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New tax rule is terrible for software industry
- syndicatedjelly 3y agoChanging R&D expensing rules so software development must be capitalized rather than expensed is disastrous for the SaaS industry. Seriously? Playing by the rules that every business has to play by will be “disastrous” for the SaaS industry? Then so be it. Maybe this will cull some crappy unicorns that do nothing but lose money for years on end. It might be healthy for companies to buckle down and create value again.
- 15457345234 3y ago> Playing by the rules that every business has to play by The rules that 'every business has to play by' are that salaries, pretty much regardless of department and role, are an expense. Rewriting the rules such that 'programmer salaries can't be treated like salaries' is very very weird - in fact singling out any form of regular salary payment to non-stakeholders/c-suite for special tax treatment is incredibly weird. Seems very directed.
- galaxyLogic 3y agoGood point. Aren't all salaries expenses?
- 15457345234 3y agoI don't know of a system anywhere in the world that requires salaries to be considered as anything other than an expense. Amortization/capitalision has always been strictly for purchases of hardware etc. It's hard to overstate how weird a change this is. This is going to make many many many software development businesses simply non-viable overnight. Also it creates an odd level of complexity - how do you consider the salary of a programmer who's also a sysadmin? How are DevOps salaries treated? Do all roles have to be strictly defined as 'development' or 'operations'? Can 'new product' developers do bugfixes? If you hire a guy purely to fix bugs do you have to prove that's their role? It's incredibly strange.
- jncfhnb 3y agoThat is strictly not true. You would absolutely capitalize the salaries of those building capital assets.
- galaxyLogic 3y agoIt maybe be easier to understand this viewpoint if we consider that instead of paying a salary to developers, the company could pay an independent contractor to develop a software application. Clearly payments to the outside contractor would not be expenses needed to run the company, but rather a purchase of an asset. But using inhouse employees instead wouldn't really materially change what the money is spent on. I guess the situation is the same when a company uses its employees to build a house, instead of buying one. So that is the reasoning behind the law I guess but I still don't think it is a good idea. Research and Development is something the government would be wise to promote and support.
- 15457345234 3y ago> I still don't think it is a good idea It's not a good idea because it's not how things are done in literally any other country that develops software. This makes all US development shops immediately 1/5th as profitable (on the books) as non-US shops. Yes, they catch up after 5 years, if they're still in business. I'm not sure that I'm overstating it but this law change will, I think, effectively eliminate onshore software development as a profitable activity. It's very strange that this hasn't been checked back given the size of the sector. I don't normally believe stories about US government dysfunction - which seems mostly like a dog and pony show - but for something like this not to have been rectified is a bit odd.
- jncfhnb 3y agoUS dev shops are immensely more profitable than anything else. It’s not about where the devs are, it’s whether you’re a U.S. company. So that’s all moot.
- 3y ago
- recursivecaveat 3y agoNot all. For example if you hire someone and over 2 years they work on constructing a factory for you, you would capitalize their salary with the capital asset ie the factory.
- hodgesrm 3y agoNot if it’s software development. That’s now considered r&d and is deducted over 5 years or 15 if it takes place overseas.
- galaxyLogic 3y agoI think a lot of other industries get tax-breaks for R&D. Example: https://www.imf.org/en/Blogs/Articles/2023/08/24/fossil-fuel-subsidies-surged-to-record-7-trillion https://www.imf.org/en/Blogs/Articles/2023/08/24/fossil-fuel...
- jncfhnb 3y agoFossil fuel subsidies is completely irrelevant to capitalizing certain costs
- fsmv 3y agoDon't they pay the same total taxes over 5 years just spread out more? They still eventually get the full deduction.
- galaxyLogic 3y agoI think they do, but the point is start-ups can't afford to wait 5 years. Big companies can. Maybe they lobbied for this law.
- 15457345234 3y agoI very much doubt that big tech companies lobbied for this law, they seem to survive on buying up small companies. This is going to eliminate those small companies.
- gizmo686 3y agoThe point of buying up small companies is to avoid them growing into competition. If there are fewer startups around, the price of buying your way into maintaining incumbency decreases.
- jokethrowaway 3y agoIt's not like we'll ever find out. And it's weird how these little accidents keep happening in favour of big companies. Making it harder for new competitors AND depressing tech salaries? Sure Likewise EU vatmoss didn't add so much crap on small sellers that they all moved on amazon.
- imtringued 3y agoYou can buy the startups after year one or two when they realize they make money but can't borrow money to pay their taxes.
- nradov 3y agoThis law is a problem and should be fixed, but even if the law takes effect as written most start-ups will still be unprofitable and thus still won't pay income tax.
- Justin_K 3y agoI have a perfect example as to why these rules are unfair. I work in the healthcare industry and a lot of the r&d is because it has to keep up with new regulations set out every year. So the government is forcing expenses on us.... And then making us wait to deduct.
- jncfhnb 3y agoMaking you build an asset and treat it as an asset from a tax perspective. Sounds like you’re really complaining that you have to deal with regulation in the healthcare industry. Your post has nothing of merit about why it’s not right to treat it as a capital asset. You’re just whining that it’s worse than the status quo you had before.
- november84 3y agoYou're right, and this can be depreciated over it's useful life. Not all r&d leads to something viable. So I'm guessing we'll see more of these capital assets being recorded as losses to reduce tax liability.
- peteradio 3y agoI'm gonna bet that there is very little discovery in your work and you are essentially translating spec into code. Now your process for doing this is undoubtedly bloated and slow as shit (you said its healthcare right?) but that doesn't make it r&d.
- rkagerer 3y agoThat legislation is just plain stupid. Article links to a letter that had a deadline back in Oct. Are there any subsequent efforts to rally reform?
- js2 3y agoPrevious discussions: Software firms across US facing tax bills that threaten survival (cnbc.com) 924 points by mjwhansen 8 months ago | 995 comments https://news.ycombinator.com/item?id=35614313 https://news.ycombinator.com/item?id=35614313 Tell HN: Submit comments to IRS re tax treatment of software dev expenses 461 points by mNovak 41 days ago | 229 comments https://news.ycombinator.com/item?id=38120388 https://news.ycombinator.com/item?id=38120388
- anon373839 3y agoThis change has been discussed as an unfortunate legislative oversight, something that both parties want to fix but, by gosh, Congress just can’t seem to figure out how to get it on their busy agenda. However, from my perspective, I see this as a clever way to depress developer salaries which have risen in recent years. This tax change makes small companies and startups much less viable, so there will be fewer places for developers to work. As others have noted, it will also alleviate competitive pressure faced by the entrenched players. Given these lobbyist-friendly “side effects”, I wonder if we will ever see this trash taken out.
- november84 3y agoI'm begging to feel like the only way that'll ever have a chance to happen is if the show Designated Survivor becomes reality. Obviously many of the trash will be replaced by more trash but perhaps not all of it.
- ryanwaggoner 3y agoI’ve been watching this story for a year+, and I fully agree with the outrage, but I haven’t heard of any startups that went under because of this. I wonder if everyone is just blowing it off or classifying those expenses as something other than R&D and just hoping they can defend in the case of an audit? Where are all the horror stories from the effects of this law?
- mediumsmart 3y agoWhat is the ratio of useless startups that would fold under the old tax law? Will this bring the number down / make them nonstarters?
- jncfhnb 3y agoThis issue brings forth a wave of angry software devs that don’t know anything about taxes asserting that this is unprecedented and crazy. But at the end of the day, building software, ESPECIALLY for a novel startup, is building an asset. There might be some argument that there’s regular maintenance to be considered but generally speaking you are “building”. And that means it’s a capitalized cost. “It’s bad for me startup” is such a weak argument…
- jopsen 3y agoHonestly, I'd consider software more of a liability than an asset :) But how frequently does your code live a long an happy life? Some does, but much software has short lifespan.
- jncfhnb 3y agoI know it’s a joke but that’s not how it works. Liabilities are strictly debts to other people.
- ilyagr 3y agoCould you explain this in more detail? What is a capitalized cost? What is the logic in taxing this kind of cost more than others, or spreading the tax break over more years? I have some guesses, but I don't understand the basic philosophy of what should be a tax on the business, what should be a tax on the business owners (when their property becomes more valuable, e.g. capital gains tax), and what should be a tax on the employees' salaries (I guess this part is analogous to a sales tax on products the business buys).
- deleted 3y ago[deleted]
- jncfhnb 3y agoThe basic idea behind accounting is recognizing when value comes in and out. E.g. if you get $100M up front to do work over 10 years, you don’t get $100M in revenue and nothing over the next 9 years. You spread the 100 over 10 years. Even if the cash comes in immediately. Capitalizing a cost means you’re saying this is a cost that is needed to build an asset that will provide value over time. If you build a factory or an app that is expected to help generate revenue over the next ten years then its dev costs should be allocated over the next ten years. Companies want to say all of the cost belongs in year 1 so that they can avoid paying any taxes in year 1. It is not taxed “more”. Capital gains tax is a separate thing not relevant to what’s being discussed. The salaries are not being taxed either (payroll tax is a separate idea here too). The question is which years should the salaries applied against revenue.
- olliej 3y agoI'm still unclear on this: how is R&D not being an expense impacting the costs of a business? Paying employees is a taxable expense. Buying supplies is a taxable expense. Paying rent on office space is a taxable expense. Seriously, what is the R&D cost that is no longer being treated as a taxable expense?
- gizmo 3y agoYou can still pay employees to write software and treat it as a regular expense. But if you want preferable treatment for R&D expenses now you need to amortize over 5 years. That’s all.
- olliej 3y agoThe problem is that I don't understand what the preference is. If your employee has a salary of $X, then the taxable expense should only be $X, it does not matter what the employee is doing. So I don't understand what the benefit of classifying an employee's salary as being R&D was prior to this rule change. That's the whole point of my question. As far as I can tell, every actual expense is tax deductible, which (from the complaints) implies that either there's an expense I'm not aware of that is no longer deductible (which seems bad), that the R&D classification allowed you to move when you claimed the expenses regardless of when they were actually incurred, or that R&D was used to classify non-expenses as if they were expenses. Only the first option seems reasonable to complain about, the 2nd seems of limited use (based on the complaints being made), and if it's the last option I would think everyone would support the rule change as the last option is imo fraud. From the way people are complaining I'm assuming that it's not the last option, but I do not understand what the issue is here, because I don't understand what this mysterious "R&D" expense is, if not salaries, consumables, and equipment depreciation. Which are all taxable expenses.
- youngtaff 3y agoCapitalising software development costs is ‘stealing from the future’… I’ve work at senior levels in several companies that have done it and in each case it’s led to under over reporting of profits and reporting of costs The temptation is capitalise as much as possible because it makes the profits look more, costs look less