5 ms·

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 y

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
  - jncfhnb 3y ago
    What is missing from this definition? The possibility of delivering it via an API? what is meaningfully wrong?
    - gopher_space 3y ago
      Continuous Integration as legal fiction?
      - jncfhnb 3y ago
        Ok but why is that relevant? Does that actually change anything about the actual issue? Or do you just not like the specifics of how they describe dev work in a way that does not affect tax treatment?
        gopher_space 3y ago
        I was largely agreeing with you, suggesting that CI/CD is the new "on the internet" of the legal realm. > Does that actually change anything about the actual issue? Not in the slightest.
  - galaxyLogic 3y ago
    right they are still on the Waterfall model
    - jncfhnb 3y ago
      And you believe that agile development deserves unique tax treatment?

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
- jncfhnb 3y ago
  What is missing from this definition? The possibility of delivering it via an API? what is meaningfully wrong?
  - gopher_space 3y ago
    Continuous Integration as legal fiction?
    - jncfhnb 3y ago
      Ok but why is that relevant? Does that actually change anything about the actual issue? Or do you just not like the specifics of how they describe dev work in a way that does not affect tax treatment?
      - gopher_space 3y ago
        I was largely agreeing with you, suggesting that CI/CD is the new "on the internet" of the legal realm. > Does that actually change anything about the actual issue? Not in the slightest.
- galaxyLogic 3y ago
  right they are still on the Waterfall model
  - jncfhnb 3y ago
    And you believe that agile development deserves unique tax treatment?