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This is insane, how does it make sense? Employee salary expenses are no different from other expenses to run your business. Imagine they did this for raw materi

This is insane, how does it make sense? Employee salary expenses are no different from other expenses to run your business. Imagine they did this for raw material instead, a restaurant could only expense 20% of the food that they sell. If they purchased $100 worth of food, but could only sell $50 worth of it, they have to pay tax on that even when making a net loss overall. It just does not make any sense. There would've been a huge uproar if this was done for cost of goods. Why are employee salary expenses any different?

UncleMeat 1y ago
There are other expenses that are also amortized.
sokoloff 1y ago
Now imagine that a restaurant buys 100 tables, 500 chairs, kitchen equipment, cutlery for 800 people, signage, a security system, and does a remodeling before opening. (Or an airline buys an airplane. Or a hotel chain builds a hotel.) Should they be able to expense all of those items that provide value for multiple years in a single year? Does software development provide value exclusively in the year it's done? Or over multiple years?
- londons_explore 1y ago
  It's only shifting what year the government gets its revenue. The government should simply let the company choose how to do it, but if they choose anything other than year 1 interest will be payable at government bond rates.
  - warkdarrior 1y ago
    It's also massively shifting the companies' cash flows. The company paid $X for R&D this year, but for tax purposes 80% of that $X expense is moved to next four years. So for this year's tax purposes, the company R&D expenses are much lower than what the company paid.
- demosthanos 1y ago
  The reason that we require you to deduct an expense over years for some things is because they have a resale value that needs to be accounted for. It's not a pure expense because you have an asset with real value that came out of the purchase. Employee time has no resale value. Once used it's gone, so employee salaries are expenses, not investments. The only possible justification for the Section 174 R&D changes is that employees working in R&D theoretically are producing something which does have a resale value, so there's a small tax dodge enabled by direct-expensing your R&D costs but then ending up with an infinitely-copyable asset that came out of it. If that's what you're saying, then I'd reply to that argument by saying that paying humans to design new things has historically been a business strategy that the government has wanted to incentivize in a way that buying and holding physical assets has not been. I've seen no justification for the government deciding that from 2022 on we should actively discourage R&D, it just seems to be a mistake.
  - Retric 1y ago
    > I've seen no justification for the government deciding that from 2022 on we should actively discourage R&D, it just seems to be a mistake. Removing a specific tax exemption to create a level playing field isn’t discouraging R&D. That’s the thing, every year such exemptions exist the US taxpayers are handing out money. Just because we subsidize say EV’s or Corn doesn’t mean that’s the baseline forever more.
    - demosthanos 1y ago
      Level playing field for whom? Who does incentivizing R&D disadvantage? Restaurants weren't competing with R&D-heavy corporations in any way. R&D-heavy corporations competed with each other, on a level playing field where all of them can build new stuff without having to pay taxes on negative income in their early years. The only change this has made is un-level the playing field in favor of old, established corporations that already have the revenue streams in place to fund their new R&D projects.
      - Retric 1y ago
- polotics 1y ago
  I have seen a lot of software development where what's been done has been changed beyond recognition over the course of less than a year.
- bravesoul2 1y ago
  Ironically I think they would want to claim that over multiple years unless they have other profitable operations under the same company. E.g. other restaurants.
- gamblor956 1y ago
  The appropriate analogy is: Imagine a restaurant spends money on employees to build 100 tables, 500 chairs, etc. Those tangible goods would be capital assets, so the labor costs of building them would also be capitalized. This change to the tax code is just bringing the tax treatment of software development in line with how every other industry is treated. IOW, it was closing a loophole. A very valuable loophole, whose beneficiaries used it to get filthy rich, and bragged about how their industry was so much more valuable than everything else, even though a lot of that value was due to the exception software was getting in the tax code. Notably, in the current version of the budget as of 6/6, the loophole is temporarily coming back, though given the Musk-Trump feud, it's very possible it will get pulled again to try to mollify the hardline deficit caucus.
- tomrod 1y ago
  They should have the choice. If software lasted longer than 18 months or was otherwise tangible, this could also make sense.
altairprime 1y ago
It makes sense when you consider that there is no minimum tax rate on businesses. Given the choice, Amazon would rather spend 100% of its profits on itself than allow any of its profits to be paid out in taxes. Section 174 was implemented without a minimum tax on corporate profits before voluntary deductions such as research. Therefore, it’s exploitable and all companies ought to hire and fire staff to ensure their profits show as 0%. This tax code defect is now closed by accident, but could have been done much more intelligently than it was. Oh well. (EDIT: My first sentence is potentially confusing when I reread it later. To restate: section 174 was defective as implemented due to the uncapped 100% deduction, but the concept of a significant research exemption is still excellent. Just need to close the effective 0% corporate tax rate loophole.)
- thayne 1y ago
  The company already pays payroll taxes on those salaries, and the employees pay income taxes. And the people hurt by this aren't the shareholders or top executives, it's the rank and file workers getting laid off, losing benefits, and being asked to work more for the same pay. What this change effectively did was make software developers significantly more expensive, without increasing the amount those developers get paid.
  - warkdarrior 1y ago
    Software developers are already too expensive in US, so this applies some downward pressure on those salaries. Frankly the economy will be much better off when tech salaries equalize across geos, thus avoiding the deep whole US manufacturing is in (for example, manufacturing wages in Vietname are one tenth of US manufacturing wages, and thus it is better to open new plants there).
    - bboygravity 1y ago
      Yeah, make everybody equally poor. That'll solve things.
      - 1y ago
mountainriver 1y ago
It was literally just a shot at California and New York, that’s all it was. “Own the libs” ya know “if we aren’t rich then no one else will be”
patmcc 1y ago
Employee salary cost isn't always 100% an expense. Imagine you are BigCarCo, you make cars. The salary for your factory workers that build cars to be sold is an expense, incurred in that year, to be matched against the revenues earned by selling those cars. But the cost to build the factory needs to be amortized over the lifetime of the factory - and that's true whether you buy a factory from BigFactoryCo or hire a bunch of people to build it. Now, I'd argue that a) most software dev work is closer to the factory worker than the factory builder and b) the lifetime for most software is less than 5 years, but the idea that some cost of developing software should be amortizable is pretty reasonable.
- jillesvangurp 1y ago
  Actually, if the company isn't selling the software they build, what their software devs do is closer to building a factory rather than working in it. Mostly developing software is about automating things that are expensive and slow to do manually. So, to stick with the factory analogy, it makes the factory a bit better and more efficient. If you stop doing that because it is too expensive, you fall behind with your factory. Of course the whole issue in the US is that it outsourced much of what happens in factories to China and software has become one of the main things the country runs on.
patmcc 1y ago
If the restaurant buys e.g. a fancy oven or a delivery truck, it can't expense 100% of that cost in year 1, it has to spread that cost over the lifetime of the oven or truck. Labor that operates the business day-to-day would be an expense, labor that creates a capital asset is more complicated. I happen to think most employee time in software dev is more on the day-to-day operation side, and should be expensed, but I can see an argument that some should (or could) be amortized.
- DSMan195276 1y ago
  > If the restaurant buys e.g. a fancy oven or a delivery truck, it can't expense 100% of that cost in year 1, it has to spread that cost over the lifetime of the oven or truck. The difference of course is that you'll have a truck or oven that can be sold. If you could count the full value in the first year then you could sell and buy one each year to reduce your taxes without actually changing anything. Thus if we want to go that route for software the salary of the R&D employees should be counted against the value of the software they created (As in, the value were it to be sold wholesale to another company). The time spent by the employees is not an asset, once you pay the employees for their time it's gone even if they generated nothing of value. The actual value is that of the software, but that's obviously not easily assigned a value.
- rpeden 1y ago
  It's a lot easier to get financing for a tangible asset like an oven or a delivery truck, which mitigates the cash flow issue. Sure, you can only deduct a certain percentage of the asset's value as an expense each year, but your cash expenditures to pay for it are also spread over a multi year period.
gnopgnip 1y ago
It’s the same for movies, other intangible assets that are valuable and produce income over several years. And it’s done for many tangible goods, like servers in a datacenter, the kitchen equipment in a restaurant.
- Schiendelman 1y ago
  I think you may misunderstand. For most of those, you get the choice to amortize if you prefer. In this instance, you must amortize, which is a big problem for startups.
  - gnopgnip 1y ago
    Generally it’s not a choice. Valuable assets are required to be amortized over their useful life with limited exceptions
    - rpeden 1y ago
      For the tangible ones, it's often relatively easy to get financing that lets you spread the payment over the asset's useful life, which solves most of the cash flow issues you get if you pay in cash up front but have to spread the expense over many years.
    - Schiendelman 1y ago
      Your previous comment mixed tangible and intangible. R&D is intangible, so I focused there. Your response mostly applies to tangible. I think the other reply to you here makes a great point. Let's try not to talk past each other!
      - gnopgnip 1y ago
        Valuable assets includes both tangible and intagible, it applies to both
        Schiendelman 1y ago

UncleMeat 1y ago

There are other expenses that are also amortized.

sokoloff 1y ago

Now imagine that a restaurant buys 100 tables, 500 chairs, kitchen equipment, cutlery for 800 people, signage, a security system, and does a remodeling before opening. (Or an airline buys an airplane. Or a hotel chain builds a hotel.) Should they be able to expense all of those items that provide value for multiple years in a single year? Does software development provide value exclusively in the year it's done? Or over multiple years?

londons_explore 1y ago
It's only shifting what year the government gets its revenue. The government should simply let the company choose how to do it, but if they choose anything other than year 1 interest will be payable at government bond rates.
- warkdarrior 1y ago
  It's also massively shifting the companies' cash flows. The company paid $X for R&D this year, but for tax purposes 80% of that $X expense is moved to next four years. So for this year's tax purposes, the company R&D expenses are much lower than what the company paid.
demosthanos 1y ago
The reason that we require you to deduct an expense over years for some things is because they have a resale value that needs to be accounted for. It's not a pure expense because you have an asset with real value that came out of the purchase. Employee time has no resale value. Once used it's gone, so employee salaries are expenses, not investments. The only possible justification for the Section 174 R&D changes is that employees working in R&D theoretically are producing something which does have a resale value, so there's a small tax dodge enabled by direct-expensing your R&D costs but then ending up with an infinitely-copyable asset that came out of it. If that's what you're saying, then I'd reply to that argument by saying that paying humans to design new things has historically been a business strategy that the government has wanted to incentivize in a way that buying and holding physical assets has not been. I've seen no justification for the government deciding that from 2022 on we should actively discourage R&D, it just seems to be a mistake.
- Retric 1y ago
  > I've seen no justification for the government deciding that from 2022 on we should actively discourage R&D, it just seems to be a mistake. Removing a specific tax exemption to create a level playing field isn’t discouraging R&D. That’s the thing, every year such exemptions exist the US taxpayers are handing out money. Just because we subsidize say EV’s or Corn doesn’t mean that’s the baseline forever more.
  - demosthanos 1y ago
    Level playing field for whom? Who does incentivizing R&D disadvantage? Restaurants weren't competing with R&D-heavy corporations in any way. R&D-heavy corporations competed with each other, on a level playing field where all of them can build new stuff without having to pay taxes on negative income in their early years. The only change this has made is un-level the playing field in favor of old, established corporations that already have the revenue streams in place to fund their new R&D projects.
    - Retric 1y ago
polotics 1y ago
I have seen a lot of software development where what's been done has been changed beyond recognition over the course of less than a year.
bravesoul2 1y ago
Ironically I think they would want to claim that over multiple years unless they have other profitable operations under the same company. E.g. other restaurants.
gamblor956 1y ago
The appropriate analogy is: Imagine a restaurant spends money on employees to build 100 tables, 500 chairs, etc. Those tangible goods would be capital assets, so the labor costs of building them would also be capitalized. This change to the tax code is just bringing the tax treatment of software development in line with how every other industry is treated. IOW, it was closing a loophole. A very valuable loophole, whose beneficiaries used it to get filthy rich, and bragged about how their industry was so much more valuable than everything else, even though a lot of that value was due to the exception software was getting in the tax code. Notably, in the current version of the budget as of 6/6, the loophole is temporarily coming back, though given the Musk-Trump feud, it's very possible it will get pulled again to try to mollify the hardline deficit caucus.
tomrod 1y ago
They should have the choice. If software lasted longer than 18 months or was otherwise tangible, this could also make sense.

altairprime 1y ago

It makes sense when you consider that there is no minimum tax rate on businesses. Given the choice, Amazon would rather spend 100% of its profits on itself than allow any of its profits to be paid out in taxes. Section 174 was implemented without a minimum tax on corporate profits before voluntary deductions such as research. Therefore, it’s exploitable and all companies ought to hire and fire staff to ensure their profits show as 0%. This tax code defect is now closed by accident, but could have been done much more intelligently than it was. Oh well. (EDIT: My first sentence is potentially confusing when I reread it later. To restate: section 174 was defective as implemented due to the uncapped 100% deduction, but the concept of a significant research exemption is still excellent. Just need to close the effective 0% corporate tax rate loophole.)

thayne 1y ago
The company already pays payroll taxes on those salaries, and the employees pay income taxes. And the people hurt by this aren't the shareholders or top executives, it's the rank and file workers getting laid off, losing benefits, and being asked to work more for the same pay. What this change effectively did was make software developers significantly more expensive, without increasing the amount those developers get paid.
- warkdarrior 1y ago
  Software developers are already too expensive in US, so this applies some downward pressure on those salaries. Frankly the economy will be much better off when tech salaries equalize across geos, thus avoiding the deep whole US manufacturing is in (for example, manufacturing wages in Vietname are one tenth of US manufacturing wages, and thus it is better to open new plants there).
  - bboygravity 1y ago
    Yeah, make everybody equally poor. That'll solve things.
    - 1y ago

mountainriver 1y ago

It was literally just a shot at California and New York, that’s all it was. “Own the libs” ya know “if we aren’t rich then no one else will be”

patmcc 1y ago

Employee salary cost isn't always 100% an expense. Imagine you are BigCarCo, you make cars. The salary for your factory workers that build cars to be sold is an expense, incurred in that year, to be matched against the revenues earned by selling those cars. But the cost to build the factory needs to be amortized over the lifetime of the factory - and that's true whether you buy a factory from BigFactoryCo or hire a bunch of people to build it. Now, I'd argue that a) most software dev work is closer to the factory worker than the factory builder and b) the lifetime for most software is less than 5 years, but the idea that some cost of developing software should be amortizable is pretty reasonable.

jillesvangurp 1y ago
Actually, if the company isn't selling the software they build, what their software devs do is closer to building a factory rather than working in it. Mostly developing software is about automating things that are expensive and slow to do manually. So, to stick with the factory analogy, it makes the factory a bit better and more efficient. If you stop doing that because it is too expensive, you fall behind with your factory. Of course the whole issue in the US is that it outsourced much of what happens in factories to China and software has become one of the main things the country runs on.

patmcc 1y ago

If the restaurant buys e.g. a fancy oven or a delivery truck, it can't expense 100% of that cost in year 1, it has to spread that cost over the lifetime of the oven or truck. Labor that operates the business day-to-day would be an expense, labor that creates a capital asset is more complicated. I happen to think most employee time in software dev is more on the day-to-day operation side, and should be expensed, but I can see an argument that some should (or could) be amortized.

DSMan195276 1y ago
> If the restaurant buys e.g. a fancy oven or a delivery truck, it can't expense 100% of that cost in year 1, it has to spread that cost over the lifetime of the oven or truck. The difference of course is that you'll have a truck or oven that can be sold. If you could count the full value in the first year then you could sell and buy one each year to reduce your taxes without actually changing anything. Thus if we want to go that route for software the salary of the R&D employees should be counted against the value of the software they created (As in, the value were it to be sold wholesale to another company). The time spent by the employees is not an asset, once you pay the employees for their time it's gone even if they generated nothing of value. The actual value is that of the software, but that's obviously not easily assigned a value.
rpeden 1y ago
It's a lot easier to get financing for a tangible asset like an oven or a delivery truck, which mitigates the cash flow issue. Sure, you can only deduct a certain percentage of the asset's value as an expense each year, but your cash expenditures to pay for it are also spread over a multi year period.

gnopgnip 1y ago

It’s the same for movies, other intangible assets that are valuable and produce income over several years. And it’s done for many tangible goods, like servers in a datacenter, the kitchen equipment in a restaurant.

Schiendelman 1y ago
I think you may misunderstand. For most of those, you get the choice to amortize if you prefer. In this instance, you must amortize, which is a big problem for startups.
- gnopgnip 1y ago
  Generally it’s not a choice. Valuable assets are required to be amortized over their useful life with limited exceptions
  - rpeden 1y ago
    For the tangible ones, it's often relatively easy to get financing that lets you spread the payment over the asset's useful life, which solves most of the cash flow issues you get if you pay in cash up front but have to spread the expense over many years.
  - Schiendelman 1y ago
    Your previous comment mixed tangible and intangible. R&D is intangible, so I focused there. Your response mostly applies to tangible. I think the other reply to you here makes a great point. Let's try not to talk past each other!
    - gnopgnip 1y ago
      Valuable assets includes both tangible and intagible, it applies to both
      - Schiendelman 1y ago