8 ms·

I am not a tax expert but my understanding is that a business would claim expenditure as R&D because of the beneficial tax treatment: it's a choice you make to

I am not a tax expert but my understanding is that a business would claim expenditure as R&D because of the beneficial tax treatment: it's a choice you make to categorise expenditure as R&D, you're under no obligation to do so. If the tax treatment of R&D spend has changed to be less favourable in your circumstance (i.e: you can't afford the short term cost of amortisation) then you would not claim the spend to be R&D related. After all, a small technology company working on their revenue-generating product is not doing anything experimental: it's only experimental if you massage it as such. I could be far off the mark -- so please correct me if I am wrong -- but your framing suggests that if a business spends money on software development then they must amortise the cost which does not seem to be correct.

silverlight 4y ago
This is how it worked in previous years. Previously, you could elect to take the R&E expenses either entirely in a single year or amortized over the longer period. This year the change is: 1) You can no longer take it all in the single year, and 2) All software development is now R&E automatically, no exceptions. Note that this is separate from the R&E tax credit that you can also claim, that's a different deal in addition to this.
- TaxJD 4y ago
  I’m an attorney who works with companies doing software dev everyday, and this is not only a really bad tax policy, but will be detrimental to US innovation. There are a few things you can do, as many others pointed out, like claiming the R&D credit (section 41), extending your tax return, and making sure you have sources of financing if you a owe a big tax bill. My team also wrote an article on this subject a few weeks back with takeaways and graphs to show the potential math: https://capstantax.com/rev-proc-2023-11/ https://capstantax.com/rev-proc-2023-11/ If anyone wants to reach out to me, feel free to do so as my contact info is at the bottom of the above article.
- jacobsimon 4y ago
  Reply from our CPA: “There's pretty widespread bipartisan distaste for that change and there have been multiple attempts to extend the deadline or amend the change, but they haven't picked up steam yet. Still possible it will be changed retroactively. The saving grace is that a lot of the expenses they are talking about you needing to amortize would qualify for the R&D credits you'll be getting. So there's often a substantial offset between the two.”
  - silverlight 4y ago
    This is what I've also heard from our CPA (that no one likes this and it shouldn't be happening), but since it's here and taxes are due in April, here we are.
    - dcow 4y ago
      You asked for advice and are ignoring it. ~~Don’t take the R&D credit.~~ Don't use Section 174. Problem solved. EDIT: Let me elaborate: unless you are in the “start up phase” incurring startup costs, you are not required to follow section 174. I suspect the confusion is between how we use “startup” colloquially vs how the IRC uses “startup costs”. Once your business is up and running you are “carrying on” business, even if you aren't yet making a profit. You are only required to follow section 174 if you are choosing to classify your expenses as “startup costs” which in my experience would be very odd after the first year and even after the business is founded. Not an accountant of course, but nobody is going to tell me to pay taxes on revenue before expenses. And writing software does not automatically mean you are doing R&D. Not even in spirit. If you’re writing a script that speeds up part of your business and makes you more money, thats not “R&E”. It’s just work. EDIT2: > In the meantime, the Section 174 amendment should not cause established taxpayers to adjust their accounting methods when applying Section 162. Existing taxpayers incurring R&E costs as part of their ordinary and necessary expenses while carrying on a trade or business can continue to make deductions with confidence that legislative and judicial history support that practice. https://news.bloombergtax.com/tax-insights-and-commentary/changing-research-tax-break-rules-will-harm-fewer-than-predicted https://news.bloombergtax.com/tax-insights-and-commentary/ch...
riku_iki 4y ago
> it's a choice you make to categorise expenditure as R&D, you're under no obligation to do so Link provided by author says there is no choice: (3) Software development. For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
- phphphphp 4y ago
  My understanding is that only applies if you're claiming that your expenditure is R&D, that is, it's saying that all software development costs are permitted as part of R&D not that if you spend money on software development you must declare it to be R&D. There are other requirements to meet for expenditure to qualify as R&D, like experimentation and consideration of alternatives: if all software development is R&D and R&D must have alternatives considered and justified, are companies even permitted to engage in software development if suitable alternatives exist?
  - twodave 4y ago
    Spot on. This actually applies to most consultants like myself. Though I pay expenses in order to develop software, since I don't own the resulting IP I can't take advantage of the R&D credit.
  - silverlight 4y ago
    This is not what my accountant is telling me or what the articles I am finding from large accounting firms are saying... It is not a choice anymore, if it is software dev, it's R&E now. They added a specific callout for software development only right to the tax code. Example: if you are a restaurant and you buy an off the shelf point of sale software, this doesn't apply. If you are in the business of making a point of sale software to sell to restaurants, or your restaurant chain develops its own point of sale software internally, it applies to all costs related to the development of that software now.
    - phphphphp 4y ago
      Have you read this article: https://news.bloombergtax.com/tax-insights-and-commentary/changing-research-tax-break-rules-will-harm-fewer-than-predicted https://news.bloombergtax.com/tax-insights-and-commentary/ch...?
moneywoes 4y ago
So how would someone categorize those expenses differently?
- pclmulqdq 4y ago
  On a launched product, cost of sales. On an unlaunched product, cost of inventory, etc. One of the key questions that defines "R&D" is technical risk: are you answering a question of "Can it be done?" or "How can we do it?" If you know how and you are just slapping it together, it's an opex.
  - jay_kyburz 4y ago
    "Software Use" rather than "Software Development"
deleted 4y ago
[deleted]

silverlight 4y ago

This is how it worked in previous years. Previously, you could elect to take the R&E expenses either entirely in a single year or amortized over the longer period. This year the change is: 1) You can no longer take it all in the single year, and 2) All software development is now R&E automatically, no exceptions. Note that this is separate from the R&E tax credit that you can also claim, that's a different deal in addition to this.

TaxJD 4y ago
I’m an attorney who works with companies doing software dev everyday, and this is not only a really bad tax policy, but will be detrimental to US innovation. There are a few things you can do, as many others pointed out, like claiming the R&D credit (section 41), extending your tax return, and making sure you have sources of financing if you a owe a big tax bill. My team also wrote an article on this subject a few weeks back with takeaways and graphs to show the potential math: https://capstantax.com/rev-proc-2023-11/ https://capstantax.com/rev-proc-2023-11/ If anyone wants to reach out to me, feel free to do so as my contact info is at the bottom of the above article.
jacobsimon 4y ago
Reply from our CPA: “There's pretty widespread bipartisan distaste for that change and there have been multiple attempts to extend the deadline or amend the change, but they haven't picked up steam yet. Still possible it will be changed retroactively. The saving grace is that a lot of the expenses they are talking about you needing to amortize would qualify for the R&D credits you'll be getting. So there's often a substantial offset between the two.”
- silverlight 4y ago
  This is what I've also heard from our CPA (that no one likes this and it shouldn't be happening), but since it's here and taxes are due in April, here we are.
  - dcow 4y ago
    You asked for advice and are ignoring it. ~~Don’t take the R&D credit.~~ Don't use Section 174. Problem solved. EDIT: Let me elaborate: unless you are in the “start up phase” incurring startup costs, you are not required to follow section 174. I suspect the confusion is between how we use “startup” colloquially vs how the IRC uses “startup costs”. Once your business is up and running you are “carrying on” business, even if you aren't yet making a profit. You are only required to follow section 174 if you are choosing to classify your expenses as “startup costs” which in my experience would be very odd after the first year and even after the business is founded. Not an accountant of course, but nobody is going to tell me to pay taxes on revenue before expenses. And writing software does not automatically mean you are doing R&D. Not even in spirit. If you’re writing a script that speeds up part of your business and makes you more money, thats not “R&E”. It’s just work. EDIT2: > In the meantime, the Section 174 amendment should not cause established taxpayers to adjust their accounting methods when applying Section 162. Existing taxpayers incurring R&E costs as part of their ordinary and necessary expenses while carrying on a trade or business can continue to make deductions with confidence that legislative and judicial history support that practice. https://news.bloombergtax.com/tax-insights-and-commentary/changing-research-tax-break-rules-will-harm-fewer-than-predicted https://news.bloombergtax.com/tax-insights-and-commentary/ch...

riku_iki 4y ago

> it's a choice you make to categorise expenditure as R&D, you're under no obligation to do so Link provided by author says there is no choice: (3) Software development. For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.

phphphphp 4y ago
My understanding is that only applies if you're claiming that your expenditure is R&D, that is, it's saying that all software development costs are permitted as part of R&D not that if you spend money on software development you must declare it to be R&D. There are other requirements to meet for expenditure to qualify as R&D, like experimentation and consideration of alternatives: if all software development is R&D and R&D must have alternatives considered and justified, are companies even permitted to engage in software development if suitable alternatives exist?
- twodave 4y ago
  Spot on. This actually applies to most consultants like myself. Though I pay expenses in order to develop software, since I don't own the resulting IP I can't take advantage of the R&D credit.
- silverlight 4y ago
  This is not what my accountant is telling me or what the articles I am finding from large accounting firms are saying... It is not a choice anymore, if it is software dev, it's R&E now. They added a specific callout for software development only right to the tax code. Example: if you are a restaurant and you buy an off the shelf point of sale software, this doesn't apply. If you are in the business of making a point of sale software to sell to restaurants, or your restaurant chain develops its own point of sale software internally, it applies to all costs related to the development of that software now.
  - phphphphp 4y ago
    Have you read this article: https://news.bloombergtax.com/tax-insights-and-commentary/changing-research-tax-break-rules-will-harm-fewer-than-predicted https://news.bloombergtax.com/tax-insights-and-commentary/ch...?

moneywoes 4y ago

So how would someone categorize those expenses differently?

pclmulqdq 4y ago
On a launched product, cost of sales. On an unlaunched product, cost of inventory, etc. One of the key questions that defines "R&D" is technical risk: are you answering a question of "Can it be done?" or "How can we do it?" If you know how and you are just slapping it together, it's an opex.
- jay_kyburz 4y ago
  "Software Use" rather than "Software Development"

deleted 4y ago

[deleted]