5 ms·

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 cha

by dcow 4y 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 4y 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 4y ago
  All sw dev is considered R&E. Soo you have no choice
  - imtringued 4y 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 4y 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.
    - mjwhansen 4y ago
      You do, if you want to claim the tax credit. But the R&D tax credit and R&E under Section 174 are two completely different things. Until 2022, companies had the choice between expensing and amortizing software development under Section 174. (Section 174 specifically calls out all software development as falling under that section.) So they would only time track when they wanted to get the R&D tax credit, which only covers a portion of software development activities. R&D tax credit software development is a much narrower scope than R&E software development. So it didn't matter until now.
      - fogzen 4y ago
        “In the case of a taxpayer’s specified research or experimental expenditures for any taxable year” … Seems pretty obvious to me that the section only applies to what is claimed as R&E. Software development doesn’t have to be claimed as R&E, but if it is, now it unambiguously qualifies.
        Alacart 4y ago
        Isn't the main problem that this change forces all software development, regardless of purpose, to be classified as R&E and therefore forced to be amortized?
        dcow 4y ago
        No! That’s what confused CPAs are telling gullible startup founders. Nothing forces you to classify engineering salaries or even contract expenses under the provisions of section 174 which describe “research and experimental expenditure”. There are some reasons historically why people elected to do that, but that may be a bad idea moving forward and honestly seems rather dishonest to me. No, your Jira clone is not “research and experimental expenditure”, it’s just a fucking database with a UI… just like 97% of all other startups. It’s more like: if you can use section 174 because you spun up a project to research curing diabetes with nano bots, then your software development allocated towards the project also counts as R&E, cheers. Repeat after me: “my core business is not a research and experimental expenditure, it’s just a normal mundane boring operating expense”.
  - fogzen 4y ago
    I don’t think the law says all software development has to be part of a mandatory R&E credit. It says “For the purposes of this section…”, so it doesn’t apply if you’re not claiming R&E credit.
    - jbverschoor 4y ago
      From https://uscode.house.gov/view.xhtml?req=(title:26%20section:174%20edition:prelim) https://uscode.house.gov/view.xhtml?req=(title:26%20section:... > For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure. Where "this section" is "§174. Amortization of research and experimental expenditures" Tax credit is separate from amortization afaict.
      - dcow 4y ago
        Where does it say that all your business expenditure must be considered R&E and consequently are subject to the provisions of section 174? Yes, if some of your expenditure falls under R&E, then you use section 174 which says any portion thereof involving software development must be amortized. What’s described is a cause and effect relationship, not a global mutation of all expenses.
      - jbverschoor 4y ago
        @dcow > Where does it say that all your business expenditure must be considered R&E and consequently are subject to the provisions of section 174? It doesn't, and neither did I. It states that all software development is seen as R&E > Yes, if some of your expenditure falls under R&E, then you use section 174 which says any portion thereof involving software development must be amortized. > What’s described is a cause and effect relationship, not a global mutation of all expenses. That's not how I interpret it. Section 174 states that all sw dev will fall under R&E. By your logic, you could rule out any "Special rules and definitions" of all sections. Again, it's not about "all expenses". It's about "any amount paid or incurred in connection with the development of any software". Basically payroll, contractors, and even outsourced companies. To prevent massive outsourcing, the amortization rate is 7% (15 years) instead of 20%. Look at it this way: A "machine" must be amortized. In its lifespan it wil generate some sort of income (almost by itself). Software can be seen as a "machine". Makes total sense. Here in NL, if you mine bitcoin. You'll have to pay income tax over it, as it's seen similar as "labor".
  - logifail 4y ago
    > All sw dev is considered R&E In the UK the relevant document is CIRD81900[0] which sets out what conditions must be satisfied to qualify for R&D tax relief. It's lengthy, but worth the read. One section that stands out is: "A process, material, device, product, service or source of knowledge does not become an advance in science or technology simply because science or technology is used in its creation" [0] https://www.gov.uk/hmrc-internal-manuals/corporate-intangibles-research-and-development-manual/cird81900 https://www.gov.uk/hmrc-internal-manuals/corporate-intangibl...
    - jsty 4y ago
      Unsure if you were getting at this too, but software development in the UK can absolutely be ineligible for R&D tax credits yet still require treatment as capital expenditure for tax purposes (and thus not simply fully deductible in year 1 like revenue expenditure) - see [0] from the AAT on this. Disclaimer: Not an accountant, not your accountant, get professional advice. [0] https://www.att.org.uk/tax-treatment-software-and-website-costs https://www.att.org.uk/tax-treatment-software-and-website-co...
      - logifail 4y ago
        > software development in the UK can absolutely be ineligible for R&D tax credits yet still require treatment as capital expenditure for tax purposes Indeed. Although: "If businesses develop their own software, the classification of expenditure relating to this (including salaries of in-house IT staff) should be assessed following the same principles. The fact that expenses such as salaries may be recurring does not on its own prevent them from being capital in nature. However, it should be noted that: The salaries of IT staff will not normally be capital expenditure unless some major new project can be identified. If staff are making only piecemeal changes or minor improvements to software, their salaries are likely to be revenue costs." Yet from the [US-based] contibutions in the thread it sounds as though _all_ in-house software developers' salaries may _have_ to be treated as capital expenditure for tax purposes in the US. This seems, frankly, bonkers. I appreciate that portions of the US tax code might well be exactly that(!)
      - spiralx 4y ago
  - dcow 4y ago
    Stop parroting this nonsense. If you really think gluing a React UI onto MongoDB and then jamming it into an Electron app so that you can charge a subscription for your juice-pulp-bag-squeezing-machine is “research and experimental expenditure” you have either drown yourself so far in Kool-Aid that your skin is blue or you’re certifiably committing tax fraud.
    - jbverschoor 4y ago
      > (3) Software development > For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure. I'm just "parroting" from house.gov
      - dcow 4y ago
        For purposes of this section This section describes how to handle expenses you consider to honestly be research and experimental expenditure. It does not supersede all other sections of the tax code and magically cause all software expenses to get sucked under this section. It simply instructs you how to proceed when evaluating your R&E expenditure, of which software development unambiguously qualifies. Section 174 literally begins with > In General > In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—
        jbverschoor 4y ago
        And this section is "26 USC 174: Amortization of research and experimental expenditures" Why is it so hard to believe? The US has a credit problem. There's a ton of money going to software dev. It gives the government some easy access to capital. It's essentially a loan from tech companies
        dcow 4y ago
        Amortization of research and experimental expenditures applies to research and experimental expenditures. It doesn't apply to the money you spent paying a contractor to hook your PoS and Shopify into Stripe. If you’re researching how to cure brain cancer by experimenting on rats with gene therapy, then yeah, you might consider organizing your expenses under the provisions of section 174. But even then it’s not a requirement.
  - phkahler 4y ago
    >> All sw dev is considered R&E. Soo you have no choice You certainly have a choice to claim it as such or not. More importantly, why TF has the government been paying software engineers salary all these years? That's the real question. Also, has it occurred to anyone that this may be why the big tech companies are laying off engineers in droves?
    - bioemerl 4y ago
      The government has not been paying software engineer salaries in any sense. This is in regards to profit calculation where business typically pays taxes on profits, so a zero profit company whose largest expense is developers gets a "fuck you, go out of business now" tax bill.
      - phkahler 4y ago
        Companies have been getting a handout and are now losing it. I'm not gonna cry.
        bioemerl 4y ago
        Companies have not been getting a hand out. Taxes are always paid on profits and not revenue.
  - caseyohara 4y ago
    This is categorically untrue, many developers are COGS. > The salaries of the team responsible for keeping the production instance of the software up and running should also be included in COGS. All other R&D expenses should not be in COGS. https://www.saas-capital.com/blog-posts/what-should-be-included-in-cogs-for-my-saas-business/ https://www.saas-capital.com/blog-posts/what-should-be-inclu...
    - Bjartr 4y ago
      > 174(c)(3)SoftwareDevelopment > For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure. My understanding is the problem is the phrase "any amount paid or incurred in connection with". It is unambiguous and provides no leeway. Any costs related to software development are R&D. Period.
      - caseyohara 4y ago
        The ambiguous part is "the development of any software". What does "development" mean? Is it used in the same sense as "real estate development" or "software development"? Does "development" include maintenance of existing software? As everyone here knows, software development (the profession and practice) is a lot more than just greenfield projects to create brand new products and IP.
    - dcow 4y ago
      Great source! To add: > Amortized software development costs (we discourage capitalizing these costs in the first place) Emphasis mine. They're saying if you amortize your other software dev as R&E (stuff that isn't ops/infra/etc. and thus considered COGS) then it doesn't count towards your COGS. But then what they're pretty clearly saying in the parenthetical is that they don't recommend doing that in the first place, which implies that you have a choice.
deleted 4y ago
[deleted]
bradleyjg 4y ago
How do you explain the CBO scoring?
spiffytech 4y ago
From the Section 174 text: 26 U.S. Code § 174 - Amortization of research and experimental expenditures (c) Special rules (3) Software development For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure. https://www.law.cornell.edu/uscode/text/26/174 https://www.law.cornell.edu/uscode/text/26/174 To me it doesn't sound like classification is discretionary to me, or that splitting semantic hairs will prove effective (IANAL). (Additionally, the R&E classification is different from R&D)
- dcow 4y ago
  Guys, this entire section is under the ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS section. Taking a deduction is never mandatory (though usually recommended if applicable). Context matters. > In computing taxable income under section 63, there shall be allowed as deductions the items specified in this part, Generally, these sections explaining deductions, including 174, are things you adopt. From the beginning of the section > (a) In general > In the case of a taxpayer’s specified research or experimental expenditures for any taxable year— Everything that follows is subject your specified R&E. Which is all part of the itemized deductions framework which is all completely discretionary. For instance, here’s section 162 > a) In general > There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including— > (1) a reasonable allowance for salaries or other compensation for personal services actually rendered; You are simply carrying on business ordinarily. People don’t operate businesses on R&E expenditure. It’s just not a rational interpretation of the tax code and you don't even need to be a lawyer to read this document or form that conclusion. 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...
  - polynox 4y ago
    Shall means shall, as in it’s mandatory.

by dcow 4y ago

nocoiner 4y 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 4y ago
All sw dev is considered R&E. Soo you have no choice
- imtringued 4y 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 4y 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.
  - mjwhansen 4y ago
    You do, if you want to claim the tax credit. But the R&D tax credit and R&E under Section 174 are two completely different things. Until 2022, companies had the choice between expensing and amortizing software development under Section 174. (Section 174 specifically calls out all software development as falling under that section.) So they would only time track when they wanted to get the R&D tax credit, which only covers a portion of software development activities. R&D tax credit software development is a much narrower scope than R&E software development. So it didn't matter until now.
    - fogzen 4y ago
      “In the case of a taxpayer’s specified research or experimental expenditures for any taxable year” … Seems pretty obvious to me that the section only applies to what is claimed as R&E. Software development doesn’t have to be claimed as R&E, but if it is, now it unambiguously qualifies.
      - Alacart 4y ago
        Isn't the main problem that this change forces all software development, regardless of purpose, to be classified as R&E and therefore forced to be amortized?
        dcow 4y ago
        No! That’s what confused CPAs are telling gullible startup founders. Nothing forces you to classify engineering salaries or even contract expenses under the provisions of section 174 which describe “research and experimental expenditure”. There are some reasons historically why people elected to do that, but that may be a bad idea moving forward and honestly seems rather dishonest to me. No, your Jira clone is not “research and experimental expenditure”, it’s just a fucking database with a UI… just like 97% of all other startups. It’s more like: if you can use section 174 because you spun up a project to research curing diabetes with nano bots, then your software development allocated towards the project also counts as R&E, cheers. Repeat after me: “my core business is not a research and experimental expenditure, it’s just a normal mundane boring operating expense”.
- fogzen 4y ago
  I don’t think the law says all software development has to be part of a mandatory R&E credit. It says “For the purposes of this section…”, so it doesn’t apply if you’re not claiming R&E credit.
  - jbverschoor 4y ago
    From https://uscode.house.gov/view.xhtml?req=(title:26%20section:174%20edition:prelim) https://uscode.house.gov/view.xhtml?req=(title:26%20section:... > For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure. Where "this section" is "§174. Amortization of research and experimental expenditures" Tax credit is separate from amortization afaict.
    - dcow 4y ago
      Where does it say that all your business expenditure must be considered R&E and consequently are subject to the provisions of section 174? Yes, if some of your expenditure falls under R&E, then you use section 174 which says any portion thereof involving software development must be amortized. What’s described is a cause and effect relationship, not a global mutation of all expenses.
    - jbverschoor 4y ago
      @dcow > Where does it say that all your business expenditure must be considered R&E and consequently are subject to the provisions of section 174? It doesn't, and neither did I. It states that all software development is seen as R&E > Yes, if some of your expenditure falls under R&E, then you use section 174 which says any portion thereof involving software development must be amortized. > What’s described is a cause and effect relationship, not a global mutation of all expenses. That's not how I interpret it. Section 174 states that all sw dev will fall under R&E. By your logic, you could rule out any "Special rules and definitions" of all sections. Again, it's not about "all expenses". It's about "any amount paid or incurred in connection with the development of any software". Basically payroll, contractors, and even outsourced companies. To prevent massive outsourcing, the amortization rate is 7% (15 years) instead of 20%. Look at it this way: A "machine" must be amortized. In its lifespan it wil generate some sort of income (almost by itself). Software can be seen as a "machine". Makes total sense. Here in NL, if you mine bitcoin. You'll have to pay income tax over it, as it's seen similar as "labor".
- logifail 4y ago
  > All sw dev is considered R&E In the UK the relevant document is CIRD81900[0] which sets out what conditions must be satisfied to qualify for R&D tax relief. It's lengthy, but worth the read. One section that stands out is: "A process, material, device, product, service or source of knowledge does not become an advance in science or technology simply because science or technology is used in its creation" [0] https://www.gov.uk/hmrc-internal-manuals/corporate-intangibles-research-and-development-manual/cird81900 https://www.gov.uk/hmrc-internal-manuals/corporate-intangibl...
  - jsty 4y ago
    Unsure if you were getting at this too, but software development in the UK can absolutely be ineligible for R&D tax credits yet still require treatment as capital expenditure for tax purposes (and thus not simply fully deductible in year 1 like revenue expenditure) - see [0] from the AAT on this. Disclaimer: Not an accountant, not your accountant, get professional advice. [0] https://www.att.org.uk/tax-treatment-software-and-website-costs https://www.att.org.uk/tax-treatment-software-and-website-co...
    - logifail 4y ago
      > software development in the UK can absolutely be ineligible for R&D tax credits yet still require treatment as capital expenditure for tax purposes Indeed. Although: "If businesses develop their own software, the classification of expenditure relating to this (including salaries of in-house IT staff) should be assessed following the same principles. The fact that expenses such as salaries may be recurring does not on its own prevent them from being capital in nature. However, it should be noted that: The salaries of IT staff will not normally be capital expenditure unless some major new project can be identified. If staff are making only piecemeal changes or minor improvements to software, their salaries are likely to be revenue costs." Yet from the [US-based] contibutions in the thread it sounds as though _all_ in-house software developers' salaries may _have_ to be treated as capital expenditure for tax purposes in the US. This seems, frankly, bonkers. I appreciate that portions of the US tax code might well be exactly that(!)
    - spiralx 4y ago
- dcow 4y ago
  Stop parroting this nonsense. If you really think gluing a React UI onto MongoDB and then jamming it into an Electron app so that you can charge a subscription for your juice-pulp-bag-squeezing-machine is “research and experimental expenditure” you have either drown yourself so far in Kool-Aid that your skin is blue or you’re certifiably committing tax fraud.
  - jbverschoor 4y ago
    > (3) Software development > For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure. I'm just "parroting" from house.gov
    - dcow 4y ago
      For purposes of this section This section describes how to handle expenses you consider to honestly be research and experimental expenditure. It does not supersede all other sections of the tax code and magically cause all software expenses to get sucked under this section. It simply instructs you how to proceed when evaluating your R&E expenditure, of which software development unambiguously qualifies. Section 174 literally begins with > In General > In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—
      - jbverschoor 4y ago
        And this section is "26 USC 174: Amortization of research and experimental expenditures" Why is it so hard to believe? The US has a credit problem. There's a ton of money going to software dev. It gives the government some easy access to capital. It's essentially a loan from tech companies
        dcow 4y ago
        Amortization of research and experimental expenditures applies to research and experimental expenditures. It doesn't apply to the money you spent paying a contractor to hook your PoS and Shopify into Stripe. If you’re researching how to cure brain cancer by experimenting on rats with gene therapy, then yeah, you might consider organizing your expenses under the provisions of section 174. But even then it’s not a requirement.
- phkahler 4y ago
  >> All sw dev is considered R&E. Soo you have no choice You certainly have a choice to claim it as such or not. More importantly, why TF has the government been paying software engineers salary all these years? That's the real question. Also, has it occurred to anyone that this may be why the big tech companies are laying off engineers in droves?
  - bioemerl 4y ago
    The government has not been paying software engineer salaries in any sense. This is in regards to profit calculation where business typically pays taxes on profits, so a zero profit company whose largest expense is developers gets a "fuck you, go out of business now" tax bill.
    - phkahler 4y ago
      Companies have been getting a handout and are now losing it. I'm not gonna cry.
      - bioemerl 4y ago
        Companies have not been getting a hand out. Taxes are always paid on profits and not revenue.
- caseyohara 4y ago
  This is categorically untrue, many developers are COGS. > The salaries of the team responsible for keeping the production instance of the software up and running should also be included in COGS. All other R&D expenses should not be in COGS. https://www.saas-capital.com/blog-posts/what-should-be-included-in-cogs-for-my-saas-business/ https://www.saas-capital.com/blog-posts/what-should-be-inclu...
  - Bjartr 4y ago
    > 174(c)(3)SoftwareDevelopment > For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure. My understanding is the problem is the phrase "any amount paid or incurred in connection with". It is unambiguous and provides no leeway. Any costs related to software development are R&D. Period.
    - caseyohara 4y ago
      The ambiguous part is "the development of any software". What does "development" mean? Is it used in the same sense as "real estate development" or "software development"? Does "development" include maintenance of existing software? As everyone here knows, software development (the profession and practice) is a lot more than just greenfield projects to create brand new products and IP.
  - dcow 4y ago
    Great source! To add: > Amortized software development costs (we discourage capitalizing these costs in the first place) Emphasis mine. They're saying if you amortize your other software dev as R&E (stuff that isn't ops/infra/etc. and thus considered COGS) then it doesn't count towards your COGS. But then what they're pretty clearly saying in the parenthetical is that they don't recommend doing that in the first place, which implies that you have a choice.

deleted 4y ago

[deleted]

bradleyjg 4y ago

How do you explain the CBO scoring?

spiffytech 4y ago

From the Section 174 text: 26 U.S. Code § 174 - Amortization of research and experimental expenditures (c) Special rules (3) Software development For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure. https://www.law.cornell.edu/uscode/text/26/174 https://www.law.cornell.edu/uscode/text/26/174 To me it doesn't sound like classification is discretionary to me, or that splitting semantic hairs will prove effective (IANAL). (Additionally, the R&E classification is different from R&D)

dcow 4y ago
Guys, this entire section is under the ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS section. Taking a deduction is never mandatory (though usually recommended if applicable). Context matters. > In computing taxable income under section 63, there shall be allowed as deductions the items specified in this part, Generally, these sections explaining deductions, including 174, are things you adopt. From the beginning of the section > (a) In general > In the case of a taxpayer’s specified research or experimental expenditures for any taxable year— Everything that follows is subject your specified R&E. Which is all part of the itemized deductions framework which is all completely discretionary. For instance, here’s section 162 > a) In general > There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including— > (1) a reasonable allowance for salaries or other compensation for personal services actually rendered; You are simply carrying on business ordinarily. People don’t operate businesses on R&E expenditure. It’s just not a rational interpretation of the tax code and you don't even need to be a lawyer to read this document or form that conclusion. 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...
- polynox 4y ago
  Shall means shall, as in it’s mandatory.