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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 he

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!
  - w4 3y ago
    Because it was used to game the CBO score for the 2017 tax bill by offsetting tax cuts with future revenue, making the bill seem more revenue neutral upon analysis. This was done under the presumption that Congress would never actually let something so insane and detrimental to American innovation and competitiveness go into effect, and would obviously roll it back before 2022. The IRS didn’t even have guidance for the change until months and months after the April filing deadline, because why would they prepare guidance for something that will so obviously be rolled back? Then Congress did not roll it back. So here we are.
codingclaws 3y ago
Wait, isn't it an incomplete example? How much money did you start with? In other words, you had to pay the developer some salary before any revenue came in.
- jkelleyrtp 3y ago
  I built a prototype for a potential customer and they agreed to pay me 100k to develop it. Let's say they're my only customer - we're a boutique shop. I didn't need any startup capital - just needed to promise to solve one person's problem.
- mikeyouse 3y ago
  That comes off the balance sheet which doesn’t impact taxes. Eg if they raised $100k from friends/family to start the company, that equity investment has no bearing on the P&L or taxes owed.

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!
- w4 3y ago
  Because it was used to game the CBO score for the 2017 tax bill by offsetting tax cuts with future revenue, making the bill seem more revenue neutral upon analysis. This was done under the presumption that Congress would never actually let something so insane and detrimental to American innovation and competitiveness go into effect, and would obviously roll it back before 2022. The IRS didn’t even have guidance for the change until months and months after the April filing deadline, because why would they prepare guidance for something that will so obviously be rolled back? Then Congress did not roll it back. So here we are.

codingclaws 3y ago

Wait, isn't it an incomplete example? How much money did you start with? In other words, you had to pay the developer some salary before any revenue came in.

jkelleyrtp 3y ago
I built a prototype for a potential customer and they agreed to pay me 100k to develop it. Let's say they're my only customer - we're a boutique shop. I didn't need any startup capital - just needed to promise to solve one person's problem.
mikeyouse 3y ago
That comes off the balance sheet which doesn’t impact taxes. Eg if they raised $100k from friends/family to start the company, that equity investment has no bearing on the P&L or taxes owed.