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Thanks for working on this guys. The current tax code is fairly crazy: you could spend a few million in salaries, sell 200k of software in a year and possibly o

Thanks for working on this guys. The current tax code is fairly crazy: you could spend a few million in salaries, sell 200k of software in a year and possibly owe taxes on that. Even if the company would otherwise be shutting down. The traditional capital asset treatment applied to software leaves a lot to be desired. Some software is a capital asset, but much just isn’t. Or at least should be considered to depreciate rapidly.

ndriscoll 1y ago
I would be surprised if nearly all software companies wouldn't consider their code to be a valuable capital asset. For example, do you think your company would be okay with releasing commits/snapshots of their source code and design docs into the public domain once they hit 5 years old? Or do they currently depreciate too quickly?
- Terr_ 1y ago
  I don't think that framing really tells us much, because there could be many reasons not to release that code that don't indicate it's an asset, such as (A) worries it might have still-relevant security issues, (B) costs of scrubbing other information like employee PII, or (C) the code is too useless to be worth the effort. If the goal is to measure retained value, I'd ask how much a competitor would pay to acquire your 5-year-old code (for direct use, not for hacking you) without feeling cheated afterwards.
  - amluto 1y ago
    Possibly more than it cost to develop in the first place, at least in some industries. Which might result in utterly absurd tax treatment.
- BJones12 1y ago
  I think companies view it as a trade secret. Whether or not that particular app is making money, regardless of how old it is, they don't want to release the code.
- freeone3000 1y ago
  Salaries are not generally considered “capital” - HR wording aside, you do not own your employees. It’s an immediate expense that may, or may not, produce something of value. The IRS is using a theory of value where software (1) is a capital asset (okay, sure), (2) has a six-year deprecation schedule (uhhh why not 5 like everything else?), and (3) is valued at the exact cost of all inputs to it, including salaries (uh oh). This is unlike how capital assets are valued for any other industry! And it has the effect that hiring a second lawyer is “cheaper” (for five years anyway) than hiring a second developer.
  - rectang 1y ago
    > (3) is valued at the exact cost of all inputs to it, including salaries (uh oh). Thanks, that really gets at the heart of the issue. Are any other business processes and elements — e.g. accounting mechanisms, print design, sales funnels — valued this way?
    - cjbgkagh 1y ago
      There could be a distinction between creating new value (greenfield), and maintaining existing value (brownfield). Most of my work is green field and I do consider it to be a capital asset, it's sweat equity as I don't pay myself, but I can't deduct my non-salary either. Others estimate the most of the software work is 95% brownfield. An other issue is competitiveness with other jurisdictions that don't have these tax laws, but even if that were normalized there are jurisdictions that are far lower tax in general regardless of the classification.
    - phendrenad2 1y ago
      Imagine if secretaries' salaries were applied to the "capital asset" of the well-organized file cabinets they create. Or if janitors' salaries were applied to the "capital asset" of a clean workspace. This whole quagmire is far more insane than anyone is giving it credit for.
    - freeone3000 1y ago
      Straight no. That’s why they had to put in line 3, “clarifying” the intent, because it’s not done anywhere else.
- demosthanos 1y ago
  If you're ripping off a competitor, sure, the salaries of your engineers roughly translates to the value of the resulting capital asset. But the most valuable work that software engineers do is the stuff that has never been done before. The salaries of your developers and designers and your product managers go first towards figuring out what a valuable capital asset would look like. Only after that can you start investing in the actual asset. The same is true for all true R&D, which is why historically the government has tried to provide protections for R&D work to incentivize people to not just churn out the safe bet over and over again. Patents fall into this category, but software patents are (rightly) hard to come by. Through 2022, the risk of software development was offset by the ability to expense the costs and avoid a tax bill, and this was good policy if your aim is to encourage innovation. The capital asset theory could still work if there were some way to appraise the value of the actual asset you created. But absent such a way, this thinking is deeply flawed for all but the most shovelware of jobs.
  - thaumasiotes 1y ago
    > If you're ripping off a competitor, sure, the salaries of your engineers roughly translates to the value of the resulting capital asset. I don't think this comes close to being true. It would make ripping off a competitor pointless.
- creato 1y ago
  Even if true, a small fraction of engineering time on a project is actually developing that asset. The rest is maintenance and support. The tax code does allow for this distinction, but only if you track hours associated with each kind of work, which basically no one does. And even if they tried, it's difficult because that line is blurry. Tasks are rarely 100% one or the other. Ever fixed a bug by refactoring to make something better? Which kind of engineering is that? Can you justify that to the IRS accountant auditing you?
- 8note 1y ago
  you could test this by looking for MIT licensed code on github?
wagwang 1y ago
Isnt this just false? I thought corporate taxes are levied on net income?
- ok_dad 1y ago
  Have you read section 174? It forces software to be classified as R&D and then use a weird 6 year amortization (10-20-20-20-20-10) for the salary.
  - wagwang 1y ago
    Oh amortizing salary is kinda weird, I thought it meant like data center expenses must be amortized
- deleted 1y ago
  [deleted]
- arcbyte 1y ago
  Corporate taxes are indeed levied on net income after expenses. Trading money for capital assets is not considered expense. If you start the year with 0$ in your bank. After the end of the year you have made $200k in revenue. However you "spent" $200k on software salaries. However, because these are software costs, they must be depreciated over 5 years, so only 20% of that $200k software cost can be applied as depreciation cost which is considered an expense. So your net income for this year is $200k revenue - $20k depreciation expense = $180k. Your 15% tax on this is $27k. So you made $200k and spent all of it on software, so your bank account is 0, but you owe $27k in taxes.
  - ndriscoll 1y ago
    You do, however, have $160k worth of software that is generating ~$16k/mo in revenue (or more since you presumably did not make that $200k evenly spread out across year 1 while you were developing the software), so in year 2 you could halt further development, use a loan to get through the 2 months it takes to make the money to pay your taxes, and then make $176k profit. Then you pay your taxes on year 2 and walk away with $152k in the bank along with $120k worth of software asset. (Of course an asset that generates $200k/year is actually worth far more than $200k, so in that case 20% depreciation seems even more absurd)
piracyrules 1y ago
[flagged]

ndriscoll 1y ago

I would be surprised if nearly all software companies wouldn't consider their code to be a valuable capital asset. For example, do you think your company would be okay with releasing commits/snapshots of their source code and design docs into the public domain once they hit 5 years old? Or do they currently depreciate too quickly?

Terr_ 1y ago
I don't think that framing really tells us much, because there could be many reasons not to release that code that don't indicate it's an asset, such as (A) worries it might have still-relevant security issues, (B) costs of scrubbing other information like employee PII, or (C) the code is too useless to be worth the effort. If the goal is to measure retained value, I'd ask how much a competitor would pay to acquire your 5-year-old code (for direct use, not for hacking you) without feeling cheated afterwards.
- amluto 1y ago
  Possibly more than it cost to develop in the first place, at least in some industries. Which might result in utterly absurd tax treatment.
BJones12 1y ago
I think companies view it as a trade secret. Whether or not that particular app is making money, regardless of how old it is, they don't want to release the code.
freeone3000 1y ago
Salaries are not generally considered “capital” - HR wording aside, you do not own your employees. It’s an immediate expense that may, or may not, produce something of value. The IRS is using a theory of value where software (1) is a capital asset (okay, sure), (2) has a six-year deprecation schedule (uhhh why not 5 like everything else?), and (3) is valued at the exact cost of all inputs to it, including salaries (uh oh). This is unlike how capital assets are valued for any other industry! And it has the effect that hiring a second lawyer is “cheaper” (for five years anyway) than hiring a second developer.
- rectang 1y ago
  > (3) is valued at the exact cost of all inputs to it, including salaries (uh oh). Thanks, that really gets at the heart of the issue. Are any other business processes and elements — e.g. accounting mechanisms, print design, sales funnels — valued this way?
  - cjbgkagh 1y ago
    There could be a distinction between creating new value (greenfield), and maintaining existing value (brownfield). Most of my work is green field and I do consider it to be a capital asset, it's sweat equity as I don't pay myself, but I can't deduct my non-salary either. Others estimate the most of the software work is 95% brownfield. An other issue is competitiveness with other jurisdictions that don't have these tax laws, but even if that were normalized there are jurisdictions that are far lower tax in general regardless of the classification.
  - phendrenad2 1y ago
    Imagine if secretaries' salaries were applied to the "capital asset" of the well-organized file cabinets they create. Or if janitors' salaries were applied to the "capital asset" of a clean workspace. This whole quagmire is far more insane than anyone is giving it credit for.
  - freeone3000 1y ago
    Straight no. That’s why they had to put in line 3, “clarifying” the intent, because it’s not done anywhere else.
demosthanos 1y ago
If you're ripping off a competitor, sure, the salaries of your engineers roughly translates to the value of the resulting capital asset. But the most valuable work that software engineers do is the stuff that has never been done before. The salaries of your developers and designers and your product managers go first towards figuring out what a valuable capital asset would look like. Only after that can you start investing in the actual asset. The same is true for all true R&D, which is why historically the government has tried to provide protections for R&D work to incentivize people to not just churn out the safe bet over and over again. Patents fall into this category, but software patents are (rightly) hard to come by. Through 2022, the risk of software development was offset by the ability to expense the costs and avoid a tax bill, and this was good policy if your aim is to encourage innovation. The capital asset theory could still work if there were some way to appraise the value of the actual asset you created. But absent such a way, this thinking is deeply flawed for all but the most shovelware of jobs.
- thaumasiotes 1y ago
  > If you're ripping off a competitor, sure, the salaries of your engineers roughly translates to the value of the resulting capital asset. I don't think this comes close to being true. It would make ripping off a competitor pointless.
creato 1y ago
Even if true, a small fraction of engineering time on a project is actually developing that asset. The rest is maintenance and support. The tax code does allow for this distinction, but only if you track hours associated with each kind of work, which basically no one does. And even if they tried, it's difficult because that line is blurry. Tasks are rarely 100% one or the other. Ever fixed a bug by refactoring to make something better? Which kind of engineering is that? Can you justify that to the IRS accountant auditing you?
8note 1y ago
you could test this by looking for MIT licensed code on github?

wagwang 1y ago

Isnt this just false? I thought corporate taxes are levied on net income?

ok_dad 1y ago
Have you read section 174? It forces software to be classified as R&D and then use a weird 6 year amortization (10-20-20-20-20-10) for the salary.
- wagwang 1y ago
  Oh amortizing salary is kinda weird, I thought it meant like data center expenses must be amortized
deleted 1y ago
[deleted]
arcbyte 1y ago
Corporate taxes are indeed levied on net income after expenses. Trading money for capital assets is not considered expense. If you start the year with 0$ in your bank. After the end of the year you have made $200k in revenue. However you "spent" $200k on software salaries. However, because these are software costs, they must be depreciated over 5 years, so only 20% of that $200k software cost can be applied as depreciation cost which is considered an expense. So your net income for this year is $200k revenue - $20k depreciation expense = $180k. Your 15% tax on this is $27k. So you made $200k and spent all of it on software, so your bank account is 0, but you owe $27k in taxes.
- ndriscoll 1y ago
  You do, however, have $160k worth of software that is generating ~$16k/mo in revenue (or more since you presumably did not make that $200k evenly spread out across year 1 while you were developing the software), so in year 2 you could halt further development, use a loan to get through the 2 months it takes to make the money to pay your taxes, and then make $176k profit. Then you pay your taxes on year 2 and walk away with $152k in the bank along with $120k worth of software asset. (Of course an asset that generates $200k/year is actually worth far more than $200k, so in that case 20% depreciation seems even more absurd)

piracyrules 1y ago

[flagged]