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> For cash-strapped companies, especially those not yet profitable, the result was a painful tax bill just as venture funding dried up and interest rates soared
by svara 1y ago
> For cash-strapped companies, especially those not yet profitable, the result was a painful tax bill just as venture funding dried up and interest rates soared
Can someone explain this? What taxes do unprofitable US businesses owe that this would be deducted against?
- dadoprso 1y agoI thought you could carry forward losses or something. i.e. Once profitable you can use your previous losses as 'tax credits'.
- mppm 1y agoIf the business has some revenue, but is not yet profitable after deducting development costs, it can become profitable on paper (and owe tax) if R&D is capitalized instead.
- deanputney 1y agoThat is kind of strangely worded, but I think I see what they're getting at. Say you would have been exactly not-profitable ($0) if you could expense all of your R&D as in the old system, therefore avoiding tax. Now with the new rules you may be on-paper profitable because you can only deduct 20% of the R&D as an expense this year. The remaining 80% of that expense tips you over, becomes profit, and that's taxable.
- orangecat 1y agoRight. With concrete numbers, say your main expense is $1 million in developer salaries and you have $500k in revenue. Going by the previous rules, you have a loss of $500k and don't owe income tax. With the new rules, you can only deduct $200k of expenses which gives you a "profit" of $300k, on which you'll owe $62k in taxes.
- deleted 1y ago[deleted]
- wdaher 1y agoHere's a toy example that hopefully makes this clear: In 2024, your business has $1m in revenue and has $2m in expenses. 100% of these expenses are R&D salaries (engineers you hire.) Your company loses $1m/year. (You brought in $1m and spent $2m.) Under the old rules, you'd owe no tax because you were unprofitable. After Sec 174, what the IRS now says is: You had revenues of $1m. But you only had $400k in expenses (because you now have to spread that $2m in R&D expense over 5 years). So actually you had a profit of $600k! And you owe tax on that $600k profit (~$120k) So you now have an additional $120k tax expense, making your business even more cash-flow negative. . Amusingly, if you're pre-revenue, none of this matters (you have no income at all, so it doesn't matter what your expenses are.) You get hardest hit by this change when you have some revenue and when you do a fair bit of R&D.
- svara 1y agoIs this true even if you don't capitalize the immaterial IP asset generated by the R&D salaries on the balance sheet? Is that required in the US? Otherwise I'm quite amazed that salaries can be carried forward as future expenses.
- wdaher 1y agoThis is what the Sec 174 change said: it says that you do have to capitalize it.
- mppm 1y agoElsewhere in the world (under IFRS accounting rules) capitalization of R&D costs has been a firm requirement for a while. The US has been somewhat unique in allowing them to be expensed instead, until recently.
- svara 1y agoTaxes are calculated according to tax accounting rules, not IFRS, though? I know of at least two Western European countries where you don't have to do that. Don't worry, we pay enough taxes either way ;)
- deleted 1y ago[deleted]
- gamblor956 1y agoWhat taxes do unprofitable US businesses owe that this would be deducted against? An unprofitable business doesn't pay income taxes. Businesses are taxed on their net income (i.e., profit). People are railing against this as the cause of tech's recent underperformance, but it was a non-factor for the vast majority of tech companies, because most tech companies aren't profitable and wouldn't have paid taxes anyway.