4 ms·

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 treatm

by 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.
cj 3y ago
I don’t understand why businesses can’t just say that their engineering department is a cost center (COGS) instead of classifying engineer salaries as R&D expenditures. I guess one downside would be not qualifying for the R&D tax credit. The majority of software engineering is the equivalent of janitorial work… keeping servers online, fixing bugs, maintaining services, upgrading and refactoring code, etc. It’s difficult for me to tell how much of this issue is just people making a fuss about the literal interpretation of the tax code compared to how it will, in practice, impact their business. Nearly all accountants try to operate in the gray, in that accountants know how to tweak the numbers just enough to not get in big trouble with the IRS but enough that the business can slide through various loopholes. I have a feeling most accountants would just say “reclassify your engineers as maintenance workers, COGS” as a solution.
- csdreamer7 3y ago
  > I don’t understand why businesses can’t just say that their engineering department is a cost center (COGS) instead of classifying engineer salaries as R&D expenditures. They used to be able to. Then Trump and the Republicans came into power and changed it in 2017; the first year to be effective is 2022. https://bipartisanpolicy.org/blog/congress-is-running-out-of-time-to-fix-a-critical-rd-tax-issue-in-2023/ https://bipartisanpolicy.org/blog/congress-is-running-out-of... This was to help finance that 20% tax loophole as far as I understand it. https://www.nytimes.com/2018/08/08/us/politics/tax-deduction-pass-through-businesses.html https://www.nytimes.com/2018/08/08/us/politics/tax-deduction...
  - cj 3y ago
    The article you linked to is about R&D. The point I was making is that software engineers don’t need to be classified as R&D. Why can’t a company lump engineers in the same category as technical support? (Which doesn’t need to be amortized)
    - gumby 3y ago
      Before the 2017 change you could and should have if they were not engaged in actual R&D. But people used to lump them into R&D anyway because of the preferential tax treatment (you also used to get special treatment for NOL, which you can't any more). Software development doesn't generally follow GAAP's model because unless you're IBM or Oracle the same people sometimes fix bugs and sometimes develop new features. The GAAP rules aren't insane: if your company buys a HQ building it's assumed to last 40 years. And since each year you "get some value" (e.g. you don't pay rent to someone else) you split the value of that purchase over 40 years. If you buy a computer you amortize it over 3 years because you're likely to "use it up" and replace it after that. And so if you're a car mfr you might have some people developing a new automatic transmission. You expect to then put those things into new cars for some time to come. So GAAP says the R&D that went into the new transmission is amortized while the cost of making one and sticking it into a car you sell is indeed COGS. If you're an early stage pharma startup almost all you do is R&D for quite a long time. For a software startup you can say the same thing: even if you ship your MVP, every bug you fix is turning it into the "real thing" (unlike Oracle, above, who can split maintenance and development into two buckets). So I favor accelerated recognition of R&D costs for startups. Not sure about established companies.
cplusplusfellow 3y ago
I respectfully disagree. By these arguments, literally every deduction from revenue to calculate taxable income is a "loophole". How far does that go? What's more absurd than life itself is that you can deduct 100% of a 6000GVWR truck which you financed for 7 years, but my engineers salaries aren't deductible because I'm "building some product" so that's "development". I mean give me a freaking break.

by gumby 3y ago

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.

cj 3y ago

I don’t understand why businesses can’t just say that their engineering department is a cost center (COGS) instead of classifying engineer salaries as R&D expenditures. I guess one downside would be not qualifying for the R&D tax credit. The majority of software engineering is the equivalent of janitorial work… keeping servers online, fixing bugs, maintaining services, upgrading and refactoring code, etc. It’s difficult for me to tell how much of this issue is just people making a fuss about the literal interpretation of the tax code compared to how it will, in practice, impact their business. Nearly all accountants try to operate in the gray, in that accountants know how to tweak the numbers just enough to not get in big trouble with the IRS but enough that the business can slide through various loopholes. I have a feeling most accountants would just say “reclassify your engineers as maintenance workers, COGS” as a solution.

csdreamer7 3y ago
> I don’t understand why businesses can’t just say that their engineering department is a cost center (COGS) instead of classifying engineer salaries as R&D expenditures. They used to be able to. Then Trump and the Republicans came into power and changed it in 2017; the first year to be effective is 2022. https://bipartisanpolicy.org/blog/congress-is-running-out-of-time-to-fix-a-critical-rd-tax-issue-in-2023/ https://bipartisanpolicy.org/blog/congress-is-running-out-of... This was to help finance that 20% tax loophole as far as I understand it. https://www.nytimes.com/2018/08/08/us/politics/tax-deduction-pass-through-businesses.html https://www.nytimes.com/2018/08/08/us/politics/tax-deduction...
- cj 3y ago
  The article you linked to is about R&D. The point I was making is that software engineers don’t need to be classified as R&D. Why can’t a company lump engineers in the same category as technical support? (Which doesn’t need to be amortized)
  - gumby 3y ago
    Before the 2017 change you could and should have if they were not engaged in actual R&D. But people used to lump them into R&D anyway because of the preferential tax treatment (you also used to get special treatment for NOL, which you can't any more). Software development doesn't generally follow GAAP's model because unless you're IBM or Oracle the same people sometimes fix bugs and sometimes develop new features. The GAAP rules aren't insane: if your company buys a HQ building it's assumed to last 40 years. And since each year you "get some value" (e.g. you don't pay rent to someone else) you split the value of that purchase over 40 years. If you buy a computer you amortize it over 3 years because you're likely to "use it up" and replace it after that. And so if you're a car mfr you might have some people developing a new automatic transmission. You expect to then put those things into new cars for some time to come. So GAAP says the R&D that went into the new transmission is amortized while the cost of making one and sticking it into a car you sell is indeed COGS. If you're an early stage pharma startup almost all you do is R&D for quite a long time. For a software startup you can say the same thing: even if you ship your MVP, every bug you fix is turning it into the "real thing" (unlike Oracle, above, who can split maintenance and development into two buckets). So I favor accelerated recognition of R&D costs for startups. Not sure about established companies.

cplusplusfellow 3y ago

I respectfully disagree. By these arguments, literally every deduction from revenue to calculate taxable income is a "loophole". How far does that go? What's more absurd than life itself is that you can deduct 100% of a 6000GVWR truck which you financed for 7 years, but my engineers salaries aren't deductible because I'm "building some product" so that's "development". I mean give me a freaking break.