tells my client to make changes, it happens. Otherwise the data remains untouched. There's no "new" information created uniquely by my client and added on to the original collected publicly-owned data.
My client's customers are businesses that offer a wide array of information and support services to individual practioners of a particular industry, usually in exchange for a membership fee. These businesses are attracted to my client's database mainly because it permits them to provide their individual members with an efficient alternative to what has traditionally been a tedious and inconsistent manual effort. By referencing and manipulating this data within their OWN member software solutions, my client's business customers can help drive down their members' cost of performing certain necessary tasks.
Thus my client's business model value proposition is essentially about providing other interested companies with convenient on-line access to a centralized set of publicly owned data. My client keeps the database accurate and current within clearly defined parameters. Without the data, my client has no business proposition.
My client licenses access to this database by the month. Usually its contracts require an initial term of at least six months' guaranteed usage (sometimes 12 months), then there's always a 30- or 60-day advance termination notice at the customer's sole option.
In order to give its business customers access, my client incurs relatively minor software development expenses to customize a web-based interface between the customer's software and its database. My client charges a nonrefundable "system integration fee" at contract signing to cover the expense of its side of the integration.
Each customer's interface is unique and cannot be "reused" for another customer, so these system development costs have no lasting asset value and I expense them as incurred. I do defer set-up fee recognition until actual interface launch and spread it over the contract's defined "initial subscription term".
Given all the above factors, should I be capitalizing software development and amortizing, and if so, under which specific
Thanks for your consideration and comments or guidance.
