Can design costs be capitalized?

Expenses incurred in remodeling, refurbishing or altering a purchased building to make it available for the purpose for which it was purchased. At first glance, the shorter payback period of 48 months with the pool of cost method seems to be preferable to the 60-month repayment period with the design method. However, there is a significant trade-off that represents a potential trap for the unwary. All package design costs must be capitalized and amortized according to the pool of cost method, including costs for package designs that were never put into service.

In addition, as noted above, early cancellations for abandoned or deleted package designs are not allowed under the cost pool method. Compare this result with the design method, which allows the taxpayer to deduct the unamortized portion of the package design costs in the year of disposal or abandonment. Typically, research and development costs under GAAP are spent as they are incurred. However, if these costs can be shown to have alternative uses in the future, then a company can capitalize on the cost.

In this case, the company would capitalize on the cost as an asset and then depreciate it for the expected lifetime. It is important to note that personnel, indirect and contractual costs can never be capitalized, regardless of whether there is a future alternative use or not. Design is an essential part of creating the asset, then it is capital. If the package design is discarded or abandoned within the 60-month period, the taxpayer can deduct the unamortized portion of the design base in the tax year of disposal or abandonment.

If the taxpayer pays the interior designer to purchase furniture and accessories, and to make recommendations on a new office design, the costs paid to the interior designer for these services should be capitalized as part of the cost of furniture and accessories. Two package designs were successfully commissioned and the remaining eight package designs were immediately abandoned.