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Funny enough, this is already a response to a tax. 174 capitalizes software and general unproven R&D as the default now… ruining the cash position of many busin

Funny enough, this is already a response to a tax. 174 capitalizes software and general unproven R&D as the default now… ruining the cash position of many businesses that “made taxable GAAP profits” The rules of the game have changed. We were allowed to expense all employee compensation tied to software or R&D in the year in which we paid it. Now we can only expense a small fraction of that because we have to capitalize the expense. That means if you paid and developer $100 to develop a piece of software then sold subscriptions totaling $100 you now have a profit. The old model you have zero dollars in profit the new model says you have something like $80 in profit that you know have to pay taxes on… with what cash?

hasty_pudding 3y ago
The company used the developer that year and made the profit that year. It doesn't make sense to me why they would they have to expense it over 5 years.
- InitialLastName 3y ago
  It's not like the developer is a plumber, where the company gets paid per toilet they can replace in a year. The IP that the developer developed is an asset that will keep earning a return in ensuing years; in every other field of business, yearly depreciation is how you account for the cost of your assets.
  - hasty_pudding 3y ago
    Not all but a good chunk of my career has been digital plumbing whether I'm in a developer or an ops role. And then theres engineers devoted to maintenance of the systems full-time. Do ops/infra people fall under this?
    - tjconsult 3y ago
      No, DevOps/SRE salaries are considered COGS (cost of goods and services) so they’re accounted for the same as a cloud hosting bill–i.e. _not_ a capital investment
gamblor956 3y ago
Now we can only expense a small fraction of that because we have to capitalize the expense. This is how other businesses have always had to treat the work product of their IP generated from R&D... Software businesses were exploiting a loophole, which was fine when they were limiting themselves to their own turf. When they started encroaching into and destroying other industries, it no longer made sense to keep this loophole in place. So basically, the software industry has only itself to blame for this.
hmottestad 3y ago
I can only compare it to expensing for purchases that are considered assets. The typical example is that you buy a car for 30k, the car is still mostly worth 30k, so even if you’re out 30k cash you still own a car. So at the end of the year when you’ve made 50k profit and you wonder if you can deduct the 30k from the car, the government will say that the car is still worth a lot of money, so you can deduct 10% of that 30k you paid. I guess that the government isn’t considering the expense of the employee as much as they are considering the value that the company has retained. Say the developer creates some software that you turn around and license to your customers. That software now has a value, and it will have a value next year too. It probably won’t have a value forever, which is why you can expense a certain percentage of it every year for x number of years. The money you spent on the employee is probably a direct expense that year, but the product they created still has a value. The simplest way of valuing the product, from the governments perspective, is just to consider it equal to the development cost.

hasty_pudding 3y ago

The company used the developer that year and made the profit that year. It doesn't make sense to me why they would they have to expense it over 5 years.

InitialLastName 3y ago
It's not like the developer is a plumber, where the company gets paid per toilet they can replace in a year. The IP that the developer developed is an asset that will keep earning a return in ensuing years; in every other field of business, yearly depreciation is how you account for the cost of your assets.
- hasty_pudding 3y ago
  Not all but a good chunk of my career has been digital plumbing whether I'm in a developer or an ops role. And then theres engineers devoted to maintenance of the systems full-time. Do ops/infra people fall under this?
  - tjconsult 3y ago
    No, DevOps/SRE salaries are considered COGS (cost of goods and services) so they’re accounted for the same as a cloud hosting bill–i.e. _not_ a capital investment

gamblor956 3y ago

Now we can only expense a small fraction of that because we have to capitalize the expense. This is how other businesses have always had to treat the work product of their IP generated from R&D... Software businesses were exploiting a loophole, which was fine when they were limiting themselves to their own turf. When they started encroaching into and destroying other industries, it no longer made sense to keep this loophole in place. So basically, the software industry has only itself to blame for this.

hmottestad 3y ago

I can only compare it to expensing for purchases that are considered assets. The typical example is that you buy a car for 30k, the car is still mostly worth 30k, so even if you’re out 30k cash you still own a car. So at the end of the year when you’ve made 50k profit and you wonder if you can deduct the 30k from the car, the government will say that the car is still worth a lot of money, so you can deduct 10% of that 30k you paid. I guess that the government isn’t considering the expense of the employee as much as they are considering the value that the company has retained. Say the developer creates some software that you turn around and license to your customers. That software now has a value, and it will have a value next year too. It probably won’t have a value forever, which is why you can expense a certain percentage of it every year for x number of years. The money you spent on the employee is probably a direct expense that year, but the product they created still has a value. The simplest way of valuing the product, from the governments perspective, is just to consider it equal to the development cost.