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Wait - they are saying that employee salaries are not expenses? That is surely wrong? Just because those salaries are for R&D? I could understand if there wa

Wait - they are saying that employee salaries are not expenses? That is surely wrong? Just because those salaries are for R&D? I could understand if there was some additional tax break for R&D which was being removed. I can't see how basic operating costs cease to be expenses.

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gruez 1y ago
>Wait - they are saying that employee salaries are not expenses? >That is surely wrong? Just because those salaries are for R&D? The same would be true if you hired a bunch of scientists/engineers and got them to do R&D.
- triceratops 1y ago
  Would it also be true if you hired a bunch of construction workers and got them to build a stadium?
  - gruez 1y ago
    Buildings have to be depreciated, so probably? If you have to depreciate a building if you buy it, why should you get a free pass just because you built it yourself?
mixdup 1y ago
What other cost do you think goes into software development? Companies are not spending that much money on IDE licenses. The vast, vast majority of software/R&D costs are labor
- MattPalmer1086 1y ago
  So? They are all costs, whatever their source. In the UK, business gets taxed on profit, which is what is left from revenue after subtracting costs.
tomrod 1y ago
This was my first reaction when I heard about it before it passed. I was horrified.
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antognini 1y ago
They are expenses, but amortized over 5 years. So if you spent $2m on employee salaries, you would then deduct $400k from your revenue every year for 5 years. If your employee expenses remained constant, then by year 5 you would be deducting $2m from your revenue since you'd be accumulating the deductions from the previous four years. So in steady state it wouldn't necessarily be a big problem. But for a startup which is hiring many new employees and whose revenue is growing it's a huge problem.
svara 1y ago
Based on my exchange with wdaher, who seems to understand this well, it's a bit more subtle than that: The salaries are of course expenses, but they are exactly offset by the value of the IP created by the R&D activities. It's a bit as if you spent money on buying some materials. As long as the material doesn't degrade, the cash is gone but the value is the same and therefore won't reduce your taxes. If that IP is amortized over a single year, it does not contribute to taxation, but it does if it is amortized over a longer period.
patmcc 1y ago
They're still expenses, they just now need to be amortized. Buying a truck is an expense, as is buying gas for the truck. But the former you have to amortize over x years, the latter you can expense immediately. The law used to be "employee salaries for software are like buying gas" and now it's "employee salaries for software are like buying a truck".
- jandrewrogers 1y ago
  The critical difference is that the business owns the truck but not the employee. The amortization assumes that the asset can be sold for value. An employee can quit at any time for any reason. You don’t retain the right to their labor for five years.
  - patmcc 1y ago
    If they're producing a capital asset, you do retain the right to the fruits of their labor, even if they quit. The rationale behind amortization isn't exactly the idea that the asset can be sold, it's that the asset is producing revenue over multiple years. For software, the asset is the codebase. Let's say you hire a single software dev, for one year, and they write Excel++, which you can sell for the next ten years. It would be entirely appropriate to amortize the cost of creating that software over those ten years, based on the matching principle (a fundamental idea of accounting, matching expenses with revenue). The issue in the real world is that's not how the software industry actually works, 99% of the time.
    - jandrewrogers 1y ago
      As anyone that has ever sold software IP knows, most of the value is vested in the person that wrote the code, not the code itself. The code is not a factory, it is the output of the factory.
      - simoncion 1y ago
        > ...most of the value is vested in the person that wrote the code, not the code itself. You must have misphrased what you intended to say. If what you wrote was true, a software company's most valuable asset would be the specific programmers in its employ. If true, average tenure of a programmer would be way longer than 1.5->2 years as companies worked really, really hard to keep their most valuable assets from walking out the door into the doors of another company just to get reasonable pay increases. Perhaps your opinion is influenced by doing post-collapse-sales of a whole bunch of software houses that built just plain bad software? I can't see why else you'd be selling "software IP" independently of the rest of the business. Anyway. Given that information, how should you have phrased what you wanted to say?

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gruez 1y ago

>Wait - they are saying that employee salaries are not expenses? >That is surely wrong? Just because those salaries are for R&D? The same would be true if you hired a bunch of scientists/engineers and got them to do R&D.

triceratops 1y ago
Would it also be true if you hired a bunch of construction workers and got them to build a stadium?
- gruez 1y ago
  Buildings have to be depreciated, so probably? If you have to depreciate a building if you buy it, why should you get a free pass just because you built it yourself?

mixdup 1y ago

What other cost do you think goes into software development? Companies are not spending that much money on IDE licenses. The vast, vast majority of software/R&D costs are labor

MattPalmer1086 1y ago
So? They are all costs, whatever their source. In the UK, business gets taxed on profit, which is what is left from revenue after subtracting costs.

tomrod 1y ago

This was my first reaction when I heard about it before it passed. I was horrified.

deleted 1y ago

[deleted]

antognini 1y ago

They are expenses, but amortized over 5 years. So if you spent $2m on employee salaries, you would then deduct $400k from your revenue every year for 5 years. If your employee expenses remained constant, then by year 5 you would be deducting $2m from your revenue since you'd be accumulating the deductions from the previous four years. So in steady state it wouldn't necessarily be a big problem. But for a startup which is hiring many new employees and whose revenue is growing it's a huge problem.

svara 1y ago

Based on my exchange with wdaher, who seems to understand this well, it's a bit more subtle than that: The salaries are of course expenses, but they are exactly offset by the value of the IP created by the R&D activities. It's a bit as if you spent money on buying some materials. As long as the material doesn't degrade, the cash is gone but the value is the same and therefore won't reduce your taxes. If that IP is amortized over a single year, it does not contribute to taxation, but it does if it is amortized over a longer period.

patmcc 1y ago

They're still expenses, they just now need to be amortized. Buying a truck is an expense, as is buying gas for the truck. But the former you have to amortize over x years, the latter you can expense immediately. The law used to be "employee salaries for software are like buying gas" and now it's "employee salaries for software are like buying a truck".

jandrewrogers 1y ago
The critical difference is that the business owns the truck but not the employee. The amortization assumes that the asset can be sold for value. An employee can quit at any time for any reason. You don’t retain the right to their labor for five years.
- patmcc 1y ago
  If they're producing a capital asset, you do retain the right to the fruits of their labor, even if they quit. The rationale behind amortization isn't exactly the idea that the asset can be sold, it's that the asset is producing revenue over multiple years. For software, the asset is the codebase. Let's say you hire a single software dev, for one year, and they write Excel++, which you can sell for the next ten years. It would be entirely appropriate to amortize the cost of creating that software over those ten years, based on the matching principle (a fundamental idea of accounting, matching expenses with revenue). The issue in the real world is that's not how the software industry actually works, 99% of the time.
  - jandrewrogers 1y ago
    As anyone that has ever sold software IP knows, most of the value is vested in the person that wrote the code, not the code itself. The code is not a factory, it is the output of the factory.
    - simoncion 1y ago
      > ...most of the value is vested in the person that wrote the code, not the code itself. You must have misphrased what you intended to say. If what you wrote was true, a software company's most valuable asset would be the specific programmers in its employ. If true, average tenure of a programmer would be way longer than 1.5->2 years as companies worked really, really hard to keep their most valuable assets from walking out the door into the doors of another company just to get reasonable pay increases. Perhaps your opinion is influenced by doing post-collapse-sales of a whole bunch of software houses that built just plain bad software? I can't see why else you'd be selling "software IP" independently of the rest of the business. Anyway. Given that information, how should you have phrased what you wanted to say?