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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 peri
by 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 agoI’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 agoReply 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 agoThis 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 agoYou 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...
- MNCPAGuy 4y agoI don’t think your interpretation is correct. All R&E costs are now required to be capitalized. “Ordinary R&E” related to 162 doesn’t exist. If it’s any sort of R&E related expense, it’s technically supposed to be capitalized.
- deleted 4y ago[deleted]
- silverlight 4y agoAgain, I agree with everything you are saying in your edit. It's just not what my CPA is saying the actual tax code says anymore. Honestly my main reason for starting this discussion was a) to see if anyone else's professional advice (e.g. from a CPA) was different, and b) to hopefully drum up awareness so maybe in some roundabout fashion this gets changed.
- giantg2 4y agoIt really says a lot about the system when the people who pass laws bipartisanly are not happy about what they just passed. It's almost like they could have, I dunno, read and thought about what they were passing. Just imagine all the other BS slipping through.
- jlmorton 4y agoThe fact that there are unintended consequences in legislation does not mean no one read, or thought about it. These are thousands of Congressional staffers who read and study legislation, along with many more outside of Congress, but there are missed requirements, implementation bugs, and other problems in edge cases in legislation just like everything else, because the world is complex.
- giantg2 4y agoThere's a difference between unintended consequences from something like an n-order affect on the system due to complexity vs a clearly written piece and uncomplex rule in the law. The latter suggests that due diligence was not performed. Of these thousands of staffers, it seems nobody bothered to read and understand it. We can look to history on how bills have been passed rapidly after introduction, without enough time to read and think about them. This makes me feel like the people in power don't really pay that much attention and don't care for careful deliberation. Sure, bugs happen. But in a system that holds immense power over people's lives, we should be striving for the level of bugs to be similar to life critical safety systems and not some glitchy business website.
- karmelapple 4y agoThere may be widespread bipartisan distaste, yet: 1. It passed in the 2017 tax changes 2. The Congress ending on Jan 3, 2023, did nothing about it, even though they totally could have 3. I think R&D credits will usually be significantly smaller compared to the salary paid