5 ms·

IRS tax code change in Section 174: R&D is an expense

43 points by IndoCanada 3y ago

some_random 3y ago
I'm surprised by how little discussion there's been of this seeing as it, at least to me, is just objectively a bad thing for the nation.
- the-rc 3y ago
  It's not bad for the entire nation, though, right? Wasn't the change made to compensate for the Trump tax cuts? Someone somewhere else did benefit, mainly the top bracket, especially folks in states not really affected by SALT, and some in the bottom brackets (due to a higher standard deduction). Unless I'm misremembering or missing something. Another change in recent years that mostly affected some tech companies was making free employee meals taxable.
  - some_random 3y ago
    They're not really increasing tax over the long term, because you can amortize the salary over 5 years. However, it still burdens any companies that want to do R&D and software dev work here in the US which encourages them to relocate.
    - imtringued 3y ago
      It burdens companies that want to grow and aren't big enough to borrow money at low interest. This is basically an attempt at increasing the incentives for monopoly formation. If you are big enough you can shrug it off and even buy a tax distressed company at a discount.
- gamblor956 3y ago
  It got a lot of discussion last year, and when the law was originally passed. By now, it's old news for both the tax and tech communities.
  - lesuorac 3y ago
    https://news.ycombinator.com/item?id=38120388 https://news.ycombinator.com/item?id=38120388 https://news.ycombinator.com/item?id=35614313 https://news.ycombinator.com/item?id=35614313 I thought there were a few large threads but could only find these :/
mensetmanusman 3y ago
data is an expense then, with this logic...
JumpCrisscross 3y ago
This tweet is wrong. You can still deduct R&D, you just have to amortize "R&D costs over five years, instead of deducting them immediately each year" [1][2]. It's a reduction of the deduction's benefit, not an elimination. And it happened last year. [1] https://taxfoundation.org/research/all/federal/research-development-expensing-tcja/ https://taxfoundation.org/research/all/federal/research-deve... [2] https://www.irs.gov/pub/irs-drop/rp-23-11.pdf https://www.irs.gov/pub/irs-drop/rp-23-11.pdf
- deleted 3y ago
  [deleted]
- ash 3y ago
  The author does cover this point, further in the thread. > An example: > A company has $1.2M in revenue; and $1M in costs (let's assume all costs are employing devs fulltime). > Before 2022: the profit of the company is $200K. Pays corporate tax on this. > In 2022: the profit of the company is $1M (of the $1M in salaries paid for devs, this needs to be amortized over 5 years: so $200K can be amortized for the year). Need to pay corproate tax on this. But the business might not have this much cash on hand, and so needs to borrow at a high interest rate. MASSIVE change! > ... and so now companies are incentivized to have as little R&D expenses as possible (aka fire fulltime devs doing R&D, unless they can front the 5-year spread). https://twitter.com/GergelyOrosz/status/1735037956438523984 https://twitter.com/GergelyOrosz/status/1735037956438523984
  - halJordan 3y ago
    Except companies are not "incentivized to have as little R&D expenses as possible (aka fire fulltime devs doing R&D)" Anytime you see such categorical claims you're being manipulated by the author. As an aside, people here go crazy over calling out logical fallacies but seemingly fail to recognize actual rhetorical persuasion.
    - ash 3y ago
      What is the logical fallacy here?
darth_avocado 3y ago
> A company has $1.2M in revenue; and $1M in costs (let's assume all costs are employing devs fulltime). > Before 2022: the profit of the company is $200K. Pays corporate tax on this. > In 2022: the profit of the company is $1M (of the $1M in salaries paid for devs, this needs to be amortized over 5 years: so $200K can be amortized for the year). Need to pay corproate tax on this. But the business might not have this much cash on hand, and so needs to borrow at a high interest rate. Can someone ELI5? If the salaries are $1M, how can you consider profit to be anything but $200k? How does the profit become $1M?
- some_random 3y ago
  That's the change, salaries can no longer be counted against revenue in the same year and has to be amortized. For tax purposes, you now have a profit of $1M (1.2M of revenue - (1M of salary * 0.2)). This makes sense for assets right, if you buy an excavator worth $1M you shouldn't be allowed to count that all against your profit because you still have ~$1M worth of excavator you could sell or something, but it doesn't make sense when applied to salaries. EDIT: It's actually a little worse than this, you can only amortize 10% on the first year
- lesuorac 3y ago
  I mean you might considered a loaded gun to be a gun with bullets in it but by most laws if you hold the bullets in the left hand and the gun in the right hand that's a loaded gun. The law needent be consistent with common understanding. So, in lets say 2023 your business brings in $1.2M of revenue from a pure-software product. Your net cashflow is $0.2M because you paid $1M to the dev team. Come tax time you have to report a revenue of $1.2M and the maximum allowed expenses are $0.2M so you have to pay taxes on that $1M of profit. The reason the maximum allow expenses are $0.2M is because Software is considered R&D now so the expenses towards it (the $1M in salary) _must_ be amortized over 5 years. So if next year you also had $1.2M of revenue and $1M of salaries you'd be paying profit on $1.2 - 2 * ($0.2M) since there's two years of salaries be amortized now.
  - darth_avocado 3y ago
    Well that’s stupid. Shouldn’t eng salaries be part of opex?
Projectiboga 3y ago
There is more pain to come, the 2017 tax giveaway to the most wealthy has a bunch of pain for everyone else. 23 & 25 both have temporary adjustments to middle class taxes get reduced, which will increase taxes. And that big standard deduction goes away in 2027, but the LLC and partnership pass through tax cuts and the huge cut to the top income tax bracket are permanent. Those don't revert until repealed.
caeril 3y ago
If you're a software/sass company, how exactly do you categorize developer salaries anyway? Your product is software, so that could be viewed as COGS. On the other hand, it could also be R&D.
- chii 3y ago
  > Your product is software, so that could be viewed as COGS the production of the software could be either the copying of the bits, rather than the writing of the code. For example, in the case of the novelist, is the cost of sale of a book the cost of printing and distribution? the writing of the book is not a COGS cost.
- MattRix 3y ago
  This law has a specific provision (and the IRS issued even more guidance confirming it) defining that all expenses related to software development are covered by section 174 and count as R&D. This includes labor costs for not just the developers themselves, but also anyone managing or supervising them, as well as any related benefits or costs of materials and supplies.
maf2020 3y ago
Unbelievable! Ten months have passed and the uninformed and clueless are still in denial. Let me spell it out for you - do you remember what the COVID shutdowns did to main street businesses like retail and restaurants? If this cluster-fck of tax legislation isn’t withdrawn or reformed the same fate is awaiting tech startups, generally, and software startups specifically! UNDERSTAND!!!

43 points by IndoCanada 3y ago

I'm surprised by how little discussion there's been of this seeing as it, at least to me, is just objectively a bad thing for the nation.

the-rc 3y ago
It's not bad for the entire nation, though, right? Wasn't the change made to compensate for the Trump tax cuts? Someone somewhere else did benefit, mainly the top bracket, especially folks in states not really affected by SALT, and some in the bottom brackets (due to a higher standard deduction). Unless I'm misremembering or missing something. Another change in recent years that mostly affected some tech companies was making free employee meals taxable.
- some_random 3y ago
  They're not really increasing tax over the long term, because you can amortize the salary over 5 years. However, it still burdens any companies that want to do R&D and software dev work here in the US which encourages them to relocate.
  - imtringued 3y ago
    It burdens companies that want to grow and aren't big enough to borrow money at low interest. This is basically an attempt at increasing the incentives for monopoly formation. If you are big enough you can shrug it off and even buy a tax distressed company at a discount.
gamblor956 3y ago
It got a lot of discussion last year, and when the law was originally passed. By now, it's old news for both the tax and tech communities.
- lesuorac 3y ago
  https://news.ycombinator.com/item?id=38120388 https://news.ycombinator.com/item?id=38120388 https://news.ycombinator.com/item?id=35614313 https://news.ycombinator.com/item?id=35614313 I thought there were a few large threads but could only find these :/

mensetmanusman 3y ago

data is an expense then, with this logic...

JumpCrisscross 3y ago

This tweet is wrong. You can still deduct R&D, you just have to amortize "R&D costs over five years, instead of deducting them immediately each year" [1][2]. It's a reduction of the deduction's benefit, not an elimination. And it happened last year. [1] https://taxfoundation.org/research/all/federal/research-development-expensing-tcja/ https://taxfoundation.org/research/all/federal/research-deve... [2] https://www.irs.gov/pub/irs-drop/rp-23-11.pdf https://www.irs.gov/pub/irs-drop/rp-23-11.pdf

deleted 3y ago
[deleted]
ash 3y ago
The author does cover this point, further in the thread. > An example: > A company has $1.2M in revenue; and $1M in costs (let's assume all costs are employing devs fulltime). > Before 2022: the profit of the company is $200K. Pays corporate tax on this. > In 2022: the profit of the company is $1M (of the $1M in salaries paid for devs, this needs to be amortized over 5 years: so $200K can be amortized for the year). Need to pay corproate tax on this. But the business might not have this much cash on hand, and so needs to borrow at a high interest rate. MASSIVE change! > ... and so now companies are incentivized to have as little R&D expenses as possible (aka fire fulltime devs doing R&D, unless they can front the 5-year spread). https://twitter.com/GergelyOrosz/status/1735037956438523984 https://twitter.com/GergelyOrosz/status/1735037956438523984
- halJordan 3y ago
  Except companies are not "incentivized to have as little R&D expenses as possible (aka fire fulltime devs doing R&D)" Anytime you see such categorical claims you're being manipulated by the author. As an aside, people here go crazy over calling out logical fallacies but seemingly fail to recognize actual rhetorical persuasion.
  - ash 3y ago
    What is the logical fallacy here?

darth_avocado 3y ago

> A company has $1.2M in revenue; and $1M in costs (let's assume all costs are employing devs fulltime). > Before 2022: the profit of the company is $200K. Pays corporate tax on this. > In 2022: the profit of the company is $1M (of the $1M in salaries paid for devs, this needs to be amortized over 5 years: so $200K can be amortized for the year). Need to pay corproate tax on this. But the business might not have this much cash on hand, and so needs to borrow at a high interest rate. Can someone ELI5? If the salaries are $1M, how can you consider profit to be anything but $200k? How does the profit become $1M?

some_random 3y ago
That's the change, salaries can no longer be counted against revenue in the same year and has to be amortized. For tax purposes, you now have a profit of $1M (1.2M of revenue - (1M of salary * 0.2)). This makes sense for assets right, if you buy an excavator worth $1M you shouldn't be allowed to count that all against your profit because you still have ~$1M worth of excavator you could sell or something, but it doesn't make sense when applied to salaries. EDIT: It's actually a little worse than this, you can only amortize 10% on the first year
lesuorac 3y ago
I mean you might considered a loaded gun to be a gun with bullets in it but by most laws if you hold the bullets in the left hand and the gun in the right hand that's a loaded gun. The law needent be consistent with common understanding. So, in lets say 2023 your business brings in $1.2M of revenue from a pure-software product. Your net cashflow is $0.2M because you paid $1M to the dev team. Come tax time you have to report a revenue of $1.2M and the maximum allowed expenses are $0.2M so you have to pay taxes on that $1M of profit. The reason the maximum allow expenses are $0.2M is because Software is considered R&D now so the expenses towards it (the $1M in salary) _must_ be amortized over 5 years. So if next year you also had $1.2M of revenue and $1M of salaries you'd be paying profit on $1.2 - 2 * ($0.2M) since there's two years of salaries be amortized now.
- darth_avocado 3y ago
  Well that’s stupid. Shouldn’t eng salaries be part of opex?

Projectiboga 3y ago

There is more pain to come, the 2017 tax giveaway to the most wealthy has a bunch of pain for everyone else. 23 & 25 both have temporary adjustments to middle class taxes get reduced, which will increase taxes. And that big standard deduction goes away in 2027, but the LLC and partnership pass through tax cuts and the huge cut to the top income tax bracket are permanent. Those don't revert until repealed.

caeril 3y ago

If you're a software/sass company, how exactly do you categorize developer salaries anyway? Your product is software, so that could be viewed as COGS. On the other hand, it could also be R&D.

chii 3y ago
> Your product is software, so that could be viewed as COGS the production of the software could be either the copying of the bits, rather than the writing of the code. For example, in the case of the novelist, is the cost of sale of a book the cost of printing and distribution? the writing of the book is not a COGS cost.
MattRix 3y ago
This law has a specific provision (and the IRS issued even more guidance confirming it) defining that all expenses related to software development are covered by section 174 and count as R&D. This includes labor costs for not just the developers themselves, but also anyone managing or supervising them, as well as any related benefits or costs of materials and supplies.

maf2020 3y ago

Unbelievable! Ten months have passed and the uninformed and clueless are still in denial. Let me spell it out for you - do you remember what the COVID shutdowns did to main street businesses like retail and restaurants? If this cluster-fck of tax legislation isn’t withdrawn or reformed the same fate is awaiting tech startups, generally, and software startups specifically! UNDERSTAND!!!