AI writes the code. Finance capitalizes the cost. Auditors validate the control.

Yes. Under ASC 350-40, AI token costs can be capitalized when they are direct costs attributable to a specific internal-use software project and a qualifying development activity, incurred after the project meets the capitalization threshold. Deloitte (Technology Spotlight, August 3, 2026) and EY (Technical Line 2026-04, September 24, 2026) both reach this conclusion. The pricing model does not decide the treatment; the activity, the project attribution, and the evidence do.

ASC 350-40 is the US GAAP subtopic that governs accounting for internal-use software costs, including software a company hosts and provides to customers as a service. It requires capitalizing the external direct costs of materials and services consumed in development, and payroll for employees directly associated with the project, once the capitalization threshold is met. Software developed to be sold or licensed is covered by ASC 985-20 instead.

Both, depending on the work. AI spend on development of a qualifying internal-use software project, after management has authorized it and completion is probable, is capitalized and amortized over the software’s useful life. AI spend on research, maintenance, production support, training, and general productivity is expensed as incurred. The split has to be supported by usage records tied to a project; without them, the whole cost is expensed.

Costs that are not direct costs of developing a qualifying project: preliminary research and experimentation, training, maintenance and bug fixes on software already in use, production support, and general productivity. Overhead is also excluded, such as an enterprise-wide AI subscription available to every employee for every purpose, or a minimum commitment that functions as a fixed fee (Deloitte Examples 2 and 6). All of these are expensed as incurred, regardless of who used the tool.

The tool does not determine the treatment; the activity, the project attribution, and the pricing substance do. Whether the tool is Claude Code, GitHub Copilot, or Cursor, usage-based charges may be capitalized when they are directly attributable to a qualifying project’s development work. A fixed enterprise-wide seat subscription used across the organization is overhead and is expensed, whichever tool it is for (Deloitte Example 2; EY Illustration 4). A subscription procured solely for one project and restricted to its team may be capitalizable (Deloitte Example 3).

No. Deloitte and EY both say headcount and budget-based allocations of a shared AI tool’s bill do not establish direct attribution to a project. The acceptable methods are project-level token tracking tied to development activities and usage logs that attribute consumption to a specific software project, which EY calls specific identification. If a company cannot track AI usage to a project, all of the cost should be expensed.

Records that tie each AI cost to a specific software project and a qualifying development activity. Deloitte names the sources: “AI-platform reporting or billing details, project-management systems, development tickets, and other project-accounting records.” In practice that means who used the AI service, when, what was performed, and what it cost, combined with the ticket or repository the work served, recorded at the time of the work rather than reconstructed at close.

For each AI coding session, CloudZero records the user, the time, the tool and model, the ticket and repository the session served, an inferred class of work (coding, debugging, research), a one-line summary of what the session did, the tokens used, and what it cost on the provider’s invoice where that bill is connected. Finance uses the ticket and the class to decide treatment under its policy; CloudZero supplies the record.

ASU 2025-06, issued by the FASB in September 2025, removes the project-stage model from ASC 350-40. Capitalization now begins when management has authorized and committed funding to the project and it is probable the project will be completed and used as intended. The update does not change which costs are eligible or when capitalization ends. It is effective for annual periods beginning after December 15, 2027, with early adoption permitted.

In the period, yes. A capitalized development cost is recorded as an asset and amortized over the software’s useful life, and amortization sits below the EBITDA line, so reported EBITDA rises by the amount capitalized less that period’s amortization. Cash is unchanged. For public companies the effect flows to EPS; for PE-backed companies it affects covenant EBITDA. Analysts and diligence teams compare capitalization policies and reverse amounts they judge aggressive, which is why the evidence behind each capitalized dollar matters.

Section 174 governs the tax treatment of research and software development costs, a separate question from book capitalization under ASC 350-40. For tax years beginning after December 31, 2024, Section 174A (enacted in the One Big Beautiful Bill Act, July 2025) restored immediate deduction of domestic research and software development costs; foreign costs remain on 15-year amortization. The same usage and project records support both the book and the tax analysis. Confirm treatment with your tax advisor.