It depends on how the laws or practices are in the US but for most european countries: Capitalizing means that the hourly rate of a contractor will be added as an increase of value in the software he/she creates. So you pay me 10k for something and this way the value of the software increases by 10k. The software itself is an asset. Whereas in some cases with employees you can’t fully capitalize their cost towards a piece of software, so the cost are on the balance sheet more of a loss than an increase in value of an asset. Accounting trick basically.

However I’m not an accountant so that’s only what I heard from my clients when I asked them why for example they don’t hire a full time employee for a long term project.