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How to handle customer acquisition costs from tax and accounting rules
November 23, 2020
How to handle customer acquisition costs from tax and accounting rules

            The webinar with Mitch Reitman was very informative.  One question that continues to come up is the accounting of Customer Acquisition Costs.  Many CPA’s like to expense these costs the year they are incurred. The only issue with that is it reduces net income significantly in a growing company. Would love to hear how these costs are dealt with by the industry, and how they could be amortized over the life of the asset to show the true reflection of operating income. Is this something Mitch might be able to discuss?
 Thank you,
            Mitch’s webinar is the November 4, 2020 webinar posted on the K&K website at  I asked Mitch to respond to the above question; here’s his response.
            Great question about "customer acquisition costs."   As we all know, installation margins are generally very tight and it isn't uncommon for a company to install a new account for little profit, or even a loss, and bank on the value of the future cash flow from the associated monitoring.  Believe it or not, this isn't unique to the alarm industry.  When a cable company wires a neighborhood they are expending millions of dollars for the ability to sell TV, internet, and phone service.  Alarm companies are doing the same thing on a smaller scale.
            These "customer acquisition costs" are known in the alarm industry as Creation Costs.  Creation Cost is the net cost of adding a new monitoring subscriber.  These costs can be in the form of diminished margin, or even a loss, on the install.  As your reader points out, these costs can reduce net income, or, in the case of a rapidly growing company, result in a net loss.  We have several clients for whom this is an issue.  We resolve this by capitalizing the Creation Costs and amortizing them over the expected life of the monitoring agreement.  For example, if a company charges $300 for an installation, but the direct cost (labor, materials, commissions, etc...) total $840, then the creation cost would be $540.  If the customer signs a new monitoring agreement for $30 per month, then the Creation Cost is 18x RMR.  We then move $540 of the installation cost to an account titled "Capitalized Creation Costs" (asset account) and amortize it over the expected life of the customer, typically 8 years.  We would then amortize this asset at $5.63 per month, thereby spreading the costs over the life of the account.  This might not sound significant, but for a company doing 10 installations a month, this can be around $65,000 a year. 
            Regarding the tax treatment, the alarm company is still free to deduct the actual expenses of the install in full in the year in which they are incurred or paid.  This may sound confusing and it may make smoke come out of your accountant's ears, but, if they don't understand your intentions, maybe they don't understand what you do.  
            If you are interested in properly addressing Creation Costs, for example, if you bank is questioning your profitability, we can help.  
Mitch Reitman 
Reitman Consulting Group
Fort Worth, TX

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