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(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 s

• chrisfosterelli 3y ago
  There'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 ago
    I 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.
    • yamtaddle 3y ago
      To the extent that the filibuster's beneficial, I'd say it's only so because of our bad electoral system that stabilizes at only two viable parties, and sometimes results in minority rule.
      • ChrisLTD 3y ago
        The filibuster guarantees minority rule, in the Senate.
        • deleted 3y ago
          [deleted]
        • yamtaddle 3y ago
          Yes, but it also means that the minority is less effective when it gains an electoral majority and takes 'hold of the gavel. That makes it harder for them to, say, change things to further entrench minority rule—which is real problem in several state-level governments.
          • MichaelZuo 3y ago
            This sounds like a positive because it makes sure the support backing actually enacted policies is not balanced on a knife edge.
            • yamtaddle 3y ago
              This might be true, if the policies advanced by legislators more-closely reflected what voters want. Instead, we have a bunch of very-popular reforms that never get done for a variety of reasons, but the one-two punch of the two-party system and the Senate filibuster are a big part of why. Though, personally, I'd say our system naturally stabilizing at two parties is the bigger of those two problems—it's the core reason why major legislative bodies in the US can end up maintaining or advancing laws and policy that differ sharply from what a large majority of voters want, session after session. Unfortunately, fixing that would require a bunch of legislators or a bunch of states to vote against their own interests. So, probably not gonna happen, ever.
  • AdamH12113 3y ago
    Thank you for providing the actual political context. It is much more helpful to know who did this and why then to complain about an amorphous and unchanging "Congress".
    • YeBanKo 3y ago
      I read the message you are replying to three times and I still don’t understand who did this and why? Can elaborate more?
      • Clent 3y ago
        It's the House of Representatives. That body is the origin of all taxing. The leader of the House is Kevin McCarthy. It's is ultimately on him to lead the House (or get out of other's way) in passing a tax bill. The reconciliation process allows this to occur with less bipartisan support. The interesting part of this appears to be that the Republicans removed this from the tax code but were expected to add it back in a new form. This did not occur in time for tax bills to be due.
      • ec109685 3y ago
        To get the tax cut law through congress without requiring support from democrats, they had to raise revenue somehow, so they cancelled this provision, with the idea they would add it back later.
      • AdamH12113 3y ago
        Sure. Here's the key sentence: > 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. In 2017, the Republican majorities in Congress passed a budget that would have increased the federal debt significantly over a ten-year period (i.e., it was a long-term deficit increase). Such an increase is not allowed under the rules of the Senate's budget reconciliation process, so they added sunset provisions that would have brought the deficit back down by making some of the deficit-increasing provisions (in this case, mostly tax cuts) expire early. The next sentence clarifies: > 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. These changes were made "on paper" to meet the reconciliation rules in time to pass a budget and avoid a government shutdown, but they were not intended to be permanent -- they were just a quick hack to work around procedural limitations. The intent was to fix this later, but the fixes were never implemented due to disagreement about how to handle other parts of the bill. The advantage of this kind of description is that it gives you a piece of a larger story and leads to some obvious follow-up questions. Why did it take until the last minute for Republicans to pass a budget when they had full control of Congress and the White House? Why couldn't they pass a budget that didn't increase the deficit? Why does the Senate have such weird procedural issues and why haven't they been fixed? You can find some of the answers by looking into the bill itself[1]. But even if you don't you can pick up other pieces later by hearing other bits of news. The factions and political processes that produce bad legislation can be understood, and with that understanding the power to alter them, even if only by voting. The other kind of description, which I see far too often, treats bad legislation the same way we treat bad weather. It can be predicted a few days in advance, but we have no control over it. It's just something that happens, and all we can do is let it wash over us. The clouds bring the rain and Congress brings bad legislation; thus has it ever been. It's an ahistorical form of learned helplessness. [1] https://en.wikipedia.org/wiki/Tax_Cuts_and_Jobs_Act_of_2017 https://en.wikipedia.org/wiki/Tax_Cuts_and_Jobs_Act_of_2017
  • taxopinion 3y ago
    [flagged]
    • pc86 3y ago
      What does any of this have to do with libertarians?
      • tomrod 3y ago
        Nothing. It's an oddball comment, for sure! As a minarchist (form of libertarian), I would love to see the state operate more efficiently. That would achieve a part of my own personal political beliefs. I recognize the need for a state and the role society must have in shaping it for it to be a stable, functioning state. Surprise rules dramatically increasing taxation due to political judo performed six years prior is horrible.
  • fredgrott 3y ago
    It gets worse, we do not reach true majorities in the House and Senate until 2030. Thus until then budgets get passed under budget reconciliation.
  • Workaccount2 3y ago
    [flagged]
  • rodgerd 3y ago
    The thing that is most striking to me about your explanation is that the change was made six years ago; it seems that anyone responsible for a company's tax position and cashflow (CFO, accountant, etc) should have been planning for this between then and now. Much like the SVB panic, a great deal of this seems to be people running companies without either paying attention to things that could have a significant impact, or hiring someone who does.
    • citizenkeen 3y ago
      When I took tax law, one of the things that blew my mind is that it can be retroactive. An exemption might expire, but then be retroactively reinstated. This happens all the time. There is the tax law that applies to your 2022 income now, and then there's the tax law that will apply to your 2022 taxes in five years.
    • mjwhansen 3y ago
      They have been. Large companies have been engaging with Congress since 2019 on this, reminding them that they intended to revert this before it took effect. CFOs wrote a letter to Congress in November. https://investinamericasfuture.org/Communications/letters/ https://investinamericasfuture.org/Communications/letters/
      • newswasboring 3y ago
        Maybe they put too much trust in the US congress' functioning
  • Spooky23 3y ago
    I don’t know why you’d think it was an oversight. After all, they pushed SALT, which raised the taxes of any homeowner living in a high cost of living state, and further transfers wealth to flyover country and the south.
  • newswasboring 3y ago
    This whole thing sounds so shady to me, can't believe this is how they are running a country.
• gorkish 3y ago
  There are means to offset, defer, and reduce tax burden that you also get from doing R&D, so honestly the change in the way the salary is treated is somewhat balancing these other tax benefits that startups are also taking. It's a balancing change to a larger system, not a targeted change to screw startups. A comparison over just Year #1 is disingenuous.
  • aarondf 3y ago
    Let's say you have to pay 30% tax on 800,000 of profit, so now you're 240k in the hole. That's your year one! If you don't survive to take the future deductions it's kinda moot right?
    • appking 3y ago
      Even worse for companies in high tax states like California, overall tax rate is closer to 40%.
  • mjwhansen 3y ago
    Only a small portion of activities count as R&D for R&D tax credit purposes. R&E is a much bigger category and where the problem lies. This write up has a good graphic showing the magnitude (scroll halfway) https://www.striketax.com/journal/tcja-and-the-resulting-tax-implications-for-r-d-companies https://www.striketax.com/journal/tcja-and-the-resulting-tax...
• lifeisstillgood 3y ago
  This seems a silly question but are you forced to label software development as "R&D" instead of just expensing it in the first year. I mean this is an accounting trap, it seems the best way to get out of it is to use accounting.
  • jsmith99 3y ago
    The accounting standards forbid expensing things that should be capitalised, and if you go ahead and do it anyway your investors will wonder why your accounts show you have no assets.
    • rhaway84773 3y ago
      Your CA would certainly prevent that from happening well before your investors look at your accounts.
  • jabart 3y ago
    The law has a call out that software development costs are all R&D now. So yes according to my understanding (as one of the signers) and those who have written about this as well.
    • vlovich123 3y ago
      I think this is flawed in both directions. Sure when you’re primarily building new stuff maybe the cost of that should be amortized. What happens if you’re just maintaining a product though rather than actually developing new stuff? That doesn’t feel like R&D effort.
      • pclmulqdq 3y ago
        Maintenance of existing software doesn't count as R&D under this categorization. The IRS will have some helpful guidance available in June. You know, two months after the deadline.
        • 3y ago
• ElevenLathe 3y ago
  IANA accountant but this seems...fine? The point of writing software is typically to get some benefit from it in future years, just as GM expects to get more than one year's use out of a lathe or a sheet metal press. Of course they won't be able to cover the entire expense of buying the lathe entirely out of revenue they receive in the same tax year that they buy it. Why should they expect to be able to do the same for software?
  • lesuorac 3y ago
    How closely did you read the line items? In the example given they received a revenue that covers the entire cost of the software. The problem is that they then used that revenue for payroll which would be fine previously as if you make $X and pay $X in payroll then you pay ($X - $X) 0 in taxes and there isn't a cash flow problem. To stick with the apples-oranges lathe example. Imagine GM got a loan of $1M for the lathe and they can only depreciate 1/5 the cost of the lathe. So come tax time, GM has to pay taxes on their 800K of "profit" since they can't fully count the cost of the lathe against the loan.
    • uoaei 3y ago
      I think I'm failing to see your point, as I cannot find one here. If GM needs a lathe and has a reasonable business strategy, they should be able to get their accounting office and their leadership to align on how to make it make sense over 5 years. If they can't, it's a business run poorly, and according to the basic tenets of free market capitalism (which you seem to be leaning on heavily) that business would and should fail. More generally, this seems a natural consequence of the impersonal ways that businesses treat employees, aka "human capital stock" to use the term of art. Capital stock / assets used for generating revenue should be taxed the same across the board.
      • pclmulqdq 3y ago
        In a world where you venture-fund software development, this is fine, since the venture funding isn't revenue. In a world where you fund software development with revenue, this hurts a lot, particularly for young companies (and especially for companies that get research grants, which are revenue). Established companies can probably debt-finance development the way GM would debt-finance a lathe (yes, large enterprises often use debt to buy everything possible). Small companies likely won't have that benefit. Particularly because that software isn't necessarily a capital asset that can back a secured loan, the way a lathe is.
• SomeBoolshit 3y ago
  That sounds a lot like that delicious regulatory capture that giant companies like very much.
  • hgsgm 3y ago
    It benefits VCs because it makes it impossible to sustainably self-fund a business.
• tempsy 3y ago
  Seems like a big deal but have not heard it come up til now? Maybe cause tax season?
  • gamblor956 3y ago
    It's not a big deal because this change affects very few companies outside of Silicon Valley and it only affects companies at the start of the R&D process. After 5 years, the tax impact evens out to be the same as currently expensing R&D salaries. And generally, software companies have gotten the benefit of the R&D credit even for things would not have qualified for the R&D credit if it had not involved software, so this change was merely seen as correcting a tax loophole that the software industry has been exploiting (and arguably abusing) for several decades.
    • surfman 3y ago
      The R&D tax impact will NOT even out. its taxes you pay for 5 years that you don't get back. R&D tax credits is a small right-off and not worth the efforts. Lots of startups don’t even do the R&D tax credits because of the cost and time evolved to do all the necessary records, backups and reports.
    • aarondf 3y ago
      It very much affects bootstrapped companies building a software product. I'm not sure where you got the idea that it only affect Silicon Valley companies? If you bootstrap your company to the point where you can afford one engineer's salary, you can only deduct 20% of that against your revenue. I.e. you've paid out all the cash and but you still have to pay taxes on the 80% that is not allowed to be expensed this year.
      • gamblor956 3y ago
        This is how it has always worked for non software companies... If your business isn't solvent without tax loopholes, your business isn't really a business.
• pclmulqdq 3y ago
  This also looks like it completely screws people who get government research grants for their for-profit companies (eg SBIRs). When I was thinking about one, my accountant was telling me that the grant is technically revenue, which would make it convert to taxable income less expenses. Forcing companies to capitalize R&D basically means that you have to pay tax on the grant funding first, leaving only the after-tax value of the grant for actual R&D. I doubt most grant proposals have a 20-30% haircut built into the budget like that...
  • 1auralynn 3y ago
    Yup, I am screwed because I got an SBIR grant in 2022. The default indirect cost rate is ~30%. In this new scenario, it should be something more like 60%, which reduces the usable funds that can be spent on actual development (IF you can even get a high rate like that approved by the govt agency) EDIT: By "screwed" I mean that I'm facing a $100k personal tax bill because the company is an LLC taxed as an S-Corp. You can say all you want about lack of planning, etc, but the reality is that many times very small business do not have the budget for a high-end business accountant on retainer. If I were to try to "plan better" to avoid this situation, I would have just not written the grant or tried to do any of it and gotten a FT job or something instead. It's an innovation-killer.
    • pclmulqdq 3y ago
      I am personally very happy that my LLC's SBIR grant proposals in 2022 were all turned down, because I wasn't thinking about the disastrous tax consequences.
      • 1auralynn 3y ago
        Right? Like, should I even bother applying for Phase II in September? There is no way I could afford to pay taxes on $1.8M.
        • pclmulqdq 3y ago
          IMO you should talk to an accountant. It's pretty cheap to do that in comparison to the tax bills (my accounting bills are <$1000/year for a similar situation to you). Phase II is a lot of money, and you may be able to get some venture debt now that you're past Phase I to cover what the SBIR doesn't (ie the taxes). There's also some chance that the law around this will be reversed.
• majormajor 3y ago
  After 4 years are you back to where you started? With the fifth year stacking on top of the other 200K chunks from the first four years? (If your hiring keeps accelerating I guess not, so major scaling of your team would seem to be discouraged by this change.)
  • pclmulqdq 3y ago
    Assuming everything stays the same, this rule actually results in marginally lower tax burden (since progressive income tax means that 5 years of tax at $800k < 4 years of tax at $1 million). Assuming that it changes, no. In a worst case scenario, you may be paying a lot more if you do most of your development in a peak year and then lose the revenue stream later.
    • jdminhbg 3y ago
      > (since progressive income tax means that 5 years of tax at $800k < 4 years of tax at $1 million) This is corporate tax, not income tax, so is not progressive.
      • pclmulqdq 3y ago
        It's not progressive as of 2018, but it may return to being progressive over the next 5 years.
        • jdminhbg 3y ago
          It might, or it might be cut across the board, meaning you paid more by having profit recorded during a time of higher rates. Congress can do anything with those rates.
    • majormajor 3y ago
      I would assume you aren't laying off your whole staff after year 1, so the comparison if costs stay the same seems like this instead? Old: Year 1: 0 Profit Year 2: 0 Profit Year 3: 0 Profit Year 4: 0 Profit Year 5: 0 Profit New: Year 1: 800K Profit Year 2: 600K Profit Year 3: 400K Profit Year 4: 200K Profit Year 5: 0 Profit E.g. stack another amortized round of annual salary each time. Even if revenue stays the same but costs increase, your Year 5 total for each is "X Profit" where X is the amount of revenue delta from Year 1 to Year 5? If rapid hiring growth followed by layoff scenarios, you are worse off here: you pay the tax on the hiring boom for at least the first year or two before your revenue might drop enough to make it not matter? If you're further away from profitability, it's maybe still a wash. Hire up to 10 Million in salaries in 1 year, but your revenue after 2 years is just 4M - you're still under the window. You only get hit by the difference in the bill if your revenue accelerates a lot (which is an OK problem to have)? So on one hand it seems like it could reduce poorly planned impulse hiring by spreading out the costs, but on the other hand the "run big losses until we make it" plan is less affected anyway because of the "big" in "run big losses"... so it seems to hurt the sustainable folks more in that case.
• Terretta 3y ago
  Ok, but in year five, it would look like this again: 1,000,000 Revenue - 1,000,000 1/5 Salary expense x 5 years rolling ----------- 0 Profit So really, it's removing (deferring, or peanut buttering) the startup and ramp up "invent new things" subsidy, while not really affecting steady state R&D if you're not growing talent ahead of revenue. So even in year 5, it's an adverse incentive for putting new/more talent to work. Even big business may not be able to make as many growth project budgets work.
  • whimsicalism 3y ago
    Startup subsidy? This seems to be penalizing competition and new competitors, for literally no reason.
    • RhodesianHunter 3y ago
      No reason? Regulatory capture is the reason.
  • uoaei 3y ago
    Unconstrained growth is not tolerated anywhere else, but somehow people bend over backwards to explain how actually any constraints on business growth are Very Bad And Evil.
    • AnotherGoodName 3y ago
      Unsustained growth is just one type of growth though and this affects all growth so I don't see you point as relevant here.
      • Zamicol 3y ago
        I'm commenting on one of your older comments so it doesn't appear in the current discussion. What I think needs to be adjusted with GR is simple: Just as time dilates, t'=γt, gravity emission itself must time dilate: g'=γg. In the case of GR, just replace t with g. t'=t√(1−(2GM/rc^2)). The problem here is solving for gravity self-interaction concerning gravity emission.
• fnordpiglet 3y ago
  I’ve not read all the comments but I’d note that this issue becomes less serious every year as you build a pipeline of amortization. Assuming 1mm stays the same YoY in 5 years you’re paying no taxes again. Each year taxable income reduce by a further $200k until year 5. That provides no relief now but even without action it resolves eventually - except for new firms.
  • joshgachnang 3y ago
    > Assuming 1mm stays the same YoY in 5 years That's a pretty big assumption.
  • KMag 3y ago
    ... growing firms are also penalized. Also, if a company goes bankrupt (like the majority of companies), those last 4 years of amortization just go into the government's pocket. Even if you could ignore the time value of money, it doesn't actually even out over the long run.
    • fnordpiglet 3y ago
      Yes. It also penalizes shrinking firms as you simply lose the benefit of amortization if you can’t use it.
      • hgsgm 3y ago
        Penalizes shrinking revenues, not shrinking firms. Shrinking firms who maintain revenue (layoffs!!) do well by winding down tax liability.
        • fnordpiglet 3y ago
          My bad you’re right!
  • RhodesianHunter 3y ago
    But the first year is the hardest...
• adrr 3y ago
  Something is getting lost translation here. You can capitalize certain projects of that meet a certain threshold. I can't capitalize something as trivial as changing some colors. The capitalization is based on the expected lifespan of deliverable. Web pages is like 2 years. Bug fixes/maintenance, and project management are not capitalizable and its common to use 80/20. Public companies want to capitalize everything to improve earnings and kick up their stock price but they are kept in check by auditors. How is this going to change?
  • aarondf 3y ago
    As it relates to developer salaries, you don't have an option to decide if you're going to capitalize or immediately expense. With this bill, you must amortize over five years. You're talking about deciding whether or not to capitalize a laptop, a piece of equipment, a vehicle, etc, and over what period. There's lots of guidance for that. This is very specifically affecting the salaries you pay software developers.
    • adrr 3y ago
      I just figured out the disconnect. This is only for tax reporting and not financials. This is going to be fun.
      • eldavido 3y ago
        Real estate has this same problem but 10x as bad.
• sangnoir 3y ago
  Is it mandatory for software companies to classify engineer salaries as "R&D"? I haven't yet gotten an answer for this each time this issue comes up. I know it used to be advantageous due to the R&D amortization period, and I feel this was abused in cases were there was effectively no research or development (in the traditional sense). How is your example materially different from a furniture shop that has similar revenue & salary numbers, but previously wasn't able to amortize salaries as "R&D"?
  • cdot2 3y ago
    What would a software developer do that isn't research or development? Maybe my understanding of "research and development" is wrong. Is there a formal definition that I can go by?
    • sangnoir 3y ago
      What would a welder do that isn't research or development? I believe for both jobs certain tasks are journeyman-like, but others are legit R&D. I don't think software ought to be blanket-exempted because its done on a computer. Here's the IRS' guidance on software: https://www.irs.gov/businesses/audit-guidelines-on-the-application-of-the-process-of-experimentation-for-all-software https://www.irs.gov/businesses/audit-guidelines-on-the-appli...
      • TylerE 3y ago
        > What would a welder do that isn't research or development? Weld stuff?
        • jdmichal 3y ago
          Isn't welding just "developing" metal products? That's why you have to take into account that it's "research and development", and not "research" and "development". As in research and the development of that research, not separately research and development.
• bitL 3y ago
  How does this work with consultants/contractors? Are they still booked under R&D expenses?
  • dfkljsdlakj 3y ago
    yes.
  • celestialcheese 3y ago
    So doesn't this just incentivize replacing FTE's with contracting firms when starting up?
    • shagie 3y ago
      https://www.claconnect.com/en/resources/articles/2023/a-costly-situation-for-businesses-section-174-capitalization-is-here https://www.claconnect.com/en/resources/articles/2023/a-cost... > The amortization period is five years for domestic expenses and 15 years for foreign expenses. Additionally, for the first year of the amortization period, the expenses are “placed in service” at the midpoint of the tax year. Thus, the deduction in year one is only half the amount it will be in subsequent years.
  • mbesto 3y ago
    Yes.
• winter_blue 3y ago
  This sounds like sheer madness. Does anyone know what the situation is in other countries (in particular, in Canada) for the same situation as above? One option companies have, if this isn't fixed, might be to re-incorporate, or relocate their company to Canada[1]. [1] Assuming Canada taxes sensibly (and allows R&D or developer salaries to be deducted).
  • dh2022 3y ago
    Canadian corporate taxes are quite a bit higher than in the US - 33% vs 21%. So not an easy decision...
    • ttul 3y ago
      Yes, but have you heard of SR&ED?
  • AmericanChopper 3y ago
    You’d expect to run into transfer pricing issues if did that, unless you’d already structured your company avoid those problems. This problem here, and many others like it stem from the fact that corporate tax is a stupid concept. It doesn’t generate any additional tax revenue, because any tax that is paid as corporate tax will simply be used to offset taxes that would otherwise be paid as income tax. It also simply preferences operating models which are more accessible to large companies, disadvantaging SMEs. Any company can theoretically choose to not be profitable, by reinvesting all of its profits, and investors typically don’t care if their value is returned via growth or dividends. But many SME operators do, and the accounting and compliance costs associated with that place a higher burden on SMEs. But the whole debate around the topic is muddied by people who intentionally misrepresent how these systems work for their political gain, and their followers who don’t understand how these systems work (until some stupid change like this affects them, and the stupidity of the system is made clear).
    • dh2022 3y ago
      "Any company can theoretically choose to not be profitable, by reinvesting all of its profits, and investors typically don’t care if their value is returned via growth or dividends. " - the Amazon model for its first 20 years :). Amazon was founded in 1994 and it started to make profits reliably in 2016 : https://www.macrotrends.net/stocks/charts/AMZN/amazon/net-income https://www.macrotrends.net/stocks/charts/AMZN/amazon/net-in...
• cj 3y ago
  IANAA, but very important to remember that: 1) R&D classification of a single employee should be a percentage. Accountants don't list employees one by one on a tax return, they're grouped together and a percentage of their wages can be allocated to different functions of a business outside of R&D. 2) A lot of things do not qualify as "R&D". For example... - Fixing bugs - Maintaining existing features - Improving existing features (even enhancing functionality) - Building a feature because sales promised it to a customer - Refactoring code - Anything related to devops/infrastructure, upgrading servers, updating dependencies - Anything related to customer support, onboarding or retention - Anything related to helping Sales/Marketing close new business or get more leads - Anything related to supporting day-to-day business operations I'm not an expert, but I think it will be relatively easy for accountants to do some magic behind the scenes by classifying only a small percent of wages toward R&D. I think the average engineer spends less than 20% of their time on "true" R&D, and if that's the case, 80% of wages can be deducted as an expense without amortizing.
  • hinkley 3y ago
    It would be interesting if this reintroduced "10% time" with strict wording about not working on R&D in your 90% time. Just to simplify the labor involved in calculating it.
  • ativzzz 3y ago
    > I think the average engineer spends less than 20% of their time on "true" R&D Based on all of the items in #2, the average software engineer spends close to 0% of their time on R&D - with rare exceptions for those working on cutting edge tech, in research roles or maybe super senior engineers figuring out how to solve complex technical problems The rest of us just write code and sit in meetings
  • dahfizz 3y ago
    Do you have a source for this? The law seems pretty clear to me: > ANY amount paid or incurred in connection with the development of ANY software shall be treated as a research or experimental expenditure. https://www.law.cornell.edu/uscode/text/26/174 https://www.law.cornell.edu/uscode/text/26/174
• kazinator 3y ago
  More like: 1,000,000 Revenue - 1,000,000 Salary expense # this does not magically shrink to 200K - 200,000 tax on revenue (random percentage out of a hat) ----------- (200,000) In the red! If paying salaries isn't an expense you can write off, you still have to pay all those salaries, and then pay tax on the money used for those salaries.
  • aarondf 3y ago
    Yeah that would be the cash flow, my example was taxable income. But yes, that's the whole problem!
  • alchemist1e9 3y ago
    I don’t think you understand amortized expense accounting and income tax, you have a line item labeled tax on revenue. What you are showing is cash flow not the income statement and also you don’t understand the tax is based on the income statement and not the salaries being paid or the revenue, but the calculated income for tax purposes. In the 2nd year it will be 2/5ths, $200K, amortized expense of prior year plus current year, assuming same numbers, and by the 5th year would be full amount. Your cash flow is correct and yes it becomes -$200K which is really bad. However I wanted to clarify the mechanics.
    • kazinator 3y ago
      Here in Canada we have similar fractional write-offs called CCA (capital cost allowance). That's for assets though, like a company building, car or equipment. I've written an accounting system before for business activities and successfully used its reports to win a tax dispute. I'm not so interested in the details of this, particularly because it's in another country, but I do understand the implications of suddenly not being able to entirely write off the likely most important and large business expense.
      • alchemist1e9 3y ago
        Ok so you understand but your original comment, before you changed it, talked about a tax on revenue, which isn’t accurate. I also wrote my own accounting systems based on ledger-cli and regularly deal with amortization of assets. The change is extremely bad and I’m not trying to say otherwise. Just wanted to clarify the exact calculation and difference between income statement and cash flow calculation.
• dcchambers 3y ago
  When seeing it written out like this is simple math, this tax change seems absolutely insane. It would mean some (many?) small businesses will face tax bills that are far higher than any actual cash they have on hand. How did anyone ever think this was a good idea?
  • bradlys 3y ago
    It was written to fuck over smaller companies. That was the point of it.
    • dmix 3y ago
      Written by whom? What was the original bill?
      • fragsworth 3y ago
        If it wasn't done by accident, then it was likely lobbied for by bigger tech companies that are already profitable. They stand to benefit the most from this kind of legislation by destroying all the small competition, and by being able to buy them up for cheap.
      • ineptech 3y ago
        Answered upthread: https://news.ycombinator.com/item?id=35615264 https://news.ycombinator.com/item?id=35615264
      • light_hue_1 3y ago
        Republicans. As always they are the enemy. https://www.nytimes.com/2017/12/19/us/politics/tax-bill-vote-congress.html https://www.nytimes.com/2017/12/19/us/politics/tax-bill-vote... "the most sweeping rewrite of the tax code in decades"
    • pjdesno 3y ago
      The amortization change was a deliberate part of the 2017 tax cut. One of the express purposes of the tax changes was to raise taxes on liberals, and I guess they figured that companies that take the R&D credit are run by liberals.
• RC_ITR 3y ago
  This is disingenuous though, because they would also have 4 other years of salaries to amortize. If anything HN should be cheering this law since it incentivizes growing your R&D team quickly and consistently.
  • aarondf 3y ago
    If you make a million and pay a million in salaries, you have no cash left, right? But! You get to pay taxes as if you made 800k in profit. So lucky you, you have zero dollars and now you get to pay 240,000 in tax (800k * 30%) to the government. You're now 240k in the hole. Game over, no year two, three, or four. This doesn't affect venture funded companies as badly because they have millions in funding and they can ride out the amortization. It does, however, affect bootstrappers trying to start a thing. Perhaps you could call them small, indie hackers? If anything, HN should not be cheering this law as it doesn't affect large incumbents and those with millions in VC funding, but crushes the little guys.
    • RC_ITR 3y ago
      We aren’t supposed to ask direct questions on here, but you “get” that a company charges 20% of each of the past 5 years, right? Like, we agree that’s what depreciation/amortization is, right? So this most affects companies that have a relatively large R&D org relative to the past few years (aka my point about growing R&D ahead of other functions).
      • aarondf 3y ago
        I'm a CPA, so I super do get it.
        • RC_ITR 3y ago
          Weird to not include that in the example then. Maybe this will help you. If (as you imply) SW developers are critical to this year’s revenue (vs. building for future years revenue), then why don’t they go in COGS? Seems like an easy way to solve the problem…
• MagicMoonlight 3y ago
  Wages aren’t R&D lmao
  • aarondf 3y ago
    Unfortunately, the Government of the United States disagrees with you.
• mitjam 3y ago
  It can also be positive to amortize r&d and software development costs eg. when you have no revenue this year but expect revenues the following years, you pay less taxes then and overall. In Germany software development and r&d with unknown outcomes cannot be amortized whereas you have the choice with say self developed factory equipment.
  • aarondf 3y ago
    Agreed, options are great! Unfortunately this bill removes all options. Also operating losses can be carried forward and used for 20 years, so recognizing a big loss in a single year isn't really that bad.
• medellin 3y ago
  I was wondering how the end of highly paid engineers like myself would come to an end. Maybe this is it.
• rr808 3y ago
  Realistically though the first year is: 0 Revenue - 1,000,000 Salary expense ----------- - 1,000,000 Profit So doesnt really make much difference
  • aarondf 3y ago
    This has nothing to do with year one though. This is hitting companies that are in year 5, 10, 20, etc. If you were running a small software company that make 2m in revenue and puts 200k to the bottom line, your business no longer works.
• dpifke 3y ago
  Even worse: amortization under § 174 begins at the mid-point in the year in which the expense was incurred, so it's actually 1/10th salary expense in the first year (6/60 months). I have a favor to ask HN: is there anyone going through this that would be willing to share a redacted version of their accounting change statement[0] required to comply with this law by Rev. Proc. 2023-11? It's not at all clear to me (not a CPA or tax lawyer, but normally perfectly capable of doing bookkeeping/accounting for my single-member LLC) how specific "(D) a description of the type of expenditures included as specified research or experimental expenditures" is supposed to be. I filed an extension today because I'm now second-guessing what I wrote; my Google-fu has thus far turned up zero examples of a CPA-blessed version of this statement. (Probably because one of the other statutory requirements is that it includes the taxpayer's identification number.) [0] Rev. Proc 2023-11: https://www.irs.gov/pub/irs-drop/rp-23-11.pdf https://www.irs.gov/pub/irs-drop/rp-23-11.pdf [PDF]
• dataangel 3y ago
  What is the rationale for amortizing R&D expenses in general? Even outside software, what is the motivation for this?
  • dboreham 3y ago
    One reason is that sometimes companies claim money from the government for their R&D spend (some sort of scheme by government to incent R&D spending, presumably). In that event the government wants to prevent companies from gaming the system by simply saying that they spent all their profits each year on R&D. So rules are created that say you have to spread the spend over N years for tax purposes. Same as asset depreciation -- you're generally not allowed to depreciate a large asset in one year.
  • maxerickson 3y ago
    The R&D isn't a pure expense, it typically has a result. Say you spend a million dollars developing a widget and then sell it for 10 years. The money spent in year one results in multiple years of income. I don't have a strong enough understanding of the change to really have an opinion, but that seems to be the clearer description, the R&D spending is being treated as an investment in the business (which it probably is) that results in capital (who knows if that is true).
    • eldavido 3y ago
      As someone who's taken a couple semesters of college-level accounting, and filed my corporate taxes correctly many years without audit (but am not an accountant/CPA), this seems broadly correct. I'm actually surprised people are freaking out about this. Of course software is R&D. And of course you don't just get to expense it all at once. It's long-lived, like you said. Maybe we could have some tax breaks like our friends over in real estate, but I very much think the base assumption should be that software dev is capitalized.
      • crazygringo 3y ago
        I don't know why you're saying "of course you don't" when it's been that way every year until now. People are freaking out because it's a gigantic change that there wasn't any awareness around.
• loandbehold 3y ago
  Do these companies have an option of moving overseas to avoid this?
• brightball 3y ago
  What happens if they pay an 3rd party company?
• foobarbazetc 3y ago
  Also: this specifically singles out software development for ??? reasons. Office Manager: 100% expense. Software Engineer: 20% over 5 years (actually only 10% for the first year). If they’re international then 6.67% over 15 years. Not only that, but the effect “stacks” over the years. So year 1: 1,000,000 - 100,000 ————————- 900,000 Profit Year 2: 1,000,000 - 200,000 - 200,000 - 100,000 ————————- 500,000 Profit Year 3: 1,000,000 - 200,000 - 200,000 - 200,000 ————————- 400,000 Profit Year 4: 1,000,000 - 200,000 - 200,000 - 200,000 - 200,000 ————————- 200,000 Profit Year 5+: 1,000,000 - 200,000 - 200,000 - 200,000 - 200,000 - 200,000 ————————- 0 Profit By the time you get to year 5, you’ve paid tax on $2,000,000 of phantom profits you never had. If you’re a C Corp that’s $420,000 in extra federal taxes (plus whatever state tax). If you’re a smaller company you’re probably a S Corp and federal and state tax could be ~50% passed through to your personal return. How any owner survives that, I’m not sure.
  • jart 3y ago
    That sounds pretty horrible. Am I correct in assuming though that once you get over the five year hump, you're OK? Also wouldn't startups mostly be paying devs out of VC funding rather than revenue the first five years?
    • mwint 3y ago
      Only if you’re not growing.
    • mikeytag 3y ago
      No. If you are growing and increasing expenses you’re always behind. The only case where you get ahead is if you stop growing or shrink.
      • deleted 3y ago
        [deleted]
      • jart 3y ago
        That makes sense, thanks for clarifying. How do you think businesses would react to this? For example, I imagine self-hosted servers would need to be depreciated too, so the tech community invented cloud as the solution. Maybe this policy change will cause tech companies to hire more TVCs rather than FTEs?
• analog31 3y ago
  I appreciate the suddenness of the change, but aside of that, how is this different than amortizing the cost of a million dollars worth of equipment? Couldn't they borrow the money for their taxes against future profits? Thinking about it more, perhaps it's a mistake to assume that the software being written has a service lifespan of five years.
  • techolic 3y ago
    Because you don't stop paying developers starting the second year?
    • analog31 3y ago
      But aren't you deriving value from what they developed in the first year? I mean, maybe that's my mistake. If they spent a million, made a million, and are now back to square one, it would make more sense to not amortize the investment because it's not an investment.
      • Filligree 3y ago
        Yes, but according to this law you're not allowed to do that; you have to amortize it over five years.
        • analog31 3y ago
          That seems to be the rub. It doesn't differentiate between different reasons and business models for writing software: Software as wealth, and software as pure expense. It's also pretty harsh on a business that's just plain unprofitable. The laws should be arranged so that if you start a business and it's a flop, but you have no debts, you can walk away pretty much unscathed.
  • mr_toad 3y ago
    > Couldn't they borrow the money for their taxes against future profits? In theory, but good luck getting a loan secured against IP for a reasonable rate.
• fisherjeff 3y ago
  Also, to be clear, it will eventually stack up and roughly even out as you amortize 1/5 of each of 5 years’ worth of R&D spend per year. Basically the part that sucks is that there was no 4-year phase-in period.
  • TootsMagoon 3y ago
    ^^ This is the core issue.
  • nilsbunger 3y ago
    It doesn't even out if the company keeps growing - if your headcount is growing 50% per year you can have very significant tax drag.
    • fisherjeff 3y ago
      I think you may have that backwards but yes. You are effectively always paying for expenses incurred 2.5 years ago. EDIT: Nevermind, you had it the right way.
• brookmg 3y ago
  Damn, what are they thinking right now?
  • maga_2020 3y ago
    Not an accountant But I think, they are thinking that software devs should be consultants ( unless they are researches doing something very risky, something that may not work (from technical not business sense)) This way, they are an expense to the corporation, and each one of the consultants pay their own income tax. In that way the corporation building software for sale/SaaS is treated the same way that a corporation that's buying and then renting out real-estate, for example.
• prepend 3y ago
  Are software dev salaries treated differently than regular employees. I thought 100% of salary and benefits were deductible against revenue. I’m missing why software salaries are amortized against just straight expenses?
• deleted 3y ago
  [deleted]
• TacticalCoder 3y ago
  > The new law would instead work like this: Forcing sofware dev salaries to be considered R&D then forcing all R&D expenses to be amortized over five years? There's a name for that kind of behavior. It's theft.
• deleted 3y ago
  [deleted]
• jtaft 3y ago
  Salaries aren’t tax deductible normally? That seems wrong.
• ckemere 3y ago
  Just to clarify, if they last 5 years, then eventually it gets back to even by year 5, is that correct? Also, if you classify the employee differently, does that change situation?
  • dkural 3y ago
    Yes, you're correct.
  • 1auralynn 3y ago
    As long as you never grow.
• dcow 3y ago
  IMHO the solution is really more simple than people are making it out to be and it’s weird politics among CPAs causing all the distress. To people wiling to challenge their CPAs style of doing things: don’t classify your core expenses as “research and development”. I believe this follows the letter and spirit of the law. R&D is extra stuff you do on top of an already profitable business. When you’re building a product you’re implementing. It’s entirely a semantic problem that has happened because we call the job function “software development” and the tax code uses “research and development” (a different function) as the language. The CPA thing is caused by there being a central source of “doing things” that all the CPAs follow because they’re not qualified to be a tax lawyer and think for themselves. So everyone is stuck in whatever rut their guild’s status quo tax setup for #startups has caused.
  • nocoiner 3y ago
    You know, this is pretty clearly the right answer. Software developer salaries are ordinary business expenses. There’s some alarming language in the section about deductibility of R&E expenses, but core business functions aren’t R&E. Really perceptive comment.
    • jbverschoor 3y ago
      All sw dev is considered R&E. Soo you have no choice
      • imtringued 3y ago
        That doesn't make sense since there is both greenfield development and maintenance development. By this logic we would have to track our hours and write down when we do maintenance work and when we do R&D.
        • Bjartr 3y ago
          > That doesn't make sense And yet that's the letter of the law. R&D expenses must be amortized over 5 years. Software development must be counted as R&D. There is no consideration in the law as written for categorizing software development differently. That's the reason this whole scenario is a problem in the first place.
• nonethewiser 3y ago
  I think you’re missing a variable here. Corporations == bad
• mohitc 3y ago
  Is this applicable to different titles developing software, such as Member of Technical staff?
• mscuwa 3y ago
  1,000,000 Revenue - 1,000,000 Salary expense ----------- 0 Profit We are talking about an extremely lucky company if it's the first year. How many startups are able to get revenue equal to salary expenses in the first year? While they might exists, it's not very common. For all others and if it's not the first year you already have losses carried forward which will offset those 800,000 (since you didn't amortize them in the previous years, right?), so in your example if it's the first year you get any revenue you would have (years since founding) * $1,000,000 in losses. What do I miss here?
  • ilandsman 3y ago
    Why are you only considering the first year? My company has been around almost 20yrs and is impacted. There's no years since founding in any part of the calculation.
    • mscuwa 3y ago
      If we are considering a stable company the only problem is that you expensed more since 2017 than you would have normally done, i.e. you effectively paid less taxes over 5 years. Now you need to catch up. I admit it's not fun, especially if everybody expects it won't happen, but overall it's the same tax.
      • robocat 3y ago
        Here’s a few thought experiments. 1. Your landlord decides that you needs to pay 5 years rent in advance. Each year you have paid off one year, however you need to pay another year to keep up. When you leave, the landlord will pay you back 1 year rent every year for 4 years. [landlord == government] 2. You develop an exact Facebook clone. The business tanks. How much was the software worth? Facebook’s value is only minimally in the software itself. Facebooks value is mostly in daily user eyeballs and advertising contracts and network effects. 3. You get some VC funding and spend 5 years developing software. You start making a profit, so you can claim the prior losses. However, the losses are not inflation adjusted (nor risk adjusted, nor discount adjusted). Your taxes are not adjusted for inflation, so you earn less than you should fairly. 4. You sell your business. Now you need to decide on the a valuation of the software, since it affects taxable income in the future. Leads to valuation games that have no benefit to anyone. 5. You go bankrupt - software valued at zero. Now do you need to claim those R&E taxes back from the IRS? Does that cause a lump in your personal income that puts you into a higher tax bracket? 6. You spend a year writing v1. Next year you completely rewrite v2 using cleanroom techniques, and deploy it. Do you get to claim 100% depreciation on the now obsolete code? 7. A data analyst writes a one-off query that is never to be used again. Is the time they spent on it R&E?
• g42gregory 3y ago
  This calculation will apply with any level of profitability. The tax simply goes up. My questions is how the large software development companies (Google) are dealign with this? It would be $10s of billions of extra tax for each of them. We didn't hear the outcry. If they were to pay extra $10s of billions, presumably they could get the whole country up in arms quickly. Maybe this relates only to the portion of software development that us declared as an R&D expense? The regular software engineers' salaries would be the cost of goods/services sold?
  • polynox 3y ago
    It’s a cash flow issue, not a tax rate issue.
• tomato_123 3y ago
  Luckily, barely any startups actually have revenue.
  • aarondf 3y ago
    Huh? It's not about startups. It's about small software businesses that were moderately profitable yesterday and are potentially out of business today.
• sheeshkebab 3y ago
  Oh, hiring 1099 consultants now looking rather attractive
• vertis 3y ago
  Not forgetting that the government is ALSO taking money on the other side of the salary as well. I much prefer Estonia's system of taxation. Flat 20% on share dividends. Any money that stays within the business (or gets spent on wages, other expenses) isn't taxed (aside: there are social and income taxes on wages). Coming from Australia's system it's just so simple to be compliant. Feels designed to help businesses grow.
  • robertlagrant 3y ago
    I have been thinking this for a while. Corporation tax creates so much work, and it would be better to tax certain inflows of money. So my salary is taxed; my dividends are taxed; my purchases are taxed with VAT, that sort of thing. Stop making companies employ armies of accountants to figure out all the tax credits/implications/corporate structures etc so the government doesn't take too much.
    • vertis 3y ago
      I pay the Estonian accountant (xolo.io) ~100€ a month and that covers just about everything required to keep the company in good standing. Minor amounts of admin to sign off the annual report (all done with my smart card).
      • robertlagrant 3y ago
        That sounds exactly as it should be. Very neat.
• deleted 3y ago
  [deleted]
• phkahler 3y ago
  Isn't this all referring to the "R&D tax credit"? My understanding of the word 'tax credit" is that any labor that could be classified as R&D would essentially be funded by the government. When this came out I thought "what a scam" because companies were going to develop their next-gen products anyway, but now some of our work could qualify as "R&D" and basically be free to the company. If my interpretation was correct, that would explain why big tech companies pay so many people so well - they weren't actually paying them at all, the government was. Even though I may benefit from that, that's not how I think it should be. OTOH, I'm not a biz guy but I was under the impression that paying employees was an expense anyway and would be deducted from revenue and not taxed. How is R&D different?
  • aarondf 3y ago
    > Isn't this all referring to the "R&D tax credit"? No, it is not.
    • phkahler 3y ago
      >> Congress failed to extend a key tax provision last year allowing companies to fully expense research & development costs in the year incurred, a blow to big corporations that had lobbied for it. OK, so what is it?
      • aarondf 3y ago
        Like the quote above says, it's about expensing costs. It has nothing to do with credits. R&D credits are a thing, but a thing we are not talking about!
  • rbultje 3y ago
    > Isn't this all referring to the "R&D tax credit"? No. The terminology is confusing. Section 174, specifically point 3, classifies software development as R&E as of 2022 and requires amortization over 5-15 years. This prevents software engineering salaries as a standard business tax deduction. This has nothing to do with the R&D tax credit (section 41).
• phkahler 3y ago
  >> 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. So stop claiming software development as R&E and just say they're regular salaried employees. The government never should have been paying them in the first place!
  • aarondf 3y ago
    It's not up to you to categorize them one way or another. This law mandates that they are r&d and thus amortized.
    • phkahler 3y ago
      No, no it doesnt.
      • aarondf 3y ago
        I'm not sure how to convince you other than telling you to read the law (or the article.) That's why everyone is freaking out about this
      • aarondf 3y ago
        > Under new Section 174(c)(3), software development costs are treated as R&E expenditures and must also be capitalized and amortized in accordance with the new rules. 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...