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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 pu

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
    > Who does incentivizing R&D disadvantage? Taxpayers who end up with the bill and every company is competing for workers, office space, etc. Incentives across decades shift what people study, what business get created, etc. R&D sounds great abstractly, but it’s not some panacea where unlimited funding results in pure gains. The economy is generally more efficient without central planning, and dumping money into anything that can be classified as R&D is simply inefficient.
    - demosthanos 1y ago
      > every company is competing for workers, office space, etc My company is all-remote and none of us would work for a company that isn't doing R&D. Most of an entire profession now has to be amortized over 5 years. > The economy is generally more efficient without central planning The old tax code isn't "central planning", it just had the very reasonable property that the government wouldn't force you to pay taxes on a loss. This scenario [0] is now possible. It wasn't before. That is a catastrophic level of stupidity, and you can't justify it with invisible-hand nonsense. https://news.ycombinator.com/item?id=44204353 https://news.ycombinator.com/item?id=44204353
      - Retric 1y ago
        > none of us would work for a company that isn't doing R&D So you’d just be unemployed for the rest of your lives? That’s a possible edge case not worth adjusting the tax code for, but it seems unlikely. > wouldn't force you to pay taxes on a loss. R&D is an investment, you only pay taxes if the rest of the company is profitable. If your company is spending 1M / year on R&D and not adding 800k in long term value then in theory you’d be correct. But at that point you either aren’t doing R&D, or are doing such a poor job of it that the government shouldn’t be encouraging that activity.
        HillRat 1y ago
        The problem here is that all software development (excepting that done for hire) is classified as R&D. The software developer working on your Wordpress or Magento site (and arguably the accountant building a spreadsheet, to take the statute at face value) isn't an operational expense, they're now an R&D expense that has to be amortized and can't be taken as an expense against revenue. Previously, this was an optional choice (and many large and mature companies were amortizing anyway), but under the current tax treatment it's required, which essentially turns early-stage startups into cash bonfires, given how many small companies don't make it to year five.
- kelnos 1y ago
  > Removing a specific tax exemption to create a level playing field isn’t discouraging R&D. If the end result of removing this exemption is that there is less R&D done in the US, then yes, empirically, removing the exemption discourages R&D. Assuming the mass layoffs were indeed fueled by the removal of this exemption (I don't know if the article is correct or not), then it is reasonable to assert that it is true that removing the exemption has reduced the amount of R&D done. Or, you could also say that the "default state" is some low level of R&D, and the tax exemption encouraged and incentivized more of it. Either way you slice it, though, the status quo prior to 2022 was some level of encouraged/incentivized R&D. That status quo changed to encourage/incentivize less R&D, and companies have followed these lack of incentives and have fired a lot of their R&D staff. Is that a good thing for the US? I can't see how it could be.
  - Retric 1y ago
    > empirically, removing the exemption discourages R&D. Not clearing a road means fewer people use it, but you not going out with a shovel to clear a public roads isn’t you discouraging their use nor is you canceling your plans to clear said roads. Having zero subsidies is the default situation.
    - profile53 1y ago
      It didn’t create a level playing field, it just discouraged a very specific type of R&D while ignoring all others. All other types of employee salaries follow certain rules and some can optionally follow R&D rules. Software is now the only one required to follow 5 year R&D amortization so the deck is now stacked against software.
      - Retric 1y ago
        Software is an asset. If you pay people to build a building you don’t get to deduct their salaries as an operating expense.
    - anp 1y ago
      The default situation is whatever was yesterday. I’d be astonished to learn that even a single significant civilization functioned without subsidies or patronage of priorities held by a society’s leaders.
twoodfin 1y ago
What about construction worker and other labor time to build a factory? That’s the analogy being made here by the tax code: Software whose development is a capital expense with value returned over time.
- demosthanos 1y ago
  From a quick search it appears to me like construction labor is deductible as an expense in the year it is incurred. Do you have evidence that says otherwise?
  - kgwgk 1y ago
    > Dear ChatGPT, is construction labor deductible as an expense in the year it is incurred according to GAAP? Please answer in a few lines. Under GAAP, construction labor is not immediately deductible as an expense in the year it is incurred if it relates to the construction of a long-term asset (like a building). Instead, it is capitalized as part of the asset's cost and then expensed over time through depreciation. Only labor costs not tied to asset creation (e.g., routine maintenance) are expensed as incurred.
    - sokoloff 1y ago
      Though your answer is correct for the tax code as well as GAAP, Generally Accepted Accounting Principles are not necessarily followed by the tax code.
      - twoodfin 1y ago
        Unfortunately my understanding of the R&D expensing rule is that it is lifted directly from GAAP, which means private companies have to adhere to those (heavyweight) rules to comply.
      - kgwgk 1y ago
        Fair point. I changed the question to "according to the tax code" and it told me that Construction labor is generally not deductible as an expense in the year incurred if it is related to the construction or improvement of a capital asset (like a building). Instead, under the U.S. tax code (IRC §263A), these costs must usually be capitalized and recovered through depreciation over time. Exceptions may apply for certain small taxpayers or repairs.
sitkack 1y ago
Software is like Art, it doesn't have value until sold or can be used. If they sell services based on the software, they are generating revenue and then taxation on that revenue can occur. Same as if they sell the software, either as a copy or ownership. But not being able to take salary as a business expense seems like as thing that would happen if software in and of itself has value, which is largely does not.
- thaumasiotes 1y ago
  > But not being able to take salary as a business expense seems like as thing that would happen if software in and of itself has value, which is largely does not. To me it seems like a thing that just wouldn't happen. Forget software. Say you own a McDonald's, and as part of your operations you have some people on staff to take orders, prepare food, and clean the bathrooms. Why are their wages not a deductible business expense? If the answer is "they are, don't be stupid", then... what exactly was the R&D tax break?
- jay_kyburz 1y ago
  The software itself has no value, it's the licence to use the software.
mixdup 1y ago
But the employee time that had a one time use was turned into software. That software is the thing that has value longer than "right now"
- demosthanos 1y ago
  And the value of that software will be taxed if and when it starts to draw cash.
nickfromseattle 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. My understanding is that this was done in order to balance the tax bill passed by the Trump admin due to a requirement to be budget neutral. Cut tax revenue here, increase tax revenue there.

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
  > Who does incentivizing R&D disadvantage? Taxpayers who end up with the bill and every company is competing for workers, office space, etc. Incentives across decades shift what people study, what business get created, etc. R&D sounds great abstractly, but it’s not some panacea where unlimited funding results in pure gains. The economy is generally more efficient without central planning, and dumping money into anything that can be classified as R&D is simply inefficient.
  - demosthanos 1y ago
    > every company is competing for workers, office space, etc My company is all-remote and none of us would work for a company that isn't doing R&D. Most of an entire profession now has to be amortized over 5 years. > The economy is generally more efficient without central planning The old tax code isn't "central planning", it just had the very reasonable property that the government wouldn't force you to pay taxes on a loss. This scenario [0] is now possible. It wasn't before. That is a catastrophic level of stupidity, and you can't justify it with invisible-hand nonsense. https://news.ycombinator.com/item?id=44204353 https://news.ycombinator.com/item?id=44204353
    - Retric 1y ago
      > none of us would work for a company that isn't doing R&D So you’d just be unemployed for the rest of your lives? That’s a possible edge case not worth adjusting the tax code for, but it seems unlikely. > wouldn't force you to pay taxes on a loss. R&D is an investment, you only pay taxes if the rest of the company is profitable. If your company is spending 1M / year on R&D and not adding 800k in long term value then in theory you’d be correct. But at that point you either aren’t doing R&D, or are doing such a poor job of it that the government shouldn’t be encouraging that activity.
      - HillRat 1y ago
        The problem here is that all software development (excepting that done for hire) is classified as R&D. The software developer working on your Wordpress or Magento site (and arguably the accountant building a spreadsheet, to take the statute at face value) isn't an operational expense, they're now an R&D expense that has to be amortized and can't be taken as an expense against revenue. Previously, this was an optional choice (and many large and mature companies were amortizing anyway), but under the current tax treatment it's required, which essentially turns early-stage startups into cash bonfires, given how many small companies don't make it to year five.
kelnos 1y ago
> Removing a specific tax exemption to create a level playing field isn’t discouraging R&D. If the end result of removing this exemption is that there is less R&D done in the US, then yes, empirically, removing the exemption discourages R&D. Assuming the mass layoffs were indeed fueled by the removal of this exemption (I don't know if the article is correct or not), then it is reasonable to assert that it is true that removing the exemption has reduced the amount of R&D done. Or, you could also say that the "default state" is some low level of R&D, and the tax exemption encouraged and incentivized more of it. Either way you slice it, though, the status quo prior to 2022 was some level of encouraged/incentivized R&D. That status quo changed to encourage/incentivize less R&D, and companies have followed these lack of incentives and have fired a lot of their R&D staff. Is that a good thing for the US? I can't see how it could be.
- Retric 1y ago
  > empirically, removing the exemption discourages R&D. Not clearing a road means fewer people use it, but you not going out with a shovel to clear a public roads isn’t you discouraging their use nor is you canceling your plans to clear said roads. Having zero subsidies is the default situation.
  - profile53 1y ago
    It didn’t create a level playing field, it just discouraged a very specific type of R&D while ignoring all others. All other types of employee salaries follow certain rules and some can optionally follow R&D rules. Software is now the only one required to follow 5 year R&D amortization so the deck is now stacked against software.
    - Retric 1y ago
      Software is an asset. If you pay people to build a building you don’t get to deduct their salaries as an operating expense.
  - anp 1y ago
    The default situation is whatever was yesterday. I’d be astonished to learn that even a single significant civilization functioned without subsidies or patronage of priorities held by a society’s leaders.

twoodfin 1y ago

What about construction worker and other labor time to build a factory? That’s the analogy being made here by the tax code: Software whose development is a capital expense with value returned over time.

demosthanos 1y ago
From a quick search it appears to me like construction labor is deductible as an expense in the year it is incurred. Do you have evidence that says otherwise?
- kgwgk 1y ago
  > Dear ChatGPT, is construction labor deductible as an expense in the year it is incurred according to GAAP? Please answer in a few lines. Under GAAP, construction labor is not immediately deductible as an expense in the year it is incurred if it relates to the construction of a long-term asset (like a building). Instead, it is capitalized as part of the asset's cost and then expensed over time through depreciation. Only labor costs not tied to asset creation (e.g., routine maintenance) are expensed as incurred.
  - sokoloff 1y ago
    Though your answer is correct for the tax code as well as GAAP, Generally Accepted Accounting Principles are not necessarily followed by the tax code.
    - twoodfin 1y ago
      Unfortunately my understanding of the R&D expensing rule is that it is lifted directly from GAAP, which means private companies have to adhere to those (heavyweight) rules to comply.
    - kgwgk 1y ago
      Fair point. I changed the question to "according to the tax code" and it told me that Construction labor is generally not deductible as an expense in the year incurred if it is related to the construction or improvement of a capital asset (like a building). Instead, under the U.S. tax code (IRC §263A), these costs must usually be capitalized and recovered through depreciation over time. Exceptions may apply for certain small taxpayers or repairs.

sitkack 1y ago

Software is like Art, it doesn't have value until sold or can be used. If they sell services based on the software, they are generating revenue and then taxation on that revenue can occur. Same as if they sell the software, either as a copy or ownership. But not being able to take salary as a business expense seems like as thing that would happen if software in and of itself has value, which is largely does not.

thaumasiotes 1y ago
> But not being able to take salary as a business expense seems like as thing that would happen if software in and of itself has value, which is largely does not. To me it seems like a thing that just wouldn't happen. Forget software. Say you own a McDonald's, and as part of your operations you have some people on staff to take orders, prepare food, and clean the bathrooms. Why are their wages not a deductible business expense? If the answer is "they are, don't be stupid", then... what exactly was the R&D tax break?
jay_kyburz 1y ago
The software itself has no value, it's the licence to use the software.

mixdup 1y ago

But the employee time that had a one time use was turned into software. That software is the thing that has value longer than "right now"

demosthanos 1y ago
And the value of that software will be taxed if and when it starts to draw cash.

nickfromseattle 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. My understanding is that this was done in order to balance the tax bill passed by the Trump admin due to a requirement to be budget neutral. Cut tax revenue here, increase tax revenue there.