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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 somet

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.
deleted 1y ago
[deleted]
marcosdumay 1y ago
> you do not own your employees Well, that framing is just wrong. The companies are paying taxes over what those employees created, not over the employees. Does the company own the software? > The IRS is using a theory of value where... Notice that all of your 3 points are exactly like any other kind of capital. Most countries exclude salaries from the income calculation because it has good practical consequences (both on making accounting cheaper and on incentivizing companies to hire), not because of any theoretical problem.
sahila 1y ago
> This is unlike how capital assets are valued for any other industry! Is your dismay that it's unfair compared to other industries or that the policy doesn't reflect reality that software is a capital asset that has a lifetime longer than 6 years for many companies?
- demosthanos 1y ago
  It's that it doesn't reflect the reality that the value of software is not remotely correlated with the salaries that were spent building it. It could be valued much higher or much lower, spanning a huge range. Using salaries as a proxy for value of the asset encourages only the safest shovelware bets, discouraging risk taking lest your asset be taxed at substantially higher than it's worth. Avoiding that risk-adverse dynamic is why Section 174 was written the way it was since the 50s to encourage R&D, and it's paid off in spades.
  - thaumasiotes 1y ago
    Well, a larger issue seems to be that this whole idea is premised on taxing an unrealized gain. If I create a painting, I don't owe any taxes on it until I sell it. If the world decides that I'm Picasso and my sneezing on a canvas means it's worth $50 million, it still won't be true that, after I sneeze without covering my mouth and some spittle lands on one of my blank canvases, a government official shows up to my house to force me to sell it so that I can pay the taxes I owe for creating it.
    - sethherr 1y ago
      While I understand the drawbacks, the current situation - where the ultra-wealthy don’t pay taxes because all their wealth is in unrealized gain - is even worse
      - thaumasiotes 1y ago
        > the current situation - where the ultra-wealthy don’t pay taxes because all their wealth is in unrealized gain This is neither the current situation nor even a theoretical possibility.

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.

deleted 1y ago

[deleted]

marcosdumay 1y ago

> you do not own your employees Well, that framing is just wrong. The companies are paying taxes over what those employees created, not over the employees. Does the company own the software? > The IRS is using a theory of value where... Notice that all of your 3 points are exactly like any other kind of capital. Most countries exclude salaries from the income calculation because it has good practical consequences (both on making accounting cheaper and on incentivizing companies to hire), not because of any theoretical problem.

sahila 1y ago

> This is unlike how capital assets are valued for any other industry! Is your dismay that it's unfair compared to other industries or that the policy doesn't reflect reality that software is a capital asset that has a lifetime longer than 6 years for many companies?

demosthanos 1y ago
It's that it doesn't reflect the reality that the value of software is not remotely correlated with the salaries that were spent building it. It could be valued much higher or much lower, spanning a huge range. Using salaries as a proxy for value of the asset encourages only the safest shovelware bets, discouraging risk taking lest your asset be taxed at substantially higher than it's worth. Avoiding that risk-adverse dynamic is why Section 174 was written the way it was since the 50s to encourage R&D, and it's paid off in spades.
- thaumasiotes 1y ago
  Well, a larger issue seems to be that this whole idea is premised on taxing an unrealized gain. If I create a painting, I don't owe any taxes on it until I sell it. If the world decides that I'm Picasso and my sneezing on a canvas means it's worth $50 million, it still won't be true that, after I sneeze without covering my mouth and some spittle lands on one of my blank canvases, a government official shows up to my house to force me to sell it so that I can pay the taxes I owe for creating it.
  - sethherr 1y ago
    While I understand the drawbacks, the current situation - where the ultra-wealthy don’t pay taxes because all their wealth is in unrealized gain - is even worse
    - thaumasiotes 1y ago
      > the current situation - where the ultra-wealthy don’t pay taxes because all their wealth is in unrealized gain This is neither the current situation nor even a theoretical possibility.