What expense category is PagerDuty?

PagerDuty is a digital operations management platform that provides incident response and on-call scheduling. It helps businesses automate alerts and notifications to ensure timely responses to IT issues and system outages. 

The accurate categorization of PagerDuty expenses is essential for several reasons. It allows financial controllers to maintain a clear understanding of IT operations costs, budget effectively for necessary system management tools, and ensure compliance with financial reporting standards. It also aids in analyzing the return on investment (ROI) for IT management platforms and allocating expenses appropriately within the IT department, providing a detailed view of system reliability spending.

This guide aims to provide financial controllers with a comprehensive explanation of how to accurately classify PagerDuty expenses. We'll also cover key accounting considerations relevant to these expenses and discuss the associated tax implications for businesses.

How to Classify PagerDuty Expenses?

The most accurate way to classify PagerDuty expenses is as Software Expenses or Information Technology (IT) Expenses, depending on the company's accounting practices.

1. Software Expenses: Since PagerDuty is a cloud-based platform that provides software to manage IT incidents, the subscription fees are typically classified as Software Expenses. This reflects the subscription-based access to software that streamlines IT operations.

IRS Publication 535 discusses software expenses, differentiating between purchased software and subscription-based services, which aligns with PagerDuty's subscription model.

2. Information Technology (IT) Expenses: In some cases, particularly in organizations with a detailed IT cost structure, PagerDuty fees might be included under IT Expenses. This category encompasses costs related to a company's technology infrastructure and operations.

While IRS Publication 535 doesn't explicitly categorize "incident management software," it provides guidance on deducting various technology-related expenses, which can be applied to PagerDuty. Both classifications can be acceptable, but consistency is key. The chosen classification should be applied uniformly across all PagerDuty expenses.

Expense Categories to Avoid for PagerDuty

It's important to avoid some common but potentially inaccurate expense categories when classifying PagerDuty, or to use them inconsistently. Here's a breakdown of why these categories are generally less preferred:

1. Administrative Expenses: While PagerDuty supports administrative functions, this category is too broad. "Software Expenses" or "IT Expenses" more accurately reflect the nature of the tool.
2. Operational Expenses: This category is also broad. While PagerDuty is an operational tool, using a more specific category provides better clarity.
3. Subscription Expenses: While technically correct, this is a subcategory of software expenses. It's better to use "Software Expenses" unless you need very granular tracking.

Important Note on Alternative Classifications

It's crucial to understand that some alternative classifications could be acceptable if applied consistently. However, consistency is paramount. A business should choose one classification method and apply it uniformly across all PagerDuty expenses to maintain accurate and comparable financial records.

To maintain accuracy and clarity in financial reporting, PagerDuty expenses should ideally be classified as Software Expenses or Information Technology (IT) Expenses, used consistently.

Considerations While Categorizing PagerDuty Expenses

When accounting for PagerDuty expenses, several factors come into play:

1. Expense Recognition
   
   • If PagerDuty is paid monthly, the expense should be recognized in the month it is incurred.
   • If PagerDuty is paid annually, the expense should be allocated over the 12-month period. This aligns with accrual accounting principles, which dictate that expenses should be matched with the revenues they help generate, providing a more accurate picture of profitability within a specific period.

Tip: When dealing with annual subscriptions, establishing a system to amortize the expense monthly ensures that the income statement accurately reflects the cost of using PagerDuty in each accounting period.

2. Materiality
   
   • For companies with substantial IT or software expenditures, creating a separate "PagerDuty Expenses" account might be beneficial for detailed tracking and analysis.
   • For companies with smaller budgets, including PagerDuty expenses within general "Software Expenses" or "IT Expenses" accounts is acceptable.

Tip: Assess the materiality of PagerDuty expenses within your company's overall budget. If it's a significant expense, detailed tracking will provide better visibility and control.

3. Departmental Allocation
   
   • PagerDuty expenses are typically allocated to the IT or DevOps department, as they directly relate to those functions.

Tip: While generally allocated to one department, analyzing PagerDuty costs in relation to system uptime or incident resolution metrics can provide insights into the platform's value.

Examples of PagerDuty Services and Their Classification

Here are a couple of examples of PagerDuty services and how they can be classified:

1. PagerDuty Business Plan: The recurring fees for the core PagerDuty service are classified as Software Expenses.
2. PagerDuty Add-ons: Costs for additional features or integrations purchased within the PagerDuty platform are also classified as Software Expenses.

What Are The Tax Implications for PagerDuty Expenses?

From a tax perspective, PagerDuty expenses are generally deductible business expenses, meaning they can be deducted from gross income to arrive at taxable income, as long as they meet the IRS criteria.

1. To be deductible, the expenses must be "ordinary and necessary".

• An ordinary expense is one that is common and accepted in your trade or business.
• A necessary expense is one that is helpful and appropriate for your trade or business.

If a business pays for an annual PagerDuty subscription, it could be considered a prepaid expense. IRS Publication 535 discusses the rules for deducting prepaid expenses, stating that if the benefit period extends beyond the current tax year, the expense must be allocated over the periods it benefits.

Tip: Be mindful of prepaid expenses, particularly with annual software subscriptions. Ensure that these expenses are properly amortized over the relevant tax years to comply with IRS regulations.

2. Amortization of PagerDuty Costs:

In general, PagerDuty subscription fees are recurring operational expenses and are not amortized. Amortization typically applies to capital expenses, such as the purchase of intangible assets with a useful life of more than one year.

However, if a company were to develop custom software integrated with PagerDuty or acquire a very large, multi-year license with unique terms that resemble an intangible asset, amortization might come into play.

Additionally, accurate records of PagerDuty expenses are essential for supporting deductions and complying with IRS requirements. This includes:

1. Invoices from PagerDuty.
2. Proof of payment (e.g., bank statements, credit card statements).
3. Internal records documenting the business purpose of the PagerDuty subscription.

IRS Publication 463 and 535 emphasize the importance of maintaining detailed records of business expenses.

Tip: Implement a robust record-keeping system for all IT and software expenses, including PagerDuty. This will streamline tax preparation and provide support in the event of an audit.

How Fyle Automates Your Expense Categorization and More!

Fyle significantly simplifies the management and tracking of PagerDuty expenses, offering businesses enhanced efficiency, control, and valuable insights into their IT operations spending.

Here's a detailed explanation of how Fyle helps:

1. Automated Expense Tracking: IT or finance personnel can easily submit PagerDuty invoices through Fyle's mobile or web app. Fyle automatically extracts key data from the invoices, minimizing manual data entry and potential errors and accelerating the expense reporting process.
2. Automated Expense Categorization: Fyle's AI can be configured to automatically categorize PagerDuty expenses as "Software Expenses" or "IT Expenses" based on pre-set rules. This ensures consistent and accurate coding of expenses, saving time and improving accuracy.
3. Seamless Accounting Integration: Similar to how PagerDuty integrates with other IT management tools, Fyle integrates with popular accounting software (e.g., QuickBooks, Xero, NetsSuite) to automatically sync PagerDuty expense data. This eliminates the need for manual data transfer, speeds up reconciliation, and enhances overall efficiency.
4. Customizable Approval Workflows: Fyle allows businesses to establish customizable approval workflows for PagerDuty expenses. This ensures that expenses are reviewed and approved by the appropriate personnel, granting greater control over spending.
5. Detailed Reporting and Analytics: Fyle provides comprehensive reporting and analytics on PagerDuty expenses, delivering valuable insights into IT operations spending. You can utilize Fyle's reporting capabilities to analyze PagerDuty costs in relation to incident frequency or resolution times, enabling data-driven decisions on IT investments and resource allocation.
6. Compliance and Audit Trail: Fyle maintains a detailed audit trail of all PagerDuty expense transactions, facilitating easy tracking of who submitted, approved, and processed each expense. This aids businesses in ensuring compliance with internal policies and external regulations and simplifies audits.
7. Cost Savings Insights: Accurate expense tracking and analysis within Fyle can help businesses uncover cost-saving opportunities. For example, it can reveal whether there are underutilized PagerDuty features or if a different subscription tier would be more cost-effective. Fyle's reporting features can provide a company with insights into the average PagerDuty expense per incident, enabling them to evaluate the cost-effectiveness of their incident management strategy.

By automating and streamlining the management of PagerDuty expenses, Fyle empowers businesses to save time, reduce administrative overhead, and achieve enhanced visibility and control over their IT operations expenditures.

FAQs around PagerDuty expense categorization

1. How are expenses for PagerDuty, or similar incident response platforms, treated for tax purposes?

Like any other business expense, the deductibility of PagerDuty costs hinges on whether they are ordinary and necessary. An ordinary expense is one that's common and accepted in your industry. For businesses in tech or those requiring reliable systems monitoring and incident response, PagerDuty is likely considered ordinary. A necessary expense is one that's helpful and appropriate for your trade or business; if PagerDuty aids in maintaining operational efficiency and preventing downtime, it's likely considered necessary.

2. Are there specific IRS guidelines for deducting PagerDuty types of service expenses?

The IRS publications don't specifically mention PagerDuty or similar incident response tools. However, the general principles for deducting business expenses apply: they must be ordinary and necessary, and you must keep accurate records to substantiate them.

3. What records should I keep for PagerDuty expenses?

Maintain records of invoices or statements from PagerDuty, bank or credit card statements showing payments, and any documentation that demonstrates the business use of the service.

4. Where would I typically deduct PagerDuty expenses on my tax return?

Where you deduct PagerDuty expenses depends on your business structure. Sole proprietors would typically deduct these expenses on Schedule C (Form 1040). Other business structures would deduct them on the equivalent business income tax form.