What is the best way to categorize software development costs for a new product in a startup? Should this be accounted as an asset or expense?

Create an expense account in the chart of accounts called R&D expense and post the expenses to that account

@ram_nagarajan 

Beginning in 2022, you need to amortize these costs over a period of time.  It's a significant change in tax law and you will want to contact your CPA to make sure you're recording them properly.