5 ms·

Don't they pay the same total taxes over 5 years just spread out more? They still eventually get the full deduction.

by fsmv 3y ago

galaxyLogic 3y ago
I 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 ago
  I 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 ago
    The 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 ago
    It'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 ago
    You 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 ago
  This 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.
  - hodgesrm 3y ago
    Unfortunately it’s not that simple. You can’t deduct software dev (aka r&d per section 174) as an operating expense. Instead the expense is capitalized over 5 years. The effect is to make software companies look a lot more profitable than they actually are according to normal accounting standards. It hits bootstrapped companies particularly hard. Matters are of course more complicated than this because nothing in the IRS code is really simple at least as far as corporate taxes are concerned. It’s an incredibly stupid law.
    - jncfhnb 3y ago
      They generally are more profitable though. The dev costs are tangential to the revenue and expenses. If you spend $100 building your app and earn $100 that year, you can still sell the app next year. Perhaps you still need some dev work to maintain it. But it’s misleading to suggest you earned 0 profit. That dev effort is going to apply its value to the company over time.
      - jopsen 3y ago
        If the app / software still has value next year. The counter argument is that lots of software is short lived. Without someone maintaining it, software is often worthless.
        jncfhnb 3y ago
        The fact that something needs to be maintained is not evidence that it’s not an asset. Perhaps the maintenance should be expensed. But people are kidding themselves if they think the majority of development is not making something that will be useful for longer than the immediate year. What does your company do? Oh we make X. Well developing X is building an asset.
      - hodgesrm 3y ago
        > But it’s misleading to suggest you earned 0 profit. That dev effort is going to apply its value to the company over time. I would be with you except that Section 174 just says the following: [0[ .03 Activities that are treated as software development. Activities that are treated as software development for purposes of § 174 generally include but are not limited to: (1) Planning the development of the computer software (or the upgrades and enhancements to such software), including identification and documentation of the software requirements; (2) Designing the computer software (or the upgrades and enhancements to such software); (3) Building a model of the computer software (or the upgrades and enhancements to such software); (4) Writing source code and converting it to machine-readable code; (5) Testing the computer software (or the upgrades and enhancements to such software) and making necessary modifications to address defects identified during testing, but only up until the point in time that: (a) In the case of computer software developed for use by the taxpayer in its trade or business, the computer software is placed in service; and (b) In the case of computer software developed for sale or licensing to others, technological feasibility has been established, product masters(s) have been produced, and the computer software is ready for sale or licensing to others; and (6) In the case of computer software developed for sale or licensing to others (or the upgrades and enhancements to such software), production of the product master(s). It makes sense to think of some degree of capitalization for software development but this definition is not defensible for anyone who has the least understanding of how software businesses (including SaaS) actually work. It sounds like it was written in the 1970s. [0] https://www.irs.gov/pub/irs-drop/n-23-63.pdf https://www.irs.gov/pub/irs-drop/n-23-63.pdf

Don't they pay the same total taxes over 5 years just spread out more? They still eventually get the full deduction.

by fsmv 3y ago

Don't they pay the same total taxes over 5 years just spread out more? They still eventually get the full deduction.

I 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 ago
I 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 ago
  The 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 ago
  It'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 ago
  You 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 ago
This 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.
- hodgesrm 3y ago
  Unfortunately it’s not that simple. You can’t deduct software dev (aka r&d per section 174) as an operating expense. Instead the expense is capitalized over 5 years. The effect is to make software companies look a lot more profitable than they actually are according to normal accounting standards. It hits bootstrapped companies particularly hard. Matters are of course more complicated than this because nothing in the IRS code is really simple at least as far as corporate taxes are concerned. It’s an incredibly stupid law.
  - jncfhnb 3y ago
    They generally are more profitable though. The dev costs are tangential to the revenue and expenses. If you spend $100 building your app and earn $100 that year, you can still sell the app next year. Perhaps you still need some dev work to maintain it. But it’s misleading to suggest you earned 0 profit. That dev effort is going to apply its value to the company over time.
    - jopsen 3y ago
      If the app / software still has value next year. The counter argument is that lots of software is short lived. Without someone maintaining it, software is often worthless.
      - jncfhnb 3y ago
        The fact that something needs to be maintained is not evidence that it’s not an asset. Perhaps the maintenance should be expensed. But people are kidding themselves if they think the majority of development is not making something that will be useful for longer than the immediate year. What does your company do? Oh we make X. Well developing X is building an asset.
    - hodgesrm 3y ago
      > But it’s misleading to suggest you earned 0 profit. That dev effort is going to apply its value to the company over time. I would be with you except that Section 174 just says the following: [0[ .03 Activities that are treated as software development. Activities that are treated as software development for purposes of § 174 generally include but are not limited to: (1) Planning the development of the computer software (or the upgrades and enhancements to such software), including identification and documentation of the software requirements; (2) Designing the computer software (or the upgrades and enhancements to such software); (3) Building a model of the computer software (or the upgrades and enhancements to such software); (4) Writing source code and converting it to machine-readable code; (5) Testing the computer software (or the upgrades and enhancements to such software) and making necessary modifications to address defects identified during testing, but only up until the point in time that: (a) In the case of computer software developed for use by the taxpayer in its trade or business, the computer software is placed in service; and (b) In the case of computer software developed for sale or licensing to others, technological feasibility has been established, product masters(s) have been produced, and the computer software is ready for sale or licensing to others; and (6) In the case of computer software developed for sale or licensing to others (or the upgrades and enhancements to such software), production of the product master(s). It makes sense to think of some degree of capitalization for software development but this definition is not defensible for anyone who has the least understanding of how software businesses (including SaaS) actually work. It sounds like it was written in the 1970s. [0] https://www.irs.gov/pub/irs-drop/n-23-63.pdf https://www.irs.gov/pub/irs-drop/n-23-63.pdf