What expense category is Retool Expenses?

Businesses increasingly leverage platforms like Retool to rapidly build custom internal tools, applications, and dashboards that connect to their existing databases and APIs. These tools help improve operational efficiency, streamline workflows, and provide better data access. For accountants and Small to Medium-sized Business (SMB) owners, the costs associated with subscribing to and using Retool are important business expenditures that require correct classification, especially considering how the platform is utilized within the business.

This guide will explore how Retool expenses are typically categorized, crucial considerations for their classification (including its use as a development tool and potential implications under tax rules for research and experimentation), provide examples of these costs, detail their tax implications under IRS guidelines, and discuss how Fyle can assist in streamlining the tracking of these software expenditures.

Retool Expenses Category

Retool is a development platform that allows businesses to build internal applications and tools with less traditional coding effort. Expenses incurred for using Retool are generally considered Operating Expenses, but the specific accounting and tax treatment can depend on how the platform is used.

For accounting and tax purposes, Retool subscription fees and related costs commonly fall into categories such as:

1. Software Subscriptions or Software Licenses: This is the primary classification for the recurring fees paid for access to the Retool cloud platform.
2. Software Development Tools: Reflecting its function as a platform used by developers or technical staff to build applications.
3. IT Department Expenses or General and Administrative Expenses: These are used to support internal tool development and operational efficiency across various parts of the business.
4. Potentially allocable to Research and Experimental (R&E) Expenditures: If Retool is used directly in activities that qualify as R&E under IRC Section 174 (e.g., developing new or significantly improved software products or internal processes), a portion of Retool's cost might be allocated to these specific capitalized R&E projects.

The key is that these costs are incurred to build tools that support or improve business operations or develop new products/processes.

Some Important Considerations While Classifying Retool Expenses

Primary Use of Retool 

This is critical for Tax Treatment:

Building General Internal Utilities/Dashboards

If Retool is primarily used to build internal tools for day-to-day operational efficiency, data visualization, or simple workflow automation that doesn't involve developing new products for sale or significant process improvements rising to the level of R&E, the subscription fee is generally treated as a standard operating expense (software subscription).

Developing New or Improved Software Products/Processes (R&E)

If Retool is used as a significant tool in the process of developing new software products for sale to customers, or for creating substantially new or improved internal software-based processes that meet the IRS definition of "Research and Experimental Expenditures" under Section 174, then the costs directly attributable to these R&E activities (which could include an allocable portion of Retool subscription fees) must be capitalized and amortized for tax years beginning after December 31, 2021.

Subscription Model

Retool operates on a subscription basis, typically with per-user fees and different pricing tiers (e.g., Free, Team, Business, Enterprise). These recurring fees for platform access are generally expensed over the service period, unless allocated to a capitalized R&E project.

Distinction from Custom Software Development Projects

While Retool enables the building of applications, the subscription fee is for using the platform itself. If you have employees whose labor is dedicated to building a specific, significant internal-use software asset using Retool that qualifies for capitalization (either as R&E or other internal-use software rules), their labor costs and potentially a directly allocable portion of the Retool platform cost for that project would be capitalized.

Internal Labor Costs vs. Platform Fees

The salaries of your employees who use Retool to build tools are part of your regular payroll expenses. The Retool fee is for the software platform they are using.

Recordkeeping 

It is essential to maintain detailed records for all Retool expenses. This includes:

• Subscription agreements and invoices from Retool, detailing the plan, number of users, and service period.
• Proof of payment.
• Crucially, if Retool is used in R&E activities, internal project records that can substantiate the allocation of Retool costs (and other associated costs like developer time) to specific R&E projects should be maintained.

Examples of Retool Expenses

Expenses related to using the Retool platform typically include:

• Monthly or annual subscription fees based on the number of users and the selected Retool plan (e.g., Team, Business, Enterprise).
• Fees for specific features, add-ons, or higher usage limits, if applicable under the chosen plan.
• Charges for any premium support or dedicated services, if offered and purchased from Retool.

The primary expense is usually the recurring subscription fee for access to the development platform.

Tax Implications of Retool Expenses

Standard SaaS Subscription (Non-R&E Use)

If Retool is used for building general internal tools, dashboards, and for operational efficiencies not meeting the definition of R&E under Section 174, the subscription fees are generally deductible as ordinary and necessary business expenses in the year they are paid or incurred, depending on your accounting method.

• Cash Method: Deductible when paid. Annual subscriptions paid upfront often fall under the "12-month rule," allowing full deduction in the year of payment if the benefit doesn't extend more than 12 months beyond the first benefit receipt or the end of the following tax year.
• Accrual Method: Deductible ratably over the subscription period.

Use in Research and Experimental (R&E) Activities (under IRC Section 174)

If Retool is used as a direct and allocable cost in developing or improving a software product or internal process that qualifies as R&E under Section 174:

• For tax years beginning after December 31, 2021, such specified R&E expenditures (which could include the directly attributable portion of Retool subscription costs) must be capitalized and amortized ratably over a 5-year period for research conducted in the U.S. (15 years for research conducted outside the U.S.). Amortization begins at the midpoint of the tax year when these R&E expenses are paid or incurred.
• This is a significant mandatory change from prior law, where businesses often had more flexibility to expense such costs.

Amortization of R&E expenditures is reported on IRS Form 4562, Depreciation and Amortization.

No Capitalization of the SaaS Subscription Itself (for general use)

The Retool SaaS subscription fee for general operational tool-building is typically not capitalized as a standalone intangible asset by the user. The capitalization consideration arises primarily when it's directly tied to a specific R&E project.

Recordkeeping is Critical

Businesses must maintain robust documentation to support either the current deduction of Retool subscription fees (as a general software expense) or their capitalization and amortization as part of an R&E project. This includes clear records of how and for what projects Retool is being utilized.

It is strongly recommended that a qualified tax advisor be consulted to determine the appropriate treatment of Retool expenses, especially if the platform is used in activities that might constitute Research and Experimental Expenditures under Section 174.

How Fyle Can Automate Expense Tracking for Retool Expenses

Managing recurring payments for development platforms like Retool can be streamlined through an automated expense management system such as Fyle:

Efficient E-receipt and Invoice Handling

Retool typically provides invoices and billing confirmations electronically. These documents can be easily forwarded from your company email (Gmail, Outlook) to Fyle. Fyle's system can then automatically parse this information, create an expense entry, and attach the source document for easy reference.

Consistent Categorization and GL Integration

With Fyle, you can establish rules to automatically categorize Retool expenses under the appropriate account and assign the correct General Ledger (GL) codes. This is facilitated by Fyle's ability to import your chart of accounts and other relevant financial dimensions from your main accounting software.

Simplified Credit Card Reconciliation

If Retool subscriptions are paid using a corporate credit card that is integrated with Fyle, transaction data is captured in real-time through direct feeds from major card networks like Visa, Mastercard, and American Express. Fyle can then automatically match these card transactions with the corresponding Retool invoices, significantly simplifying the reconciliation process.

Seamless Data Sync with Accounting Systems

Fyle offers robust, two-way integrations with leading accounting software packages, including QuickBooks Online, QuickBooks Desktop, NetSuite, Xero, and Sage Intacct. This ensures that once Retool expenses are processed and approved in Fyle, they are automatically and accurately exported to your accounting system, minimizing manual data entry and maintaining data integrity.

Clear Visibility into IT and Development Spending

Fyle’s dashboards and reporting capabilities provide real-time insight into all business expenditures, including spending on software and development platforms like Retool. This allows accountants and IT managers to monitor these costs effectively, track them against budgets, and make informed decisions regarding technology investments.

By implementing Fyle, businesses can ensure their Retool expenses are accurately captured, appropriately categorized, promptly reconciled, and seamlessly integrated into their overall financial management processes.