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There are some misunderstandings in the comments that seem to stem from not having read the section, so I thought it was worth referencing the actual text [0].

There are some misunderstandings in the comments that seem to stem from not having read the section, so I thought it was worth referencing the actual text [0]. It's quite short and easy to read. The most important bits: * Subsection (a) requires amortizing "Specified research or experimental expenditures" over 5 years (paragraph (2)) instead of deducting them (paragraph (1)) * Paragraph (c)(3) is a Special Rule that requires that all software development expenses be counted as a "research or experimental expenditure". That's it. All software expenses must be treated as research and experimental expenses, and no research and experimental expense can be deducted instead of amortized. Ergo, all software expenses must be amortized over 5 years. I strongly recommend reading the section before forming an opinion. It really is quite unambiguous and is unambiguously bad for anyone who builds software and especially for companies that aren't yet thoroughly established in their space (i.e. startups). Also note that this makes Software a special case of R&D. It's the only form of R&D that Section 174 requires you to categorize as such and therefore amortize. [0] https://www.law.cornell.edu/uscode/text/26/174 https://www.law.cornell.edu/uscode/text/26/174

radley 1y ago
It's not really targeted at tech, insomuch as at Democrats. Everyone assumed it was a traditional accounting hack. But given the timing and the reinitialization, it's clearly political, not economic. The code is a strategic time-bomb designed to cause a high-profile economic downturn during a presidential election cycle, specifically when the following president is a Democrat and Republicans have a house majority. It was used to harm Biden's economy, and it will happen again in 2030 if the next president is a Democrat. While deferred, it will be spun as a major Trump "economic achievement" for the midterms, because companies will be able to afford to hire again. The tech industry is merely high-profile fodder for extreme politics. It really is that petty.
- victoro 1y ago
  The Democrats had control of the presidency and the house in 2022 when this provision first went into effect but had 2 fewer senators (1 fewer if you count the tie-breaking VP). Why didn't they try to change it? Is there some reason a change in the tax code like this can't be modified or repealed once its in place?
  - tomrod 1y ago
    They tried. They had Senate spoilers.
    - candiddevmike 1y ago
      As a progressive, it seems like the Democrats always have Senate spoilers...
      - SpicyLemonZest 1y ago
        Providing spoilers was the explicitly designed purpose of the US Senate. It's not a one-sided problem - Senate spoilers are also why the Affordable Care Act didn't get repealed in 2017.
        tomrod 1y ago
        Explicitly?
        glompers 1y ago
        US Senator was an office initially designed to be selected by state legislatures rather than by direct popular election like the representatives. To a populist or a party boss, that might count as a spoiler to the will of the people or to the will of those in DC, or to both. But I may misinterpret GP's point.
        mayneack 1y ago
        I assume the person you're replying to is talking about the Filibuster and supermajority requirements not the direct election history. The filibuster is a senate rule not a constitutional design, so it wasn't part of the "design". Maybe they're both different ways of adding veto points to the same effect, but I think spoilers as "explicit design" is probably not how I'd describe it. https://en.wikipedia.org/wiki/Filibuster_in_the_United_States_Senate https://en.wikipedia.org/wiki/Filibuster_in_the_United_State...
- _heimdall 1y ago
  If this was passed in 2017 to go into effect during the next presidential term, wouldn't that only work as a time bomb for Biden's presidency if Trump didn't expect to win a second consecutive term? Given the history of prior presidents winning 2 consecutive terms, it seems like Trump could have reasonably expected a 2022/2023 tax change to be his problem.
  - kenjackson 1y ago
    No. It’s after re-election. Bad news late in your second term isn’t that big of a deal, unless you care about legacy.
    - _heimdall 1y ago
      Most presidents care about legacy, at least to me it seems like trump holds that as a higher priority than most.
      - paulryanrogers 1y ago
        Trump seems to care what people think today, every day. He doesn't seem like someone who puts a lot of thought into the future.
        b112 1y ago
        You know, I wonder if that's a sad but valuable trait for a politician. Public opinion can change daily, and external events can appear with no warning. These things can make a prior path of action vanish, or even make it madness to pursue. If you try to plan everything long term, I bet you hit a lot of disappoint as a politician. If you only see today, then you're not fighting for things that are now not possible. I imagine one would be far less stressed as a result. And maybe more popular than otherwise.
        paulryanrogers 1y ago
        Some problems require years or even decades to address. Consider how quickly a COVID vaccine was developed, yet it depended upon many years of quietly studying SARS and R&D around MRNA. Or consider trying to address developing or maintaining infrastructure. A chaotic politican whose mind is changed by the last person they spoke with won't do well facing serious long term problems. It gets worse if the only things they consistently stand for is their own power, personal wealth, their sycophants, and their grade-school-level (mis)understanding of complex matters.
- efitz 1y ago
  This is just wrong. It was passed in 2017 (during Trump’s presidency). It was to go into effect in 2020 (a presidential election year during Trump’s presidency). He hoped to be re-elected.
  - demosthanos 1y ago
    No. It went into effect in 2022 [0], which means the timeline absolutely does track with OP's theory. That gives a hypothetical Trump term 2 a full year to fix it but also imposes enough of a time crunch that they could plan on sabotaging attempts to fix it by another party. I'm not saying it's the actual story, but the timeline does track. [0] Page 60, Sec 1306(e) sets the date: https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf
    - efitz 1y ago
      I don’t think it really changes the narrative. 2020 was also a congressional election year, even had Trump won (as he appeared to want desperately) he could not have been assured of a Republican congress. My argument is simple: Occam’s Razor The Republicans in congress put the provision in solely as a gimmick to get past the CBO. Frankly I don’t think legislators in either party are competent enough to have foreseen the consequences and even if they had been they wouldn’t have put a bomb like this in that would be more likely than not to backfire and affect them. I just think that too often people interpret incompetence as malice, especially nowadays when things are so polarized that it’s fashionable to hate people who differ with one’s political opinions.
      - throwaway173738 1y ago
        I think you’re wrong that legislators are incompetent. They’re human, and they’ve spent much of their lives learning how to get votes, but they’re not incompetent. A lot of them aren’t malicious, but there seems to be a small group of people outside of the legislative branch who are hell bent on taking control at all costs. And if you want to keep the votes rolling in you have to work with those people or get primaried. The dysfunction follows from fear more than incompetence these days.
jweir 1y ago
We are small and so have been on a hiring freeze since 2022. I’d like to hire but the upfront cost is high. For those around when this went into effect many business owners were surprised. Our accountants told us they seriously thought congress would fix this before it went into effect.
- throwup238 1y ago
  [flagged]
  - viraptor 1y ago
    It's actually not uncommon for something stupid to make it to the official tax code and then get reverted. They knew the history.
  - gbxyz 1y ago
    Get a better government.
    - bandyaboot 1y ago
      Get better citizens.
      - master-lincoln 1y ago
        Get better education for kids that grow to become citizens
        datavirtue 1y ago
        This. We are seeing the ROI for "education" in America.
        mcsniff 1y ago
        There's another word for "educating" people until they reach the decision you want them to. Brainwashing. You know it's completely possible that people have a different outlook or opinion or perspective on things and that is why they disagree with you, not necessarily a lack of education? Some people think these are good ideas and they vote or welcome them. Some people think they are bad ideas and they vote or oppose them.
youngtaff 1y ago
I worked for a UK company that amortised it’s development costs… it led to the false belief that the company was profitable when it really wasn’t
- Reason077 1y ago
  Exactly. And if you’re more profitable on paper, you have to pay more tax, making you even less profitable in reality.
- trhway 1y ago
  Yes, that is tremendously important aspect here - the US tech would look better on paper - higher paper profits due lower paper expenses - while getting increased cash flow stress due to decreased deductability of the salaries which are among the main expenses in software dev business.
  - itsoktocry 1y ago
    >Yes, that is tremendously important aspect here - the US tech would look better on paper It's completely unimportant. Nobody is getting fooled "on paper" by amortized salaries.
    - trhway 1y ago
      Except for example the millions of stock market casual participants.
    - kgwgk 1y ago
      People is getting fooled by "adjusted" earnings that reduce salaries "on paper" by hiding the "non cash" component.
    - youngtaff 1y ago
      Want a bet? I’ve seen it used in UK listed companies to massage the profit numbers and make divisions of the company seem more profitable than they are
- 1y ago
deleted 1y ago
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trhway 1y ago
What i like about US is that compare to other countries (like for example Russia where i'm originally from) there is almost no lying and cheating here. Instead there is a respect of the law and an army of talented creative accountants and lawyers. Remember that stale "multi-used" sandwich served with the drink which by virtue of its existence converted drinking establishment into a food serving restaurant? Not being an accountant, i'd just speculate, out of sheer fantasy, that some hardware chip/gadget added to your software may similarly convert your software development into hardware/gadget one.
- vlovich123 1y ago
  I'm not sure I buy into this. Sure, compared with Russia it's probably a lot less, at least in terms of being something everyday people engage in. But in terms of comparing with countries like Germany or Sweden I don't know. Here's some food for thought: * Global financial crises: Banks were paying (bribing) ratings agencies to rate junk bonds AAA. * Savings & loan crisis: widespread fraud & insider abuse. * Bernie Madoff: Ran the largest Ponzi scheme ever, with an estimated fraud total of $65B raking in $17.5B in invested cash. * Enron: straight up accounting fraud sprinkled with intentionally causing brownouts in California to pad their pockets with a side bonus of making Gov Davis unpopular & get him recalled (Enron was closely aligned with the Bush administration). * Nixon straight up using psy-ops against Democrats & finally trying to burgal the DNC offices. In terms of stats, the FBI does a few hundred bribery and corruption cases annually. Are they good at catching white collar crime? Well such crimes regularly take more than 5 years to investigate. And hell, some things that are basically lying and cheating are straight up legal. Usury is legal with minimal to no regulation of payday loans. Pyramid schemes are legal as long as you call it multi-level marketing. The list goes on and on.
  - bluGill 1y ago
    If the list doesn't go on and on that is a clear sign that corruption is being hid.
    - lucianbr 1y ago
e40 1y ago
And if the R&D uses foreign workers, because you can't afford to pay US wages, then the 5 years goes to 15 years! This hurts small companies (like mine) that were priced out of the US developer market.
- deeth_starr_v 1y ago
  I’m not sure this is exactly true. If your foreign workers are a service contract then those are services expenses immediately deductible. Same if you are using local service contracts. My understanding is this creates a drag for companies that want to hire f/t.
  - fhd2 1y ago
    Foreign workers are to my knowledge effectively always a service contract, since it's pretty complicated (if even possible) to hire FTEs across borders without subsidiaries, which are expensive to maintain. I'm curious if contract work is really exempt, would look like a major loophole to me.
    - K0balt 1y ago
      Tax law is full of major loopholes. It’s highly political law, so doing one thing while saying you are doing another is a feature, not a bug.
      - e40 1y ago
        There are definitely gray areas to the law, but in my decades of experience dealing with lawyers, they won't steer you to do something very far over the line. I think the companies that do step far over the line, to game the system, are doing so knowing full well they are breaking the law, but they believe they are unlikely to be caught. And they're very likely right. You could separate CEO's/CFO's in to two camps: stay legal and do what you need to do to make the almighty $$. In the 80's the phrase "greed is good" was born, but the last 2 decades have really upped the ante on this.
    - 1y ago
mountainriver 1y ago
This is one of the worst things MAGA has done. Tech startups are the source of so much of our wealth, and this makes it very challenging to ever build one. I can’t believe this still exists, and no one has changed it. We truly are governed by morons
- MoonGhost 1y ago
  [flagged]
- cma 1y ago
  A dead post below says it was biden and somehow Obama, but sibling reply link says it passed into law in 2017, not 2022, the first year it went into effect I think.
  - wvenable 1y ago
    The article is pretty clear that the law was from 2017 had a scheduled start date of 2022. Although probably not the actual intended effect, it does have the effect of confusing who would be responsible for it by those who don't read past the effective date.
    - vineyardmike 1y ago
      > Although probably not the actual intended effect This is actually a really common intention in laws like this. Get the tax cuts during your term, and then kick the can down the road so your successor's term is marred by the bad law. If your successor wants to fix it, they need to pass a different tax to recoup the costs, and incur the publicity of "raising taxes".
      - matthewdgreen 1y ago
        I think it’s partly that and partly the fact that tax bills tend to be scored on a ten year time window. Note that this law doesn’t actually change the amount of tax that software companies can deduct, it just requires them to spread the deduction over several years. So if you’re scoring your new tax bill on a ten year window and five years into the bill this thing kicks in, then it looks like more tax is being collected in years 5-10. But that’s just an illusion because all the deductions are still there, they’re just being pushed out beyond the end of the window where they don’t “count”. At least this is my understanding.
droopyEyelids 1y ago
Who sponsored this text in the bill?
- curtis3389 1y ago
  Here's the cosponsors of the bill: https://www.congress.gov/bill/115th-congress/house-bill/1/cosponsors https://www.congress.gov/bill/115th-congress/house-bill/1/co... I think the purpose of the change was to "increase revenue": > Requiring that certain research or experimental expenditures be amortized over a five-year period or longer, starting in 2023, would increase revenues by $109 billion over the period from 2023 to 2027. https://www.congress.gov/congressional-report/115th-congress/house-report/409 https://www.congress.gov/congressional-report/115th-congress...
  - mjevans 1y ago
    They want to call it anything other than a tax. It's a specific tax, on a particular class of better educated workers in specific jobs.
    - kasey_junk 1y ago
      That typically don’t vote for that party and are unsympathetic.
      - Braxton1980 1y ago
        Unsympathetic because?
        largbae 1y ago
        Generally R&D software developers aren't considered to be poor or disadvantaged.
        Braxton1980 1y ago
        What if they lose their job?
sandworm101 1y ago
But where an established company invests steadily in software, whether it is amoritized or deducted year to year is a wash. Rather than harm tech, this would seem to protect established US companies at the expense of startups. Thats probably great for shareholders in publicly traded companies. It seems just another querk of taxation meant to maintain the established order
- rileymat2 1y ago
  Only bootstrapped startups, funded startups will get the amortization by the time they need to deduct from earnings.
  - subarctic 1y ago
    This is what I was thinking too
- Uvix 1y ago
  It's only a wash if they've been amortizing all along. There's been no advantage to doing so, so established ones have all been deducting, and will have the same five year window of increased taxable income that startups will.
  - demosthanos 1y ago
    Startups have to face that five year window every time they start up. Each and every startup will have a year 0 where they're spending more than they earn, and under the new Section 174 they will only get to deduct 10% of their employee's salaries that year. In year two they get to deduct 20% of year 1's salaries and 10% of year 2's salaries, which is still 30% of what the established players will be able to deduct. By year 4, if they make it that far (which most startups don't) they'll finally be at 90% of a full deduction. Add to that the fact that startups also by definition have a much higher rate of growth than established companies and you'll find that a startup almost definitionally will be paying substantially more in taxes as long as it remains a startup, because they only get to deduct an average of the last 5 years of expenses from this year's revenue in order to calculate this year's profit. That's fine when your last five years are more or less similar to this one, but it's terrible when you've been growing. The net effect of this change can only be to disincentive startups and cement big, slow established players.
gscott 1y ago
I thought wages were deductible anyway. Say you pay a developer $250,000 a year. The employee pays the tax on their own wages.
- deleted 1y ago
  [deleted]
- walterbell 1y ago
  W2 salary is different from fully loaded labor cost.
- notimetorelax 1y ago
  No, not in this case. 250k is an expense for the company. Company had to amortize this expense over 5 or 15 years. (15 for software engineers outside of the US)
  - Tade0 1y ago
    > (15 for software engineers outside of the US) Yikes. Does that apply to outsourcing?
arkis22 1y ago
salary is already counted as an expense right? does that mean we were double billed as two expenses? salary and R&D?
- ridomune 1y ago
  more like triple. do not forget the sales tax when you're spending it.
ChuckMcM 1y ago
Excellent summary.
cma 1y ago
> All software expenses must be treated as research and experimental expenses From what I've read, not for software fixes to ongoing products, but for new products and I can't remember for new feature work. Also if you contract for someone else I heard you can still write off expenses without amortization.
- nlitened 1y ago
  I would guess that because in these cases software development costs would be classified as “cost of goods sold” instead of “research and development”
bunnie 1y ago
It's pretty bad. It had a huge impact on my personally, I'm a small R&D shop and basically I have had to end all risky long-term research projects. In addition to the research costs, I'd also have to pay taxes on the research costs mostly up-front. Significantly, if the project doesn't work out, I'm still out of pocket for the tax money. It's a penalty for taking a risk, and it kneecaps American innovators in a globally competitive technology race. The rules are even worse than the article notes because it double-dings open source developers. See Section 6.4 of https://www.irs.gov/pub/irs-drop/n-23-63.pdf https://www.irs.gov/pub/irs-drop/n-23-63.pdf. The relevant bit is here: > "However, even if the research provider does not bear financial risk under the terms of the contract with the research recipient, if the research provider has a right to use any resulting SRE product ... costs paid or incurred by the research provider that are incident to the SRE activities performed by the research provider under the contract are SRE expenditures of the research provider for which no deduction is allowed ..." The rule as written means contractors who write Windows drivers could deduct their expenses (as they would have no residual rights to a closed-source work product), but contractors who write Linux drivers may not (as they would have some rights to open-source Linux drivers).
- djfivyvusn 1y ago
  Just pledge copyright of contributions to eff or something.
  - bunnie 1y ago
    Work-for-hire open source contributions often already bear a copyright holder of the entity paying for the work. The problem isn't who is the copyright holder. The problem is that the license assigned says that anyone is free to use the code. Anyone is a set of people that includes the contributor, which then triggers the interpretation that the research is incrementally in the contributor's benefit and thus disqualified from preferential tax treatment. You'd need a custom license where everyone in the world could use the results except for the contributor, and then like, a source control system that hides the source files from the contributor's view of the repository.
ant6n 1y ago
I don’t get the big hoopla. Here in Germany I’m opting to turn development costs into assets (I simplify a bit). I need assets on the balance sheet, otherwise we’re over-indebted. As long as the development costs are much higher than income (I.e. as long as you’re not profitable), then it shouldn’t matter. And once you are profitable, you pay some more corporate taxes, but aren’t they kind of not too high in the us anyway?
- PaulDavisThe1st 1y ago
  the big hoopla is this: you're a newish startup. You have $300k/yr revenue and $$270k/yr expenses of which $250k is paying your programmers. prior to this rule change, what you pay your programmers is just a deductible expense, so you owe taxes (in this very simplified example with no other expenses etc. etc.) on just $50k. after the rule change, you can deduct only $50k of the labor cost (in this year), so now you owe tax on $250k. there is a very good chance you do not have the cash available to make this payment. of course, after 5 years, things all balance out and are effectively "back to normal". but you have to get through those 5 years first.
  - ant6n 1y ago
    How does this work, in your first year, to have 300K revenue on 270K development cost. It sounds like some very specific boot strapping case, and even then after 70K deductions its 230K profit, so like 50K in taxes on 30K profit. Sure it’s annoying, but it doesnt sound like total doom. Its more likely youll have 250K programmer expense in the first year, 100K in revenue, need 200K in outside investment, and pay very little taxes. After a couple of years it evens out anyway. Consider some sort of logistics company. They might pay 250K for their hardware (e.g. vehicles), 50K in expenses, get 300K in revenue. Theyll be taxed the same as the startup building up their IT assets.
    - PaulDavisThe1st 1y ago
      The logistics company example is not really relevant. The critical point about the rule change is the fact that all software related expenses, including salaries or contract labor costs, must now be amortized over 5 or 15 years. What was previously deductible no longer is, and this changes the cash flow situation dramatically for a software-intensive business, for 5 years. Sure, for heavily capitalized startups that are losing money, the rule change is not an issue. But for companies that manage to get to profitable status soon, even if it is only a small profit, the rule change can be devastating. A quick search for past HN articles about this will provide lots of example links to follow.
netcan 1y ago
What are the implications of this. As I understand accounting, this means that reported profits would be higher, and therefore incur more corporate income tax liability. Cash flow isn't effected besides tax. A startup isn't likely to be making a profit yet, under either accounting rule. Is there a benefit to reporting a larger loss? My first thought is that this effects Google and suchlike, not startups. But... assuming steady state "r&d" expenditure... it's not that much. Everything gets deducted within 5 years anyway. So... maybe this hinders more modestly profitable, and fast growing companies most. Those that can't afford to carry 5 years worth of paper profits as easily. Otoh... I am curious about how the difference between r&d expenses and operational ones are determined irl. This should be quantifiable. How much extra assets are software companies actually booking? It seems questionable that this "silent killer" had actually affected employment so much.
- calderwoodra 1y ago
  I'm not an accountant, but as I understand it, you don't pay taxes on profits, but on revenue. So previously, some 20% of all revenue would be owned as corporate income tax, and startups would deduct it all as they're spending much more on R&D than they owe in corporate income tax. But with this tax change, the deduction would be much lower (80% lower IIUC).
  - testrun 1y ago
    No, you pay taxes on profits. What this does is reduce your upfront deduction.
    - epr 1y ago
      Yes, but the main thing here is that ALL software development is now "profit" in the short term. In theory you've developed a capital good that benefits you over time, hence the amortization. Simplified 2021 example before 174: 100k Revenue 100k Software Dev Costs No profit or tax Simplified 2022 example after 174: 100k Revenue 100k Software Dev Costs 90k "profit" 18.9k taxes Above example is year one of suddenly having these taxes, because if your software costs are the same or lower over time it gets easier. It's just extremely painful for smaller and especially fast growing companies like startups without a lot of cash, especially when interest rates are so high. Accountants: If I am wrong about the above, please correct me
dwedge 1y ago
It might be "quite short" but it's full of click bait style text. This tax law will change everything, but we won't say what it is for 4 or 5 paragraphs, nor what changed for another 3 Edit : sorry I just realised you meant the tax law is short. The article itself is very annoyingly written
- demosthanos 1y ago
  Agreed. I think the article's text was responsible for the confusion in the comments prior to me posting this. They could have been much more clear and straightforward.
hshdhdhj4444 1y ago
Exactly! The change is very simple. And the predictable impact of the change is very clear. It shouldn’t impact large companies that are already profitable. But it’s devastating for software companies that are not profitable yet. And that’s without even getting into the philosophical issues with it.
datavirtue 1y ago
This was also a gift to big tech, boxing out competitors.
MPSimmons 1y ago
I have no doubt it's bad, but I can't believe that it's both fueling mass layoffs and also almost nobody has heard of it. Those are unlikely to both be true.
- iancmceachern 1y ago
  By what logic?
  - MPSimmons 1y ago
    At least one person at every company impacted knows why they're firing people, right? Likely several people who are in a decision making capacity. At every company. Those companies have R&D for a reason. A company _wants_ to make things, right? If this is impacting their ability to make things, wouldn't it be in a company's best interest to advocate openly against the tax code, rather than be silent about the reason, fire their staff, and just not make things? It doesn't make sense to me how so many people are aware of this to the point that many many companies are all doing the same thing for the same reason, but seemingly nobody was talking about it before this post. That doesn't make a lot of sense to me.
    - iancmceachern 1y ago
      It's not like this. It's like this: Company wants to do R&D, they have a budget, they do math that says they can afford to pay X number of R&D workers with Y budget. Government changes tax laws in unexpected way, that changes the math so that Y budget only can support X-A R&D workers because the "A" goes to taxes now. Also important to note, the tech R&D space is a very small part of the overall economy. We exist in a little thought bubble here on HN.
  - eipipuz 1y ago
    Assuming this change is causing the layoffs, then these companies know about this. If these companies don't know about this change, then why would we believe this change is causing it.
mvdtnz 1y ago
> It really is quite unambiguous and is unambiguously bad for anyone who builds software Not "anyone". Anyone in America.
rayiner 1y ago
In general, the tax code does not provide immediate deductions for purchase of assets that generate recurring income. Instead, the cost of the asset must be depreciated over time. The provision you point to excludes land, physical property, and software from treatment as R&D expenditures. Because all of those things generate recurring revenue over time. It’s specifically listed in that statute, but it’s not treated as a “special case.” E.g. If a whiskey maker pays to build a distillation system, it can’t deduct that cost immediately. Because that’s a capital asset that generates recurring revenue. Software is properly treated the same way.
- demosthanos 1y ago
  Historically, Section 174 allowed everyone to opt in or out of R&D amortization. That amortization is required from anyone for R&D is new. Further, software is the only type of R&D explicitly called out as required to count as R&D. Which means it should be taken as a given that most other industries are finding ways to count their R&D as anything else, while we've been intentionally given the short straw for some reason by having our specific field be the only one identified by name so as to leave no wiggle room. I'd say that definitely counts as being a special case. The section is even labeled "Special Rules".

radley 1y ago

It's not really targeted at tech, insomuch as at Democrats. Everyone assumed it was a traditional accounting hack. But given the timing and the reinitialization, it's clearly political, not economic. The code is a strategic time-bomb designed to cause a high-profile economic downturn during a presidential election cycle, specifically when the following president is a Democrat and Republicans have a house majority. It was used to harm Biden's economy, and it will happen again in 2030 if the next president is a Democrat. While deferred, it will be spun as a major Trump "economic achievement" for the midterms, because companies will be able to afford to hire again. The tech industry is merely high-profile fodder for extreme politics. It really is that petty.

victoro 1y ago
The Democrats had control of the presidency and the house in 2022 when this provision first went into effect but had 2 fewer senators (1 fewer if you count the tie-breaking VP). Why didn't they try to change it? Is there some reason a change in the tax code like this can't be modified or repealed once its in place?
- tomrod 1y ago
  They tried. They had Senate spoilers.
  - candiddevmike 1y ago
    As a progressive, it seems like the Democrats always have Senate spoilers...
    - SpicyLemonZest 1y ago
      Providing spoilers was the explicitly designed purpose of the US Senate. It's not a one-sided problem - Senate spoilers are also why the Affordable Care Act didn't get repealed in 2017.
      - tomrod 1y ago
        Explicitly?
        glompers 1y ago
        US Senator was an office initially designed to be selected by state legislatures rather than by direct popular election like the representatives. To a populist or a party boss, that might count as a spoiler to the will of the people or to the will of those in DC, or to both. But I may misinterpret GP's point.
        mayneack 1y ago
        I assume the person you're replying to is talking about the Filibuster and supermajority requirements not the direct election history. The filibuster is a senate rule not a constitutional design, so it wasn't part of the "design". Maybe they're both different ways of adding veto points to the same effect, but I think spoilers as "explicit design" is probably not how I'd describe it. https://en.wikipedia.org/wiki/Filibuster_in_the_United_States_Senate https://en.wikipedia.org/wiki/Filibuster_in_the_United_State...
_heimdall 1y ago
If this was passed in 2017 to go into effect during the next presidential term, wouldn't that only work as a time bomb for Biden's presidency if Trump didn't expect to win a second consecutive term? Given the history of prior presidents winning 2 consecutive terms, it seems like Trump could have reasonably expected a 2022/2023 tax change to be his problem.
- kenjackson 1y ago
  No. It’s after re-election. Bad news late in your second term isn’t that big of a deal, unless you care about legacy.
  - _heimdall 1y ago
    Most presidents care about legacy, at least to me it seems like trump holds that as a higher priority than most.
    - paulryanrogers 1y ago
      Trump seems to care what people think today, every day. He doesn't seem like someone who puts a lot of thought into the future.
      - b112 1y ago
        You know, I wonder if that's a sad but valuable trait for a politician. Public opinion can change daily, and external events can appear with no warning. These things can make a prior path of action vanish, or even make it madness to pursue. If you try to plan everything long term, I bet you hit a lot of disappoint as a politician. If you only see today, then you're not fighting for things that are now not possible. I imagine one would be far less stressed as a result. And maybe more popular than otherwise.
        paulryanrogers 1y ago
        Some problems require years or even decades to address. Consider how quickly a COVID vaccine was developed, yet it depended upon many years of quietly studying SARS and R&D around MRNA. Or consider trying to address developing or maintaining infrastructure. A chaotic politican whose mind is changed by the last person they spoke with won't do well facing serious long term problems. It gets worse if the only things they consistently stand for is their own power, personal wealth, their sycophants, and their grade-school-level (mis)understanding of complex matters.
efitz 1y ago
This is just wrong. It was passed in 2017 (during Trump’s presidency). It was to go into effect in 2020 (a presidential election year during Trump’s presidency). He hoped to be re-elected.
- demosthanos 1y ago
  No. It went into effect in 2022 [0], which means the timeline absolutely does track with OP's theory. That gives a hypothetical Trump term 2 a full year to fix it but also imposes enough of a time crunch that they could plan on sabotaging attempts to fix it by another party. I'm not saying it's the actual story, but the timeline does track. [0] Page 60, Sec 1306(e) sets the date: https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf
  - efitz 1y ago
    I don’t think it really changes the narrative. 2020 was also a congressional election year, even had Trump won (as he appeared to want desperately) he could not have been assured of a Republican congress. My argument is simple: Occam’s Razor The Republicans in congress put the provision in solely as a gimmick to get past the CBO. Frankly I don’t think legislators in either party are competent enough to have foreseen the consequences and even if they had been they wouldn’t have put a bomb like this in that would be more likely than not to backfire and affect them. I just think that too often people interpret incompetence as malice, especially nowadays when things are so polarized that it’s fashionable to hate people who differ with one’s political opinions.
    - throwaway173738 1y ago
      I think you’re wrong that legislators are incompetent. They’re human, and they’ve spent much of their lives learning how to get votes, but they’re not incompetent. A lot of them aren’t malicious, but there seems to be a small group of people outside of the legislative branch who are hell bent on taking control at all costs. And if you want to keep the votes rolling in you have to work with those people or get primaried. The dysfunction follows from fear more than incompetence these days.

jweir 1y ago

We are small and so have been on a hiring freeze since 2022. I’d like to hire but the upfront cost is high. For those around when this went into effect many business owners were surprised. Our accountants told us they seriously thought congress would fix this before it went into effect.

throwup238 1y ago
[flagged]
- viraptor 1y ago
  It's actually not uncommon for something stupid to make it to the official tax code and then get reverted. They knew the history.
- gbxyz 1y ago
  Get a better government.
  - bandyaboot 1y ago
    Get better citizens.
    - master-lincoln 1y ago
      Get better education for kids that grow to become citizens
      - datavirtue 1y ago
        This. We are seeing the ROI for "education" in America.
      - mcsniff 1y ago
        There's another word for "educating" people until they reach the decision you want them to. Brainwashing. You know it's completely possible that people have a different outlook or opinion or perspective on things and that is why they disagree with you, not necessarily a lack of education? Some people think these are good ideas and they vote or welcome them. Some people think they are bad ideas and they vote or oppose them.

youngtaff 1y ago

I worked for a UK company that amortised it’s development costs… it led to the false belief that the company was profitable when it really wasn’t

Reason077 1y ago
Exactly. And if you’re more profitable on paper, you have to pay more tax, making you even less profitable in reality.
trhway 1y ago
Yes, that is tremendously important aspect here - the US tech would look better on paper - higher paper profits due lower paper expenses - while getting increased cash flow stress due to decreased deductability of the salaries which are among the main expenses in software dev business.
- itsoktocry 1y ago
  >Yes, that is tremendously important aspect here - the US tech would look better on paper It's completely unimportant. Nobody is getting fooled "on paper" by amortized salaries.
  - trhway 1y ago
    Except for example the millions of stock market casual participants.
  - kgwgk 1y ago
    People is getting fooled by "adjusted" earnings that reduce salaries "on paper" by hiding the "non cash" component.
  - youngtaff 1y ago
    Want a bet? I’ve seen it used in UK listed companies to massage the profit numbers and make divisions of the company seem more profitable than they are
1y ago

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trhway 1y ago

What i like about US is that compare to other countries (like for example Russia where i'm originally from) there is almost no lying and cheating here. Instead there is a respect of the law and an army of talented creative accountants and lawyers. Remember that stale "multi-used" sandwich served with the drink which by virtue of its existence converted drinking establishment into a food serving restaurant? Not being an accountant, i'd just speculate, out of sheer fantasy, that some hardware chip/gadget added to your software may similarly convert your software development into hardware/gadget one.

vlovich123 1y ago
I'm not sure I buy into this. Sure, compared with Russia it's probably a lot less, at least in terms of being something everyday people engage in. But in terms of comparing with countries like Germany or Sweden I don't know. Here's some food for thought: * Global financial crises: Banks were paying (bribing) ratings agencies to rate junk bonds AAA. * Savings & loan crisis: widespread fraud & insider abuse. * Bernie Madoff: Ran the largest Ponzi scheme ever, with an estimated fraud total of $65B raking in $17.5B in invested cash. * Enron: straight up accounting fraud sprinkled with intentionally causing brownouts in California to pad their pockets with a side bonus of making Gov Davis unpopular & get him recalled (Enron was closely aligned with the Bush administration). * Nixon straight up using psy-ops against Democrats & finally trying to burgal the DNC offices. In terms of stats, the FBI does a few hundred bribery and corruption cases annually. Are they good at catching white collar crime? Well such crimes regularly take more than 5 years to investigate. And hell, some things that are basically lying and cheating are straight up legal. Usury is legal with minimal to no regulation of payday loans. Pyramid schemes are legal as long as you call it multi-level marketing. The list goes on and on.
- bluGill 1y ago
  If the list doesn't go on and on that is a clear sign that corruption is being hid.
  - lucianbr 1y ago

e40 1y ago

And if the R&D uses foreign workers, because you can't afford to pay US wages, then the 5 years goes to 15 years! This hurts small companies (like mine) that were priced out of the US developer market.

deeth_starr_v 1y ago
I’m not sure this is exactly true. If your foreign workers are a service contract then those are services expenses immediately deductible. Same if you are using local service contracts. My understanding is this creates a drag for companies that want to hire f/t.
- fhd2 1y ago
  Foreign workers are to my knowledge effectively always a service contract, since it's pretty complicated (if even possible) to hire FTEs across borders without subsidiaries, which are expensive to maintain. I'm curious if contract work is really exempt, would look like a major loophole to me.
  - K0balt 1y ago
    Tax law is full of major loopholes. It’s highly political law, so doing one thing while saying you are doing another is a feature, not a bug.
    - e40 1y ago
      There are definitely gray areas to the law, but in my decades of experience dealing with lawyers, they won't steer you to do something very far over the line. I think the companies that do step far over the line, to game the system, are doing so knowing full well they are breaking the law, but they believe they are unlikely to be caught. And they're very likely right. You could separate CEO's/CFO's in to two camps: stay legal and do what you need to do to make the almighty $$. In the 80's the phrase "greed is good" was born, but the last 2 decades have really upped the ante on this.
  - 1y ago

mountainriver 1y ago

This is one of the worst things MAGA has done. Tech startups are the source of so much of our wealth, and this makes it very challenging to ever build one. I can’t believe this still exists, and no one has changed it. We truly are governed by morons

MoonGhost 1y ago
[flagged]
cma 1y ago
A dead post below says it was biden and somehow Obama, but sibling reply link says it passed into law in 2017, not 2022, the first year it went into effect I think.
- wvenable 1y ago
  The article is pretty clear that the law was from 2017 had a scheduled start date of 2022. Although probably not the actual intended effect, it does have the effect of confusing who would be responsible for it by those who don't read past the effective date.
  - vineyardmike 1y ago
    > Although probably not the actual intended effect This is actually a really common intention in laws like this. Get the tax cuts during your term, and then kick the can down the road so your successor's term is marred by the bad law. If your successor wants to fix it, they need to pass a different tax to recoup the costs, and incur the publicity of "raising taxes".
    - matthewdgreen 1y ago
      I think it’s partly that and partly the fact that tax bills tend to be scored on a ten year time window. Note that this law doesn’t actually change the amount of tax that software companies can deduct, it just requires them to spread the deduction over several years. So if you’re scoring your new tax bill on a ten year window and five years into the bill this thing kicks in, then it looks like more tax is being collected in years 5-10. But that’s just an illusion because all the deductions are still there, they’re just being pushed out beyond the end of the window where they don’t “count”. At least this is my understanding.

droopyEyelids 1y ago

Who sponsored this text in the bill?

curtis3389 1y ago
Here's the cosponsors of the bill: https://www.congress.gov/bill/115th-congress/house-bill/1/cosponsors https://www.congress.gov/bill/115th-congress/house-bill/1/co... I think the purpose of the change was to "increase revenue": > Requiring that certain research or experimental expenditures be amortized over a five-year period or longer, starting in 2023, would increase revenues by $109 billion over the period from 2023 to 2027. https://www.congress.gov/congressional-report/115th-congress/house-report/409 https://www.congress.gov/congressional-report/115th-congress...
- mjevans 1y ago
  They want to call it anything other than a tax. It's a specific tax, on a particular class of better educated workers in specific jobs.
  - kasey_junk 1y ago
    That typically don’t vote for that party and are unsympathetic.
    - Braxton1980 1y ago
      Unsympathetic because?
      - largbae 1y ago
        Generally R&D software developers aren't considered to be poor or disadvantaged.
        Braxton1980 1y ago
        What if they lose their job?

sandworm101 1y ago

But where an established company invests steadily in software, whether it is amoritized or deducted year to year is a wash. Rather than harm tech, this would seem to protect established US companies at the expense of startups. Thats probably great for shareholders in publicly traded companies. It seems just another querk of taxation meant to maintain the established order

rileymat2 1y ago
Only bootstrapped startups, funded startups will get the amortization by the time they need to deduct from earnings.
- subarctic 1y ago
  This is what I was thinking too
Uvix 1y ago
It's only a wash if they've been amortizing all along. There's been no advantage to doing so, so established ones have all been deducting, and will have the same five year window of increased taxable income that startups will.
- demosthanos 1y ago
  Startups have to face that five year window every time they start up. Each and every startup will have a year 0 where they're spending more than they earn, and under the new Section 174 they will only get to deduct 10% of their employee's salaries that year. In year two they get to deduct 20% of year 1's salaries and 10% of year 2's salaries, which is still 30% of what the established players will be able to deduct. By year 4, if they make it that far (which most startups don't) they'll finally be at 90% of a full deduction. Add to that the fact that startups also by definition have a much higher rate of growth than established companies and you'll find that a startup almost definitionally will be paying substantially more in taxes as long as it remains a startup, because they only get to deduct an average of the last 5 years of expenses from this year's revenue in order to calculate this year's profit. That's fine when your last five years are more or less similar to this one, but it's terrible when you've been growing. The net effect of this change can only be to disincentive startups and cement big, slow established players.

gscott 1y ago

I thought wages were deductible anyway. Say you pay a developer $250,000 a year. The employee pays the tax on their own wages.

deleted 1y ago
[deleted]
walterbell 1y ago
W2 salary is different from fully loaded labor cost.
notimetorelax 1y ago
No, not in this case. 250k is an expense for the company. Company had to amortize this expense over 5 or 15 years. (15 for software engineers outside of the US)
- Tade0 1y ago
  > (15 for software engineers outside of the US) Yikes. Does that apply to outsourcing?

arkis22 1y ago

salary is already counted as an expense right? does that mean we were double billed as two expenses? salary and R&D?

ridomune 1y ago
more like triple. do not forget the sales tax when you're spending it.

ChuckMcM 1y ago

Excellent summary.

cma 1y ago

> All software expenses must be treated as research and experimental expenses From what I've read, not for software fixes to ongoing products, but for new products and I can't remember for new feature work. Also if you contract for someone else I heard you can still write off expenses without amortization.

nlitened 1y ago
I would guess that because in these cases software development costs would be classified as “cost of goods sold” instead of “research and development”

bunnie 1y ago

It's pretty bad. It had a huge impact on my personally, I'm a small R&D shop and basically I have had to end all risky long-term research projects. In addition to the research costs, I'd also have to pay taxes on the research costs mostly up-front. Significantly, if the project doesn't work out, I'm still out of pocket for the tax money. It's a penalty for taking a risk, and it kneecaps American innovators in a globally competitive technology race. The rules are even worse than the article notes because it double-dings open source developers. See Section 6.4 of https://www.irs.gov/pub/irs-drop/n-23-63.pdf https://www.irs.gov/pub/irs-drop/n-23-63.pdf. The relevant bit is here: > "However, even if the research provider does not bear financial risk under the terms of the contract with the research recipient, if the research provider has a right to use any resulting SRE product ... costs paid or incurred by the research provider that are incident to the SRE activities performed by the research provider under the contract are SRE expenditures of the research provider for which no deduction is allowed ..." The rule as written means contractors who write Windows drivers could deduct their expenses (as they would have no residual rights to a closed-source work product), but contractors who write Linux drivers may not (as they would have some rights to open-source Linux drivers).

djfivyvusn 1y ago
Just pledge copyright of contributions to eff or something.
- bunnie 1y ago
  Work-for-hire open source contributions often already bear a copyright holder of the entity paying for the work. The problem isn't who is the copyright holder. The problem is that the license assigned says that anyone is free to use the code. Anyone is a set of people that includes the contributor, which then triggers the interpretation that the research is incrementally in the contributor's benefit and thus disqualified from preferential tax treatment. You'd need a custom license where everyone in the world could use the results except for the contributor, and then like, a source control system that hides the source files from the contributor's view of the repository.

ant6n 1y ago

I don’t get the big hoopla. Here in Germany I’m opting to turn development costs into assets (I simplify a bit). I need assets on the balance sheet, otherwise we’re over-indebted. As long as the development costs are much higher than income (I.e. as long as you’re not profitable), then it shouldn’t matter. And once you are profitable, you pay some more corporate taxes, but aren’t they kind of not too high in the us anyway?

PaulDavisThe1st 1y ago
the big hoopla is this: you're a newish startup. You have $300k/yr revenue and $$270k/yr expenses of which $250k is paying your programmers. prior to this rule change, what you pay your programmers is just a deductible expense, so you owe taxes (in this very simplified example with no other expenses etc. etc.) on just $50k. after the rule change, you can deduct only $50k of the labor cost (in this year), so now you owe tax on $250k. there is a very good chance you do not have the cash available to make this payment. of course, after 5 years, things all balance out and are effectively "back to normal". but you have to get through those 5 years first.
- ant6n 1y ago
  How does this work, in your first year, to have 300K revenue on 270K development cost. It sounds like some very specific boot strapping case, and even then after 70K deductions its 230K profit, so like 50K in taxes on 30K profit. Sure it’s annoying, but it doesnt sound like total doom. Its more likely youll have 250K programmer expense in the first year, 100K in revenue, need 200K in outside investment, and pay very little taxes. After a couple of years it evens out anyway. Consider some sort of logistics company. They might pay 250K for their hardware (e.g. vehicles), 50K in expenses, get 300K in revenue. Theyll be taxed the same as the startup building up their IT assets.
  - PaulDavisThe1st 1y ago
    The logistics company example is not really relevant. The critical point about the rule change is the fact that all software related expenses, including salaries or contract labor costs, must now be amortized over 5 or 15 years. What was previously deductible no longer is, and this changes the cash flow situation dramatically for a software-intensive business, for 5 years. Sure, for heavily capitalized startups that are losing money, the rule change is not an issue. But for companies that manage to get to profitable status soon, even if it is only a small profit, the rule change can be devastating. A quick search for past HN articles about this will provide lots of example links to follow.

netcan 1y ago

What are the implications of this. As I understand accounting, this means that reported profits would be higher, and therefore incur more corporate income tax liability. Cash flow isn't effected besides tax. A startup isn't likely to be making a profit yet, under either accounting rule. Is there a benefit to reporting a larger loss? My first thought is that this effects Google and suchlike, not startups. But... assuming steady state "r&d" expenditure... it's not that much. Everything gets deducted within 5 years anyway. So... maybe this hinders more modestly profitable, and fast growing companies most. Those that can't afford to carry 5 years worth of paper profits as easily. Otoh... I am curious about how the difference between r&d expenses and operational ones are determined irl. This should be quantifiable. How much extra assets are software companies actually booking? It seems questionable that this "silent killer" had actually affected employment so much.

calderwoodra 1y ago
I'm not an accountant, but as I understand it, you don't pay taxes on profits, but on revenue. So previously, some 20% of all revenue would be owned as corporate income tax, and startups would deduct it all as they're spending much more on R&D than they owe in corporate income tax. But with this tax change, the deduction would be much lower (80% lower IIUC).
- testrun 1y ago
  No, you pay taxes on profits. What this does is reduce your upfront deduction.
  - epr 1y ago
    Yes, but the main thing here is that ALL software development is now "profit" in the short term. In theory you've developed a capital good that benefits you over time, hence the amortization. Simplified 2021 example before 174: 100k Revenue 100k Software Dev Costs No profit or tax Simplified 2022 example after 174: 100k Revenue 100k Software Dev Costs 90k "profit" 18.9k taxes Above example is year one of suddenly having these taxes, because if your software costs are the same or lower over time it gets easier. It's just extremely painful for smaller and especially fast growing companies like startups without a lot of cash, especially when interest rates are so high. Accountants: If I am wrong about the above, please correct me

dwedge 1y ago

It might be "quite short" but it's full of click bait style text. This tax law will change everything, but we won't say what it is for 4 or 5 paragraphs, nor what changed for another 3 Edit : sorry I just realised you meant the tax law is short. The article itself is very annoyingly written

demosthanos 1y ago
Agreed. I think the article's text was responsible for the confusion in the comments prior to me posting this. They could have been much more clear and straightforward.

hshdhdhj4444 1y ago

Exactly! The change is very simple. And the predictable impact of the change is very clear. It shouldn’t impact large companies that are already profitable. But it’s devastating for software companies that are not profitable yet. And that’s without even getting into the philosophical issues with it.

datavirtue 1y ago

This was also a gift to big tech, boxing out competitors.

MPSimmons 1y ago

I have no doubt it's bad, but I can't believe that it's both fueling mass layoffs and also almost nobody has heard of it. Those are unlikely to both be true.

iancmceachern 1y ago
By what logic?
- MPSimmons 1y ago
  At least one person at every company impacted knows why they're firing people, right? Likely several people who are in a decision making capacity. At every company. Those companies have R&D for a reason. A company _wants_ to make things, right? If this is impacting their ability to make things, wouldn't it be in a company's best interest to advocate openly against the tax code, rather than be silent about the reason, fire their staff, and just not make things? It doesn't make sense to me how so many people are aware of this to the point that many many companies are all doing the same thing for the same reason, but seemingly nobody was talking about it before this post. That doesn't make a lot of sense to me.
  - iancmceachern 1y ago
    It's not like this. It's like this: Company wants to do R&D, they have a budget, they do math that says they can afford to pay X number of R&D workers with Y budget. Government changes tax laws in unexpected way, that changes the math so that Y budget only can support X-A R&D workers because the "A" goes to taxes now. Also important to note, the tech R&D space is a very small part of the overall economy. We exist in a little thought bubble here on HN.
- eipipuz 1y ago
  Assuming this change is causing the layoffs, then these companies know about this. If these companies don't know about this change, then why would we believe this change is causing it.

mvdtnz 1y ago

> It really is quite unambiguous and is unambiguously bad for anyone who builds software Not "anyone". Anyone in America.

rayiner 1y ago

In general, the tax code does not provide immediate deductions for purchase of assets that generate recurring income. Instead, the cost of the asset must be depreciated over time. The provision you point to excludes land, physical property, and software from treatment as R&D expenditures. Because all of those things generate recurring revenue over time. It’s specifically listed in that statute, but it’s not treated as a “special case.” E.g. If a whiskey maker pays to build a distillation system, it can’t deduct that cost immediately. Because that’s a capital asset that generates recurring revenue. Software is properly treated the same way.

demosthanos 1y ago
Historically, Section 174 allowed everyone to opt in or out of R&D amortization. That amortization is required from anyone for R&D is new. Further, software is the only type of R&D explicitly called out as required to count as R&D. Which means it should be taken as a given that most other industries are finding ways to count their R&D as anything else, while we've been intentionally given the short straw for some reason by having our specific field be the only one identified by name so as to leave no wiggle room. I'd say that definitely counts as being a special case. The section is even labeled "Special Rules".