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Thousands of small businesses are struggling because of R&D amortization

• deleted 3y ago
  [deleted]
• pettycashstash2 3y ago
  Not much detail available
• itsoktocry 3y ago
  >A handful of these small business owners have bravely spoken to journalists from the Wall Street Journal and CNBC[...]But the vast majority are hesitant to speak to journalists as it might give their competitors free intel or make their employees nervous that they might lose their jobs. This seems a tad overblown? "brave", "free intel"? Why would we need to hear the same thing from thousands of small businesses? This stuff is all over the industry, but employees are oblivious unless their company is explicitly interviewed? It's a bad law, but I'm not sure what is interesting about this Tweet.
  • alephnerd 3y ago
    > Why would we need to hear the same thing from thousands of small businesses That's how lawmakers prioritize work. It seems some kind of lobbying organization for early stage companies might be needed - maybe some think tank funded by a couple early stage focused VCs
    • ChrisMarshallNY 3y ago
      Sounds like this community would be an ideal place to start. Disclaimer: I'm retired, so I don't have a dog in this race.
  • sokoloff 3y ago
    As an employee, if I hear my CEO/CFO saying how this law makes it hard to employ SWEs, I will be likely to worry about my job. I pay attention to news coverage and interviews of my company execs, whatever they’re talking about. I don’t pay attention to all other company execs talking about tax law.
• MasterYoda900 3y ago
  I don’t see why software should receive special treatment when 99.99% of software engineers/developers are not in any way engaged in what might be considered genuine scientific research and development, which R&D tax advantages should be reserved for. > Changes to R&D amortization were a rude surprise to them, as they'd never had to amortize software development before, and didn't think of the work they do as R&D. Precisely. They didn’t think of their work as R&D because it was not R&D. Frankly, they should have seen this coming. > These are small businesses we're talking about. Almost all of them make under $10M in annual revenue, and the vast majority are under $2M in revenue. What about the millions of other small businesses that don’t get special tax treatment? Restaurants, bars, plumbing companies, landscaping companies, accounting firms, etc.? Software engineers are not scientists. At the end of the day, a company is supposed to be able to stand on its own two feet, not rely on government handouts. Allowing otherwise unprofitable businesses to stay in business disincentivizes innovation and efficiency, which harms productivity growth and makes us all poorer in the long run.
  • kleinsch 3y ago
    I don’t think you understand what they’re discussing. If you run a plumbing company, make $100K in revenue, pay a plumber $100K, you have no profits, owe no corporate taxes. If you run a software company, make $100K in revenue, pay a software engineer $100K, section 174, which just went into effect recently, means you now owe taxes on $90K of profit. This is because you must spread dev costs over 5 years, you can’t deduct them in the year they happened. https://blog.pragmaticengineer.com/section-174/ https://blog.pragmaticengineer.com/section-174/
    • nerdponx 3y ago
      I assume you meant 80k instead of 90k?
      • moron4hire 3y ago
        The code defines that you start with the midpoint of the taxable year, so even though it covers a five year period, it will also cover 6 tax years. Because of that, the first tax year (which was 2022), only 10% can be deducted. Tax years 2 through 5 is 20%. You can deduct the last 10% in the 6th tax year.
• FrustratedMonky 3y ago
  ? Was there a change in the tax code? Then why not provide some links, it isn't secret then? Why wouldn't people be able to talk about it. What is brave about discussing a tax policy? There was not context given about what it is, what is is causing.
  • acdha 3y ago
    This is a much better article: basically these companies are paying for the tax cut Republicans gave the to the top bracket in 2017: > In 2017, then-President, Donald Trump, signed the 2017 Tax Cuts & Jobs act, which overhauled tax codes and reduced tax – for example, it reduced the top tax bracket from 39.6% to 37%. To make the bill pass strict budgetary rules, the Senate used a process called reconciliation: adding in tax code changes that delayed tax increases. These delayed increases “balanced out” the tax reduction. https://newsletter.pragmaticengineer.com/p/the-pulse-75 https://newsletter.pragmaticengineer.com/p/the-pulse-75
    • mhluongo 3y ago
      You're getting down voted for sounding partisan I suspect, but regardless of the politics, you're absolutely right. That bill was a huge change across the US tax system.
      • acdha 3y ago
        Yeah, it’s an election year so even a literal statement of fact is going to be downvoted by some people. Hopefully at some point they’ll have an epiphany about whether they should self-identify with a party so strongly when an accurate descriptions of its actions feels like an attack, but I’m not as optimistic about that as I used to be.
        • edgyquant 3y ago
          It’s a partisan statement since you only mention the upper tax bracket and not that it also slashed taxes for the lowest one completely and reduced them for basically everyone while making changes to a ton of other things (like child tax credits) as well. You’re over simplifying and singling out your pet political issue in an effort to sway opinion to your political leaning. If you had just said it was due to those tax cuts you likely wouldn’t have been downvoted.
• kleinsch 3y ago
  More detail with math here. Lawmakers are discussing delaying these changes for a few years and/or allowing deductions for domestic employees, but all depends on signing a budget, which is never certain. https://blog.pragmaticengineer.com/section-174/ https://blog.pragmaticengineer.com/section-174/
  • osigurdson 3y ago
    >> let go of 23 engineers employed in India >> lots of devs in Switzerland starts to make a lot more sense, especially now. This seems contradictory.
    • moron4hire 3y ago
      They're talking about incorporating in Switzerland, which allows 135% deduction for R&D costs. Yes, Switzerland pays you to run a startup.
      • IndoCanada 3y ago
        But it is difficult to fire them which is a big problem for tech companies where hiring and firing are common
        • rafaelmn 3y ago
          Use international contractors ? Or is the deduction for local devs only ?
        • moron4hire 3y ago
          I hear this a lot and it's difficult to reconcile with my experience. Every US company I've worked at (and that's always been in at-will states) has not made it easy to get rid of people. Even people with woefully bad records of losing money every year and having multiple harassment complaints filed against them were kept for nearly a decade. With one exception (I personally got fired from a tiny startup because I refused to commit timesheet fraud for the CEO), the stories I've heard of the lengths that European companies have to go through to fire someone sound exactly the same to the processes I've seen at all of my employers.
• raphman 3y ago
  FWIW, Gergely Orosz provided some helpful background on Twitter and in his newsletter: https://twitter.com/GergelyOrosz/status/1735030983173230944 https://twitter.com/GergelyOrosz/status/1735030983173230944 https://newsletter.pragmaticengineer.com/p/the-pulse-75 https://newsletter.pragmaticengineer.com/p/the-pulse-75
  • mjwhansen 3y ago
    Thanks for sharing this! Gergely asked me to review this post before it went live, and his interpretation of the issue is correct.
• pavlov 3y ago
  Here’s an article with more info about what changed and why: https://www.theregister.com/2024/01/12/us_tax_research/ https://www.theregister.com/2024/01/12/us_tax_research/ This change was actually part of the Trump tax cuts in 2017. It was delayed by five years as an accounting trick to make the bill look better at the time: the tax cuts’ projected long-term impact on the deficit didn’t look quite so bad when they tacked on a bunch of tax increases that would take effect in the distant future of 2022 (and with the assumption that this could of course be repealed if Republicans stayed in power). Why target software companies? I guess because their owners look more like Democratic voters than, say, real estate investors who benefit from massive tax breaks that remain untouchable.
  • EdwardDiego 3y ago
    Yeah, the "Coastal liberal elite" is a popular boogeyman. I mean, look at the actual "elites", don't see too many Bernie-bros alongside Musk, Thiel, and the Zuck.
• the_mitsuhiko 3y ago
  Since this is already hanging around for an entire tax year a lot of companies are 1/5th into that pain. If this does not get changed in the next few months it would not surprise me if this becomes the new norm. Which would also be quite interesting to see how that would play out. Some companies apparently have already been amortizing salaries for a while in anticipation of this (eg: Google). Given that this also greatly punishes outsourcing I would not be surprised if at least that aspect will remain even if some of the rest will be rolled back.
  • tinyhouse 3y ago
    Is it true that they are 1/5th into the pain? What about every new hire? That's the part I don't understand. It seems to discourage companies from increasing their headcount. Also, what happens when an employee leaves after 2 years? The company paid 2 years of salary but expensed only 35% of year 1 and 15% of year 2. Update: Now thinking about it, it doesn't matter if an employee leaves, since the company will expense their salary portions that they haven't expensed yet in their future tax bills.
    • the_mitsuhiko 3y ago
      You already have such amortizations for a lot of things. In some cases this even gives you possibilities to improve your tax burden. It just means that you cannot deduct it all in one year. If you downsize a company to zero employees you still get to subtract salaries for a few more years against your profits. It will set different incentives wiring wise and I’m not convinced they are good ones, but from this rule some people will benefit so they might fight the rollback.
      • wait_a_minute 3y ago
        Would this cause more intentional hiring? In other words, since everyone's already 1/5th into it this means that anyone who was hired in the last year since all those layoffs was hired intentionally with more of an expectation of betting on them for the longer term.
  • 3y ago
• spacecadet 3y ago
  Sorry, Im pretty anti-tax, but this is the mature way to run a software business... I remember starting my career and presenting amortization sheets for software R&D and not a single exec giving a shit, whole industry gave up if you ask me.
  • p_l 3y ago
    Salaries being amortized never made sense
    • spacecadet 3y ago
      Please explain then. Because if you spend $2m on an idea, layoff half the company, pivot to a new idea, rehire. You think it's fair on the rest of us you get to write that risk off? This. Is. Why. People. Hate. Tech.
      • brianwawok 3y ago
        I amortize a server because you buy it now, it does work, then is eventually obsolete and you toss it. Does a developer keep doing work for me after he quits/dies?
        • spacecadet 3y ago
          [flagged]
        • atherton33 3y ago
          The code you hired the developer to write/maintain should keep working for you after he quits/dies. Or you made a real bad investment.
          • PaulDavisThe1st 3y ago
            Do you want hiring people to be considered as an investment? I think that might have a lot of unintended side-effects.
• notamy 3y ago
  https://nitter.net/mjwhansen/status/1748345492998696961 https://nitter.net/mjwhansen/status/1748345492998696961
• telesilla 3y ago
  Take action and sign up for the Small Software Business Owners Association newsletter and petitions to the government: https://ssballiance.org/ https://ssballiance.org/ Michele Hansen is doing an incredible job here and should be recognized for it. Latest news was sent yesterday: Republicans and Democrats finally struck a tax deal that includes a partial fix for Section 174. It includes expanding the Child Tax Credit, a key Democratic priority, with a handful of business tax issues where were Republican priorities... Not sure if there is a public copy of that email, but the core info is on the site, it has a list of ways to get your representative's attention and a script to follow. Please call.
  • addicted 3y ago
    They’re calling this a business priority for the Republicans when it was a Republican House, Senate and President that passed this measure. That’s a bit too “must make it seem bipartisan” when there is a clear partisan direction. Even when this fix is passed, it will be voted for unanimously by Democrats and only a small fraction of Republicans will vote for it. Explain again to me how that makes it a Republican priority as opposed to a priority of the endangered species that is the Pro Business Republicans?
    • pclmulqdq 3y ago
      You should note that these sorts of tax law changes are largely a revenue game: Someone wants to cut some other tax, so they find a place to raise taxes elsewhere without thinking about the consequences. But also, the vast majority of people employed by R&D-heavy companies are Democrats, so it's hard to impute motive one way or the other.
      • deleted 3y ago
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      • ecocentrik 3y ago
        Independent/unaffiliated voters are now 47% of the electorate in the US so that last statement probably doesn't hold water. Are educated voters, regardless of party affiliation, more likely to vote for serious candidates that focus on issue resolution over culture signaling? Sometimes, but that no longer has much to do with party affiliation.
• torstenvl 3y ago
  [flagged]
  • addicted 3y ago
    Your comment is completely backwards. Chevron has nothing to do with this. This was a specific law passed by Congress and the Trump administration to make their massive tax cut for billionaires revenue neutral. The IRS is implementing the law as passed and has nothing to do with Chevron. It would be the exact same with or without Chevron because this has nothing to do with it. It’s quite telling that the anti Chevron people have to rely on blatant falsehoods to push their agenda.
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• djoldman 3y ago
  How does one determine whether work done by an employee is classified as R&D or as an immediate expense? If a programmer is building an app that isn't yet offered as a product, is that R&D? If a programmer is maintaining an app that is offered as a product, is that NOT R&D?
  • MattRix 3y ago
    Well the “good” thing about this law is that it also classifies ALL software development (and any supporting activities!) as R&D. And yes that’s as absurd as it sounds, but it’s true.
    • geraldwhen 3y ago
      This is a good thing. Prior to this, I had to make up a paper explaining why my team was R&D with help from an outside consulting group annually. It was always a sham. We were building product.
      • hyperpape 3y ago
        My understanding[0] is that building product was always categorizable as R&D (though it was up to the company to choose to categorize it that way). What was not R&D was operational expenses (production support, etc). [0] This is based on working at a company that went through a brief period where we had to do extra tracking to be able to capitalize our time if it was possible, and then reading up on the matter to try and understand what the hell the purpose was. Possible I'm wrong about the matter--I've never been the one doing the finances.
      • AlotOfReading 3y ago
        The IRS definition of R&D is intended to encompass product development. Quote the tax code: The term generally includes all such costs incident to the development or improvement of a product. [0] https://www.law.cornell.edu/cfr/text/26/1.174-2 https://www.law.cornell.edu/cfr/text/26/1.174-2
      • agwa 3y ago
• 55555 3y ago
  Am I correct that if this does not get fixed, it's a huge boon for dev agencies as paying them is an immediate expense for the startup, while paying in-house devs is not?
  • deleted 3y ago
    [deleted]
  • moron4hire 3y ago
    From my reading, that would be an expense directly related to the development of the software, which also must be amortized. What I haven't figured out is what the Dev agency has to do. They don't own the software being developed. Unless they have in-house libraries they develop... And how does this work for open source projects that have corporate support to be developed on during company time? If you amortized the "R&D excited" of the developer's salary on the premise that the software will make long-term, recurring income, what does that mean for software that isn't being sold? My previous job, I was the only software developer, making a tool that employees and customers in the company used together. We didn't sell the software, we sold a service completely unrelated to the software, the software was just a supplement to the service.
    • mjwhansen 3y ago
      The agency gets to expense it, as they do not bear the risks and benefits of commercialization. Their client has to amortize it, though.
  • mjwhansen 3y ago
    That’s incorrect - client would still have to amortize the work
• mensetmanusman 3y ago
  Any accidental policy that disincentivizes R&D is stupid, but par for the course in recent history for the U.S. Major materials innovations are discovered here, but the only nations that want to actually invest and build upon them are currently in Asia. The argument was that the US wants to transition away from building things towards building software which is more profitable, and then this... This is what happens when a monoculture of business/law/finance-thinking takes over political leadership.
  • PaulDavisThe1st 3y ago
    > Any accidental policy that disincentivizes R&D is stupid The problem with section 174 is not that it disincentivizes R&D. These rules were already in place for R&D spending, and were generally welcomed by companies with actual R&D expenditures. The problem with section 174 is that it essentially forces ALL expenditure on software development to be treated like R&D.
  • georgeburdell 3y ago
    Being formerly in the materials industry at an individual contributor level, I think Asia’s preponderance of materials development firms is less about what the U.S. incentivizes and more about how poor the quality of life is for the engineers compared to what they could be doing. Asian engineers will put up with a lot more B.S. than Americans, and they have low birth rates to show for it.
• minton 3y ago
  I’m confused why this is so impactful. If you have software devs, even if you don’t classify as R&D, you can deduct their full salaries, right?
  • hobofan 3y ago
    How would you classify software _developers_ if not under Research & _Development_?
    • kody 3y ago
      "Hey boss, can you go ahead and change my job title to Code Janitor?"
      • EdwardDiego 3y ago
        so, we've decided to promote you to Principal Monkey With a Typewriter, we expect Hamlet any day now.
    • icedchai 3y ago
      We'll call them "sustaining engineers" and define most features as "bug fixes." Problem solved.
      • selimthegrim 3y ago
        If you call them sustaining members maybe you can ask CPB, PRI and NPR for tax advice.
    • chipweinberger 3y ago
      its R&E (experimentation), not R&D.
  • agwa 3y ago
    No, the law defines all software development costs as R&D (technically "R&E") for the purposes of requiring capitalization: https://www.law.cornell.edu/uscode/text/26/174 https://www.law.cornell.edu/uscode/text/26/174 (c)(3) This is regardless of whether you classify the costs as R&D for the purpose of claiming a tax credit under Section 163.
• jrdnh 3y ago
  The IRS provided incrementally helpful guidance on the types of costs that must be capitalized in September. The capitalization requirements are generally more restrictive than GAAP where only ~30% of costs are capitalized for book purposes at many companies. There are some types of software development that are outside the scope of 174 though such as UI changes that don't add new capabilities. https://www.irs.gov/pub/irs-drop/n-23-63.pdf https://www.irs.gov/pub/irs-drop/n-23-63.pdf
• ryanwaggoner 3y ago
  If this persists, it seems like it’d make sense for many software companies to shift the development and ownership of their software outside of the US, and then pay licensing fees to those overseas subsidiaries for the use of the software, which isn’t taxed as R&D.
  • deleted 3y ago
    [deleted]
  • wait_a_minute 3y ago
    Why on earth would someone give up ownership of their product or platform to an overseas subsidiary? The risks of that are massive, especially in a setting that is more prone to conflict as of late. This would increase the risks of losing your IP entirely. If ownership and development move overseas, then you'd be giving what you have away to someone else to entrust them with the entire thing to avoid paying a bit of tax. Software has its own supply chain too, and if you lose your product or platform due to doing this then that's going to be too bad...USA protections means USA presence and USA taxes.
    • Steven-Clarke 3y ago
      TL;DR: Engaging with decentralized organizations and open-source communities allows access to global talent and diverse perspectives, fostering innovation and resilience. This approach, focusing on collaboration over ownership, offers potential benefits in R&D and innovation, outweighing traditional models that prioritize geographical and IP constraints. 1. Global Talent and Diverse Perspectives: DAOs and open-source projects, by their nature, often operate without geographical boundaries. This allows them to hire and collaborate with talent from all over the world, bringing in diverse perspectives and expertise that can be crucial for R&D and innovation. The traditional model of keeping all operations within a single country might limit access to this global talent pool. 2. Decentralization as a Strength: Decentralized structures can offer resilience and flexibility. In a world where geopolitical tensions and conflicts can disrupt traditional business operations, a decentralized model, with no single point of failure or control, might actually reduce certain risks. Intellectual property, in this case, isn't concentrated in one jurisdiction but is part of a global network, which could mitigate the risk of loss due to regional conflicts or regulatory changes. 3. Innovation and Experimentation: The open-source and DAO model is fundamentally about experimentation and pushing the boundaries of what's possible in technology and organizational structures. By embracing these models, companies can participate in cutting-edge developments and explore new ways of working that might not be possible within the confines of traditional corporate structures. 4. Intellectual Property Considerations: While there are legitimate concerns about IP protection, decentralized and open-source models often operate on a different paradigm regarding IP. The focus is less on ownership and more on collaboration, community, and building upon shared knowledge. In many cases, the value generated isn't from the IP itself but from the community and ecosystem that develops around it. 5. Regulatory and Tax Implications: It's important to acknowledge that regulatory and tax environments are significant considerations. However, for some organizations, the benefits of global collaboration and access to decentralized structures might outweigh the simplicity of operating within a single jurisdiction. example/ Optimism $100 Million for Developers - Announcing RetroPGF Round 3 Recipients https://optimism.mirror.xyz/37Bgum6MfTJWDuE41CH9RXSH5KBm_RCL5zsSFeRZl4E https://optimism.mirror.xyz/37Bgum6MfTJWDuE41CH9RXSH5KBm_RCL...
• exabrial 3y ago
  We need temporary relief, immediately. But long term, how about we shrink the size of the federal government? Then we don’t have to flog small businesses to death to feed the massively inefficient and wasteful machine!?
  • PaulDavisThe1st 3y ago
    These changes came about as part of the Trump administration & Republican efforts to reduce taxation. Because you can't trivially just cut taxes (as was done in 2017) without showing how you will either make up the missing revenue or reduce spending, they threw in a time-deferred measure - the new Section 174 that "demonstrated" how the tax cuts in 2017 would be paid for in the future. It was all sleight of hand, but what's new? Republicans have been talking about shrinking the size of the federal government for decades. They routinely fail to come up with substantive cuts in spending that would not set off a disaster for them at the polls, or for the country economically, or both. There is this perception that the federal is full of wasteful spending, but this perception is false (there is waste, it's not a large percentage of the huge overall federal budget). This means that to actually cut the revenue needed will require truly substantive cuts to the services provided and performed by the federal government. Maybe you could be more successful at proposing what those cuts would be than any Republican has for 50 years, but it seems unlikely.
    • thinkerswell 3y ago
      What the recent Argentinian president had proposed for his country would be a good start for the US
      • PaulDavisThe1st 3y ago
        US voters have consistently rejected such policies for nearly a century, if not longer. While there are certainly people who believe as you do, you are not in a majority. There are also a lot of people in Argentina (possibly a majority) who don't agree with those policies either.
• gavinhoward 3y ago
  This is exactly why I decided to not make my single-member, zero employee LLC an S Corp; if I'm paying no salaries, I don't have the Section 174 craziness. With an S Corp, you have to pay yourself a salary, and if your work is primarily software development, Section 174 might hit you. (IANAL or accountant. Talk to one of them.)
  • mjwhansen 3y ago
    Unfortunately, this doesn’t erase the impact. This applies beyond salaries to all resources used for what 174 considers R&D. Servers, software, the desk chair you sit on to do development —- all have to be amortized under 174.
    • gavinhoward 3y ago
      Those are physical things that had to be amortized anyway, and I had planned for that.
      • w4 3y ago
        That's not correct through '27: https://tax.thomsonreuters.com/en/glossary/bonus-depreciation https://tax.thomsonreuters.com/en/glossary/bonus-depreciatio... It also applies to e.g. saas used for software development, which never would be depreciated over time previously. So your paid GitHub account? Amortize it over 5 years.
        • gavinhoward 3y ago
          Don't use none of that, so not worried.
    • volkk 3y ago
      what about as a sole proprietorship?
      • mjwhansen 3y ago
• siliconc0w 3y ago
  You got it all wrong, sure that first commit was R&D but the rest of the year? Maintenance. Or- sure we launched the platform and that was R&D but now we're just doing data entry.
  • PaulDavisThe1st 3y ago
    The IRS document https://www.irs.gov/pub/irs-drop/n-23-63.pdf https://www.irs.gov/pub/irs-drop/n-23-63.pdf is extremely clear on this. New features, improvements? All costs must be amortized. You can only expense bug fixes and GUI changes that don't add features.
    • jagged-chisel 3y ago
      Aha! I can now put all this stuff into the backend now, and the UX people can futz with how to present it to the users over time. Brilliant!
    • mannyv 3y ago
      Mock all the changes now, then file a bunch of bugs against the non-working feature. Win!
• AlbertCory 3y ago
  I've been researching this for another issue. Anyhow, expensing R&D is a perennial political issue. Logically, if you're creating an income-producing asset, then you have to depreciate it over its useful life. The theory is sound, but of course politicians can mess with it, as they do. But I thought the "useful life" of software was 3 years. No?
  • marcosdumay 3y ago
    You usually want to incentivize R&D, messing with that simple theory is the standard. Anyway, even that 3 years common knowledge number is biased into long-lived code. Do you spend work time putting out fires? Do you write code that is immediately discovered to be wrong so you have to take more time and fix it? Those 3 years are only for software that already passed through all of that. (Anyway, I don't have any interest on that fight, I'm just watching from a safe distance.)
    • AlbertCory 3y ago
      I'm not an accountant but I did take a basic course. I don't have a dog in this fight either. Does "maintenance" on an amortized asset have to be amortized as well? Don't know.
      • marcosdumay 3y ago
        > Does "maintenance" on an amortized asset have to be amortized as well? Usually not. Also, from other comments here, it looks like bug-fixing doesn't count as R&D (anyway, in a development focused company, you'll probably spend more deciding what is or isn't bug-fixing than you'd get from the difference). Still, there are many more things that make software disappear just after being written. It's actually similar to most of R&D, so it makes little sense to count it the same way as capital investment.
• pclmulqdq 3y ago
  I have said this before and attracted downvotes for it, but here goes. There are two possible arguments here to try, and I have only ever seen people lobbying against this change use the one, less persuasive argument. That argument is what I will call the "incentives" argument: that change in the rule provides bad incentives against doing R&D. This argument goes along the lines of "this will cost jobs for R&D workers" or "this will reduce the competitiveness of the US." The other possible argument (that I have not seen cited) is that "R&D" work can be operational, and that forcing capitalization of R&D expenses is a bad accounting practice. This Twitter thread only argues the former. The glaring problem with the incentives argument is that it gives up the point that the ability to operationalize R&D work is a subsidy for technology and software companies. This is equivalent to asking for a subsidy at a time when startups can pull $100 million with no product and other technology companies are reaping record profits. That is not a particularly persuasive argument, and it triggers bad emotional reactions from people. If not for the SBIR companies getting absolutely shafted, the responses to this argument I have seen from non-tech people range from "fuck you" to "deal with it." The accounting argument is boring and sort of technical, but also a lot harder to argue against and doesn't trigger a negative emotional reaction. All of the people making the rules will understand it, and the IRS could even make the clarification on what is and isn't "R&D" on an accounting basis without an act of congress. They have kind of done this, but have not been pushed nearly far enough.
  • tracerbulletx 3y ago
    Having been an accountant early in my career before becoming a software developer, I'm amazed that this isn't the primary argument.
    • pclmulqdq 3y ago
      I (shamefully) have an MBA, and I learned a lot about accounting during that process. Whether basic research ought to be operationalized or capitalized when looking at company valuation was actually a bit of a point of debate, but both sides have strong arguments. What definitely shouldn't be capitalized is "new feature for my existing software" which pretty clearly is capitalized under the current rules.
• BenFranklin100 3y ago
  This is going to wipe out a lot of small businesses, including innovative software dev startups. Here’s a simplified example of this works: Let’s say you’re a four person software dev startup. Everybody is making, say, $125K to get by. That’s $500K in salary expense which normally you can write off as expenses against revenue/funding. For this example, let’s say somehow you also generated $500K in revenue/funding, i.e. you just broke even. Currently, you would (of course) owe zero taxes. Under the new tax rules, you couldn’t write off those R&D salaries as expenses, only amortize them over 5 years. That is, your salary expenses for this year is only ~ $100K, and this you made a $400K ‘profit’ (!!) on which you owe taxes ($100K).
  • matsemann 3y ago
    I don't get it. How is this not just $500k salary? How is it R&D?
    • jiveturkey 3y ago
      under the new regs, software work is required to be classified as R&D.
    • j16sdiz 3y ago
      The idea is: You can hire a R&D team for one year, fire the entire R&D team and still benefits from their works in the next few years. In terms of tax, should we average out these expense over the years? These can have huge difference because how complex our tax and accounting rules are.
      • BenFranklin100 3y ago
        Further, R&D is at best a bet, as any of us who has ran a technology business well know. It’s not at all clear one will be able to take the research to market and monetize the R&D investment. Doing that is called founding a successful company.
        • Gormo 3y ago
• nullc 3y ago
  The same continuing income occurs for journalists and other fields that produce copyrighted output, in fact it's more true there since there isn't a substantial bug fixing load. So why just software and not all fields that produce durable intellectual property?
  • erichocean 3y ago
    It's even more clear with copyright what the amortization period should be.
    • nullc 3y ago
      Yep, 120 years until the work is published then accelerated to 95 years. Lets pass that law and see how Disney feels about Founders' Copyright. :D
  • mindslight 3y ago
    That's a fantastic point! Also it made me think about the converse, which might be interesting - libre software. Assuming a company has no plans of dual-licensing, ownership of the actual copyright of libre software is independent of how that software gets used to generate income. Anyone else could come along and use a copy of the software to create a business without any license payments to the owner. Or alternatively the original company could donate said software to a nonprofit steward (eg FSF or Apache) and be in a similar position. So accounting wise, it would seem that amounts spent on developing libre software could be more appropriately classified along with things like recruiting, advertising expenses, or even charitable donations, rather than the creation of an income-producing asset. Setting up that software to work on the company's production infrastructure would still be a development expense requiring amortization. But the work to keep it running would still be maintenance.
• slotrans 3y ago
  Possibly the most unpopular argument of all: do not comply. Change your employees job titles and/or tax classifications if you have to. Whatever it takes to say "these are salaries, not R&D". If you're big enough they'll notice, but for a 10-person company the risk of a bad audit beats certain bankruptcy.
  • VohuMana 3y ago
    Maybe unpopular but I assume this is just what is going to happen. I remember awhile back when I was visiting Ireland one of the tours mentioned that modern whiskey and beer in Ireland came about because of taxes. I wish I could remember more details but the story went along the lines of each time a new tax on some type of alcohol happened the producers would reclassify their beverage or change the method which produced it to avoid the new taxes. I assume this will be the same in the US, software R&D is now some other title with less taxes. When the small companies do it the IRS isn’t going to care but then big ones will do it and the tax law cat and mouse game will continue.
    • kevindamm 3y ago
      The difficulty with this is that §174 counts "all such costs incident to the development or improvement of a product." This makes it hard for you to reclassify the researcher role as any kind of software development role because software development is still R&D. The fact that it includes payments to third parties for R&D also means you can't even just split your software dev house into a nonprofit or something. What can you do? Claim prompting an LLM is not software development even if it produces code? It's just search then, right?
  • tchock23 3y ago
    Yeah, that's what I'm guessing many smaller companies will do. Does the developer talk to customers or do customer success/support? Great, they are now "Sales Engineers" for tax purposes. (Note: not recommending to do that, but guessing that is a natural byproduct of an unfair tax code).
  • jayd16 3y ago
• Steven-Clarke 3y ago
  Yes Section 174 is a huge issue for US companies of all sizes. We are seeing a shift in companies and other decentralized projects explore places like Panamá. The blockchain industry is dealing with IRS, SEC and other regulatory challenges. Some companies are choosing to leave the US. There are options and advantages to operating outside the US. US timezone, a USD economy and a territorial tax system makes it easy to operate from my home country. interview on this topic: https://www.youtube.com/watch?v=BzUAJzKb8bA https://www.youtube.com/watch?v=BzUAJzKb8bA
  • thinkerswell 3y ago
    If you are a US business, it’s hard to escape the overly burdensome US taxes.
  • EdwardDiego 3y ago
    I think the crypto industry is going to face tax and securities regulation in any jurisdiction that isn't corrupt or operating as a tax haven.
• andoaazzz662 3y ago
  Playing devil's advocate here. There are a large number of jobs that fall under this R&D classification in the software space that I do not feel carry the weight that a term like R&D ought to imply. This carve out was clearly intended to be for fundamental research in hard technical disciplines. Much of where it is being claimed however is really more accurately described as product development and market research at best. Not the kind of hard technical R&D that this is pitched as. It seems that the number of software engineers involved in actual R&D (according to my admittedly made up and subjective definition) is vanishingly small, much less than 1% in all likelihood if we do some quick napkin guestimates. So to what extent do we want to provide tax incentives to (an already profitable in some cases but also commonly accused of setting big piles of money on fire) industry for normal run of the mill product development? That's what's really going on here imo, and it's not obvious to me that there is any way to justify that. There has to be some line drawn somewhere between applications development / product development, and true R&D ala some systems research group working on scheduling algorithms or whatever. I admit that the line here is blurry and not well defined. That needs to change if there are tax incentives involved. At the very least, anything that you know for sure is going to end up in an end product is NOT R&D. The definition ought to depend on what a reasonable and informed observer would classify the risk of total failure to be. True R&D tends to have a very high risk of complete failure in either a technical sense or a product integration sense (as in, you find a solution to your question but it cannot be made into a commercially viable product, often for technical reasons or the specifics of your solution). That is what laws like this are intended to incentive, because we have collectively decided that we want this research to take place even if the risk calculus is such that it is entirely unprofitable for a lot of companies.
• dang 3y ago
  Related. Others? Section 174 removed in new Senate tax agreement - https://news.ycombinator.com/item?id=39013863 https://news.ycombinator.com/item?id=39013863 - Jan 2024 (3 comments) Ask HN: IRS section 174 – cause of layoffs? - https://news.ycombinator.com/item?id=38957651 https://news.ycombinator.com/item?id=38957651 - Jan 2024 (21 comments) Will US companies hire fewer engineers due to Section 174? - https://news.ycombinator.com/item?id=38931860 https://news.ycombinator.com/item?id=38931860 - Jan 2024 (38 comments) Will US companies hire fewer engineers due to Section 174? - https://news.ycombinator.com/item?id=38870429 https://news.ycombinator.com/item?id=38870429 - Jan 2024 (19 comments) IRS tax code change in Section 174: R&D is an expense - https://news.ycombinator.com/item?id=38642461 https://news.ycombinator.com/item?id=38642461 - Dec 2023 (23 comments) Guidance on Amortization of Research or Exp. Expenditures Under Section 174 [pdf] - https://news.ycombinator.com/item?id=38637540 https://news.ycombinator.com/item?id=38637540 - Dec 2023 (2 comments) Tell HN: People laid off in my company due to IRS Section 174 changes - https://news.ycombinator.com/item?id=38633668 https://news.ycombinator.com/item?id=38633668 - Dec 2023 (6 comments) Tell HN: Submit comments to IRS re tax treatment of software dev expenses - https://news.ycombinator.com/item?id=38120388 https://news.ycombinator.com/item?id=38120388 - Nov 2023 (227 comments) Tell HN: New IRS guidance on software development for Section 174 amortization - https://news.ycombinator.com/item?id=37494601 https://news.ycombinator.com/item?id=37494601 - Sept 2023 (3 comments) Software firms across US facing tax bills that threaten survival - https://news.ycombinator.com/item?id=35614313 https://news.ycombinator.com/item?id=35614313 - April 2023 (985 comments) Ask HN: How are you handling Section 174 changes for bootstrapped companies? - https://news.ycombinator.com/item?id=34627712 https://news.ycombinator.com/item?id=34627712 - Feb 2023 (187 comments)
• jgalt212 3y ago
  The long and the short of it is only the well-heeled are allowed exploit tax loopholes.
• deleted 3y ago
  [deleted]
• jodacola 3y ago
  This is a topic about which I'm very passionate. I've written my congressional representatives several times. I've posted on LinkedIn. I'm raising awareness with my close colleagues. I'm trying to beat the drum as much as I can. There is a minor win that was just advanced in the House yesterday[0] to delay US onshore amortization through 2025 via The Tax Relief for American Families and Workers Act of 2024[1]. It doesn't touch offshore amortization. It's not enough. I was geared up to start a business this year; this, specifically, has put the brakes on it. I've written as much to my congressional representatives. I'm doing research into what it would take to incorporate in another country, and the implications therein, if it comes to that. I'm going to sign up to https://ssballiance.org/ https://ssballiance.org/, as telesilla recommended. Let's beat the drum together, folks. [0] https://www.voanews.com/a/7448071.html https://www.voanews.com/a/7448071.html [1] https://www.finance.senate.gov/imo/media/doc/the_tax_relief_for_american_families_and_workers_act_of_2024_technical_summary.pdf https://www.finance.senate.gov/imo/media/doc/the_tax_relief_... edit: formatting
  • lizhang 3y ago
    What does the delay in [0] mean for the stories in the twitter thread? Would they be able to get their tax payment + penalty back? Or would this delay only affect the 2023-2025 tax years?
  • eropple 3y ago
    > It's not enough. I was geared up to start a business this year; this, specifically, has put the brakes on it. I've read a little about this, but not a lot. How has this put sufficient drag on starting a business that it's impractical to go from zero to one? Is there an aspect of the business model that's particularly impacted?
    • bjclark 3y ago
      Zero to one is considered “R&D” and that’s what this entire thing is about.
      • eropple 3y ago
• ghastmaster 3y ago
  This explains why I have seen so many tech companies doing layoffs. They layoff now, wait for the fix(hopefully), then hire people again(hopefully). And here I thought it was AI replacing the workers.
• nsxwolf 3y ago
  What does this mean if you’re trying to start your own 1-person SaaS company?
  • pcthrowaway 3y ago
    IANAL. IANAA. As a sole proprietorship it's likely very good for you (until the tax code is fixed). Your potential clients can write off your subscription costs as immediate expenses, rather than building in-house and amortizing the R&D costs over 5-15 years. As a different entity type, if you pay yourself a salary, I believe you amortize that like any other company would. But if the U.S. is anything like Canada, you can pay yourself a much lower salary, and then pay yourself through dividends as well.
• deleted 3y ago
  [deleted]
• ultra_nick 3y ago
  Now my managers have even more reason to rush out broken "features" and use bugs to "fix" them later.
• jdksmdbtbdnmsm 3y ago
  Why would I be on the side of someone willing to go through all this trouble just to avoid paying American wages? Frankly, I would prefer you not start a business or do it elsewhere.
  • erik_seaberg 3y ago
    This affects all US software companies, even when you hire US employees.
    • jdksmdbtbdnmsm 3y ago
      Congress delayed it for 2 years only for US employees.
• jkelleyrtp 3y ago
  Can someone help me understand? Let's just say I started a company last year. I sell software and made $100k revenue this year. I hired someone for $100k to help build that software. I have zero dollars left in the bank at the end of the year. According to 174 I can only amortize that $100k over 5 years, not all at once. So now I have to pay taxes on $80k profit. I have no money in my bank account, how can I pay any taxes at all? It's not like I'm going to fire my engineer, he does feature and maintenance work. Let's say that next year my business stays the same. 100k in 100k out. I still have no money in the bank and have to pay taxes on $80k profit, again? What?? Every little startup in Silicon Valley makes software, spends a lot on salaries, and is barely breakeven. How... am I expected to run a business like this?
  • flutas 3y ago
    Not to go all achstuushually on you, but it's even worse. You can only deduct 10% the first year. Every year after is 20%, then year 6 is a "make up" of the last 10%. So year 1 would be $90k now not $80k. > Because of the tax code’s accounting conventions, domestic firms ultimately have to deduct 10 percent of costs in year one, 20 percent of costs each year in years two through five, and the remaining 10 percent of costs in year six. [0]: https://taxfoundation.org/blog/rd-amortization-impact/ https://taxfoundation.org/blog/rd-amortization-impact/
  • wmf 3y ago
    You're understanding it correctly. The "answer" is that you either take VC investment, borrow money to pay the taxes (in this economy??), or go out of business.
    • jkelleyrtp 3y ago
      Going into business is now a liability for me. What? Why is all software work counted this way? Why software? Shouldn't I be paying taxes later once I've made money? This is like paying taxes on unrealized gains - I can't pay those taxes - I haven't made any gains!
      • 3y ago
• rebelis_man 3y ago
  any relation with this ? https://thegreattaking.com/read-online-or-download https://thegreattaking.com/read-online-or-download
• baazaa 3y ago
  The best solution is to incentivise investment by setting its tax rate to 0. That's what Trump's cash-flow tax would have done. Higher taxes on the money printing ventures (Google ads etc.), lower taxes on start-ups and companies developing new products. That would be besides all of the other benefits like preventing profit-shifting. Maybe if Silicon Valley wasn't so intensely ideological it would have backed the right horse when it came to tax policy. I have very little sympathy here because I think most software developer salaries really are 'development', the problem isn't the classification of developer salaries, it's that the current corporation tax is dumb.
  • paulmendoza 3y ago
    Section 174 software changes was designed to punish blue states in order to pay for tax cuts for the wealthy so their budget would balance.
    • baazaa 3y ago
      Yes and I'm talking about the original 2016 house-republican DBCFT proposal which would have eliminated tax on investment in general. Section 174 is a hack to fix a moronic tax that would have been replaced if not for the left. There shouldn't be a section 174 to even amend. And as I said, software development clearly is development, the change makes perfect sense. If you want R&D to be taxed (even with deductions which get amortized), and you work in R&D, you don't get to whinge when a loophole gets closed so you get taxed like other R&D expenses. The people getting bankrupted by this deserve it insofar as they opposed the tax reform bill that would have elegantly solved this problem forever.
• koolba 3y ago
  Any accountants here who can answer how all of this applies to a business operating in a cash basis? Granted any sizable org won’t be, but Joe’s SaaS or Alice’s App is likely operating on a cash basis with a standard Jan/Dec fiscal year.
  • paulmendoza 3y ago
    Any software dev that business does will be treated as a capital purchase. Doesn’t matter if you use cash basis or not.
• gumby 3y ago
  To be fair, accelerated R&D amortization (immediate full expensing in the year the expense was incurred) is a tax loophole. Essentially, the default tax treatment of expenses is basically to take the expense same as you would treat it under GAAP, but some people (I am one of them BTW) think that we should put a finger on the scales for the case of legitimate R&D. Now though I happen to think accelerating it is a good idea, everybody thinks their particular loophole is a good idea. To say that removing the special treatment is a policy mistake is a reasonable position to take, though opponents have a reasonable position as well (as I said I'm in favor of the special benefit). But to call this change unfair is, IMHO, unreasonable. It's also bogus to plead ignorance as the twitter poster did: "as they'd never had to amortize software development before, and didn't think of the work they do as R&D." Their accountants sure did, because otherwise it would not have qualified for the R&D exemption. And their accountant would have to tell them what to do to make it qualify.
  • a-dub 3y ago
    i don't know enough about tax codes and how business works to comment on the actual policy, but it sure does seem to me that changes that result in immediate and massive new liabilities are unfair.
    • cma 3y ago
      I think the big problem with this is just the accounting burden: now even salaried programmers have to track hours between greenfield and maintenance development.
      • gumby 3y ago
        I suspect you could use your infrastructure ti give you a pretty good idea of where the split is as you have tools like your bug tracing system, different branches on repos etc to figure out adequately how much time goes where. Much better than time cards unless you’re a government contractor.
    • gumby 3y ago
      > changes that result in immediate and massive new liabilities are unfair. Congress knows this: the law was passed in 2017 but only took effect for tax year 2022. This very issue was widely discussed at the time. That was five years to figure out what to do and your CFO (or at the very least your tax accountant) should have been warning you. I mean, if your tax accountant doesn't know the tax law that's a bad thing.
• WalterBright 3y ago
  Taxing a startup on non-existent "profit" is a really bad idea.
  • dboreham 3y ago
    You have to have income in order to be taxed. So there is no taxing non-existent profit. There has to be actual profit. What people must be complaining about is that they can't take all the income from product X in year Y and say it was spent on developing product X so no profit was made. Instead they'd need to have spent that income on marketing supporting and maintaining that product. Then they'd be making zero profit and no tax owed.
    • WalterBright 3y ago
      If you spent $100k on salaries and generated $60k of revenue, you'll owe tax but you lost $40k.
    • Gormo 3y ago
      If you paid 100k in salaries and earned 100k in revenue, then you broke even, and no actual profit was made. Under the rules being discussed here, however, the 100k you spent in salaries has to be amortized over five years, meaning that even though you actually spent 100k this year, only 20k is deductible from this year's taxes. The IRS then taxes you on the 80k of "profit" you made, which doesn't actually exist, so you don't have the funds to pay the taxes, and your business becomes insolvent. This is absolutely about taxes being charged against non-existent profit.
    • jandrewrogers 3y ago
      > You have to have income in order to be taxed. That “income” is being legislated into existence by disallowing the deduction of customary primary operating costs that are allowed in any other business. In effect, it becomes a tax on revenue in the early years of a software company. Taxes tied to revenue are notorious for creating unhealthy and perverse market incentives, which is why very few jurisdictions use them. Many small software businesses are now in the position of potentially literally paying more income tax to the IRS than the profit + asset value over the entire life of the business. It is pretty messed up to make small business owners pay “income” taxes out of their own pocket in the absence of offsetting profit. It is yet another indefensible and unique perversion of reasonable policy under US tax authority.
• dfee 3y ago
  A simple excel-like model to understand this would clear up many confused comments.
• 4b11b4 3y ago
  Amortizing salaries...?
• w4 3y ago
  The real kicker to this entire discussion is this: In a time where America is ostensibly gearing up for peer competition with China and working to onshore manufacturing and development, we are strongly disincentivizing domestic innovation by aggressively taxing R&D while China strongly incentivizes innovation with a 150% bonus deduction for R&D expenses[1]. Wish us luck, because we’re going to need it. [1] https://www2.deloitte.com/content/dam/Deloitte/us/Documents/Tax/us-tax-countrypage-china.pdf https://www2.deloitte.com/content/dam/Deloitte/us/Documents/...
• iamflimflam1 3y ago
  I’m still confused about this. Why does software development have to be classified as R&D? If it’s not classified as R&D then you just treat it as a normal expense and you aren’t impacted by this rule. Am I reading this incorrectly?
• Fawlty 3y ago
  This makes no sense and impacts a lot of early stage software projects. In many cases for bootstrap ones it makes them not financially viable - 100%+ effective tax rate would do that if you optimize for early profitability. Even for VC backed ones, those taxes just eat into your runway. I know a bunch of companies that opt for some weird international setup to try and avoid the effects but it’s really not what you should do in early days…
• jl2718 3y ago
  Who does this benefit in a zero-sum competition scenario, assuming that everybody is affected. For instance, imagine a competition over the AI toaster market. You have Philburn, the broke PhD student with a great idea, Burnright LLC, the toaster algorithm and electronics designer, BurnCo, the manufacture, and B2N, the toast technology venture capitalist. A few scenarios: 1) BurnCo hires Philburn for internal R&D. 2) Burnright develops the tech and licenses to BurnCo. 3) BurnCo contracts Burnright for R&D. 4) Philburn starts Smoke, gets B2N investment, and gets acquired by BurnCo. Which of these, or others, become comparatively advantaged with this new tax treatment?
  • rbultje 3y ago
    > Who does this benefit in a zero-sum competition scenario, assuming that everybody is affected. Foreign-run software companies not affected by this law, big companies with deep pockets that don't need to fear upstart competition, and other industries that are not R&E but can enjoy the lower tax rates from TCJA that were paid for with this revenue.
• ryanwaggoner 3y ago
  We're all going to end up working for dev agencies that build stuff for IP holding companies in Panama, which then license the use of that software back to their parent American tech companies.
• yencabulator 3y ago
  Is anyone here capable of cogently summarizing The Tax Relief for American Families and Workers Act of 2024, its likelihood of passing into law, and whether that will actually fix this? (As far as I can read it, if passed it would delay this until 2025, likely with the intent to change the laws before that but with more time to debate.)
  • cplusplusfellow 3y ago
    How typical of Congress to intentionally set up fights every 2-3 years over completely obvious BS, and summarily shut down the government and scapegoat something else like top-line rates on the "working rich" while playing class warfare politics.
• osigurdson 3y ago
  The problem with taxing software development like this is it is impossible to know the value of the asset up front. A $1M investment might be worth $1B or $0.