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> For almost 70 years, American companies could deduct 100% of qualified research and development spending in the year they incurred the costs. Salaries, softwa

> For almost 70 years, American companies could deduct 100% of qualified research and development spending in the year they incurred the costs. Salaries, software, contractor payments — if it contributed to creating or improving a product, it came off the top of a firm’s taxable income. According to the article, as long as the tech workers contribute to improving or creating a product (be it games or apps), they count as R&D cost.

dtagames 1y ago
I worked in games 2 years before the studio shutdown. It wasn't because of "R&D" tax breaks. None of the recent layoffs or studio closures are explained by that. Nor are the Microsoft, Dell, or Intel layoffs which aren't game-related.
gregw2 1y ago
To qualify for R&D tax breaks, IIRC having identified qualifying work for a segment of my firm, there must be elements of hypothesis, experimentation, results, etc that I would consider more science-y 'Research' than just turn the crank software 'Development.' It has to be both. And that has to be documented. And offshore research+development doesn't get you a tax break. The irony is that the R+D tax actually discourages onshore pure development as a 'trade' and encourages a split of onshore R+D and offshore D. This sort of thing appears to be self-reported; I don't know if it ever gets audited. I don't know if big tech lies or creatively interprets what counts and that has contributed to the issue. But this article sort of over-represents what qualifies as R&D for US tax purposes.
- ghc 1y ago
  Under the new rules, all software development, excluding bug fixes, must be expensed in this manner. "Turn the crank" development is included. https://larsco.com/blog/section-174-updates-navigating-the-impact-on-software-development https://larsco.com/blog/section-174-updates-navigating-the-i...
  - ndriscoll 1y ago
    Which makes sense. Software is functionally a capital asset, so really it should be depreciated across the length of the copyright term (unless the company wants to release it to the public domain to fully depreciate it early).
    - robocat 1y ago
      Maybe software should be a capital asset, but these depreciation rules don't fix that issue. The rule says if you pay someone $200k to develop software: then you now have a $200k asset that then devalues to value of $0 over 5 years (starting midyear). That's just plain weird. For our example a depreciation table might look like: Year, %Amortized, Amount 2025 10% $20,000 2026 20% $40,000 2027 20% $40,000 2028 20% $40,000 2029 20% $40,000 2030 10% $20,000 The final effect of the 174 rule change is that you still finally end up with a software asset worth $0. However you now have taxable income of $200k in year one and expenses equalling $200k spread over 5 years. The taxes paid could be a lot: although the taxation money is really just being lent to the government for a few years at 0%. The actual financial costs are fucking complicated. Understanding accounting and taxes are two absolutely essential skills if you ever wish to be a founder (and useful anyways). Finding a solution to dealing with the valuation of assets is difficult. The historical solution of depreciation is broken for software, intellectual property and goodwill. In theory, taxes on dividends and capital gains taxation already deal with the issue (company taxation at x% kinda ends up at $0 because the shareholder pays y% and claims back the x% through imputation). And remember that salaries are properly taxed.
      - ndriscoll 1y ago
        Right, that weirdness is why it should be depreciated over the length of the copyright term. You spend $200k this year, and now you have a useful asset for the next 95 years (or 120 years if you never publish it). If it turns out it's not useful, we could then allow companies publish the source and release it into the public domain to immediately "destroy" the asset (the copyright) and claim their deduction. So failed r&d projects would be deductible right away as long as the public gets them, and ones that result in a useful asset get depreciated based on how long they actually last, which is currently potentially multiple lifetimes.
- nitwit005 1y ago
  At the last couple of companies we worked at, they just sent out surveys on what time went to different activities. We couldn't possibly fill that out honestly, as that wasn't tracked. Which, I think is an overlooked part of this. They must constantly have gotten feedback that people were lying to them.

dtagames 1y ago

I worked in games 2 years before the studio shutdown. It wasn't because of "R&D" tax breaks. None of the recent layoffs or studio closures are explained by that. Nor are the Microsoft, Dell, or Intel layoffs which aren't game-related.

gregw2 1y ago

To qualify for R&D tax breaks, IIRC having identified qualifying work for a segment of my firm, there must be elements of hypothesis, experimentation, results, etc that I would consider more science-y 'Research' than just turn the crank software 'Development.' It has to be both. And that has to be documented. And offshore research+development doesn't get you a tax break. The irony is that the R+D tax actually discourages onshore pure development as a 'trade' and encourages a split of onshore R+D and offshore D. This sort of thing appears to be self-reported; I don't know if it ever gets audited. I don't know if big tech lies or creatively interprets what counts and that has contributed to the issue. But this article sort of over-represents what qualifies as R&D for US tax purposes.

ghc 1y ago
Under the new rules, all software development, excluding bug fixes, must be expensed in this manner. "Turn the crank" development is included. https://larsco.com/blog/section-174-updates-navigating-the-impact-on-software-development https://larsco.com/blog/section-174-updates-navigating-the-i...
- ndriscoll 1y ago
  Which makes sense. Software is functionally a capital asset, so really it should be depreciated across the length of the copyright term (unless the company wants to release it to the public domain to fully depreciate it early).
  - robocat 1y ago
    Maybe software should be a capital asset, but these depreciation rules don't fix that issue. The rule says if you pay someone $200k to develop software: then you now have a $200k asset that then devalues to value of $0 over 5 years (starting midyear). That's just plain weird. For our example a depreciation table might look like: Year, %Amortized, Amount 2025 10% $20,000 2026 20% $40,000 2027 20% $40,000 2028 20% $40,000 2029 20% $40,000 2030 10% $20,000 The final effect of the 174 rule change is that you still finally end up with a software asset worth $0. However you now have taxable income of $200k in year one and expenses equalling $200k spread over 5 years. The taxes paid could be a lot: although the taxation money is really just being lent to the government for a few years at 0%. The actual financial costs are fucking complicated. Understanding accounting and taxes are two absolutely essential skills if you ever wish to be a founder (and useful anyways). Finding a solution to dealing with the valuation of assets is difficult. The historical solution of depreciation is broken for software, intellectual property and goodwill. In theory, taxes on dividends and capital gains taxation already deal with the issue (company taxation at x% kinda ends up at $0 because the shareholder pays y% and claims back the x% through imputation). And remember that salaries are properly taxed.
    - ndriscoll 1y ago
      Right, that weirdness is why it should be depreciated over the length of the copyright term. You spend $200k this year, and now you have a useful asset for the next 95 years (or 120 years if you never publish it). If it turns out it's not useful, we could then allow companies publish the source and release it into the public domain to immediately "destroy" the asset (the copyright) and claim their deduction. So failed r&d projects would be deductible right away as long as the public gets them, and ones that result in a useful asset get depreciated based on how long they actually last, which is currently potentially multiple lifetimes.
nitwit005 1y ago
At the last couple of companies we worked at, they just sent out surveys on what time went to different activities. We couldn't possibly fill that out honestly, as that wasn't tracked. Which, I think is an overlooked part of this. They must constantly have gotten feedback that people were lying to them.