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A lot of people don't know what this Section 174 is about, so here's a brief explainer. Normally, when you have expenses, you deduct them off your revenue to f

A lot of people don't know what this Section 174 is about, so here's a brief explainer. Normally, when you have expenses, you deduct them off your revenue to find your taxable profit. If you have $1 million in sales, and $900k in costs, you have $100k in profit, and the government taxes you on that profit. Section 174 says you can't do this for software engineers. If you pay a software engineer, that's not "really" an "expense", regardless of the fact that you paid them. What you've actually done, Congress said, is bought a capital good, like a machine. And for calculating tax owed, you have to depreciate that over several years (5 in this case). Depreciating means that if you pay an engineer $200k in a year, in tax-world you only had $40k of real expense that year, even though you paid them $200k. So the effect is that it makes engineers much more expensive, because normally when a company hires an engineer, like they spend on any other expense, they can at least think "well, they will reduce our profit, which reduces our tax obligation," but in this case software engineers are special and aren't deductible in the same way. In the case of the $200k engineer, you deduct the first $40k in the first year, then you can expense another $40k from that first year in the second year, the third $40k in the third year, and so on through the fifth year. So eventually you get to expense the entire first year of the engineer's pay, but only after five years. The effect is that companies wind up using their scarce capital to loan the federal government money for five years, and so engineers become a heavy financial burden. If a company hires too many engineers, they will owe the federal government income tax even in years in which they were unprofitable. These rules, by the way, don't apply to other personnel costs. If you hire an HR person or a corporate executive, you expense them in the year you paid them. It's a special rule for software engineers. It was passed by Congress during the first Trump administration in order to offset the costs of other corporate tax rate cuts, due to budgeting rules.

api 1y ago
Doesn’t this also unfairly penalize bootstrapped companies? VC track companies seldom have taxable profits.
- davidjfelix 1y ago
  It may result in an outsized penalty to bootstrapped companies but being VC funded doesn't make you immune to this. VC funded companies with revenue will not be able to offset their revenue by reinvesting in R&D (software development) expenses, so in some cases they may be seen as having a profit when they previously wouldn't have. In those cases they'd have a tax burden.
logifail 1y ago
> Normally, when you have expenses, you deduct them off your revenue to find your taxable profit. If you have $1 million in sales, and $900k in costs, you have $100k in profit [..] I'm not sure it's helpful to simplify quite that much, doesn't this usually depend on whether we're talking about operating expenses (typically rent, utilities, salaries, supplies) or capital expenditures (typically buildings, land, intangibles...)?
- GavinMcG 1y ago
  It found it helpful that it was presented that simply. The point isn’t what else is or isn’t deductible, it’s that engineering salaries went from being deductible to being amortized.
  - logifail 1y ago
    Businesses don't get to say they're claiming "$900k in costs" ... it depends on what kind of costs... EDIT: and in this instance, it depends on what kind of software engineering.
    - organsnyder 1y ago
      But why is software engineering treated specially, here? Does Disney have to pay taxes on film animators the same way, given that they're developing a capital asset?
      - PaulDavisThe1st 1y ago
        Probably that is a large, rich field, and when you crunch the numbers, collecting corporate income taxes on 80% of essentially all s/w developer salaries in the first year after it goes into effect was a nice push to the CBO numbers related to Trump's 2017 tax cuts.
    - NickHirras 1y ago
      This is what's happened at my workplace. We account for time spent working on developing new products differently that development time maintaining legacy applications. Because they are reported for tax purposes differently.
ASalazarMX 1y ago
That's nuts, since a payroll should never be considered an asset. That's trying to put a material value on software, and doing it based on the salaries of developers is as crazy as valuing it in lines of code. The value of software could be based on something more realistic, like a percentage of actual revenue, but I suppose tech giants would be against that.
- addaon 1y ago
  > That's trying to put a material value on software, and doing it based on the salaries of developers is as crazy as valuing it in lines of code. Software clearly has material value. For software that is built, not bought, the company building it clearly values it exactly enough to pay the salaries of the software developers building it. What other estimate of its material value is better than the one that the company purchasing it is demonstrably willing to pay?
  - yojo 1y ago
    The argument I’ve heard is it specifically makes investing in speculative software (new product lines, new features, etc) more expensive. If you’re doing new drug discovery at a bio-lab, treating all your failures as depreciating “assets” seems bonkers. The same seems true of much software development where the work product ends up thrown away.
    - ndriscoll 1y ago
      The answer to this seems obvious to me: let the company publish all code and documentation pertaining to failed experiments and release it into the public domain to be allowed to fully depreciate it immediately. If it is actually worthless, they should be happy to do so.
      - throwaway7783 1y ago
        As long as the same is held true about car designs that never went to production, drug design that were not deemed profitable etc. Why pick on just software?
OneDeuxTriSeiGo 1y ago
So it applies to software engineers but under what definition of software engineer? This [1] is the only definition the code actually give. > (3) Software development > For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure. 1. https://www.law.cornell.edu/uscode/text/26/174 https://www.law.cornell.edu/uscode/text/26/174 ----- Is a test or QA engineer considered a software engineer? Is an FPGA or ASIC engineer still considered a software engineer if they are writing in HDLs? Is a systems engineer, electrical engineer, or mechanical engineer considered a software engineer because they use MATLAB, etc and use programming to do their design work? Is a sysadmin, DB admin, or other IT staff considered a software engineer because they write software as part of their job? What about a quantitative analyst, data scientist, accountant, actuary, or any of the other maths and analysis adjacent job roles that regularly use some level of programming to do their job (and therefore write software)? What about HR, etc who use excel documents? Excel is fundamentally just a graphical array programming language (and the design of spreadsheet tools is heavily inspired directly from APL). Is anyone who uses excel or builds/maintains spreadsheets considered a software engineer? Like software engineering is such a broad field and programming bleeds into every part of modern business at this point.
- teeray 1y ago
  > under what definition of software engineer? Probably a broad enough definition to net the US Government the greatest tax revenue possible for the effort to enact this.
  - abeppu 1y ago
    IDK if that's right. Oddly, the current administration has gutted the IRS and seems pretty ambivalent about collecting taxes that are on the books. I wonder if there will be an inconsistent definition of who is a software engineer, based on how friendly the company is with the administration, whether the company still has someone with a DEI title, etc.
    - teeray 1y ago
jajko 1y ago
Why not claim them as: admins, devops, analysts, testers, technicians, managers? Probably few more. Its really about precisely software development roles? Don't we anyway do some of that other stuff regardless? But if you are correct that is supremely dumb, especially in place like US.
- OneDeuxTriSeiGo 1y ago
  https://www.law.cornell.edu/uscode/text/26/174 https://www.law.cornell.edu/uscode/text/26/174 > (3) Software development > For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure. Strictly speaking every single one of those jobs falls under that role. If you "develop" any software, which arguably includes even making or maintaining excel spreadsheets (as excel is a graphical array lang inspired by APL), then you seem to fall under this umbrella.
  - logifail 1y ago
    > Strictly speaking every single one of those jobs falls under that role Q: Isn't this about whether you're doing "R&D" or not?
    - jandrewrogers 1y ago
      No, it classifies all software development as R&D by definition.
      - logifail 1y ago
        > it classifies all software development as R&D by definition We may need to argue about the word "development", but in any case, do you have a reference for that? https://www.thomsonreuters.com/en-us/posts/tax-and-accounting/section-174-expenditures/ https://www.thomsonreuters.com/en-us/posts/tax-and-accountin... "In the United States, to help spawn innovation as part of the Economic Recovery and Tax Act of 1981, the Research & Experimentation Tax Credit was introduced. Although it was initially supposed to last three years as a specific incentive to encourage companies to invest in R&D, Congress recognized its value in helping businesses create more products and services. However, it was quickly realized that this tax code made calculations for R&D complicated, especially for small businesses, which led the government to create other iterations of tax codes in order to help clarify the situation. However, not until 2017 and the enactment of Section 174 of the TCJA has there been such a comprehensive change to R&D accounting. Indeed, before the TCJA’s enactment, businesses deducted the total amount of R&D expenditures as an expense in the taxable year. Beginning in 2022, all costs related to R&D must now be amortized over five years for US-based companies or 15 years for non-US companies." I'm struggling to understand why we think R&D expenditure - including software development - should not be amortised?
spullara 1y ago
They are just product managers and the development is being done by AI agents.
- teeray 1y ago
  You jest, but you’ve also touched upon something interesting. Is this exactly what companies are trying to do? To the IRS: “We employ zero software engineers—only AI ranch hands to wrangle the AI in the right direction.”
  - spullara 1y ago
    not really jesting, just a message from the future
zacharycohn 1y ago
Just to drive the point home very explicitly: That means, in the given example above, you are able to deduct $180k that first year instead of $900k. That gives you a profit, from a tax perspective, of $820k. But you only have $100k of actual dollars. Good luck paying your taxes!
- actinium226 1y ago
  Only if you assume that the 900k in costs is exclusively the salary of 5 engineers. Realistically you will employ other people and have overhead costs like rent, etc., and I assume that other non-salary costs (health insurance, etc.) aren't included (b/c I assume health insurance, like rent, is a company-wide overhead cost and that companies aren't expected to carve out what portion of that is going to the software folks but what do I know?). But if we more realistically assume it's 3 software folks at 200k, then the taxable profit is 580k (100 profit + 3*(200k salary - 40k ammortized))
  - throwaway7783 1y ago
    1M eng salaries, 5m revenue, 4M other costs. Today I am cash flow neutral at 5m revenue, but with this I'm paying taxes on 800k "profits", which don't exist anywhere but on paper. But I have to pay the taxes in real dollars.
    - rtpg 1y ago
      This is going to sound silly but you paid 800k in profits, but now have 4 years of banked costs you can use to _reduce_ your profit margin. So you pay taxes on 800k profits, but then each subsequent year you reduce you profit by 200k, even though you don't have 200k leaving the door. If 1M eng salaries was your stable state, then after several years you're... going to have 1M in costs to subtract from your profit! The stable state is the same! I'm not going to argue about the capex change being "good", I do think it's worth highlighting that for large enough companies you're now looking at a different flavor of tax flow. Amortizing your costs over 5-10 years is something people like doing for other costs after all.
candiddevmike 1y ago
How do we restore only the tax deduction and not pass the rest of the BBB?
- nick238 1y ago
  You don't. That's how bills are passed: everyone adds a little of what they want. To the extreme, it's called "pork barrel politics", but there's a whole continuum between that and a basic compromise.
- bigstrat2003 1y ago
  You contact your representatives in Congress (mail, phone, in person at town halls and such) and say "hey, stop passing giant omnibus bills". You encourage others to do the same. That's all you can do, as a citizen. Unfortunately it won't make a difference because the vast majority of Americans simply do not care. So very few people will be putting pressure on their representatives, and nothing will change.
gnopgnip 1y ago
Normally when a business spends money producing a valuable asset, it is required to depreciate the cost to acquire the asset over the useful life. If a business pays people to create a new building, that is depreciated over 20 years. Even if it was paid for as salaries of employees, it isn't a special situation unique to software engineering.
- TulliusCicero 1y ago
  I don't think that's quite right? The value of the asset itself is depreciated over years, sure, but the payroll itself for the employees is just an immediate expense.
  - phkahler 1y ago
    How can you compare a purchased asset to one you pay people to build?
- commandlinefan 1y ago
  But isn't the reasoning there that you could turn around and sell that building right away?
  - gnopgnip 1y ago
    The reasoning behind depreciation is matching the income produced by the valuable asset, not really about resale value. Presumably the value for tax purposes is based on the cost because the cost is harder to manipulate for something like software. Like some big box stores argue under the "dark store" theory they should be valued for much less because they have restrictive covenants banning competitors from using the property if sold, or that vacant property should be used as comparables.
Ajedi32 1y ago
I agree this sounds like bad policy, but what's the logic for doing this with actual capital goods then? Doesn't that have exactly the same problem of limiting corporate investment?
- shoxidizer 1y ago
  The reasoning is that the deductions for expenses should be applied for the same year as the income they bring in. For expenses that will cover multiple years, they are spread out over those years.
- SoftTalker 1y ago
  Accounting likes to recognize expenses with revenues. If an asset will be producing revenue for five years, its cost is recognized over that same time span.
  - aaronax 1y ago
    So...don't you get value from the newly created software for ~5 years?
    - Nevermark 1y ago
      The answer to that question can only be reliably answered in 5 years. Actual honest valuation of software is something that requires actual evidence. Software returns have extremely high variance. From a lot, to none, to high negative (For projects that don't complete, or worse, deploy to negative effect.)
      - jameshart 1y ago
        Yep, some software systems become money pits. You end up having to pay more people to keep them running. Only now if those people you have to pay to keep them running are software developers, you have to act like the money you’re spending on them is helping make new value, not merely paying interest on technical debt. Fun!
    - 1y ago
EFreethought 1y ago
Maybe this is a dumb question, but if you only deduct part of their salary in the first year, what happens if you have a software developer for several years? And then what happens after five years if they are still around?
- stonemetal12 1y ago
  After five years you are back to the status quo. It is a short term problem, long term there is no difference between the two. It primarily hurts young companies that don't take VC money, and shortens the runway of those who do.
  - sarchertech 1y ago
    It is much worse for young companies for sure, but it’s not great for any company. You’re forgoing returns on .1 * salary * tax rate for 5 years, .2 * salary * tax rate for 4 years… for every software dev in the company.
  - lsaferite 1y ago
    It also affects hiring growth because every net new dev starts a new 5-year runway.
- eadmund 1y ago
  > Maybe this is a dumb question, but if you only deduct part of their salary in the first year, what happens if you have a software developer for several years? Not dumb at all! In the second year, you get to deduct ⅕th of the previous year’s salary and ⅕th of the current year’s salary; likewise, in the third year you get to deduct ⅕th of the first year’s salary, ⅕th of the second year’s salary and ⅕th of the third year’s salary. The key thing is that in the fifth and following years, a business would deduct a fifth of each of the previous five year’s engineering payrolls. This is not great for a growing business, but it’s murder on a startup trying to grow from zero.
  - chermi 1y ago
    Thus firmly placing this in the regulatory capture category.
PaulHoule 1y ago
See also this long-time tax discrimination against software engineers https://www.taxnotes.com/research/federal/other-documents/treasury-tax-correspondence/programmers-should-qualify-as-independent-contractors-senators-say/124jy https://www.taxnotes.com/research/federal/other-documents/tr...
naikrovek 1y ago
say I work for a company for 5 years as a software developer, at $200k/yr the entire time. is this how it works: year 1: company deducts $40k: 1/5 of the salary for year 1. year 2: company deducts $80k: 1/5 of the salary for year 2, and 1/5 of the salary of year 1. year 3: company deducts $120k: 1/5 of the salary for year 3, 1/5 of the salary for year 2, and 1/5 of the salary for year 1. year 4: company deducts $160k: 1/5 of the salary for year 4, 1/5 of the salary for year 3, 1/5 of the salary for year 2, and 1/5 for year 1. year 5: company deducts $200k: 1/5 of each of my 5 years of employment. I leave the company after year 5. Year 1 of my employment is fully deducted. year 6: company deducts $160k: 1/5 of years 5, 4, 3, and 2. Year 2 of my employment is fully deducted. year 7: company deducts $120k: 1/5 of years 5, 4, and 3. Year 3 of my employment is fully deducted. year 8: company deducts $80k: 1/5 of years 5 & 4. Year 4 of my employment is fully deducted. year 9: company deducts $40k: 1/5 of year 5. Year 5 of my employment is fully deducted. what is the corporate tax rate? It's not 100%, so you're deducting a fraction developer's salary from your income, right, you're not saving that much on your tax bill each year. you're paying tax on the income you used to pay the developer. I dunno man. In a world where places like Amazon pay $0 in income tax each year, I kinda feel like companies should be paying more taxes. companies get all kinds of deductions that employees don't get themselves, and will never get. businesses have a whole heap of unfair advantages already. I'm sure the capitalists among you will want me dead for saying this, but: pay your fair share. I don't care what the law says, pay enough that no one can say that you're a lamprey on society, please.
- throwawaymaths 1y ago
  modulo accounting shenanigans company like amazon is ~ unaffected by this rule since its capable of amortizing salaries anyways
- OneDeuxTriSeiGo 1y ago
  That's not really the issue (and I say this as a socialist). The issue is that it's a weak and very leaky definition that attempts to redefine anyone that touches "software development" away from being taxed like employees into being taxed like machines that produce assets at the same value as their cost of operating. This punishes small businesses and new businesses more than any large org because it massively increases the cost of operating for the first few years. And importantly it just doesn't do so consistently. Orgs should have a higher tax burden. This just doesn't do that, instead this is punishing orgs for trying to do new things and rewarding existing momentum (i.e. the large corporations that already have a profitable revenue stream and a long trail of employment history).
Volundr 1y ago
Forgive the naive question, but is this different than other payrolled employees? So for normal employees you get the deduct the year it's paid, but for some reason for software developers you have to amortize it?
- spockz 1y ago
  The logic outlined in other posts is that this is because software is seen as an asset that nets dividend. As such, like with houses you can’t deduct all the costs at once because you keep extracting value out of it. I’m not sure whether I understand why that now applies only to software and not other things.
  - digitaltrees 1y ago
    Those arguments fall short when considering the fact that that the construction company deducted the wages of the workers that built the house. The software development firm is the builder not the home owner.
    - jncfhnb 1y ago
      If you’re building software to use or sell to other people you are definitely the owner. If you’re a body shop lending out devs to build software for other people, that would be different
- Negitivefrags 1y ago
  Theoretically it’s the same with any asset you pay someone to make. If you pay someone to make a chair, you don’t deduct the salary. Instead you create an asset valued at what you paid to build it, then depreciate it over time. The arguement for this is that it would be inconsistent to do otherwise. After all, why should buying a chair from someone else be different than paying an employee to do it? It’s worth noting that this change brings the USA in line with international financial reporting standards, so it’s not like it’s some crazy unique idea or anything.
  - 1y ago
pimlottc 1y ago
How does this compare with other types of engineers/employees?
the-rc 1y ago
Does it apply to solo companies that provide software consulting to others? I guess it doesn't for S-Corps, because of passthrough, but might for C-Corps?
- jameshart 1y ago
  If you sold the software asset to another company you don’t get an asset on your books.
  - the-rc 1y ago
    Right, that's more clear cut with proprietary software, but what about open source code?
mrbonner 1y ago
Also sounds like a staging bonus RSU scheme in tech firms, isn't it?
hinkley 1y ago
Let's be honest. At a bunch of shops the engineers hired in year 2 will never be properly recouped because the company will be out of business in less than 7 years.
- digitaltrees 1y ago
  Start ups are hard, most fail. But what rational national policy makes is several orders of magnitude harder to succeed during the riskiest period by adding tax provisions on pretend profits?
  - mixermachine 1y ago
    Seems like the incentive is to make as little profits as possible at the start to avoid being killed by taxes. I would have expected an exclusion for companies that make below X dollars or are less then Y years old.
    - amendegree 1y ago
      Any incoming revenue, whether from sales or investment is theoretically taxable as income unless the company can show that it was used for an exemption such as an op-expense. This rule classifies dev salaries as cap-ex which have a different exemption process. “Profits” are just revenue minus expenses, the question is what is an expense. This rule classifies some expenses in a modified way that lowers the annual amount of the company’s expenses raising their tax liability.
davidgay 1y ago
This description is misleading (as many of them seem to be), because you're only describing the first year. After 5 years of constant expenses, the deductions match the costs. If expenses diminish, deductions exceed costs. -> this is bad (in the short term) for companies that are growing.
- eslaught 1y ago
  Or any company in its first 5 years of operation. (Or any company, period, within the first 5 years of the law being introduced.) It takes 5 years to fill the pipeline, so even if the steady state would be fine, getting to that state might be impossible.
  - PaulDavisThe1st 1y ago
    > Or any company in its first 5 years of operation. No! Any company (with software development expenses) for the first 5 years after Sec 174 went into effect!
- digitaltrees 1y ago
  Most startups won’t make it five years especially if they have to raise or borrow money to pay taxes on phantom profit. There is no rational basis for this tax change it was a vindictive attack on blue states in the first Trump admin and an attack on California and SV in particular along with the SALT tax changes.
  - hn_acc1 1y ago
    This. They hate CA and will do anything to try to make them look bad because we call out their BS. See Los Angeles right now as an example.
  - andrewlgood 1y ago
    For startups that don’t make it five years the issue is moot. Expensing the software developers compensation in year 1 rather than over years 1-5 simply creates a larger taxable loss which creates a Net Operating Loss on the balance sheet which could be used in a future, profitable year. As NOLs can expire and have rules regarding how quickly they can be used and whether they can be sold, capitalizing the R&D could be a better answer for some firms.
kazinator 1y ago
> If you pay a software engineer, that's not "really" an "expense", regardless of the fact that you paid them. If I pay for ... pretty much anything whatsoever ... I cannot write it off my personal income tax here in Canada. Not housing, not food. Medical expenses will come off the bottom not off the top.
- abrichr 1y ago
  Corporate income taxes are treated differently than personal income taxes. You absolutely can deduct corporate expenses in Canada.
  - kazinator 1y ago
    I didn't mention Canada in order to nonsensically compare corporate taxes in the USA versus personal income tax in Canada, but because it's a good idea to mention where you are if you're writing about taxes. Yes, corps get all kinds of tax breaks, whereas individuals don't.
    - MattRix 1y ago
      As a Canadian I still don’t understand what the point of your original comment was. We already know this thread is about a US rule.
jncfhnb 1y ago
If you’re building software that is intended to be used for longer than a year then it should be capitalized. The argument on HN is always just complaining that it’s unfavorable to devs; but it’s perfectly reasonable with regards to actual tax principles.
- awkward 1y ago
  Software engineers hired for custom, in house work are not building a fixed piece of software with the intention of letting it loose unchanged for the next five years. Software engineers hired to build product are not exclusively building a finished product, and are increasingly necessary as part of the expense of operating that product long term. Industry trends have gone towards combining and blending developement, security, operations, and design.
  - patmcc 1y ago
    There are businesses that will build a big custom piece of machinery. Think a factory or a mine. That may last for 20 years, but require workers to operate, maintain, etc. This is handled in existing tax law; building or improving a capital asset is amortized, repairing or maintaining it is expensed. It can be a pain in the butt, this is why accounting is not a trivial profession. We could (and I think should) treat software the same. Some software engineer work is absolutely creating a capital asset. Some is absolutely high-priced janitor work. It makes sense to allow for both with your tax code.
    - PaulDavisThe1st 1y ago
      > Think a factory or a mine. That may last for 20 years, but require workers to operate, maintain, etc. Before Sec 174, s/w development costs were subject to a choice: amortization as if they were a capital expense, or regular deduction as a normal operating expense. Companies could decide which category to put costs into depending on the nature of the work (and presumably to suit their own interests). Sec 174 removes that option. Or rather, it narrows it significantly. You must be absolutely confident that you paid developer X for ONLY maintainance work before deducting their salary.
santiagobasulto 1y ago
What happens if you outsource all that to an "offshore" company? Is it considered an expense?
- PaulDavisThe1st 1y ago
  Then you have to amortize the costs over 15 years, instead of 5.
- deleted 1y ago
  [deleted]
phkahler 1y ago
How are software engineers different than other people on payroll? Can't they be deducted the same way as accountants or other functions?
- rbultje 1y ago
  > Can't they be deducted the same way as accountants or other functions? No.
TZubiri 1y ago
Mmh If I paid salary of 100k, and invested 100k. Then I made 0 profit regardless, actually I would have a loss of 100k? I guess the difference comes in if I made 200k, so I would have a profit of 100k. Not sure how it affects the pnl, but is it fair to say it doesn't affect total tax, just distributes it more evenly across years?
bradleyishungry 1y ago
this is not entirely true and i’ve seen the exact same comment regurgitated with the same exact numbers for the past two years. I am not in really in favor of section 174 but i’m tired of seeing misinfo. I have discussed this with a CPA multiple times and its simplified and blown out of proportion in a way that you can’t actually have a conversation about it
- JumpCrisscross 1y ago
  …could you expand on what part is inaccurate?
  - bobmcnamara 1y ago
    One example: "What they've actually done, congress said, is bought a capital good, like a machine." Replace "like a machine" with "like software"
    - JumpCrisscross 1y ago
      How is that profound?
      - bobmcnamara 1y ago
        It wasn't supposed to be profound. It's accurate.
- bmurphy1976 1y ago
  Your comment would be much more helpful if you explained how op is wrong or linked to another resource or prior comment that did so.
e40 1y ago
> you have to depreciate that over several years (5 in this case). 15 years in the case of foreign developers.
- procaryote 1y ago
  So implicitly Trump values foreign developers at 3x domestic ones
bravesoul2 1y ago
ELI5: why is this blowing up on HN this particular week in 2025. Is there a trigger? As it has been known about for a while.
- echelon 1y ago
  It's actively being discussed in Congress and is a part of OBBBA. " H.R.1990 - American Innovation and R&D Competitiveness Act of 2025 " https://www.congress.gov/bill/119th-congress/house-bill/1990/text/ih https://www.congress.gov/bill/119th-congress/house-bill/1990... > A bipartisan bill reintroduced in Congress last month could offer long-awaited relief to small tech companies hit hardest by an obscure federal tax change — one that many founders say is threatening their survival. > Industry groups from the Small Software Business Alliance to the National Venture Capital Association and TECNA are backing the bill, which sits in committee. Over 100 House members have signed on. The bill would reverse the changes not just going forward, but also retroactively. https://technical.ly/startups/r-d-tax-change-reversal-startups/ https://technical.ly/startups/r-d-tax-change-reversal-startu... > On May 13, the House Ways and Means Committee passed “The One, Big Beautiful Bill.” This bill includes several provisions that, if enacted, will be important to businesses claiming research and development incentives: > The bill would suspend the current amortization requirement for domestic R&D expenses and allow companies to fully deduct domestic research costs in the year incurred for tax years beginning January 1, 2025 and ending December 31, 2029. https://www.crowell.com/en/insights/client-alerts/house-committee-passes-part-of-big-beautiful-bill-containing-noteworthy-improvements-to-research-and-development-incentives-for-companies https://www.crowell.com/en/insights/client-alerts/house-comm... > The OBBBA suspends required capitalization of domestic research and experimental expenditures for amounts paid or incurred in taxable years beginning after December 31, 2024, and before January 1, 2030. Under the OBBBA, at the taxpayer’s election, such expenditures can be: deducted as paid or incurred under new Section 174A(a), https://www.skadden.com/insights/publications/2025/05/the-one-big-beautiful-bill-act https://www.skadden.com/insights/publications/2025/05/the-on...
  - rkagerer 1y ago
    I'm confused. The requirement to amortize software engineer expenses was introduced in Trump's first term, but now he wants to revoke it in OBBBA? But only for 5 years?
waynesonfire 1y ago
So, after 5 years, they can deduct the entire salary.. this just seems like an incentive to promote long-term employment. Doesn't seem like a bad incentive.
- optymizer 1y ago
  Well, we had massive layoffs, so I don't think the incentives worked.
- jmtulloss 1y ago
  No, this is not how it works. They can still deduct the entire first year of salary even if the person is let go, as that salary is considered a capital expense. There is no incentive to keep the person on payroll because of this policy.
fuzztester 1y ago
>Depreciating means that if you pay an engineer $200k in a year, in tax-world you only had $40k of real expense that year, even though you paid them $200k. what happens if an engineer leaves after the first year, or at any other time? what happens to the calculations then?
- kgwgk 1y ago
  Nothing. The calculation has nothing to do with people. It’s about what the company spends - and some kind of spending is capitalized depending on what activity it was related to and what the output was. That doesn’t change if the employee that you paid a salary to leaves, or the company that you bought materials from disappears, etc.
bung33 1y ago
The idea that this is leading to mass developer layoffs is an overstatement. The total amount spent will ultimately be expensed, whether immediately or over five years. The sole impact is on the time value of money, which I don't believe warrants the current scale of developer dismissals. Also, the claim that taxes are levied even during a deficit seems incorrect. While I'm not familiar with US tax law, it's typically possible to carry forward losses. For example, if a developer is hired for five years at $100 annually, the expensed amount in the fifth year would still be $100, even after any legal changes.
- procaryote 1y ago
  It means you need more money early, to pay taxes on theoretical future profits. That means it costs more. That means you can afford less on the same money. That means that you need to lay off people to maintain the same costs.
rayiner 1y ago
> Normally, when you have expenses, you deduct them off your revenue to find your taxable profit. If you have $1 million in sales, and $900k in costs, you have $100k in profit, and the government taxes you on that profit. This is an incomplete description. The ordinary rule depends on the nature of the expenditure. If your expense is for building an asset that generates recurring revenue—including paying people to build such an asset—then you cannot immediately deduct that expense. Instead, you must depreciate it over the lifetime of the asset. The issue here is that software development is sometimes genuine R&D and other times more like building an income producing asset. E.g. if you spend money building infrastructure software to move bits from one place to another, that’s more like a factory building a conveyer belt than it is like investing in fundamental pharmaceutical research.
jmyeet 1y ago
So the 2017 tax cuts that introduced this change were a massive boon to US companies, particularly the tax holiday on repatriated foreign profits. So why do we need to give these large, very profitable companies another tax cut? Or maybe we should be asking, what of the 2017 tax cuts are they willing to give up to pay for this change? Remember that after a few years, none of this matters. You might be paying $200k in salary to an engineer and can only deduct $40k, but you're also making deductions "earned" in previous years? Basically, I reject the argument that this change is responsible for layoffs. It is not. And changing it won't lead to a hiring binge. Layoffs exist to suppress wages in these largest employers. Maybe we should allow a 100% software development tax deduction if the company hasn't fired more than 1-2% of its workforce in the last calendar year. Or maybe only if the workforce is unionized. This whole thing is so anti-worker. It doesn't have to be this way.
- 8note 1y ago
  for the big companies, this makes enough sense, but theres been new businesses opened since 2017, who did not benefit from that tax holiday. why should they be dealimg with this tax hike for everytime they grow their business? i dont know how this is anti-worker? it's an extra cost to growing the number of people youre hiring, where you need them for 5 years. i guess businesses should start witholding RSUs and starting bonuses until youve been there for 5 years to match your tax ammortization?
stult 1y ago
> In the case of the $200k engineer, you deduct the first $40k in the first year, then you can expense another $40k from that first year in the second year, the third $40k in the third year, and so on through the fifth year. So eventually you get to expense the entire first year of the engineer's pay, but only after five years. This actually understates the issue slightly. The amortization is calculated from the midpoint of the first tax year, so actually you only take 10% in the first year. Meaning it takes six years to get back to square one. In your example, you would only capitalize $20k in the first year, $40k for the subsequent four years, and then another $20k in the final year.
lakeeffect 1y ago
I don't want to downplay what you're saying but many of these costs are eligible for R and d credits unlike most other employees salaries.
bunnie 1y ago
I keep seeing an objection in this thread along the lines of "what make software so special that it deserves a tax deduction". Correct me if I'm wrong, but if a company hires someone to say, mine coal or brew beer, the expense of those employees is an expense any company can claim a full tax deduction on. If you're a line chef or wait tables, your salary is tax deductible to the restaurant. So it's not that we are asking for R&D to be treated "specially" and get a deduction that other companies don't have. The problem is that R&D salary expense is being singled out as producing an asset (e.g. IP), and thus being classified in the same category as other assets, like, brewing equipment, a mining excavator, or a pizza oven. Simply put, Section 174 argues to classify people in the same category as things because ... 'these people's work outputs may have long-term value, kind of like things'(?). Allowing Sec 174 to stand is a slippery slope to classifying more and more everyday Americans' salaries into this category. One could argue in the future, for example, that those who design cars or operate machines to produce tooling dies, should not have their labor treated as regular expenses, but instead as capital assets because their labor output is captured in assets, just as Sec 174 treats the labor of software developers as assets. Everyday people should be concerned by this because if the rule stands, it could be extended to you, too. For those objecting to the equal treatment of R&D employees as all other employees in America of all stripes and vocations, keep in mind that software people have to pay personal taxes on the income, just like everyone else. Section 174 doesn't have anything to do with personal income taxes: we all pay income taxes fair and square. The question is whether there is a double-tax on software labor, paid at the corporate level (and in all likelihood, your salary is currently a tax deduction for your company, unless you write software or do R&D). I think the assumption that we are asking for "special treatment" is driving some confusion and grass-roots objection to the movement here, so I wanted to highlight that we are just asking for everyday people who work software and other R&D jobs to be treated just like every other American who works a day job. [edits for clarity]
- kgwgk 1y ago
  > One could argue in the future, for example, that those who operate machines to produce tooling dies, should not have their labor treated as regular expenses, but instead as capital assets because their labor output is captured in assets, In the future? That's how it works! > just as Sec 174 treats the labor of software developers as assets. [I was wrong about the following. I misread the text - and the submission title.] That's not what 174 does.
cco 1y ago
> It was passed by Congress during the first Trump administration in order to offset the costs of other corporate tax rate cuts, due to budgeting rules. Small correction, it was a vindictive move to negatively impact companies and regions that Trump didn't like (at the time).
dgs_sgd 1y ago
> It was passed by Congress during the first Trump administration in order to offset the costs of other corporate tax rate cuts, due to budgeting rules. Wow, so there isn’t really a good faith steel man for this? They were just like, hey, we need to offset other cuts so let’s arbitrarily pick a high paying profession that, not so coincidentally doesn’t have a lot of influence in government, and let them take the hit?
- andrewlgood 1y ago
  I think it was more along the line that R&D had been formally encouraged with special expensing rules and in 2017 they removed the special treatment.
littlestymaar 1y ago
This rule is actually desired by most (non-startups) businesses, software being an investment over a long run it makes sense to amortize the cost over several years. It is indeed detrimental to startups though, as they can end up paying taxes even when not profitable and when cash is the key issue (which isn't the case that much for most businesses).
fergie 1y ago
That does sound insane, but what is the argument in favor? Genuinely curious.
jfernandezr 1y ago
Wow, initially I thought this was the typical libertarian thing to pay less taxes. But thanks to your explanation, I see that the scheme is absolutely crazy. Software devs salaries, as any other employee, should be considered an expense. But, in a second thought, if you sell a software that you hand crafted to a single customer, in Spain, the software enterprise currently deducts all salaries, while the customer has to depreciate the cost. Think about that in the likes of building an expensive machine: the manufacturer deducts all costs while the customer has to depreciate the machine cost over 20 years. So the question is, how should a software development piece be considered when it's used internally? Why if you sell that software to others have a tax implication different than if you yourself use it? That's a very difficult question to answer with too many edges.
bambax 1y ago
If true, that's a very convincing explanation of why this new rule is wrong. I'm not a US taxpayer so my opinion really is irrelevant, but I was so far in the camp of "there's no reason to make a special case for big tech". But if what happened is actually the reverse, ie, the rule makes a special case of tech/developers and pretends their salary is not a cost but an investment, that's clearly absurd and indefensible.
miroljub 1y ago
The reasoning here is completely flawed. You don't buy a software dev, you rent him. His salary is an operational expense, that should be deductible in a year it was paid. Now, let's imagine a company buys a slave. It's one time capital investment, like buying a car or a machine, and you need to depreciate the cost over multiple years. The only way it makes sense to treat software developers as a capital investment instead of an operational cost is if they were treated legally as slaves. And slavery is not legal any more. Or is it?
- kgwgk 1y ago
  Exactly. That’s why when a company builds a factory it’s considered a capital investment. Because it’s built by slaves. It’s not like the workers are being paid for their labor or anything.
  - deleted 1y ago
    [deleted]
Havoc 1y ago
Tax authorities tend to look at income side rather than expense as you are. If this thing has a useful life and gives benefit over 5 years thus you get tax deductions over 5 years. So comes down to whether you view a software engineer as something that has value only in the moment (like HR person) or as creating an enduring asset (code base). A good code base obviously has long term value and there is no raw material input, just engineer time. Either way you end up with awkward mismatches somewhere & the deferred version as you say has undesirable chilling effects, but I don't think it is entirely without merit either. Think of it from tax man perspective: They're being asked to hand out 100% of the tax credit today while receiving the income over years time. Switching this back to old model doesn't make the mismatch go away - just shifts it to taxman.
brianbreslin 1y ago
Out of curiosity, why were software engineers carved out? Was this a punishment against the tech industry? With 45/47's administration there is always some either profit angle for his friends or retribution angle for something.
formercoder 1y ago
Wouldn’t this make the $200k drop below EBIT and thus increase accrual accounting profitability? Sure it could be less cash efficient but generally capitalizing expenses is net favorable.
ojbyrne 1y ago
Slight amendment. It's actually a little worse than you describe. Like a machine, if this is amortized over 5 years, it's subject to the "half-year convention" - the assumption is made (to keep things simple) that the engineer is hired at the exact midpoint of the year. So for your example of a $200k salary amortized over 5 years, you can only deduct $20k the first year, then $40k, $40k, $40k, $40k, and then the final $20k in the sixth year.
gamblor956 1y ago
Section 174 just brings the treatment of software engineers in line with the way that manufacturing labor is treated in all other industries. If tech hadn't exploited this loophole so hard to invade other industries, the GOP probably wouldn't have tried to close the loophole in 2017. That being said...the current version of the bill would temporarily pause the current version of section 174 (capitalization of software labor costs). There's no way for them to make the original treatment permanent without adding another trillion or so to the cost of their mega bill. However, the original reason for that temporary reprieve was that Musk was still Trump's best buddy at the time. Right now, it's the most likely target for getting cut in the reconciliation negotiations between the House and the Senate. Thus, YC reaching out to its readers to support this abomination of legislation.
gcijoel 1y ago
Your wrong! In your example, youe $200K engineer... can deduct 10% 1st year $20K, 20% or $40K for the next 4 years, and 10% year 6 $20K for a total of $200K deduction. This is called the 5-year rule.

api 1y ago

Doesn’t this also unfairly penalize bootstrapped companies? VC track companies seldom have taxable profits.

davidjfelix 1y ago
It may result in an outsized penalty to bootstrapped companies but being VC funded doesn't make you immune to this. VC funded companies with revenue will not be able to offset their revenue by reinvesting in R&D (software development) expenses, so in some cases they may be seen as having a profit when they previously wouldn't have. In those cases they'd have a tax burden.

logifail 1y ago

> Normally, when you have expenses, you deduct them off your revenue to find your taxable profit. If you have $1 million in sales, and $900k in costs, you have $100k in profit [..] I'm not sure it's helpful to simplify quite that much, doesn't this usually depend on whether we're talking about operating expenses (typically rent, utilities, salaries, supplies) or capital expenditures (typically buildings, land, intangibles...)?

GavinMcG 1y ago
It found it helpful that it was presented that simply. The point isn’t what else is or isn’t deductible, it’s that engineering salaries went from being deductible to being amortized.
- logifail 1y ago
  Businesses don't get to say they're claiming "$900k in costs" ... it depends on what kind of costs... EDIT: and in this instance, it depends on what kind of software engineering.
  - organsnyder 1y ago
    But why is software engineering treated specially, here? Does Disney have to pay taxes on film animators the same way, given that they're developing a capital asset?
    - PaulDavisThe1st 1y ago
      Probably that is a large, rich field, and when you crunch the numbers, collecting corporate income taxes on 80% of essentially all s/w developer salaries in the first year after it goes into effect was a nice push to the CBO numbers related to Trump's 2017 tax cuts.
  - NickHirras 1y ago
    This is what's happened at my workplace. We account for time spent working on developing new products differently that development time maintaining legacy applications. Because they are reported for tax purposes differently.

ASalazarMX 1y ago

That's nuts, since a payroll should never be considered an asset. That's trying to put a material value on software, and doing it based on the salaries of developers is as crazy as valuing it in lines of code. The value of software could be based on something more realistic, like a percentage of actual revenue, but I suppose tech giants would be against that.

addaon 1y ago
> That's trying to put a material value on software, and doing it based on the salaries of developers is as crazy as valuing it in lines of code. Software clearly has material value. For software that is built, not bought, the company building it clearly values it exactly enough to pay the salaries of the software developers building it. What other estimate of its material value is better than the one that the company purchasing it is demonstrably willing to pay?
- yojo 1y ago
  The argument I’ve heard is it specifically makes investing in speculative software (new product lines, new features, etc) more expensive. If you’re doing new drug discovery at a bio-lab, treating all your failures as depreciating “assets” seems bonkers. The same seems true of much software development where the work product ends up thrown away.
  - ndriscoll 1y ago
    The answer to this seems obvious to me: let the company publish all code and documentation pertaining to failed experiments and release it into the public domain to be allowed to fully depreciate it immediately. If it is actually worthless, they should be happy to do so.
    - throwaway7783 1y ago
      As long as the same is held true about car designs that never went to production, drug design that were not deemed profitable etc. Why pick on just software?

OneDeuxTriSeiGo 1y ago

So it applies to software engineers but under what definition of software engineer? This [1] is the only definition the code actually give. > (3) Software development > For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure. 1. https://www.law.cornell.edu/uscode/text/26/174 https://www.law.cornell.edu/uscode/text/26/174 ----- Is a test or QA engineer considered a software engineer? Is an FPGA or ASIC engineer still considered a software engineer if they are writing in HDLs? Is a systems engineer, electrical engineer, or mechanical engineer considered a software engineer because they use MATLAB, etc and use programming to do their design work? Is a sysadmin, DB admin, or other IT staff considered a software engineer because they write software as part of their job? What about a quantitative analyst, data scientist, accountant, actuary, or any of the other maths and analysis adjacent job roles that regularly use some level of programming to do their job (and therefore write software)? What about HR, etc who use excel documents? Excel is fundamentally just a graphical array programming language (and the design of spreadsheet tools is heavily inspired directly from APL). Is anyone who uses excel or builds/maintains spreadsheets considered a software engineer? Like software engineering is such a broad field and programming bleeds into every part of modern business at this point.

teeray 1y ago
> under what definition of software engineer? Probably a broad enough definition to net the US Government the greatest tax revenue possible for the effort to enact this.
- abeppu 1y ago
  IDK if that's right. Oddly, the current administration has gutted the IRS and seems pretty ambivalent about collecting taxes that are on the books. I wonder if there will be an inconsistent definition of who is a software engineer, based on how friendly the company is with the administration, whether the company still has someone with a DEI title, etc.
  - teeray 1y ago

jajko 1y ago

Why not claim them as: admins, devops, analysts, testers, technicians, managers? Probably few more. Its really about precisely software development roles? Don't we anyway do some of that other stuff regardless? But if you are correct that is supremely dumb, especially in place like US.

OneDeuxTriSeiGo 1y ago
https://www.law.cornell.edu/uscode/text/26/174 https://www.law.cornell.edu/uscode/text/26/174 > (3) Software development > For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure. Strictly speaking every single one of those jobs falls under that role. If you "develop" any software, which arguably includes even making or maintaining excel spreadsheets (as excel is a graphical array lang inspired by APL), then you seem to fall under this umbrella.
- logifail 1y ago
  > Strictly speaking every single one of those jobs falls under that role Q: Isn't this about whether you're doing "R&D" or not?
  - jandrewrogers 1y ago
    No, it classifies all software development as R&D by definition.
    - logifail 1y ago
      > it classifies all software development as R&D by definition We may need to argue about the word "development", but in any case, do you have a reference for that? https://www.thomsonreuters.com/en-us/posts/tax-and-accounting/section-174-expenditures/ https://www.thomsonreuters.com/en-us/posts/tax-and-accountin... "In the United States, to help spawn innovation as part of the Economic Recovery and Tax Act of 1981, the Research & Experimentation Tax Credit was introduced. Although it was initially supposed to last three years as a specific incentive to encourage companies to invest in R&D, Congress recognized its value in helping businesses create more products and services. However, it was quickly realized that this tax code made calculations for R&D complicated, especially for small businesses, which led the government to create other iterations of tax codes in order to help clarify the situation. However, not until 2017 and the enactment of Section 174 of the TCJA has there been such a comprehensive change to R&D accounting. Indeed, before the TCJA’s enactment, businesses deducted the total amount of R&D expenditures as an expense in the taxable year. Beginning in 2022, all costs related to R&D must now be amortized over five years for US-based companies or 15 years for non-US companies." I'm struggling to understand why we think R&D expenditure - including software development - should not be amortised?

spullara 1y ago

They are just product managers and the development is being done by AI agents.

teeray 1y ago
You jest, but you’ve also touched upon something interesting. Is this exactly what companies are trying to do? To the IRS: “We employ zero software engineers—only AI ranch hands to wrangle the AI in the right direction.”
- spullara 1y ago
  not really jesting, just a message from the future

zacharycohn 1y ago

Just to drive the point home very explicitly: That means, in the given example above, you are able to deduct $180k that first year instead of $900k. That gives you a profit, from a tax perspective, of $820k. But you only have $100k of actual dollars. Good luck paying your taxes!

actinium226 1y ago
Only if you assume that the 900k in costs is exclusively the salary of 5 engineers. Realistically you will employ other people and have overhead costs like rent, etc., and I assume that other non-salary costs (health insurance, etc.) aren't included (b/c I assume health insurance, like rent, is a company-wide overhead cost and that companies aren't expected to carve out what portion of that is going to the software folks but what do I know?). But if we more realistically assume it's 3 software folks at 200k, then the taxable profit is 580k (100 profit + 3*(200k salary - 40k ammortized))
- throwaway7783 1y ago
  1M eng salaries, 5m revenue, 4M other costs. Today I am cash flow neutral at 5m revenue, but with this I'm paying taxes on 800k "profits", which don't exist anywhere but on paper. But I have to pay the taxes in real dollars.
  - rtpg 1y ago
    This is going to sound silly but you paid 800k in profits, but now have 4 years of banked costs you can use to _reduce_ your profit margin. So you pay taxes on 800k profits, but then each subsequent year you reduce you profit by 200k, even though you don't have 200k leaving the door. If 1M eng salaries was your stable state, then after several years you're... going to have 1M in costs to subtract from your profit! The stable state is the same! I'm not going to argue about the capex change being "good", I do think it's worth highlighting that for large enough companies you're now looking at a different flavor of tax flow. Amortizing your costs over 5-10 years is something people like doing for other costs after all.

candiddevmike 1y ago

How do we restore only the tax deduction and not pass the rest of the BBB?

nick238 1y ago
You don't. That's how bills are passed: everyone adds a little of what they want. To the extreme, it's called "pork barrel politics", but there's a whole continuum between that and a basic compromise.
bigstrat2003 1y ago
You contact your representatives in Congress (mail, phone, in person at town halls and such) and say "hey, stop passing giant omnibus bills". You encourage others to do the same. That's all you can do, as a citizen. Unfortunately it won't make a difference because the vast majority of Americans simply do not care. So very few people will be putting pressure on their representatives, and nothing will change.

gnopgnip 1y ago

Normally when a business spends money producing a valuable asset, it is required to depreciate the cost to acquire the asset over the useful life. If a business pays people to create a new building, that is depreciated over 20 years. Even if it was paid for as salaries of employees, it isn't a special situation unique to software engineering.

TulliusCicero 1y ago
I don't think that's quite right? The value of the asset itself is depreciated over years, sure, but the payroll itself for the employees is just an immediate expense.
- phkahler 1y ago
  How can you compare a purchased asset to one you pay people to build?
commandlinefan 1y ago
But isn't the reasoning there that you could turn around and sell that building right away?
- gnopgnip 1y ago
  The reasoning behind depreciation is matching the income produced by the valuable asset, not really about resale value. Presumably the value for tax purposes is based on the cost because the cost is harder to manipulate for something like software. Like some big box stores argue under the "dark store" theory they should be valued for much less because they have restrictive covenants banning competitors from using the property if sold, or that vacant property should be used as comparables.

Ajedi32 1y ago

I agree this sounds like bad policy, but what's the logic for doing this with actual capital goods then? Doesn't that have exactly the same problem of limiting corporate investment?

shoxidizer 1y ago
The reasoning is that the deductions for expenses should be applied for the same year as the income they bring in. For expenses that will cover multiple years, they are spread out over those years.
SoftTalker 1y ago
Accounting likes to recognize expenses with revenues. If an asset will be producing revenue for five years, its cost is recognized over that same time span.
- aaronax 1y ago
  So...don't you get value from the newly created software for ~5 years?
  - Nevermark 1y ago
    The answer to that question can only be reliably answered in 5 years. Actual honest valuation of software is something that requires actual evidence. Software returns have extremely high variance. From a lot, to none, to high negative (For projects that don't complete, or worse, deploy to negative effect.)
    - jameshart 1y ago
      Yep, some software systems become money pits. You end up having to pay more people to keep them running. Only now if those people you have to pay to keep them running are software developers, you have to act like the money you’re spending on them is helping make new value, not merely paying interest on technical debt. Fun!
  - 1y ago

EFreethought 1y ago

Maybe this is a dumb question, but if you only deduct part of their salary in the first year, what happens if you have a software developer for several years? And then what happens after five years if they are still around?

stonemetal12 1y ago
After five years you are back to the status quo. It is a short term problem, long term there is no difference between the two. It primarily hurts young companies that don't take VC money, and shortens the runway of those who do.
- sarchertech 1y ago
  It is much worse for young companies for sure, but it’s not great for any company. You’re forgoing returns on .1 * salary * tax rate for 5 years, .2 * salary * tax rate for 4 years… for every software dev in the company.
- lsaferite 1y ago
  It also affects hiring growth because every net new dev starts a new 5-year runway.
eadmund 1y ago
> Maybe this is a dumb question, but if you only deduct part of their salary in the first year, what happens if you have a software developer for several years? Not dumb at all! In the second year, you get to deduct ⅕th of the previous year’s salary and ⅕th of the current year’s salary; likewise, in the third year you get to deduct ⅕th of the first year’s salary, ⅕th of the second year’s salary and ⅕th of the third year’s salary. The key thing is that in the fifth and following years, a business would deduct a fifth of each of the previous five year’s engineering payrolls. This is not great for a growing business, but it’s murder on a startup trying to grow from zero.
- chermi 1y ago
  Thus firmly placing this in the regulatory capture category.

PaulHoule 1y ago

See also this long-time tax discrimination against software engineers https://www.taxnotes.com/research/federal/other-documents/treasury-tax-correspondence/programmers-should-qualify-as-independent-contractors-senators-say/124jy https://www.taxnotes.com/research/federal/other-documents/tr...

naikrovek 1y ago

say I work for a company for 5 years as a software developer, at $200k/yr the entire time. is this how it works: year 1: company deducts $40k: 1/5 of the salary for year 1. year 2: company deducts $80k: 1/5 of the salary for year 2, and 1/5 of the salary of year 1. year 3: company deducts $120k: 1/5 of the salary for year 3, 1/5 of the salary for year 2, and 1/5 of the salary for year 1. year 4: company deducts $160k: 1/5 of the salary for year 4, 1/5 of the salary for year 3, 1/5 of the salary for year 2, and 1/5 for year 1. year 5: company deducts $200k: 1/5 of each of my 5 years of employment. I leave the company after year 5. Year 1 of my employment is fully deducted. year 6: company deducts $160k: 1/5 of years 5, 4, 3, and 2. Year 2 of my employment is fully deducted. year 7: company deducts $120k: 1/5 of years 5, 4, and 3. Year 3 of my employment is fully deducted. year 8: company deducts $80k: 1/5 of years 5 & 4. Year 4 of my employment is fully deducted. year 9: company deducts $40k: 1/5 of year 5. Year 5 of my employment is fully deducted. what is the corporate tax rate? It's not 100%, so you're deducting a fraction developer's salary from your income, right, you're not saving that much on your tax bill each year. you're paying tax on the income you used to pay the developer. I dunno man. In a world where places like Amazon pay $0 in income tax each year, I kinda feel like companies should be paying more taxes. companies get all kinds of deductions that employees don't get themselves, and will never get. businesses have a whole heap of unfair advantages already. I'm sure the capitalists among you will want me dead for saying this, but: pay your fair share. I don't care what the law says, pay enough that no one can say that you're a lamprey on society, please.

throwawaymaths 1y ago
modulo accounting shenanigans company like amazon is ~ unaffected by this rule since its capable of amortizing salaries anyways
OneDeuxTriSeiGo 1y ago
That's not really the issue (and I say this as a socialist). The issue is that it's a weak and very leaky definition that attempts to redefine anyone that touches "software development" away from being taxed like employees into being taxed like machines that produce assets at the same value as their cost of operating. This punishes small businesses and new businesses more than any large org because it massively increases the cost of operating for the first few years. And importantly it just doesn't do so consistently. Orgs should have a higher tax burden. This just doesn't do that, instead this is punishing orgs for trying to do new things and rewarding existing momentum (i.e. the large corporations that already have a profitable revenue stream and a long trail of employment history).

Volundr 1y ago

Forgive the naive question, but is this different than other payrolled employees? So for normal employees you get the deduct the year it's paid, but for some reason for software developers you have to amortize it?

spockz 1y ago
The logic outlined in other posts is that this is because software is seen as an asset that nets dividend. As such, like with houses you can’t deduct all the costs at once because you keep extracting value out of it. I’m not sure whether I understand why that now applies only to software and not other things.
- digitaltrees 1y ago
  Those arguments fall short when considering the fact that that the construction company deducted the wages of the workers that built the house. The software development firm is the builder not the home owner.
  - jncfhnb 1y ago
    If you’re building software to use or sell to other people you are definitely the owner. If you’re a body shop lending out devs to build software for other people, that would be different
Negitivefrags 1y ago
Theoretically it’s the same with any asset you pay someone to make. If you pay someone to make a chair, you don’t deduct the salary. Instead you create an asset valued at what you paid to build it, then depreciate it over time. The arguement for this is that it would be inconsistent to do otherwise. After all, why should buying a chair from someone else be different than paying an employee to do it? It’s worth noting that this change brings the USA in line with international financial reporting standards, so it’s not like it’s some crazy unique idea or anything.
- 1y ago

pimlottc 1y ago

How does this compare with other types of engineers/employees?

the-rc 1y ago

Does it apply to solo companies that provide software consulting to others? I guess it doesn't for S-Corps, because of passthrough, but might for C-Corps?

jameshart 1y ago
If you sold the software asset to another company you don’t get an asset on your books.
- the-rc 1y ago
  Right, that's more clear cut with proprietary software, but what about open source code?

mrbonner 1y ago

Also sounds like a staging bonus RSU scheme in tech firms, isn't it?

hinkley 1y ago

Let's be honest. At a bunch of shops the engineers hired in year 2 will never be properly recouped because the company will be out of business in less than 7 years.

digitaltrees 1y ago
Start ups are hard, most fail. But what rational national policy makes is several orders of magnitude harder to succeed during the riskiest period by adding tax provisions on pretend profits?
- mixermachine 1y ago
  Seems like the incentive is to make as little profits as possible at the start to avoid being killed by taxes. I would have expected an exclusion for companies that make below X dollars or are less then Y years old.
  - amendegree 1y ago
    Any incoming revenue, whether from sales or investment is theoretically taxable as income unless the company can show that it was used for an exemption such as an op-expense. This rule classifies dev salaries as cap-ex which have a different exemption process. “Profits” are just revenue minus expenses, the question is what is an expense. This rule classifies some expenses in a modified way that lowers the annual amount of the company’s expenses raising their tax liability.

davidgay 1y ago

This description is misleading (as many of them seem to be), because you're only describing the first year. After 5 years of constant expenses, the deductions match the costs. If expenses diminish, deductions exceed costs. -> this is bad (in the short term) for companies that are growing.

eslaught 1y ago
Or any company in its first 5 years of operation. (Or any company, period, within the first 5 years of the law being introduced.) It takes 5 years to fill the pipeline, so even if the steady state would be fine, getting to that state might be impossible.
- PaulDavisThe1st 1y ago
  > Or any company in its first 5 years of operation. No! Any company (with software development expenses) for the first 5 years after Sec 174 went into effect!
digitaltrees 1y ago
Most startups won’t make it five years especially if they have to raise or borrow money to pay taxes on phantom profit. There is no rational basis for this tax change it was a vindictive attack on blue states in the first Trump admin and an attack on California and SV in particular along with the SALT tax changes.
- hn_acc1 1y ago
  This. They hate CA and will do anything to try to make them look bad because we call out their BS. See Los Angeles right now as an example.
- andrewlgood 1y ago
  For startups that don’t make it five years the issue is moot. Expensing the software developers compensation in year 1 rather than over years 1-5 simply creates a larger taxable loss which creates a Net Operating Loss on the balance sheet which could be used in a future, profitable year. As NOLs can expire and have rules regarding how quickly they can be used and whether they can be sold, capitalizing the R&D could be a better answer for some firms.

kazinator 1y ago

> If you pay a software engineer, that's not "really" an "expense", regardless of the fact that you paid them. If I pay for ... pretty much anything whatsoever ... I cannot write it off my personal income tax here in Canada. Not housing, not food. Medical expenses will come off the bottom not off the top.

abrichr 1y ago
Corporate income taxes are treated differently than personal income taxes. You absolutely can deduct corporate expenses in Canada.
- kazinator 1y ago
  I didn't mention Canada in order to nonsensically compare corporate taxes in the USA versus personal income tax in Canada, but because it's a good idea to mention where you are if you're writing about taxes. Yes, corps get all kinds of tax breaks, whereas individuals don't.
  - MattRix 1y ago
    As a Canadian I still don’t understand what the point of your original comment was. We already know this thread is about a US rule.

jncfhnb 1y ago

If you’re building software that is intended to be used for longer than a year then it should be capitalized. The argument on HN is always just complaining that it’s unfavorable to devs; but it’s perfectly reasonable with regards to actual tax principles.

awkward 1y ago
Software engineers hired for custom, in house work are not building a fixed piece of software with the intention of letting it loose unchanged for the next five years. Software engineers hired to build product are not exclusively building a finished product, and are increasingly necessary as part of the expense of operating that product long term. Industry trends have gone towards combining and blending developement, security, operations, and design.
- patmcc 1y ago
  There are businesses that will build a big custom piece of machinery. Think a factory or a mine. That may last for 20 years, but require workers to operate, maintain, etc. This is handled in existing tax law; building or improving a capital asset is amortized, repairing or maintaining it is expensed. It can be a pain in the butt, this is why accounting is not a trivial profession. We could (and I think should) treat software the same. Some software engineer work is absolutely creating a capital asset. Some is absolutely high-priced janitor work. It makes sense to allow for both with your tax code.
  - PaulDavisThe1st 1y ago
    > Think a factory or a mine. That may last for 20 years, but require workers to operate, maintain, etc. Before Sec 174, s/w development costs were subject to a choice: amortization as if they were a capital expense, or regular deduction as a normal operating expense. Companies could decide which category to put costs into depending on the nature of the work (and presumably to suit their own interests). Sec 174 removes that option. Or rather, it narrows it significantly. You must be absolutely confident that you paid developer X for ONLY maintainance work before deducting their salary.

santiagobasulto 1y ago

What happens if you outsource all that to an "offshore" company? Is it considered an expense?

PaulDavisThe1st 1y ago
Then you have to amortize the costs over 15 years, instead of 5.
deleted 1y ago
[deleted]

phkahler 1y ago

How are software engineers different than other people on payroll? Can't they be deducted the same way as accountants or other functions?

rbultje 1y ago
> Can't they be deducted the same way as accountants or other functions? No.

TZubiri 1y ago

Mmh If I paid salary of 100k, and invested 100k. Then I made 0 profit regardless, actually I would have a loss of 100k? I guess the difference comes in if I made 200k, so I would have a profit of 100k. Not sure how it affects the pnl, but is it fair to say it doesn't affect total tax, just distributes it more evenly across years?

bradleyishungry 1y ago

this is not entirely true and i’ve seen the exact same comment regurgitated with the same exact numbers for the past two years. I am not in really in favor of section 174 but i’m tired of seeing misinfo. I have discussed this with a CPA multiple times and its simplified and blown out of proportion in a way that you can’t actually have a conversation about it

JumpCrisscross 1y ago
…could you expand on what part is inaccurate?
- bobmcnamara 1y ago
  One example: "What they've actually done, congress said, is bought a capital good, like a machine." Replace "like a machine" with "like software"
  - JumpCrisscross 1y ago
    How is that profound?
    - bobmcnamara 1y ago
      It wasn't supposed to be profound. It's accurate.
bmurphy1976 1y ago
Your comment would be much more helpful if you explained how op is wrong or linked to another resource or prior comment that did so.

e40 1y ago

> you have to depreciate that over several years (5 in this case). 15 years in the case of foreign developers.

procaryote 1y ago
So implicitly Trump values foreign developers at 3x domestic ones

bravesoul2 1y ago

ELI5: why is this blowing up on HN this particular week in 2025. Is there a trigger? As it has been known about for a while.

echelon 1y ago
It's actively being discussed in Congress and is a part of OBBBA. " H.R.1990 - American Innovation and R&D Competitiveness Act of 2025 " https://www.congress.gov/bill/119th-congress/house-bill/1990/text/ih https://www.congress.gov/bill/119th-congress/house-bill/1990... > A bipartisan bill reintroduced in Congress last month could offer long-awaited relief to small tech companies hit hardest by an obscure federal tax change — one that many founders say is threatening their survival. > Industry groups from the Small Software Business Alliance to the National Venture Capital Association and TECNA are backing the bill, which sits in committee. Over 100 House members have signed on. The bill would reverse the changes not just going forward, but also retroactively. https://technical.ly/startups/r-d-tax-change-reversal-startups/ https://technical.ly/startups/r-d-tax-change-reversal-startu... > On May 13, the House Ways and Means Committee passed “The One, Big Beautiful Bill.” This bill includes several provisions that, if enacted, will be important to businesses claiming research and development incentives: > The bill would suspend the current amortization requirement for domestic R&D expenses and allow companies to fully deduct domestic research costs in the year incurred for tax years beginning January 1, 2025 and ending December 31, 2029. https://www.crowell.com/en/insights/client-alerts/house-committee-passes-part-of-big-beautiful-bill-containing-noteworthy-improvements-to-research-and-development-incentives-for-companies https://www.crowell.com/en/insights/client-alerts/house-comm... > The OBBBA suspends required capitalization of domestic research and experimental expenditures for amounts paid or incurred in taxable years beginning after December 31, 2024, and before January 1, 2030. Under the OBBBA, at the taxpayer’s election, such expenditures can be: deducted as paid or incurred under new Section 174A(a), https://www.skadden.com/insights/publications/2025/05/the-one-big-beautiful-bill-act https://www.skadden.com/insights/publications/2025/05/the-on...
- rkagerer 1y ago
  I'm confused. The requirement to amortize software engineer expenses was introduced in Trump's first term, but now he wants to revoke it in OBBBA? But only for 5 years?

waynesonfire 1y ago

So, after 5 years, they can deduct the entire salary.. this just seems like an incentive to promote long-term employment. Doesn't seem like a bad incentive.

optymizer 1y ago
Well, we had massive layoffs, so I don't think the incentives worked.
jmtulloss 1y ago
No, this is not how it works. They can still deduct the entire first year of salary even if the person is let go, as that salary is considered a capital expense. There is no incentive to keep the person on payroll because of this policy.

fuzztester 1y ago

>Depreciating means that if you pay an engineer $200k in a year, in tax-world you only had $40k of real expense that year, even though you paid them $200k. what happens if an engineer leaves after the first year, or at any other time? what happens to the calculations then?

kgwgk 1y ago
Nothing. The calculation has nothing to do with people. It’s about what the company spends - and some kind of spending is capitalized depending on what activity it was related to and what the output was. That doesn’t change if the employee that you paid a salary to leaves, or the company that you bought materials from disappears, etc.

bung33 1y ago

The idea that this is leading to mass developer layoffs is an overstatement. The total amount spent will ultimately be expensed, whether immediately or over five years. The sole impact is on the time value of money, which I don't believe warrants the current scale of developer dismissals. Also, the claim that taxes are levied even during a deficit seems incorrect. While I'm not familiar with US tax law, it's typically possible to carry forward losses. For example, if a developer is hired for five years at $100 annually, the expensed amount in the fifth year would still be $100, even after any legal changes.

procaryote 1y ago
It means you need more money early, to pay taxes on theoretical future profits. That means it costs more. That means you can afford less on the same money. That means that you need to lay off people to maintain the same costs.

rayiner 1y ago

> Normally, when you have expenses, you deduct them off your revenue to find your taxable profit. If you have $1 million in sales, and $900k in costs, you have $100k in profit, and the government taxes you on that profit. This is an incomplete description. The ordinary rule depends on the nature of the expenditure. If your expense is for building an asset that generates recurring revenue—including paying people to build such an asset—then you cannot immediately deduct that expense. Instead, you must depreciate it over the lifetime of the asset. The issue here is that software development is sometimes genuine R&D and other times more like building an income producing asset. E.g. if you spend money building infrastructure software to move bits from one place to another, that’s more like a factory building a conveyer belt than it is like investing in fundamental pharmaceutical research.

jmyeet 1y ago

So the 2017 tax cuts that introduced this change were a massive boon to US companies, particularly the tax holiday on repatriated foreign profits. So why do we need to give these large, very profitable companies another tax cut? Or maybe we should be asking, what of the 2017 tax cuts are they willing to give up to pay for this change? Remember that after a few years, none of this matters. You might be paying $200k in salary to an engineer and can only deduct $40k, but you're also making deductions "earned" in previous years? Basically, I reject the argument that this change is responsible for layoffs. It is not. And changing it won't lead to a hiring binge. Layoffs exist to suppress wages in these largest employers. Maybe we should allow a 100% software development tax deduction if the company hasn't fired more than 1-2% of its workforce in the last calendar year. Or maybe only if the workforce is unionized. This whole thing is so anti-worker. It doesn't have to be this way.

8note 1y ago
for the big companies, this makes enough sense, but theres been new businesses opened since 2017, who did not benefit from that tax holiday. why should they be dealimg with this tax hike for everytime they grow their business? i dont know how this is anti-worker? it's an extra cost to growing the number of people youre hiring, where you need them for 5 years. i guess businesses should start witholding RSUs and starting bonuses until youve been there for 5 years to match your tax ammortization?

stult 1y ago

> In the case of the $200k engineer, you deduct the first $40k in the first year, then you can expense another $40k from that first year in the second year, the third $40k in the third year, and so on through the fifth year. So eventually you get to expense the entire first year of the engineer's pay, but only after five years. This actually understates the issue slightly. The amortization is calculated from the midpoint of the first tax year, so actually you only take 10% in the first year. Meaning it takes six years to get back to square one. In your example, you would only capitalize $20k in the first year, $40k for the subsequent four years, and then another $20k in the final year.

lakeeffect 1y ago

I don't want to downplay what you're saying but many of these costs are eligible for R and d credits unlike most other employees salaries.

bunnie 1y ago

I keep seeing an objection in this thread along the lines of "what make software so special that it deserves a tax deduction". Correct me if I'm wrong, but if a company hires someone to say, mine coal or brew beer, the expense of those employees is an expense any company can claim a full tax deduction on. If you're a line chef or wait tables, your salary is tax deductible to the restaurant. So it's not that we are asking for R&D to be treated "specially" and get a deduction that other companies don't have. The problem is that R&D salary expense is being singled out as producing an asset (e.g. IP), and thus being classified in the same category as other assets, like, brewing equipment, a mining excavator, or a pizza oven. Simply put, Section 174 argues to classify people in the same category as things because ... 'these people's work outputs may have long-term value, kind of like things'(?). Allowing Sec 174 to stand is a slippery slope to classifying more and more everyday Americans' salaries into this category. One could argue in the future, for example, that those who design cars or operate machines to produce tooling dies, should not have their labor treated as regular expenses, but instead as capital assets because their labor output is captured in assets, just as Sec 174 treats the labor of software developers as assets. Everyday people should be concerned by this because if the rule stands, it could be extended to you, too. For those objecting to the equal treatment of R&D employees as all other employees in America of all stripes and vocations, keep in mind that software people have to pay personal taxes on the income, just like everyone else. Section 174 doesn't have anything to do with personal income taxes: we all pay income taxes fair and square. The question is whether there is a double-tax on software labor, paid at the corporate level (and in all likelihood, your salary is currently a tax deduction for your company, unless you write software or do R&D). I think the assumption that we are asking for "special treatment" is driving some confusion and grass-roots objection to the movement here, so I wanted to highlight that we are just asking for everyday people who work software and other R&D jobs to be treated just like every other American who works a day job. [edits for clarity]

kgwgk 1y ago
> One could argue in the future, for example, that those who operate machines to produce tooling dies, should not have their labor treated as regular expenses, but instead as capital assets because their labor output is captured in assets, In the future? That's how it works! > just as Sec 174 treats the labor of software developers as assets. [I was wrong about the following. I misread the text - and the submission title.] That's not what 174 does.

cco 1y ago

> It was passed by Congress during the first Trump administration in order to offset the costs of other corporate tax rate cuts, due to budgeting rules. Small correction, it was a vindictive move to negatively impact companies and regions that Trump didn't like (at the time).

dgs_sgd 1y ago

> It was passed by Congress during the first Trump administration in order to offset the costs of other corporate tax rate cuts, due to budgeting rules. Wow, so there isn’t really a good faith steel man for this? They were just like, hey, we need to offset other cuts so let’s arbitrarily pick a high paying profession that, not so coincidentally doesn’t have a lot of influence in government, and let them take the hit?

andrewlgood 1y ago
I think it was more along the line that R&D had been formally encouraged with special expensing rules and in 2017 they removed the special treatment.

littlestymaar 1y ago

This rule is actually desired by most (non-startups) businesses, software being an investment over a long run it makes sense to amortize the cost over several years. It is indeed detrimental to startups though, as they can end up paying taxes even when not profitable and when cash is the key issue (which isn't the case that much for most businesses).

fergie 1y ago

That does sound insane, but what is the argument in favor? Genuinely curious.

jfernandezr 1y ago

Wow, initially I thought this was the typical libertarian thing to pay less taxes. But thanks to your explanation, I see that the scheme is absolutely crazy. Software devs salaries, as any other employee, should be considered an expense. But, in a second thought, if you sell a software that you hand crafted to a single customer, in Spain, the software enterprise currently deducts all salaries, while the customer has to depreciate the cost. Think about that in the likes of building an expensive machine: the manufacturer deducts all costs while the customer has to depreciate the machine cost over 20 years. So the question is, how should a software development piece be considered when it's used internally? Why if you sell that software to others have a tax implication different than if you yourself use it? That's a very difficult question to answer with too many edges.

bambax 1y ago

If true, that's a very convincing explanation of why this new rule is wrong. I'm not a US taxpayer so my opinion really is irrelevant, but I was so far in the camp of "there's no reason to make a special case for big tech". But if what happened is actually the reverse, ie, the rule makes a special case of tech/developers and pretends their salary is not a cost but an investment, that's clearly absurd and indefensible.

miroljub 1y ago

The reasoning here is completely flawed. You don't buy a software dev, you rent him. His salary is an operational expense, that should be deductible in a year it was paid. Now, let's imagine a company buys a slave. It's one time capital investment, like buying a car or a machine, and you need to depreciate the cost over multiple years. The only way it makes sense to treat software developers as a capital investment instead of an operational cost is if they were treated legally as slaves. And slavery is not legal any more. Or is it?

kgwgk 1y ago
Exactly. That’s why when a company builds a factory it’s considered a capital investment. Because it’s built by slaves. It’s not like the workers are being paid for their labor or anything.
- deleted 1y ago
  [deleted]

Havoc 1y ago

Tax authorities tend to look at income side rather than expense as you are. If this thing has a useful life and gives benefit over 5 years thus you get tax deductions over 5 years. So comes down to whether you view a software engineer as something that has value only in the moment (like HR person) or as creating an enduring asset (code base). A good code base obviously has long term value and there is no raw material input, just engineer time. Either way you end up with awkward mismatches somewhere & the deferred version as you say has undesirable chilling effects, but I don't think it is entirely without merit either. Think of it from tax man perspective: They're being asked to hand out 100% of the tax credit today while receiving the income over years time. Switching this back to old model doesn't make the mismatch go away - just shifts it to taxman.

brianbreslin 1y ago

Out of curiosity, why were software engineers carved out? Was this a punishment against the tech industry? With 45/47's administration there is always some either profit angle for his friends or retribution angle for something.

formercoder 1y ago

Wouldn’t this make the $200k drop below EBIT and thus increase accrual accounting profitability? Sure it could be less cash efficient but generally capitalizing expenses is net favorable.

ojbyrne 1y ago

Slight amendment. It's actually a little worse than you describe. Like a machine, if this is amortized over 5 years, it's subject to the "half-year convention" - the assumption is made (to keep things simple) that the engineer is hired at the exact midpoint of the year. So for your example of a $200k salary amortized over 5 years, you can only deduct $20k the first year, then $40k, $40k, $40k, $40k, and then the final $20k in the sixth year.

gamblor956 1y ago

Section 174 just brings the treatment of software engineers in line with the way that manufacturing labor is treated in all other industries. If tech hadn't exploited this loophole so hard to invade other industries, the GOP probably wouldn't have tried to close the loophole in 2017. That being said...the current version of the bill would temporarily pause the current version of section 174 (capitalization of software labor costs). There's no way for them to make the original treatment permanent without adding another trillion or so to the cost of their mega bill. However, the original reason for that temporary reprieve was that Musk was still Trump's best buddy at the time. Right now, it's the most likely target for getting cut in the reconciliation negotiations between the House and the Senate. Thus, YC reaching out to its readers to support this abomination of legislation.

gcijoel 1y ago

Your wrong! In your example, youe $200K engineer... can deduct 10% 1st year $20K, 20% or $40K for the next 4 years, and 10% year 6 $20K for a total of $200K deduction. This is called the 5-year rule.