11 ms·

I 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, whic

• vb6sp6 3y ago
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• crote 3y ago
  The 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 ago
    That's still taxed off profits, not gross.
    • qeternity 3y ago
      Yes, but it's changing the way profits are calculated, which massively impacts cash flows.
    • admax88qqq 3y ago
      If 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 ago
      You deduct (eligible) expenses from revenue to get (taxable) profit
    • mminer237 3y ago
      If 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.
      • xmcqdpt2 3y ago
        Well no, you have a 1.2M profit, and decided to reinvest 1M into R&D to produce a software asset. It's bad that the tax treatment changes suddenly because businesses need stability, but the change itself is perfectly rational.
    • tomrod 3y ago
      It changes what is considered a deductible expense. Profits = Revenue net Costs Taxes are a cost. Taxes are defined as some rate t, tax = t * (Revenue net Deductible Expenses) So Profits = Revenue - t * (Revenue - Deductible Expense) - Non-deductible Expense Percent of t is small relative to the value of 100% applied to non-deductible expense. What this has done is to take salary, deployment infra, everything, from Deductible to Non-deductible expense, leaving 20% of what was there before. That is very large.
  • 0zemp1c 3y ago
    its like a weird inverse of paying quarterly taxes...the same goal - more of your money stays with the government longer
  • deltarholamda 3y ago
    >The issue here is in the way it is deducted. The issue is that the rules changed. Businesses that relied on the former rules are now faced with a (possibly insurmountable) challenge to accommodate the new rules. Washington loves to fiddle with tax rules, and lobbyists spend a lot of time and money encouraging it, but nobody can anticipate the ripple effects. It all looks great on CBO spreadsheets and congressional press releases, but the real-world impacts can be devastating.
  • ricardobayes 3y ago
    I only hope they include some kind of small letter that the same person needs to still be employed to get the amortization - I think that's actually implied by it. The same way you got to keep a machine to keep deducting it. I think the gov't got fed up of the mass layoffs and this is how they are fixing it.
    • grogers 3y ago
      If you can deduct the remaining amortized expense immediately upon termination, could companies just fire everybody and rehire them the next day?
  • hedgehog 3y ago
    Assuming you had no other expenses the tax bill would be $168k on the $800k right? So what we're saying is a business with $1M each in revenue and salary expense would have an additional $168k in current year tax expense?
• mjwhansen 3y ago
  The problem is that this tax change is artificially inflating profits. Companies previously had the choice between expensing (writing off entirely) and amortizing (spreading out) these costs, and now they must be amortized. It is especially problematic since it categorizes all software development as R&D even if we don't think of it as R&D. It's still unclear what the IRS considers "software development" since they've never had to define it, but the way most big companies with their well-paid accountants are proceeding are that it covers new product development AND new features on existing products, but not bug fixes/maintenance. Let's take a simple example. Imagine a profitable small software company that made $1M in revenue last year, spent $700,000 on developer salaries and $200,000 on other expenses. Ordinarily, they'd be able to write off $900,000 and have a taxable net income of $100,000 that matches their actual profit. Assuming a tax rate of 25% that's a $25,000 tax bill. Now, if you assume developers spent 50% of their time building new products and new features, and 50% of other expenses were on new features, only $420,000 of the salary costs and $110,000 of other expenses are write-offs. Their taxable income just went from $100,000 to $470,000. Assuming a 25% tax rate, their tax bill is now $117,500 for 2022 — which exceeds their actual net income. This also inflates their quarterly tax payments for 2023, both of which hit right now. This gets even worse for companies that aren't profitable, as they don't have the cash flow to cover a tax bill when they hadn't planned on having one at all. And given the current financial environment, it's hard for startups to get any kind of additional financing or funding. This news article about our effort gets into this a bit more: https://technical.ly/civic-news/section-174-small-software-companies-taxes-explainer/ https://technical.ly/civic-news/section-174-small-software-c...
  • deleted 3y ago
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  • pr337h4m 3y ago
    Not very familiar with the US tax system, but is there no option to treat "R&D spending" as a normal business expense, forgoing all R&D incentives or tax credits?
    • agwa 3y ago
• hesdeadjim 3y ago
  You’re off about the major problem with Section 174 — money is being taxed *before* expenses, and there is no “out” because software has been labeled fully R&D back in 2017 (of course the republicans carved an out for oil, mineral, and gas lol). What makes it worse is that accountants at real deal firms like Plante Moran didn’t bother sounding the alarm early because they figured like every time in the last 70 years Congress would push off the effects. It is an absolutely crushing situation that is going to put a lot of shops out of business unless they have cash on hand to weather the 5 year R&D tax amortization schedule.
  • robocat 3y ago
    Even if you have the cash, in a high inflation environment with higher costs of lending, paying tax on ~80% today and getting that tax back over 4 years, leads to indirect costs. Especially for startups.
• x0x0 3y ago
  Previously: fully deduct R&D salaries from income to calculate taxable profit. Now: deduct 20% of R&D salaries from income to calculate taxable profit, with the remaining 80% spread 1/5 per year over the next 4 years. For software companies, where costs are basically eng salaries, this is a huge tax increase. It will kind of even out over time, but it wacks new companies very hard.
  • yamtaddle 3y ago
    > R&D salaries > For software companies, where costs are basically eng salaries, ... it smells like this might be fallout from mis-classifying workers and/or fudging categorization of labor for some benefit. Am I on to something?
    • agwa 3y ago
      Even companies that don't take R&D credits (which is a benefit which can be fudged) are still forced to treat software development expenses as R&E subject to 5 year amortization. Companies have no choice in that matter (see https://www.law.cornell.edu/uscode/text/26/174 https://www.law.cornell.edu/uscode/text/26/174 (c)(3))
      • yamtaddle 3y ago
        What's the reason for that? I can find a lot of coverage of the effects, and of efforts to change it, but why was it made that way to begin with?
        • agwa 3y ago
          I'm not sure if this is true, but I've heard that the Republicans needed ways to offset the tax cuts made by The Tax Cuts and Jobs Act of 2017. One of the ways was changing the treatment of R&E expenses.
          • mjwhansen 3y ago
            This is true - it was an accounting sleight of hand to make the tax cuts look paid for during Congressional Budget Office scoring
• hrunt 3y ago
  The companies spent all the money this year on R&D expenditures. That was cash out of their pocket (they spent it this year, so it reduced this year's cash on hand). The effect of the rollback is that they can now only count 20% of those expenditures to reduce their profits (and, by extension, their taxes) this year, so they are paying taxes this year on the remaining 80%. While yes, the profits are higher, the cash is not any higher, and cash pays the tax bill. Note, this was not an "unexpected" change (it's been in the code), but it WAS unexpected that the provision was not extended. Note that this affects not just startups. My wife's firm is a small, employee-owned, non-tech S-corp. This hit them as well. It resulted in tax bills for the shareholders approximately 25-30% greater than the firm's accountants expected them to be. The shareholders are on the hook for those higher taxes, although the company did the right thing and distributed extra cash to them to offset the higher taxes.
  • jadbox 3y ago
    I've been wanted to someday start an employee-owned, non-tech S-corp. However these changes are squeezing out small players.
• ricardobayes 3y ago
  Well, yeah because you're a normal person who pays tax by the book and don't look at tax optimization schemes all your waking hours. Classing devs as R&D was morally wrong anyway due to the 100% tax credit. Although I think a better approach could have been an immediate credit in the same year, but a reduced amount.