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Software firms across US facing tax bills that threaten survival
- rootusrootus 3y agoI wonder how many little companies are going to re-title their software developer as janitors. In many cases that description fits pretty well anyway.
- phamilton4 3y agoExcuse me! I am a Custodian.
- surfman 3y agoQuestion: this last year I paid software developers to create a new product, spent $1,000,000 on their wages, then I turned around and sold that software product for $1,000,000. I made no profit on this product. How much federal taxes would I owe based on this new tax rule?
- surfman 3y agoI still need help understanding this new Tax rule. I might understand capital assets better if you could answer these two questions. We pay software developers to create a new product. We spend $1m on their wages, then sell that software product for $1.1m. How much federal tax would I owe based on this new tax rule? We buy a machine for $1m and then sell it for 1.1m. How much federal taxes would I owe?
- pgruenbacher 3y agoThis is my employer... were freezing hiring for 5 yeara
- tgflynn 3y agoI have a hard time understanding why this so bad and the article does nothing to explain it. As I understand it companies only pay taxes on their profits, which generally speaking is what's left after expenses, including salaries, are subtracted. If that's the case then why would higher taxes on profits force a company out of business or to layoff staff. If anything layoffs would tend to have the short term effect of increasing profits, which would only further increase taxes. I can understand how a sudden unexpected change to the tax code could catch people off guard and cause short term problems but overall I don't see why this particular change should be so devastating once any transient effects have been absorbed.
- vb6sp6 3y ago[dead]
- crote 3y agoThe issue here is in the way it is deducted. Previously, $1.000.000 spent on R&D in 2023 would result in a $1.000.000 deduction on your 2023 taxes. Under the new system the same spending would result in a $200.000 deduction in 2023, $200.000 in 2024, $200.000 in 2025, $200.000 in 2026, and $200.000 in 2027. You still get the same deduction, but spread out over multiple years. However, it also means that you can now deduct $800.000 less in 2023 than expected, resulting in a far higher tax bill this year! If you are a startup you probably don't have that spare $800.000 just lying around doing nothing.
- eschneider 3y agoThat's still taxed off profits, not gross.
- qeternity 3y agoYes, but it's changing the way profits are calculated, which massively impacts cash flows.
- admax88qqq 3y agoIf I can only deduct 200k of the 1m I spent that inflates my net profits by 800k that I dont actually have, because I spent it on what I thought was an expense.
- lokar 3y agoYou deduct (eligible) expenses from revenue to get (taxable) profit
- mminer237 3y agoIf you make $2,000,000 gross, spend $800,000 on operating expenses, and $1,000,000 on R&D, you practically have $200,000 profit; but you have pay $210,000 in federal tax on $1,000,000.
- malfist 3y ago[flagged]
- agwa 3y agoDo you think explicitly singling out software development for unfavorable tax treatment while explicitly excluding oil and gas exploration from the same treatment is "fair"? https://www.law.cornell.edu/uscode/text/26/174 https://www.law.cornell.edu/uscode/text/26/174 (c)(2) and (c)(3)
- aarondf 3y agoIf a company has a million dollars in revenue and spends a million dollars on the salaries of software developers, how much tax do you think they should pay in that year? 1,000,000 Revenue - 1,000,000 Salary expense ----------- 0 Profit If you said "no taxes!" we're on the same page. The new law would instead work like this: 1,000,000 Revenue - 200,000 1/5th Salary expense ----------- 800,000 Profit Now the company must pay taxes on 800,000 of profit, because "R&D salaries," which includes software devs, must be amortized over five years.
- hedora 3y agoNote that this is an infinity percent tax rate and mostly only hits small businesses.
- rootusrootus 3y ago> this is an infinity percent tax rate Only if you consider just one year of it, though, unless I'm missing something. You eventually get to deduct 100%, just takes five years.
- agwa 3y agoOnly if the company still exists in 5 years time.
- einarvollset 3y ago
- mathgladiator 3y agoWhat I don't understand is why software developers salaries are treated different than other salaries?
- patmcc 3y agoThey sort of are, and they sort of aren't. If Ford builds a car factory, that's a capital asset - the costs should be amortized against the useful life of the factory. So if it costs $10 million and lasts for 10 years, they can expense $1 million a year. Those costs will include the salary of the workers to build the factory. The workers inside the factory making the cars though, that's a cost that matches to the revenue from selling those cars, so their salaries are an expense, and they can be claimed in that year. For most businesses, most of the time, they're producing work product (or supporting that) to be sold as quickly as possible. Now - when Microsoft writes Windows or Excel, or Epic makes Unreal Engine, I think there's certainly an argument that it's a capital asset they're making, and maybe costs should be amortized over the useful life. I wouldn't even be surprised if their accountants have claimed the same thing. Is that universal across software dev? No. The problems with this change are: a) It allows no nuance. If I worked for 4 months on a game that I expected to have zero sales outside the first year, I think it's silly to call that a capital asset in any real way. Not all software dev work makes capital assets. The janitor at the Ford factory doesn't get his salary expense amortized, nor should the bug fixer. b) It's all taking effect in this year. Could have switched it gradually over 10 years or something (you need to amortize x% in year 1, 2x% in year 2, etc) c) It's especially tough on small businesses. Microsoft can borrow the cash and make it clear in financial statements that this is a weird tax rule, but according to GAAP/accounting rules it's fine. But a sudden big tax bill is really tough for years 1, 2, 3 of a small business.
- flashgordon 3y agoAlso with the factory analogy - unreal is the car factory and you are like the worker who built the factory. (Asking out of ignorance) The workers wages are not treated as a capital to be amortized right?
- 3y ago
- htrp 3y agoTalk about doing your lobbying in public
- aarondf 3y ago(I put this in a reply further down, but bringing it to the top) Previously if a company has a million dollars in revenue and spends a million dollars on the salaries of software developers, this is how their taxable income might look: 1,000,000 Revenue - 1,000,000 Salary expense ----------- 0 Profit The new law would instead work like this: 1,000,000 Revenue - 200,000 1/5th Salary expense ----------- 800,000 Profit Now the company must pay taxes on 800,000 of profit because "R&D salaries," which includes software devs, must be amortized over five years. Obviously the company has no wherewithal to pay, given that they made a million and spent a million. That's the problem.
- chrisfosterelli 3y agoThere's a lot of attacking in this thread from people who haven't bothered to think about the math. It's an existential risk to some companies, and one that wasn't more widely planned for because it wasn't even believed to be intended to actually occur. Most tax experts considered the removal a budget gimmick so that the 2017 December republican majority could quickly pass a new budget using the budget reconciliation process, which can't be used to increase the deficit after a 10-year period so they had to add a time limit to a bunch of benefits "on paper" to use the reconciliation process. There appeared to be broad support for fixing it later, but the bipartisan spending bill expected to include it fell apart because they couldn't get agreement on other parts of it. To the best I can tell this isn't tech companies complaining about paying fair tax; it's a congressional oversight that is quadrupling the taxes of small business out of nowhere which nobody in power has bothered to fix.
- deleted 3y ago[deleted]
- missingcolours 3y agoI understand the arguments for it, and maybe even on net it’s beneficial because it prevents other bad things from happening, but the amount of byzantine dysfunction that’s downstream of the United States Senate Filibuster rule is really something to behold.
- keeptrying 3y agoIf there was one useful thing a !@#!@#! VCs could do is help police things like this. Grumble grumble
- sharemywin 3y agoThis seems like a great way to push all your development off shore.
- aarondf 3y agoIt's worse if you push it off shore, actually. Overseas salaries are amortized over 15 years instead of five. > The new Section 174 rules require taxpayers to capitalize and amortize specified R&E expenditures over a period of five years (attributable to domestic research) or 15 years (attributable to foreign research) https://www.grantthornton.com/insights/alerts/tax/2022/flash/irs-issues-procedures-on-new-section-174-re-compliance https://www.grantthornton.com/insights/alerts/tax/2022/flash...
- alex7734 3y agoSeems like a perfect way to prevent software companies from quickly growing their engineer count. The question is, was this done on purpose?
- brentm 3y agoIt was done as part of the Tax & Jobs Cuts Act of 2017. It was probably partly done to help offset some of the taxes that were being cut.
- mbrameld 3y agoHow long was the provision in place before Congress decided not to extend it?
- agwa 3y agoR&E expenses were fully deductible since 1954. "Extend" is a bit of a misnomer because there was no expiration date. Rather, the The Tax Cuts and Jobs Act of 2017 made a change, effective 2022.
- phoehne 3y agoTo be fair, software development in 1954 is not software development today. It's less pure research. It's more akin to building the electrical infrastructure you need for a business. Even though I see the logic of treating software developed as a capitalized asset, I don't necessarily think the outcome will be net good.
- Mountain_Skies 3y agoFor software developers, this likely will lead to even more micro-tracking of activities. Who doesn't love spending several hours each week making up wild estimates of how much time was spent in each of dozens of different categories? Now those will have to be broken down further into 'new' and 'maintenance' for most existing categories. For those who don't currently have to do any of this tracking, the taxes create quite the incentive for companies to start requiring it. Once the tracking starts, it end up creeping into more and more areas of smaller fidelity.
- anonymouse008 3y agoCool - so I made a script that automates emails to outbound leads, does this mean my capital asset allocation is my full commission since it is the software by which I made the sale? So even my normal SGA is now a capital expense? The law reads as this as a capital expense (anything to do with software [0]) - the IRS could use agency level logic to make it different, but all this exposes what’s wrong with the US. What about chatGPT scripts? They too are connected to software and now a part of almost every workflow? [0] https://irc.bloombergtax.com/public/uscode/doc/irc/section_174 https://irc.bloombergtax.com/public/uscode/doc/irc/section_1...
- chrischen 3y agoThe US was practically founded on principle of refusal to pay unfair taxes. As the article suggests some are just filing incorrectly, what are the real risks and consequences of this?
- dennis_jeeves1 3y ago>The US was practically founded on principle of refusal to pay unfair taxes What exactly is a fair tax?
- yonaguska 3y agoBy the founders definitions? At least 90 percent of the taxes we pay are not fair.
- mellavora 3y agoWhat percentage of the services provided by today's government were not around at the founding? I'd very much like to see government downsize, but if you want to pay taxes at the level at which the country was founded, you also have to restrict government activity to that level. Not sure if that is tenable.
- dennis_jeeves1 3y agoI was thinking more along lines of 100% ... But hey, point taken taken, we are generally in agreement.
- olyjohn 3y agoAny tax others have to pay, that I don't.
- jokethrowaway 3y agoNo tax is fair. They're all involuntary transactions. The US is the textbook experiment which proves that even minarchy (a minimal government) can't work. All form of governments, no matter how small, tend to grow into huge socialist monsters (the usa is the largest employer in the world, second only to China, maybe). Even if that very first government was founded on not collecting very little taxes for this very reason.
- DanAtC 3y agoPreviously https://news.ycombinator.com/item?id=34627712 https://news.ycombinator.com/item?id=34627712
- mountainofdeath 3y agoYet another self-inflicted wound the Congress of old men do to make the US software industry even less competitive. I would argue this is political because the tech industry is a convenient target at the moment, full of young people who tend to vote against the ruling party. That, and legacy industries don't care too much about R&D anyway.
- rootusrootus 3y agoThis section of the code was part of Trump's tax legislation of 2017. It is 100% ideological.
- vlark 3y agoLooks to me like a failure to plan properly. It's not like the companies didn't know this could happen. If you put your faith in Congress, be prepared to be disappointed by Congress. CFO heads should roll over this. It's their job to be up to speed on tax changes and plan for eventualities like this.
- agwa 3y agoThis is affecting companies with <$10m in revenue that don't have CFOs. I appreciate your point about not putting faith in Congress, but as a country we should not let them off the hook for passing batshit insane legislation that screws over small businesses.
- infamouscow 3y agoDoes it matter? Congress doesn't need to be involved to screw over small businesses. If the last few years have demonstrated anything, it's the government can freely destroy small businesses by forcibly shutting them down for completely intangible reasons without the slightest repercussion.
- mjwhansen 3y agoCFOs have been quite vocal on this. https://www.wsj.com/articles/u-s-cfos-ask-congress-to-repeal-change-to-r-d-tax-rules-11667845533 https://www.wsj.com/articles/u-s-cfos-ask-congress-to-repeal... Small companies don’t have CFOs.
- 1auralynn 3y agoI own a two-person educational software company. We have a CPA that we engage once a year to do our business taxes and can't afford anything fancier than that. It's an LLC taxed as an S-Corp so all of the "profit" goes directly to me on my Schedule K. For 2022, if this is not reversed, I will owe around $100K in taxes. For reference, my salary was around $100k. I'll have to take out a payment plan with the IRS, and probably shut down the company if nothing changes because I can't do that again for 2023 and beyond. We aren't making huge profits to absorb the costs and give me a fat bonus to cover my taxes. In fact in 2022, I WAS expecting a nice $30k loss and a refund. Do we deserve to survive? Probably not in some peoples' minds, but we've been scrapping together a living so far. It sucks because we were actually growing and gaining some momentum: any further growth would now be pretty impossible because I can't afford to pay my personal taxes to cover additional dev salaries.
- CRASCH 3y agoAny startup that needed a year of runway now needs five years of runway. Runway is money needed before the company can survive off of profits. If company A has $1M in expenses and $1M in investment, after the tax change it will need ~$5M in investment.
- taxopinion 3y agoYou've never filed an 1120.
- erik_seaberg 3y agoThis makes most salaries nondeductible, so you will need about 25% more revenue (80% of 21% federal and up to 10% state income tax) to break even than otherwise. If you’re pre-revenue your runway doesn’t change.
- erik_seaberg 3y agoApparently the right number is 90% of 21+10%, because amortization starts at the midpoint of the first year. (If you take authoritative tax advice from me you will totally go to jail.)
- geodel 3y agoCould that mean no more migrating code from Lang A to Lang B, Framework C to Framework D and writing blogs about it? Or even worse no more framework inventions, re-architecting SAAS platforms for performance so they can provide even more features that customers never asked for? If that's the case I do feel it is indeed threatening startup ecosystem.
- phoehne 3y agoThere's actually a pretty good argument to treat software as capex. It's an asset that allows you to earn revenue over multiple years, and apportioning part of the cost to each year of service is sound from the accounting side. Not a popular opinion, but this is not as arbitrary, crazy, or hidden deep in the weeds of tax law.
- Fire-Dragon-DoL 3y agoI thought about that, but it's also true that most software without any developers maintaining it goes stale in 1 or 2 years at most. I'm not sure if amortizing it over 5 years is reasonable.
- phoehne 3y agoThe same is true for other things you amortize and those maintenance costs are opex. If you don't change the oil, filters, spark plugs, etc. on your delivery trucks, they will break down before the end of their service life. Stale is not the same thing as useless. You might get bored by a game, or find the interface "old", but in enterprise environments, 10 year old software is very common. Heck, 90% of your transactions run on a platform first developed in the early 1960's. The 5 year is arbitrary. Arguably, software doesn't really break or wear out, so the service life is arbitrary. (That's not to say that the OS it's running on doesn't break it during an update). 5 years matches the life of the capitalized equipment on which it runs. I don't have any insight as to the debate around 5 years, but my guess is computers are a 5 year asset. My guess is the rules apply from other assets, where fixes to bugs and minor updates are opex as maintenance costs. If you make a major change that extends the life of the asset, such as remastering a game or refreshing the UI, or adding a feature, might be capitalized. This would be like adding a lift to a delivery truck or replacing the engine to extend its life.
- erik_seaberg 3y agoI happen to work on a system that launched more than five years ago, which at my company is pretty unusual (without at least one full rewrite). The teams working on generalizing use cases and new features have expanded every year since launch. Amortization makes sense for spreading out the tax deductions on an investment whose cost is fully front-loaded, but not on an investment whose cost is incremental and continually increasing over the entire lifetime.
- tlogan 3y agoThe IRS hasn't provided a clear stance on this issue (ask your tax guy). However, this will definitely hurt a lot companies because they used R&D tax credit for salaries. Convincing the IRS that certain salaries suddenly don't qualify as R&D could prove challenging. It's worth noting, though, that the R&D tax credit has been raised to $500,000 per year, which could be beneficial for very small companies.
- taxopinion 3y ago> Convincing the IRS that certain salaries suddenly don't qualify as R&D could prove challenging I always felt the R&D tax credit was too good to be true. Like how could a templated, computer generated report from a vendor ever pass muster with the IRS? Sure you could take the money, then you cease to exist later because you run out of money. And then there's no one to audit and no one to claw back from. But laws and enforcement changes. It's a crazy thing to gamble on. The IRS could audit every single R&D tax credit company and find loads of skeletons in those closets. Being a customer of an automated R&D tax credit vendor is the only thing on the APB for those offenders. What were people thinking?
- spacemanspiff01 3y agoI wonder how many companies will be doing more bugfixes now... For example, the initial product generates "hello world". What it was supposed to do was control a robot to automatically do pick and place. It's Definitely a bug that the program failed to work, it's even tracked as a defect in the issue management. No R&D involved just fixing a pretty severe software bug, namely that the product does not work.
- yetanotherloser 3y agoI like your style.
- axus 3y agoSomehow I'm reminded of delivering software licenses that don't actually activate, so that revenue could be booked now, and the software + functioning licenses delivered later.
- gumby 3y agoIt's not GAAP revenue until the product is out of your hands and in a usable state. So you can drop the license in an envelope and recognize the revenue immediately, but only if the recipient could have used it if they'd grabbed it from the mailbox. If the license isn't usable for another month, you can send it to the customer, they can pay for it, and you can even spend the cash, but the payment sits on your balance sheet as a liability until the moment the license becomes valid.
- natpalmer1776 3y agoAnd as with anything, sufficiently motivated legal representation will argue your way into the most favorable grey area possible. Arbitrary example being a license key that activates the software, but the activated software is effectively a hardcoded trade show demo version. The point most folks seem to be making is that “this isn’t corporate america’s first rodeo” and that like many other industries before software will end up with it’s own numerous nuances and loopholes established by extensive litigation.
- Osiris 3y agoWhy are software developer salaries classified as R&D expenses?
- cryptonector 3y agoR&D == research and development. Now, what do software... developers... do?
- jeffwask 3y agoNot research and development in the traditional sense which was tied to the creation of a new product, drug, etc. It was intended to offset the cost and risk of invention. I would not describe what most software engineers do as invention. Applying this broadly to most software engineers, many who are now more akin to digital plumbers than research scientists, was a lucky break for however long it lasted.
- HEmanZ 3y agoI think the issue is that for much software it’s not a clear distinction. For a few years of my career, I spent about half of my dev time improving a gigantic distributed system. Much of this work was inventing a new algorithm somewhere in the stack, A/B testing it to see what effects it had, and repeat. Lots of algorithm papers and patents came out of it. At the same time, I also had to keep the systems running well enough to do this, and technically no new customer “product” came out of it (although some open source database features did). Is this R&D? Seems like much is, and much isn’t. What do you want to incentivize?
- c-hendricks 3y ago> What do you want to incentivize? An environment where Americans correctly classify R&D instead of just saying everyone's an engineer doing R&D?
- rmah 3y agoSimply put, they are not. Unless you want them to be. Previously, there were some situations which made doing so favorable. Now, there are not. I don't know how contracted/outsourced development payments (i.e. non-employee compensation) will be treated.
- tourgen 3y ago[dead]
- rietta 3y agoUgg. Now I got to figure out how this impacts our small business this year. I just e-mailed our CPA so he would be able to look over the changes after their busy season ends. I hope there is some sort of threshold because as a small business some years we barely break even after paying salaries. I mean profit under $10k remaining to role over into January. I am driving a 16 year old Honda Civic. Not living a life of luxury over here :-/
- enginaar 3y agoi'm in a similar situation building software and my understanding is while i cannot write off my expenses 100% because i'm building an asset, if you're operating business as usual, maintaining existing software/service then it's 100% expense.
- rietta 3y agoMy wife and I am getting a refund this year. Getting beat up in the business by inflation, all costs going up, and cutting income in half is not a great tax strategy. It is going to make me push tougher time code tracking onto my developers. Fixing a bug is different than feature work is different than legit R&D that might qualify for the actual R&D tax credit. As if software devs love doing time sheets (not!) :-/
- enginaar 3y agohow subjective is it whether feature building qualifies as R&D?
- rietta 3y agoI am not an expert, but there are rules. If it fits the definition of doing or managing the qualified work and "no one is paying for it" than it could count. This is for the R&D tax credit,see https://www.irs.gov/forms-pubs/about-form-6765 https://www.irs.gov/forms-pubs/about-form-6765. Here is a copy and paste from a e-mail from our CPA: To qualify for the credit, you have to have what’s called “Qualified Research”. Qualifying research typically meet’s the following criteria ... 1. Was the research related to the development or improvement of the functionality, quality, reliability or performance of a business component (product, process, software, technique, formula or invention)? 2. Was the development technological in nature? 3. Was there technological uncertainty about either the capability or method of developing the business component or its appropriate design? 4. Was the developmental process experimental in nature? For wages to qualify for the credit, they have to be for qualifying research activities such as – 1. Conducting or executing the qualified research (e.g., testing a manufacturing prototype) 2. Directly supervising the qualified research (e.g., managing a team of software developers) 3. Directly supporting qualified research (e.g., organizing test results on formulation trials)
- mschuster91 3y agoWell... looks like everyone thought US Congress might come to its senses before it's too late. Personally, I'd be inclined to say: let it all fucking burn to the ground. Maybe that's enough incentive for the GOP to come to its senses. But unfortunately, there is a pretty high chance the GOP is willing to risk a major economic crash just to push the responsibility on Biden.
- umayah 3y agoIf you're worried about this, check out neo.tax (https://www.neo.tax/ https://www.neo.tax/). They are one of the few companies that anticipated this and built a product to solve it.
- xmagisterludix 3y agoDisclaimer: I work with startups as a consultant (not on optimizing their tax burden). I know of two companies that used neotax and they were happy with the results. What I don't know is if there is there anyone else in the space or some of the disadvantages of neotax. But... if you're an exec at a small -> medium size startup and you haven't dealt with this yet you could do a lot worse than giving these guys a call.
- armatav 3y agoAh, the mythical “regulatory capture” I keep hearing about
- garryindiana 3y agoCongress was advised (government has all the data it wants when it wants; they don’t let things like this happen without modeling the political fallout). The goal is claw back cheap money they flooded the economy with, stick it to the avocado toast crowd they felt were not showing proper fealty to spoken political traditions.
- gumballindie 3y agoIt would appear there’s a coordinated effort to diminish software engineering salaries across the board. Is the plan to decimate the industry and ship it all to india and china?
- phendrenad2 3y agoThis tax change will still affect you if you hire developers in India & China. You have to actually move your office to India or China instead (which might be a good idea).
- rbultje 3y agoActually. For foreign expenses, the amortization period is 15 years instead of 5, so the cash flow problem is even worse. :-(.
- deleted 3y ago[deleted]
- pitaj 3y agoQuick reminder: - corporate taxes have one of the highest deadweight loss of any tax - corporate taxes get passed to consumers and employees as higher cost of goods and lower wages / benefits - the USA has one of the highest rates of corporate tax in the world - handling the complex tax code is more a burden on small firms (as this case shows) All of this together means we'd be better off dropping the corporate tax entirely and instead tax income, capital gains, or consumption at higher rates.
- SketchySeaBeast 3y ago> the USA has one of the highest rates of corporate tax in the world That doesn't seem right. Apparently it ranks 81st? [1] https://taxfoundation.org/publications/corporate-tax-rates-around-the-world/ https://taxfoundation.org/publications/corporate-tax-rates-a...
- pitaj 3y agoMy apologies, I was a little outdated. Unfortunately can't update the previous comment. What I said was true as of 2017, when the USA had a corporate tax rate of 39%, which ranked third highest in the world. It was changed to 26.8% by the Trump tax cuts, which ranks 81st in the world. But that's still higher than 144 countries, including Switzerland, Finland, Sweden, Denmark, Norway, UK, and Spain (just to name a few).
- nitrosn0w 3y ago[dead]
- hinkley 3y agoI hadn't been following it but now understand why my company got weird about time tracking day one of this FY. I thought it was some weird M&A or bean counter power move but I guess it's taxes.
- cj 3y agoI'm guessing that this will result in many employers reclassing many engineers into COGS, S&M, G&A, etc (in other words, not calling their work R&D). This is relatively easy to do. If an engineer is fixing bugs, helping support team, helping sales in any way, participating in customer onboarding, keeping the servers online, etc, a company can argue the engineer is a cost of doing business rather than true "R&D". In reality, the % of time most engineers spend exclusively on 100% new products is much smaller than you'd assume at face value. Even at a young startup, I'd guess at most 50% of the work is true R&D. To reiterate, things like devops, managing infrastructure, patching servers, upgrading code, fixing bugs, professional services, etc... none of that is R&D and it's pretty easy for a small company to say that the majority of their engineering expense is not R&D (extremely difficult for the IRS to argue otherwise if they audit a company unless detailed timesheets are kept). Edit: I'm not an accountant, but pretty familiar with R&D / IRS stuff
- dafdaslkjvalk2j 3y agoWe won't know where the line is until we get guidance from the courts. A lot of things in real estate that you might think qualify as just maintenance actually have to be depreciated. Like, repairing a roof has to be capitalized since the roof will be around for awhile. The devops equivalent might be migrating from docker swarm to k8s-- the k8s cluster will be around for awhile.
- throwaway9980 3y agoThe average roof has a lifespan at least an order of magnitude greater than a k8s cluster. Most roofs being put on today will outlast k8s itself. Software is a liability, not an asset. Treating the construction and maintenance of this horrible liability knows as “code” is a complete misunderstanding of what software actual is.
- jeremyjh 3y agoIf the software makes money for the business, it is an asset.
- nitrosn0w 3y ago[dead]
- deleted 3y ago[deleted]
- phendrenad2 3y agoThis is going to give huge amounts of power to non-software and software-adjacent companies. Because their revenue doesn't come from software, they'll be able to hire software developers to work on dream projects and eat the cost.
- kazinator 3y agoYikes! R&D costs, meaning actually paying the devs to make stuff, is your biggest expense, and it's a big one. Rubber bands, paper clips and toner for the office printer don't cost anything. If your business has one large expense and you depend on writing it off, and suddenly can't, that's bad news.
- hinkley 3y agoYes, let's make research taxable but leave advertising as a deductible expense. What could go wrong?
- xmcqdpt2 3y agoAdvertising is also capex in some cases, https://www.journalofaccountancy.com/issues/1999/may/maples.html https://www.journalofaccountancy.com/issues/1999/may/maples....
- moron4hire 3y agoThe big, overlooked thing here seems to be that the vast majority of software developers are employed as consultants. Here on HN, you're used to thinking in terms of startups creating products, doing real R&D: creating a product that is speculating that someone will buy it over the next X years. But that's just not how most people who do "computer programming" are employed. Most of us are working to build some stupid CRUD app that would be basically turnkey if it weren't for the fact that consulting is so cut-throat that it can't keep any talented senior developers around. To call what consultoware developers do "R&D" would be like calling a subcontractor who does construction for suburban housing developments an "architecture firm". There's, like, some tangential relation, if you really squint hard, but in reality, there are none of the necessary creativity, or the risks creative work implies, at play.
- elzbardico 3y agoSo, cui bono? Bigger, stablished companies, for them, this is just an anoying accounting rule, but they surely have the cashflow to sail smoothly over it. Who is fucked? Workers and small, new companies, and absolutely terrible news for job seekers. For anyone not living under a rock, it is pretty clear that this was not an accidental decision.
- commandlinefan 3y ago> many small business owners ... the change to require R&D amortization So - I'm not super sympathetic to taxation in general but... small business are not doing R&D. Big businesses are hardly doing R&D. If anybody outside of _maybe_ Apple and Google are even _claiming_ they're doing enough R&D that not being able to expense it impacts their revenue, they're committing criminal levels on tax fraud.
- slavboj 3y agoLook up section 162 vs 174 treatment and the distinction between "new companies" vs "carrying on a trade". It's far from unambiguous and as long as you have a defensible position you absolutely are entitled to push the envelope. Is implementing a specification a REE "in the experimental or laboratory sense"? I'd say it's not, and I don't have to explain my position unless I'm audited. https://www.law.cornell.edu/cfr/text/26/1.174-2 https://www.law.cornell.edu/cfr/text/26/1.174-2
- ericpauley 3y agoIt looks like the CFR (at least here) hasn't been updated to match the corresponding USC: https://www.law.cornell.edu/uscode/text/26/174 https://www.law.cornell.edu/uscode/text/26/174 See c(3). Any software development is unambiguously R&D.
- hartator 3y ago> See c(3). Any software development is unambiguously R&D. "For purposes of this section" to me means you don't have to justify software development as R&E if you define that software development work as R&E. Being pedantic, but it's R&E not R&D.
- agwa 3y agoExcept the purpose of the section is to say that R&E has to be amortized. So it seems pretty clear to me that software development costs have to be amortized.
- ericpauley 3y agoExactly. I don't see how anyone can read this and tell the IRS with a straight face that their software dev doesn't need to be ammortized.
- hartator 3y agoAccording to Bloomberg [1], for ongoing business expenses, it doesn’t. For startup costs, it does need to if you want these RD credits. [1] 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... It is ambiguous even if you disagree with Bloomberg.
- orangesite 3y agoIt's going to take a lot of arguing but I predict we'll end up back where we started some time ago in the 70's: The computer hardware is the asset. Software engineer salaries are the operational expense of that asset. Fanciful: It was only a brief period of time where some companies were able to resell the operational efforts of their in-house staff to other owners of computer hardware assets. Now it's all bespoke operational activities just like steel presses and sawmills.
- cpufry 3y agosucks to suck
- synergy20 3y agothis might encouag small tech biz to outsource even more, i will pay a standard professional service fee to them, will this help me to survive?
- aibrahima 3y ago[dead]
- sudohalt 3y agoThanks!! This is very informative
- diceduckmonk 3y ago> the irs hasn't offered too much guidance on how this tax change works. They didn't offer too much guidance for trading crypto either. I reported my trades as you would for stocks. They ended up auditing me and charging me for $300k in profits when I made $3k (they did not recognize cost basis of my trades, yet decided to respect the sale proceeds) circa 2015. Meanwhile, people who did not report at all probably got off the hook.
- IAmGraydon 3y agoSomething doesn't sound right about this. On what grounds did they not recognize your cost basis? Edit: I'm guessing you acquired the crypto through some means that doesn't keep records/report to the IRS. In that case, what choice does the IRS have? You should never purchase an investment without looking toward the tax implications at the end of the year. It sounds harsh, but you should have known that claiming a cost basis you have no proof for would never fly.
- bagacrap 3y agoUhh, no exchange was reporting crypto tax basis to the IRS in 2015. I'm assuming gp won on appeal.
- m1117 3y agoWhy the taxes are only growing and never go down? Is there going to be a day when they'll be like "We'll reduce taxes"?
- meowtimemania 3y agoLots of politicians campaign on tax cuts, they've definitely been reduced in US history
- vikramkr 3y agoWe're literally barely 5 years out from the last major tax cut which followed two Obama era tax cuts that followed Bush Era tax cuts. I'm, not exactly sure where your impression of only tax hikes is coming from
- meowtimemania 3y agoTaxes should be written in a way that incentivizes hiring individuals right? Salaries shouldn't be double taxed IMO since it reduces a companies ability to hire individuals. Maybe just do a VAT tax and remove other taxes. Is this a dumb idea? (Note: I have little idea what I'm talking about)
- verdverm 3y agoMost economists would remove income tax in favor of sales / VAT, if the politics of the situation were not part of the equation.
- noelherrick 3y agoSales/VAT are regressive, so if by politics you mean "not hosing the already hosed (the poor)", and by most economists you mean folks from the Austrian school of economics, then sure.
- verdverm 3y agoSales and VAT do not have to be regressive, that is a shallow and incorrect talking point that has spread. Sales taxes today already make distinction between necessities and luxuries. In other words, there are many ways to implement sales/VAT taxes and the details matter for the outcomes
- bbarn 3y agoIf not corrected, the long reaching impact of this could snowball very badly in some places. Look at areas in California, which are largely economies based on software development. If taxes cause those businesses, and jobs to disappear, the impact to unemployment, housing markets, etc. could be quite dire in some areas. Even in large business, it could make life for engineers harder. Sure, the business can weather the change, but any amount of excess staff? Tax liability now and no longer a write off that can offset other income taxes. I think it's short sighted to view it as a small business only problem. Which, might actually help it get resolved faster.
- botswana99 3y agoBootstrap software founder here This is just bullshit Unlike many companies in the software industry, we have grown profitably for nine years without the need for any funding. Our success has been fueled by our ability to invest profits into our business, allowing us to improve our software and expand our operations continuously. However, the 2022 Section 174 R&D tax credit changes have had an impact. This recent change affects many small, independent technology companies, including my company. We have been busy building products, making our customers successful, and making payroll. We are happy to pay our fair share of taxes on our profits. However, investing in software development is the engine that allows us to grow our company and hire more employees. Our tax laws must continue to reflect this reality.
- steve_taylor 3y agoI think the point of this law is to capture tax from companies in their growth phase, as the general public sees these companies as tax avoiders and their lack of profit as an accounting trick. In reality, it will keep small companies small and less of a threat to big companies.
- SpaceL10n 3y agoIt seems like a wise idea then for Congress to allow small businesses to keep this tax credit.
- agwa 3y agoIt's not a tax credit. The tax credit is still there. It's the deduction which has gone away. And yes, small businesses are hit hardest by it going away.
- pc86 3y agoIt isn't even that the deduction went away, it must now be amortized over five years (an accounting trick on the part of Congress to pretend they're not spending money they are). This hurts businesses more the smaller they are, but paradoxically it also hurts businesses more the higher percentage of their revenue they spend in payroll. Literally if you give your employees a bigger reward for their work, you're hurt harder by this ridiculous law. If you're a sociopathic CEO with 8-10 engineers whose work output isn't directly tied to profit, and you're paying out most or all of your profit in salaries, you're definitely going to be looking at letting a few of them go to ease the tax hit.
- iguana_lawyer 3y ago“Software firms across the US have unsustainable business models” FTFY
- dqh 3y agoI wonder if this triggered the recent layoffs?
- blitz_skull 3y agoIs there any silver lining here at all?
- deleted 3y ago[deleted]
- olliej 3y agoOk, so I was going to be glib, but this sounds like if you employ someone for "R&D" you can't report their salary as an expense during the period the expense is incurred? Ignoring entirely the matter of how the f is R&D expense any different from any other expense? (my assumption is that it's actually a tax break for already rich companies)
- x-complexity 3y agoThe one thing I'm rarely seeing in this thread is any discussion with regards to the continued expansion of tax bureaucracies as these new tax bills are implemented. There are a few threads here that I can find close enough to such discussion: https://news.ycombinator.com/item?id=35619941 https://news.ycombinator.com/item?id=35619941 https://news.ycombinator.com/item?id=35615493 https://news.ycombinator.com/item?id=35615493 https://news.ycombinator.com/item?id=35619572 https://news.ycombinator.com/item?id=35619572 As noted in the top thread ( https://news.ycombinator.com/item?id=35614968 https://news.ycombinator.com/item?id=35614968 ) but not discussed further, the tracking of such amortizations mean added accounting expenses for businesses where this would've otherwise been a straightforward deduction. This inevitably means that either additional people need to be brought in to track said expenses, or a business is increasingly reliant on an external service to manage their obligations, both of which are a net negative for the business compared to the straightforward 100% deduction model. Whilst amortization is beneficial for purchases / investments that can wear down with use, the application of such accounting practices towards R&D in general only serves to increase the burdens on businesses (small or large) for performing such R&D. Arguably, it's an attempt by the government to kill R&D within the US, and to force more companies towards acquisitions & mergers, whether intentional or not. Futurama's Central Bureaucracy is worryingly becoming a real thing.
- csomar 3y agoIt's interesting that no one sees this as it is: Killing the golden goose so that the IRS can get some meat. This change, theoretically, doesn't "add" to your tax bill. You'll be paying the same amount of taxes. However, as in the example outlined in the first comment, you'll continually have a credit with the IRS due to the amortization. The questions are: 1. Is this credit recoverable? 2. Why is the IRS doing this anyway? Just for a quick cash/tax boost? Because that's what failed states look like. The USSR is looking good in proportions...
- winrid 3y agoThey're doing it this way because in the public eye big startups that write off salaries as tax expense look like tax avaiders. In reality it will just punish bootstrapped companies.
- IAmGraydon 3y agoWho, exactly, is responsible for this? We need names of representatives who wrote this into tax law.
- agwa 3y agoThis was done by the Republicans' flagship tax bill, the Tax Cuts and Jobs Act of 2017. Voting records: House: https://clerk.house.gov/Votes/2017699 https://clerk.house.gov/Votes/2017699 Senate: https://www.senate.gov/legislative/LIS/roll_call_votes/vote1151/vote_115_1_00303.htm https://www.senate.gov/legislative/LIS/roll_call_votes/vote1...
- notwhatyouthink 3y agoCurrent senate bill to restore treatment of R&D expenses to pre 2022 treatment is S.866. https://www.congress.gov/bill/118th-congress/senate-bill/866?s=1&r=7 https://www.congress.gov/bill/118th-congress/senate-bill/866... Call or write you senator.
- whelchel 3y agoIf helpful for others, my language -- As a resident of [STATE], I'm writing to express my dismay at some very recent specific tax changes negatively impacting small businesses innovating in technology, as well as express my support for a recently introduced bill to unwind those changes (S.866 - American Innovation and Jobs Act). As both a software engineer and entrepreneur, changing software development expenses to be exclusively treated as R&D expenses amortized over many years will harm our country's ability to create innovative companies on the frontier of technology, as smaller businesses that take up-front losses in exchange for growth and deferred income will be dramatically penalized and go out of business. Conversely, large companies with established revenue and credit will not be harmed, increasing their ability to reduce competition in the market. So many of America's great companies in the last decades have come from a small number of people working together on software and hardware, losing money up front to gain money in the future. If you cannot write off the up-front expenses as truly spent money with uncertain return, those businesses cannot start. It's a lose-lose-lose - this change hurts the little guys, helps the incumbent big guys, and will reinforce competitive sclerosis relative to our geopolitical competitors. I don't know what the exact right answer is, or if S.866 is it - but the current situation is certainly not correct. If we want America to be competitive and create high-paying modern jobs, we can't tax new companies to death before they have a chance to get started.
- wavesounds 3y agoWith help from gpt4: "As a concerned citizen and advocate for the technology sector in our great nation, I am writing to express my strong support for S.866, the American Innovation and Jobs Act. I believe this legislation is crucial for fixing the unfair tax treatment faced by startups, technology companies, and software engineers, which together form the backbone of innovation and economic growth in the United States. The bill will make it easier for startups and small businesses to thrive, create jobs, and compete in the global market. Additionally, the legislation will also make it more attractive for talented software engineers to choose careers in this vital industry. Our nation's ability to maintain its competitive edge in the global market depends heavily on the health and vibrancy of our technology sector. By passing S.866, we can ensure that our startups and tech companies have the resources they need to innovate, create jobs, and contribute to the economy. Furthermore, this legislation will help attract and retain top-tier talent in software engineering, an essential component of our country's continued success in the tech industry. As your constituent, I kindly urge you to support and vote in favor of the American Innovation and Jobs Act, S.866. This bill is a vital investment in our nation's future, and its passage will undoubtedly lead to continued growth and prosperity for the United States in the competitive global market. Thank you for your attention to this important issue, and I appreciate your dedication to representing the best interests of our community and the nation as a whole."
- fogzen 3y agoWhat about software agencies/consultancies? Their salaries would not be capex right? They don’t own the software, they just develop it to spec and sell the development. Their client would be the one to claim R&E right?
- g42gregory 3y agoOk, I don't understand this. It basically says that you can't completely deduct any software engineering salaries? This would affect all companies writing software, Google and Meta, for example. If this would affect Google's bottom line so much, wouldn't they change the tax code by now? If not, how are they avoiding these new taxes?
- asd33313131 3y agoThis could create a new industry of double Irish-style/sale-leaseback avoidance schemes that will be a boon to tech lawyers. E.g. Tech co sells its software to an Irish sister company and then its software engineers create software for that Irish firm, which in turn licenses its software _back_ to Tech co.
- radium3d 3y agoSounds like something the same folks who think taxing unrealized gains is a good idea and won't instantly tank the entire world market would think up and then put into law.
- EntrePrescott 3y agoThis makes zero sense to me. By what logic would a salary paid this fiscal year (be it for R&D or any other activity, I don't see why there would be any difference there) not be a simple expense to be fully deducted from the revenue in the calculation of the profit for this same fiscal year?
- xmcqdpt2 3y agoOne of the goal of this kind of accounting is to make "building the thing" and "buying the thing" as closely equivalent as possible for tax purposes. If you treat all the salaries as expenses then * Company A has 1M in capital, and builds an in-house database with 1M$ of dev salaries. At the end of the year, company A is worth 0$ because they spent all the money. * Conpany B has 1M in capital and buys (wholly and exclusively) a custom database for 1M$. At the end of the year, Company B is worth about 1M$, because they have 0$ in cash and a 1M$ database. Clearly there is an issue there, and the only way to make the two situations equivalent is to treat software development as a capital expenditure which is what it is.
- wussboy 3y agoDoesn't Company A also have a DB worth $1 million? Or are you simply referring to the way these things are accounted?
- krade 3y agonot only is this completely wrong, but you aren't taxed on assets, and capital has nothing to do with it either. assuming you meant revenue and income, your example actually perfectly illustrates the problem. Company A has $1MM in revenue, spends $1MM on SE salaries and is taxed on $800k income. Company B has $1MM in revenue, spends $1MM on some AWS db service and has no income to be taxed on.
- galaxyLogic 3y agoThis can not stand. We are an innovation nation. Job-creation requires that employing people does not increase your tax burden. It should do the opposite.
- bandrami 3y agoIf it kills off most of the cryptocurrency ecosystem it will be worth it
- bigbacaloa 3y ago"Developers don’t come cheap, and until tax year 2022, these companies could fully expense those costs as R&D rather than having to amortize them over multiple years." Maybe stupidly high salaries shouldn't be considered R+D expenses.
- RamblingCTO 3y agoAnd here I sit dreaming of how doing business in the US would be so much nicer than in Germany, where you pay multiple taxes on every Euro I make. Apparently not. I appreciate this thread very much!
- robocat 3y agoQ: what workarounds are there? Maybe open source development and assign copyright to public domain? If you don’t own the software, you don’t have anything to capitalise? What are FMAANG doing about it?
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- say_it_as_it_is 3y agoThis ensures that every innovative company is owned by the financial markets. You cannot run a business unless you raise equity or take on debt.
- lobocinza 3y agoSo the politicians are killing their gold hens (again)?
- btbuildem 3y agoSomewhat related -- our company has been making use of "R&D credits" (Canadian thing), basically getting the govt to subsidize the business. This never sat right with me, but we were a struggling startup so fair is fair. We've been bought out by a big American corp, and they continue to leverage this approach (why wouldn't they? it's free money!), but it REALLY bugs me. Calling what software engineers do "R&D" seems such a stretch. You're not doing any research, you're not developing anything new. It's just a coincidence that the word "development" is in the job title. We're closer to factory workers than research scientists, by a lot. Just putting existing widgets together in well-defined ways to implement whatever business workflows.
- ActionHank 3y agoHad a consulting CFO recommend the same to us, even mentioned they've done so for all other businesses with any software development costs. It's wild. I'm sure that at some point there will be similar fallout up here.
- Ghostt8117 3y agoSomething that doesn't get discussed often when there is an issue is a possible solution. We all just complain or make fun of those who lose out. But the issue here is that sudden changes are a problem. No company should face sudden unexpected tax changes. It creates an unstable business environment and owners cannot adequately plan for the future. Congress needs to extend this write-off for a few years and make it clear that it will not be available in the future. They cannot leave it as a "maybe" situation. I have personal opinions on this matter that are irrelevant. What matters for the future is how this affects the U.S. competitive advantage with technology, and how this affects the job market. If the impact is significant, Congress needs to act. If not, i.e. if only a few smaller companies are affected, then nothing will change and everyone needs to adjust.
- johnnyo 3y agoTo be clear, its not a sudden change. It's been written into the law since 2017 that it was sunsetting. People incorrectly assumed that Congress would extend or repeal the sunset. But its not like the tax law was changed on Dec 30th and put into effect on the 31st.
- js2 3y agoThe CNBC article doesn't really explain the change, or why it's just happening now. I had to do a web search on "Section 174" to find this: > What are the changes to Section 174, and do they affect the R&D tax credit? > Among the sweeping changes to the U.S. tax system brought by the Tax Cuts and Jobs Act of 2017 (TCJA) was an amendment to Section 174 of the Internal Revenue Code. Many experts, however, believed — or at least hoped — that the scheduled change to the provision addressing the deductibility of research and experimental (R&E) expenses might never take effect. > But the amendment did indeed kick in, beginning with the 2022 tax year. It’s left many businesses that conduct qualified research activities confused — about the change itself, how it affects the Section 41 research and development (R&D) credit, and the likely negative impact on their tax bills. Here’s what you need to know. ... https://gusto.com/resources/articles/taxes/section-174-r&d https://gusto.com/resources/articles/taxes/section-174-r&d
- astatine 3y agoI have seen several situations where this would be desirable - notably bleeding startups with vc money. There is plenty of window dressing to capitalise expenses and show a better EBITDA. What this will do is immediately reclassify large chunks of people out of "R&D" into operational resources. Just enough to balance between nice looking EBITDA and low real profit (= low tax)
- GoldenMonkey 3y agoClassify 80% of your dev time as maintenance. 20% as R&D. Problem solved. Most companies I've worked for, using R&D credits. Have a timesheet tracker... tracking actual hours of R&D work. That sounds more critical now.
- astatine 3y agoThere will be a significant drop in reported research spending. This will seem like China is doing more research than the US. There will be a hueb and cry. Congess will incentivise research spending. Back to where we were.
- cardosof 3y agoThe skeptical side of me is screaming "just now that the big techs face disruption, this comes up!"
- aryehof 3y agoMy take on this is that in the USA, software development is now viewed as the creation of an asset with a lifetime of 5 or 15 years. Accordingly, its cost (including labor) can only be expensed (depreciated) over that time period. It is this assumption that all development results in a valuable asset deriving or enabling income over time, that is contentious. A large proportion does not, yet that is not reflected in the increased tax bill applicable to all.