The buy-side accountant is trying to capitalize our research and development payroll for our proprietary AI workflows, which increases our historical tax liability and lowers our free cash flow. How do we push back?

Question

Tyler Smith · Accepted Answer

Buy-side Quality of Earnings teams often try to capitalize internal development labor to paint a different picture of your historical capital expenditure. By treating your internal AI development costs as capital expenditures rather than regular operating expenses, they attempt to reduce your historical free cash flow, which can negatively affect your cash-free, debt-free net proceed calculations at close.

To push back, you must clearly document the nature of this work. Show that your team is not building commercial software for resale, but is instead configuring existing tools to drive internal operational efficiency. These AI workflows are operational improvements, much like training employees or refining a core process.

Leverage your Accountability Chart and weekly Level 10 Meeting™ archives. Show that the employees building these workflows are part of your regular operational seats, not a segregated R&D department. Their daily tasks involve improving existing operations, and their costs are fully baked into your ongoing overhead.

Present a clean breakdown of how these AI tools have instantly lowered your general and administrative expenses. If the implementation of these workflows resulted in immediate, permanent cost savings, argue that these are operational optimizations. This proves the expenses should remain classified as ordinary operating expenses, maintaining your historical free cash flow metrics and protecting your valuation.