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> like building a factory Also like building or buying a set of tools People here love to complain about this rule but they generally don’t have any reason to

> like building a factory Also like building or buying a set of tools People here love to complain about this rule but they generally don’t have any reason to justify themselves other than “it’s bad for me personally”. You’re building software. That software is generally intended for use in the future. It is not “consumed” this year. Youre not deleting your repos every year. You’re a tech a company. Your product is an asset that you built. There’s an argument that maintenance could be carved out but generally speaking most development is development. Triply so for startups. The startups crying that they shouldn’t have to pay taxes until they’re bigger can deal. The only reason you have a tax bill is because you have taxable revenue.

lazide 2y ago
The vast majority of tools you can expense the year you buy them. It's only large capital expenditures (that usually can be resold for similar amounts as purchased at) that require amortization/depreciation. For example, an Excavator. Same if you build a house, building, etc. you can expense the labor that went into it that year, as well as materials consumed in building in. [https://onekeyresources.milwaukeetool.com/en/when-to-expense-vs-capitalize https://onekeyresources.milwaukeetool.com/en/when-to-expense...] There are situations the labor would be considered a capital expenditure, which you can then get ROI off of, but amortizing labor costs over multiple years is a pretty odd situation. If you couldn't, it would get reaaaaly ugly real fast, since the big challenge here is that cash gets spent this year, while it is only deductable against income taxes years later. So if I get $1mln in income now, and spend $1mln on say software R&D, i'd end up owing a bunch of taxes on the $1mln of income using cash I just don't have anymore. In the case of an excavator or whatever, there is a sellable asset which someone can turn around and sell to get cash if there is a problem. In the case of construction labor, there is usually some improved property or accounts receivable somewhere that can be used to pay the taxes too. In software R&D there rarely is. Outsourcing can do it though.
- prepend 2y ago
  > The vast majority of tools you can expense the year you buy them. Not ones that you build.
  - lazide 2y ago
    Materials and labor to build them, yes you can. Same for if they're not overly expensive or valuable. For it to be a capital expense they'd need to be large, sellable assets. For example, formwork? Jigs (except for something really exceptionally expensive perhaps)? Hand tools? Less-expensive-than-a-truck custom machinery? Not a problem to write off as a normal expense. 'Gigapress'? Yeah, thats a capital investment/expense. The difference here is 'is this something you built/bought to get a job done' (aka an expense), or 'is this a large valuable asset (with a market value)'. It's a sliding scale with many exceptions. Someones $100k snap-on set for example MIGHT be considered a Capital expense, not a normal business expense, depending on the circumstances and scale. There is a pretty sizable cap too where you can do whatever and not worry about it too much, a bit over $1mln if I remember correctly.
    - jncfhnb 2y ago
      Yeah, this is all made up buddy. The dollar value is not a consideration. There’s no such thing as $1M cap. Or any cap. The salient thing here is how long they are expected to last. Super cheap items are generally not going to last very long so yes they do trend towards expensing. There is ABSOLUTELY no requirement that a capital asset be sellable or have any market value. You get an F-
      - lazide 2y ago
        You need a much better accountant. Tax code section 179. With the 1 million cap. It gets adjusted, and was recently 1.222 million I believe. [https://www.law.cornell.edu/uscode/text/26/179 https://www.law.cornell.edu/uscode/text/26/179] “ (a) Treatment as expenses A taxpayer may elect to treat the cost of any section 179 property as an expense which is not chargeable to capital account. Any cost so treated shall be allowed as a deduction for the taxable year in which the section 179 property is placed in service. (b) Limitations (1) Dollar limitation The aggregate cost which may be taken into account under subsection (a) for any taxable year shall not exceed $1,000,000.” [https://www.executech.com/insights/1-million-deduction-for-new-equipment/ https://www.executech.com/insights/1-million-deduction-for-n...] For something to be considered an asset, it has to generally be “property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.” While there are certainly edge cases where something would be impossible to sell or value on a market but still considered an asset; that gets pretty murky for a number of reasons no? An asset which no one would ever buy is also going to be hard to consider something which someone would take as payment for a debt, meet a commitment, or leave as a legacy. Even a pile of beany babies has some articulable value. If it isn’t an asset, it is likely an expense. Most businesses do not account for or attempt to track the things I’ve been calling out (hand tools, etc.) at the level they consider them assets. Any more than they track a desk or whatever. It’s de minimus. Would they get worked up if someone walked off with them? Sure. But they aren’t depreciating their stocks of beaten up wrenches or counting their hammers each year, anymore than they are doing that for desks. Unless they have a really bored group of bean counters or are so large they have no choice, because they literally bought like 10k desks and now that is real money. Excavators, bobcats, etc? Yeah. Everyone is tracking those unless they’re really screwing up their taxes.
- jncfhnb 2y ago
  > So if I get $1mln in income now, and spend $1mln on say software R&D, i'd end up owing a bunch of taxes on the $1mln of income using cash I just don't have anymore. Then go get a loan which should be easy because you’ve demonstrated $1M revenue with 100% gross profit margin. A complete non issue and painfully unrealistic because how are you paying for the $1M capitalized expenses before you have the revenues? Yes, you have to raise funds to start a business. Shocking.
  - 1auralynn 2y ago
    Have you ever bootstrapped a business? If no, maybe you wouldn't be so flippant here if you had. Loans are not easy to get as a small business, particularly ones with favorable interest rates.
    - jncfhnb 2y ago
      Loans are exceptionally easy to get when you have $1M in REVENUE with NO OPERATIONAL EXPENSES. It’s the premise that’s contrived here.
      - lazide 2y ago
        If you are a software company, that $1 million you spent on software devs is your operating expense. Actual profit that year is $0. On a cash accounting basis it’s actually worse, because that company is seriously in the red after paying taxes with the new rules. Previously it would have netted out at $0. Of course someone is going to be hesitant to loan money in that situation, unless you can cut those expenses. Which if you’re in a highly competitive market could mean death to your company. Is it overly simplistic? No shit, it’s an example to illustrate why startups are getting worked up right now because they have sudden cashflow issues. And why larger companies are also doing layoffs and trying very hard to reduce their software dev spend. Including outsourcing, where they can. Because the actual way most companies will solve this once they figure it out is to not spend all their cash on software dev, and instead reduce it significantly. Because this new treatment means instead of being able to write income off as a straight business expense in the year they spent it, they have to pay taxes on money they’ve already spent in that year, and then can only make it up fractionally after that. So in the example I gave? Companies taxes that year are zero with the prior R&D rules. They had zero taxable income. With the updates to section 174, now they owe taxes on $800k of taxable income the first year. Huge difference. They can still eventually write off the whole $1mln they spent in year one, but that is a hell of a big difference in cash flow. Even if dev spend is flat for 5 years, it will take that long for it to look the same cash flow wise. And it’s rarely ever actually flat. And that is not even taking into account the increased cost of money going on, tightening access to credit. If you pulled off this situation while being in a safe industry that a bank will write a loan for you easily, then cool. But they’re surprisingly weird sometimes, and if you’re in year one it can be hard to get anyone to return your calls at all if there is anything ‘non-traditional’ about you. Which is most startups.And the ‘startup banks’ where it was easy (SVB and first republic) all got nuked. So you could easily end up paying 25% APR on short term financing to close this gap, if anyone is talking to you at all.
- gamblor956 2y ago
  The vast majority of tools you can expense the year you buy them That is not true in the U.S. All capital assets must be depreciated. This includes all tools and equipment except for very short life consumables (< 1 year).
  - lazide 2y ago
    No one sane is depreciating hand tools or anything smaller/less valuable than a bobcat. At least for businesses that aren’t doing millions of dollars worth of them. Why do you think they should? Care to quote a section of the tax code? No one, including the IRS, wants to deal with mountains of BS paperwork over small stuff like this. For a description [https://www.trustbgw.com/blog/2016/07/08/capitalize-fixed-assets-not-question#:~:text=Fixed%20assets%20are%20typically%20expensive,the%20minimum%20of%20one%20year https://www.trustbgw.com/blog/2016/07/08/capitalize-fixed-as....], “To determine when to expense and when to capitalize, consider both the de minimus rule and the useful economic life. The de minimis rule allows you to expense any item that may potentially be capitalized so long as said expense (or the sum of related expenses) does not significantly distort your bottom line. In other words, these expenses cannot make up a large percentage of your total expenses, subsequently providing you with an extraordinarily low income. A strong metric to follow is that the sum of the expenses should be less than 0.1% of your gross receipts for the year, and/or 2% of your total depreciation and amortization expense for the year. Any item that will retain no value after 12 months may be expensed. Do note that the IRS may frown upon deductions that appear to take advantage of end-of-year timing. If you incur an expense in December and then consume the item in January, you may need to argue that the deduction did not distort your bottom line in order to take it.“
    - jncfhnb 2y ago
      There is no paperwork involved in depreciating a piece of furniture over a standard schedule. You seem to be of the belief that you are required to show documentation tracking individual assets. That’s not true any more than proving the payment actually occurre as for expenses. The de minimus rule is, as your own quote indicates, for a tiny, tiny subset of your assets.
addicted 2y ago
> People here love to complain about this rule but they generally don’t have any reason to justify themselves other than “it’s bad for me personally”. Actually the justification is pretty simple. Tech startups are the future of the country and the world. That’s how much of the wealth has been built in this country for the past few decades. And there’s no other country in the world that taxes this way, which means that every other country has an edge over the U.S. now when it comes to tech startups (or frankly, any startup where the majority of the cost is human capital). It’s even worse in Tech because it’s so easy to work remotely so there’s no loss to establishing a company in the UK for example. Finally, if a country does impose a certain taxation disadvantage to itself, it’s usually a trade off against some benefit. But it’s also hard to see what the benefit is here because the government is still getting the same money over a few years span. So it’s dumb because the impact is entirely negative. That’s why no other country has done such a dumb thing either.
- toomuchtodo 2y ago
  > Tech startups are the future of the country and the world. That’s how much of the wealth has been built in this country for the past few decades. I find this assertion a challenge to agree with. Tech startups certainly market themselves as the future, but in reality, are a vocal industry projecting outsized impact while soaking up capital for inefficient uses (products with no market fit, ecosystem participant self enrichment, etc). > That’s how much of the wealth has been built in this country for the past few decades. This is not necessarily a net positive. Facebook/Meta, for example. Lots of tech wealth is no different than wealth created by big oil or tobacco, and a country adverse to supporting Tech will do just fine without. Certainly, the result will be worse for founders and investors (“startup, cash in, sell out, bro down”), but not for the general public. Wealth for wealth’s sake while diffused harm is caused in the process (whether through the product offered or the inefficient burn of capital) is not an outcome to be supported by public policy. Importantly, we have to be able to evaluate and ask ourselves: is this value? Is this innovation? Or is this just some form of performance art masquerading for the benefit of those selling us magic beans?
  - toomuchtodo 2y ago
grfjurrcv 2y ago
It’s not a capital expense because you can’t sell it! Literally no one is going to buy your garbage code, ~ever. It has zero value; in fact it has negative value — you must maintain it or risk security issues etc. The idea that it’s comparable to capital expenses in other industries is ridiculous. Approximately no one buys code. They might buy working businesses that happen to use code for something or another. They don’t buy code. (If you are literally selling code, sure, you can call it a capital expense. That’s approximately nobody though).
- dragonwriter 2y ago
  > It’s not a capital expense because you can’t sell it! Yes, you can sell IP like code copyrights. Like a factory, you generally won't if you are able to make money with it, and also like a factory, there’s often a limited pool of buyers if you need to resort to it.
mulmen 2y ago
> Youre not deleting your repos every year. Maybe you aren’t. Corporate America can be extremely inefficient about building software.
verdverm 2y ago
> You’re building software. It gets interesting when you think of responding to an outage. Are you "repairing" something that is broken, or "fixing" a bug and improving the software? It's hard to analogize what we do to the historical context in which the laws were written. > The startups crying that they shouldn’t have to pay taxes until they’re bigger can deal. The same amount of taxes get paid, it's just about when / how it is spread out. The rule change means that the youngest and smallest companies have to bear a significant burden. For these companies, the lifespan of software is much shorter, and is arguably much more "researchy" in that we are trying out lots of things to see what works. Large tech companies like MSFT, GOOG, APPL, ... they can manage this because they have the expert accountants and cashflows to weather the change over
erik_seaberg 2y ago
A production service is never done. You've realized less than 20% of the total cost in year one, and the payroll spend in years two through five will steadily increase as the team expands. Amortization spreads the front-loaded expense of building a factory out to the same timeframe as the revenue it brings, but software development expenses are slightly back-loaded if anything.
- jncfhnb 2y ago
  Amortization also spreads the back loaded expenses out to the timeframe of the revenue

lazide 2y ago

The vast majority of tools you can expense the year you buy them. It's only large capital expenditures (that usually can be resold for similar amounts as purchased at) that require amortization/depreciation. For example, an Excavator. Same if you build a house, building, etc. you can expense the labor that went into it that year, as well as materials consumed in building in. [https://onekeyresources.milwaukeetool.com/en/when-to-expense-vs-capitalize https://onekeyresources.milwaukeetool.com/en/when-to-expense...] There are situations the labor would be considered a capital expenditure, which you can then get ROI off of, but amortizing labor costs over multiple years is a pretty odd situation. If you couldn't, it would get reaaaaly ugly real fast, since the big challenge here is that cash gets spent this year, while it is only deductable against income taxes years later. So if I get $1mln in income now, and spend $1mln on say software R&D, i'd end up owing a bunch of taxes on the $1mln of income using cash I just don't have anymore. In the case of an excavator or whatever, there is a sellable asset which someone can turn around and sell to get cash if there is a problem. In the case of construction labor, there is usually some improved property or accounts receivable somewhere that can be used to pay the taxes too. In software R&D there rarely is. Outsourcing can do it though.

prepend 2y ago
> The vast majority of tools you can expense the year you buy them. Not ones that you build.
- lazide 2y ago
  Materials and labor to build them, yes you can. Same for if they're not overly expensive or valuable. For it to be a capital expense they'd need to be large, sellable assets. For example, formwork? Jigs (except for something really exceptionally expensive perhaps)? Hand tools? Less-expensive-than-a-truck custom machinery? Not a problem to write off as a normal expense. 'Gigapress'? Yeah, thats a capital investment/expense. The difference here is 'is this something you built/bought to get a job done' (aka an expense), or 'is this a large valuable asset (with a market value)'. It's a sliding scale with many exceptions. Someones $100k snap-on set for example MIGHT be considered a Capital expense, not a normal business expense, depending on the circumstances and scale. There is a pretty sizable cap too where you can do whatever and not worry about it too much, a bit over $1mln if I remember correctly.
  - jncfhnb 2y ago
    Yeah, this is all made up buddy. The dollar value is not a consideration. There’s no such thing as $1M cap. Or any cap. The salient thing here is how long they are expected to last. Super cheap items are generally not going to last very long so yes they do trend towards expensing. There is ABSOLUTELY no requirement that a capital asset be sellable or have any market value. You get an F-
    - lazide 2y ago
      You need a much better accountant. Tax code section 179. With the 1 million cap. It gets adjusted, and was recently 1.222 million I believe. [https://www.law.cornell.edu/uscode/text/26/179 https://www.law.cornell.edu/uscode/text/26/179] “ (a) Treatment as expenses A taxpayer may elect to treat the cost of any section 179 property as an expense which is not chargeable to capital account. Any cost so treated shall be allowed as a deduction for the taxable year in which the section 179 property is placed in service. (b) Limitations (1) Dollar limitation The aggregate cost which may be taken into account under subsection (a) for any taxable year shall not exceed $1,000,000.” [https://www.executech.com/insights/1-million-deduction-for-new-equipment/ https://www.executech.com/insights/1-million-deduction-for-n...] For something to be considered an asset, it has to generally be “property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.” While there are certainly edge cases where something would be impossible to sell or value on a market but still considered an asset; that gets pretty murky for a number of reasons no? An asset which no one would ever buy is also going to be hard to consider something which someone would take as payment for a debt, meet a commitment, or leave as a legacy. Even a pile of beany babies has some articulable value. If it isn’t an asset, it is likely an expense. Most businesses do not account for or attempt to track the things I’ve been calling out (hand tools, etc.) at the level they consider them assets. Any more than they track a desk or whatever. It’s de minimus. Would they get worked up if someone walked off with them? Sure. But they aren’t depreciating their stocks of beaten up wrenches or counting their hammers each year, anymore than they are doing that for desks. Unless they have a really bored group of bean counters or are so large they have no choice, because they literally bought like 10k desks and now that is real money. Excavators, bobcats, etc? Yeah. Everyone is tracking those unless they’re really screwing up their taxes.
jncfhnb 2y ago
> So if I get $1mln in income now, and spend $1mln on say software R&D, i'd end up owing a bunch of taxes on the $1mln of income using cash I just don't have anymore. Then go get a loan which should be easy because you’ve demonstrated $1M revenue with 100% gross profit margin. A complete non issue and painfully unrealistic because how are you paying for the $1M capitalized expenses before you have the revenues? Yes, you have to raise funds to start a business. Shocking.
- 1auralynn 2y ago
  Have you ever bootstrapped a business? If no, maybe you wouldn't be so flippant here if you had. Loans are not easy to get as a small business, particularly ones with favorable interest rates.
  - jncfhnb 2y ago
    Loans are exceptionally easy to get when you have $1M in REVENUE with NO OPERATIONAL EXPENSES. It’s the premise that’s contrived here.
    - lazide 2y ago
      If you are a software company, that $1 million you spent on software devs is your operating expense. Actual profit that year is $0. On a cash accounting basis it’s actually worse, because that company is seriously in the red after paying taxes with the new rules. Previously it would have netted out at $0. Of course someone is going to be hesitant to loan money in that situation, unless you can cut those expenses. Which if you’re in a highly competitive market could mean death to your company. Is it overly simplistic? No shit, it’s an example to illustrate why startups are getting worked up right now because they have sudden cashflow issues. And why larger companies are also doing layoffs and trying very hard to reduce their software dev spend. Including outsourcing, where they can. Because the actual way most companies will solve this once they figure it out is to not spend all their cash on software dev, and instead reduce it significantly. Because this new treatment means instead of being able to write income off as a straight business expense in the year they spent it, they have to pay taxes on money they’ve already spent in that year, and then can only make it up fractionally after that. So in the example I gave? Companies taxes that year are zero with the prior R&D rules. They had zero taxable income. With the updates to section 174, now they owe taxes on $800k of taxable income the first year. Huge difference. They can still eventually write off the whole $1mln they spent in year one, but that is a hell of a big difference in cash flow. Even if dev spend is flat for 5 years, it will take that long for it to look the same cash flow wise. And it’s rarely ever actually flat. And that is not even taking into account the increased cost of money going on, tightening access to credit. If you pulled off this situation while being in a safe industry that a bank will write a loan for you easily, then cool. But they’re surprisingly weird sometimes, and if you’re in year one it can be hard to get anyone to return your calls at all if there is anything ‘non-traditional’ about you. Which is most startups.And the ‘startup banks’ where it was easy (SVB and first republic) all got nuked. So you could easily end up paying 25% APR on short term financing to close this gap, if anyone is talking to you at all.
gamblor956 2y ago
The vast majority of tools you can expense the year you buy them That is not true in the U.S. All capital assets must be depreciated. This includes all tools and equipment except for very short life consumables (< 1 year).
- lazide 2y ago
  No one sane is depreciating hand tools or anything smaller/less valuable than a bobcat. At least for businesses that aren’t doing millions of dollars worth of them. Why do you think they should? Care to quote a section of the tax code? No one, including the IRS, wants to deal with mountains of BS paperwork over small stuff like this. For a description [https://www.trustbgw.com/blog/2016/07/08/capitalize-fixed-assets-not-question#:~:text=Fixed%20assets%20are%20typically%20expensive,the%20minimum%20of%20one%20year https://www.trustbgw.com/blog/2016/07/08/capitalize-fixed-as....], “To determine when to expense and when to capitalize, consider both the de minimus rule and the useful economic life. The de minimis rule allows you to expense any item that may potentially be capitalized so long as said expense (or the sum of related expenses) does not significantly distort your bottom line. In other words, these expenses cannot make up a large percentage of your total expenses, subsequently providing you with an extraordinarily low income. A strong metric to follow is that the sum of the expenses should be less than 0.1% of your gross receipts for the year, and/or 2% of your total depreciation and amortization expense for the year. Any item that will retain no value after 12 months may be expensed. Do note that the IRS may frown upon deductions that appear to take advantage of end-of-year timing. If you incur an expense in December and then consume the item in January, you may need to argue that the deduction did not distort your bottom line in order to take it.“
  - jncfhnb 2y ago
    There is no paperwork involved in depreciating a piece of furniture over a standard schedule. You seem to be of the belief that you are required to show documentation tracking individual assets. That’s not true any more than proving the payment actually occurre as for expenses. The de minimus rule is, as your own quote indicates, for a tiny, tiny subset of your assets.

addicted 2y ago

> People here love to complain about this rule but they generally don’t have any reason to justify themselves other than “it’s bad for me personally”. Actually the justification is pretty simple. Tech startups are the future of the country and the world. That’s how much of the wealth has been built in this country for the past few decades. And there’s no other country in the world that taxes this way, which means that every other country has an edge over the U.S. now when it comes to tech startups (or frankly, any startup where the majority of the cost is human capital). It’s even worse in Tech because it’s so easy to work remotely so there’s no loss to establishing a company in the UK for example. Finally, if a country does impose a certain taxation disadvantage to itself, it’s usually a trade off against some benefit. But it’s also hard to see what the benefit is here because the government is still getting the same money over a few years span. So it’s dumb because the impact is entirely negative. That’s why no other country has done such a dumb thing either.

toomuchtodo 2y ago
> Tech startups are the future of the country and the world. That’s how much of the wealth has been built in this country for the past few decades. I find this assertion a challenge to agree with. Tech startups certainly market themselves as the future, but in reality, are a vocal industry projecting outsized impact while soaking up capital for inefficient uses (products with no market fit, ecosystem participant self enrichment, etc). > That’s how much of the wealth has been built in this country for the past few decades. This is not necessarily a net positive. Facebook/Meta, for example. Lots of tech wealth is no different than wealth created by big oil or tobacco, and a country adverse to supporting Tech will do just fine without. Certainly, the result will be worse for founders and investors (“startup, cash in, sell out, bro down”), but not for the general public. Wealth for wealth’s sake while diffused harm is caused in the process (whether through the product offered or the inefficient burn of capital) is not an outcome to be supported by public policy. Importantly, we have to be able to evaluate and ask ourselves: is this value? Is this innovation? Or is this just some form of performance art masquerading for the benefit of those selling us magic beans?
- toomuchtodo 2y ago

grfjurrcv 2y ago

It’s not a capital expense because you can’t sell it! Literally no one is going to buy your garbage code, ~ever. It has zero value; in fact it has negative value — you must maintain it or risk security issues etc. The idea that it’s comparable to capital expenses in other industries is ridiculous. Approximately no one buys code. They might buy working businesses that happen to use code for something or another. They don’t buy code. (If you are literally selling code, sure, you can call it a capital expense. That’s approximately nobody though).

dragonwriter 2y ago
> It’s not a capital expense because you can’t sell it! Yes, you can sell IP like code copyrights. Like a factory, you generally won't if you are able to make money with it, and also like a factory, there’s often a limited pool of buyers if you need to resort to it.

mulmen 2y ago

> Youre not deleting your repos every year. Maybe you aren’t. Corporate America can be extremely inefficient about building software.

verdverm 2y ago

> You’re building software. It gets interesting when you think of responding to an outage. Are you "repairing" something that is broken, or "fixing" a bug and improving the software? It's hard to analogize what we do to the historical context in which the laws were written. > The startups crying that they shouldn’t have to pay taxes until they’re bigger can deal. The same amount of taxes get paid, it's just about when / how it is spread out. The rule change means that the youngest and smallest companies have to bear a significant burden. For these companies, the lifespan of software is much shorter, and is arguably much more "researchy" in that we are trying out lots of things to see what works. Large tech companies like MSFT, GOOG, APPL, ... they can manage this because they have the expert accountants and cashflows to weather the change over

erik_seaberg 2y ago

A production service is never done. You've realized less than 20% of the total cost in year one, and the payroll spend in years two through five will steadily increase as the team expands. Amortization spreads the front-loaded expense of building a factory out to the same timeframe as the revenue it brings, but software development expenses are slightly back-loaded if anything.

jncfhnb 2y ago
Amortization also spreads the back loaded expenses out to the timeframe of the revenue