4 ms·

We're not talking about a tax deduction in the sense of a special privilege, we're talking about simple calculations of profit. Before this change, tax for sof

We're not talking about a tax deduction in the sense of a special privilege, we're talking about simple calculations of profit. Before this change, tax for software development was calculated against: * Profit = Revenue - Expenses And software developer salaries fell neatly into Expenses unless you were looking for an R&D tax credit. After this change, tax for software development is calculated against this new equation: * Profit = Revenue - (1/5 * YearlyExpenses[-1]) - (1/5 * YearlyExpenses[-2]) - (1/5 * YearlyExpenses[-3]) - (1/5 * YearlyExpenses[-4]) - (1/5 * YearlyExpenses[-5]) Which means that if you are in Year 1 of operation, your values for YearlyExpenses[-2:-5] are all 0 and you only get to deduct 1/5 of your actual operating costs for the year from your "profit". So you can be in the hole but still owe taxes on your "profit" for the year because what you spent money on was classified as R&D.

lesuorac 1y ago
It is a subsidy! Why should money spent on software _development_ not have to be deprecated over time like other money spent on _development_? I get that it sucks from a cash flow standpoint but the same is going to be true of other R&D expenses. It's just that we're more exposed to this specific R&D expenditure and not others.
- anp 1y ago
  The root of this subthread makes it clear why the current provisions to force software expenses to be amortized are different than other kinds of R&D.
  - lesuorac 1y ago
    The article makes it clear it's a subsidy. > Originally enacted in 1954, Sec. 174 has historically allowed taxpayers to deduct SRE expenditures in the year incurred. Its original aim was to level the playing field for small businesses, those without dedicated research teams, that may be unable to deduct product development expenses under Sec. 162 because the costs were not ordinary and necessary expenses paid or incurred in carrying on a trade or business Straight-up, any deviation in the tax code for a special group is always a subsidy.
    - demosthanos 1y ago
      Just to be clear, "special group" here means "any small business that wants to do any R&D of any kind", right? Because software was not a special group before, all R&D was opt-in for this kind of accounting. Now, after this change, software is a special group singled out, a deviation in the tax code specially carved out for us to make our field specifically the exceptional one with no wiggle room. No other type of development is named in Section 174 to explicitly require companies to amortize. So who is that subsidizing now?
      - lesuorac 1y ago
        > So who is that subsidizing now? Uh sure, with this change software would subsidize other R&D. Prior to the change anybody not eligible for Section 174 was subsidizing Section 174 recipients. Subsidizing R&D is probably a good idea but let's call a spade a spade here. Additionally, subsidizing small business is good policy because they're by the numbers job creators while large businesses are job destroyers.
- deleted 1y ago
  [deleted]
- demosthanos 1y ago
  I mean, yes, it will be true for other R&D types. But that's also new and also broken for the same reason: it means new R&D companies are at a massive disadvantage in their first few years compared to the established players who have lots of expenses queued up to deduct. It's wealth redistribution from young startups to established players who have 5 years of past expenses to use in their favor, and that is going to be a very bad thing for the health and vibrancy of our economy. And, as a sibling points out (and as I pointed out in a comment at the top level), software is in this regime singled out from all other possible R&D expenses, making it particularly vulnerable. A skilled accountant/lawyer can probably turn big chunks of other R&D expenses into something that doesn't fall under 174. No amount of skill can do that for software, because we're singled out.
- tomrod 1y ago
  Because you slinging a React component or Vibecoding a security pile requires no Technology Readiness Level assessment nor does it have development liability. Rather, what we call Software Development is more appropriately labeled Software Engineering.
tommy_axle 1y ago
Wasn't there something when this went into effect about the mid-year being the start so it is 10% in years 1 and 6?
- demosthanos 1y ago
  Yeah, I just read that. So it's actually 10-20-20-20-20-10, which is both weirder and also slightly worse than my formula above.
  - rbultje 1y ago
    That part is not so weird, you didn't pay all salaries on January 1st. But amortizing salaries in general is ridiculous.

lesuorac 1y ago

It is a subsidy! Why should money spent on software _development_ not have to be deprecated over time like other money spent on _development_? I get that it sucks from a cash flow standpoint but the same is going to be true of other R&D expenses. It's just that we're more exposed to this specific R&D expenditure and not others.

anp 1y ago
The root of this subthread makes it clear why the current provisions to force software expenses to be amortized are different than other kinds of R&D.
- lesuorac 1y ago
  The article makes it clear it's a subsidy. > Originally enacted in 1954, Sec. 174 has historically allowed taxpayers to deduct SRE expenditures in the year incurred. Its original aim was to level the playing field for small businesses, those without dedicated research teams, that may be unable to deduct product development expenses under Sec. 162 because the costs were not ordinary and necessary expenses paid or incurred in carrying on a trade or business Straight-up, any deviation in the tax code for a special group is always a subsidy.
  - demosthanos 1y ago
    Just to be clear, "special group" here means "any small business that wants to do any R&D of any kind", right? Because software was not a special group before, all R&D was opt-in for this kind of accounting. Now, after this change, software is a special group singled out, a deviation in the tax code specially carved out for us to make our field specifically the exceptional one with no wiggle room. No other type of development is named in Section 174 to explicitly require companies to amortize. So who is that subsidizing now?
    - lesuorac 1y ago
      > So who is that subsidizing now? Uh sure, with this change software would subsidize other R&D. Prior to the change anybody not eligible for Section 174 was subsidizing Section 174 recipients. Subsidizing R&D is probably a good idea but let's call a spade a spade here. Additionally, subsidizing small business is good policy because they're by the numbers job creators while large businesses are job destroyers.
deleted 1y ago
[deleted]
demosthanos 1y ago
I mean, yes, it will be true for other R&D types. But that's also new and also broken for the same reason: it means new R&D companies are at a massive disadvantage in their first few years compared to the established players who have lots of expenses queued up to deduct. It's wealth redistribution from young startups to established players who have 5 years of past expenses to use in their favor, and that is going to be a very bad thing for the health and vibrancy of our economy. And, as a sibling points out (and as I pointed out in a comment at the top level), software is in this regime singled out from all other possible R&D expenses, making it particularly vulnerable. A skilled accountant/lawyer can probably turn big chunks of other R&D expenses into something that doesn't fall under 174. No amount of skill can do that for software, because we're singled out.
tomrod 1y ago
Because you slinging a React component or Vibecoding a security pile requires no Technology Readiness Level assessment nor does it have development liability. Rather, what we call Software Development is more appropriately labeled Software Engineering.

tommy_axle 1y ago

Wasn't there something when this went into effect about the mid-year being the start so it is 10% in years 1 and 6?

demosthanos 1y ago
Yeah, I just read that. So it's actually 10-20-20-20-20-10, which is both weirder and also slightly worse than my formula above.
- rbultje 1y ago
  That part is not so weird, you didn't pay all salaries on January 1st. But amortizing salaries in general is ridiculous.