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Does Section 175 apply to other professions? For example, if I hire a full-time handyman for my office, does their salary count as a deductible cost? Sorry if

Does Section 175 apply to other professions? For example, if I hire a full-time handyman for my office, does their salary count as a deductible cost? Sorry if this sounds naive—I'm genuinely struggling to understand why the labor of software engineers would be treated differently from other kinds of work. It seems logical that either all labor costs should count as costs, or none should. If different types of jobs are treated differently, what's the reasoning behind that?

jncfhnb 1y ago
If you hire someone to build you an office or office furniture, you are creating a long lived asset so it is capitalized If you hire someone to clean your office, you are not creating an asset so it is expensed Building software is generally creating a long lived asset
- hintymad 1y ago
  Thanks. Capitalized expense means the expense can be amortized over years? If so, the short-term profit can be higher than expensed cost? That sounds bad in this context as more profit means more tax. However, the OP seems to argue that capitalized expense is good for tech companies. In the meantime, the parent comment says "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." and then "So the effect is that it makes engineers much more expensive". This seems to also imply that capitalized expense is worse for tech companies?
  - PaulDavisThe1st 1y ago
    > Capitalized expense means the expense can be amortized over years? In the case of Sec 174, not can but must.
  - jncfhnb 1y ago
    Capitalized means it’s treated as an investment into an asset rather than just a cost of doing business. The reason we do this is because we want revenue and expenses to reasonably match the time period where their value comes into play. For example, if you build 100 widgets for $1M this year, the labor and materials cost of those widgets are capitalized into inventory. Next year you sell them all for $2M. Capitalization rules would say you had no profit or loss in the first year, and $1M profit in the second year because the cost of the inventory gets expensed when the inventory is sold. Fixed assets like buildings, machinery, and now software have pre defined lifetimes that the expense is realized over. In the case of software, it’s 5 years. Tech companies don’t like this because they want to front load recognition of expenses to pay less taxes today.
- MrDarcy 1y ago
  This comment is misleading and misses the point. When you buy an office chair you capitalize the asset on your books. The chair manufacturer in turn pays wages to a person to construct the chair. Those wages are not capitalized, the manufacturer deducts them fully when they are incurred. The main issue is that “software manufacturers” must now depreciate those same wages over 5 years. Which is unique and does not pass a basic common sense sniff test.
  - jncfhnb 1y ago
    That is not correct. The chair manufacturer capitalizes the costs of factory wages into inventory. They are expenses as cost of goods sold when the inventory is sold. Which makes sense because they have realized 100% of the value of those expenses when it is sold.
PaulDavisThe1st 1y ago
> I'm genuinely struggling to understand why the labor of software engineers would be treated differently from other kinds of work Trump wanted a large tax cut. To make the numbers look better (notably the CBO reporting), Congress looked for ways to increase revenues. For whatever reason, they settled on software development, and devised Sec 174 to generate tax on 80% of s/w developer salaries in the first year it went into effect. Why s/w development? I have seen no indication of the reasons for this; I suspect it was perceived as a "rich field" and thus suitable for this sort of treatment. Also, somewhat more fairly, s/w developers do tend to produce semi-durable assets that in some ways are like capital goods.
- nikkwong 1y ago
  Machinists also produce semi-durable assets. Should we depreciate the output of their labor, too? Like others in the thread, I view this as an assault on blue states or maybe to soften my vindictive tone, as an assault on those who are not his core constituents.
  - projektfu 1y ago
    If the machinist is doing r&d, it's essentially the same. Suppose you pay a machinist to build parts for a new machine. This cost would be capitalized. But if you pay them to repair a machine, it's expensed.
  - andrewlgood 1y ago
    IF the machinists are doing R&D, they get the same treatment as software engineers.
    - PaulDavisThe1st 1y ago
      Nope. For machinists, it is up to the employer whether to treat their work as R&D or a regular expense. After Sec 174, for s/w developers, there is no choice.
- rkagerer 1y ago

jncfhnb 1y ago

If you hire someone to build you an office or office furniture, you are creating a long lived asset so it is capitalized If you hire someone to clean your office, you are not creating an asset so it is expensed Building software is generally creating a long lived asset

hintymad 1y ago
Thanks. Capitalized expense means the expense can be amortized over years? If so, the short-term profit can be higher than expensed cost? That sounds bad in this context as more profit means more tax. However, the OP seems to argue that capitalized expense is good for tech companies. In the meantime, the parent comment says "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." and then "So the effect is that it makes engineers much more expensive". This seems to also imply that capitalized expense is worse for tech companies?
- PaulDavisThe1st 1y ago
  > Capitalized expense means the expense can be amortized over years? In the case of Sec 174, not can but must.
- jncfhnb 1y ago
  Capitalized means it’s treated as an investment into an asset rather than just a cost of doing business. The reason we do this is because we want revenue and expenses to reasonably match the time period where their value comes into play. For example, if you build 100 widgets for $1M this year, the labor and materials cost of those widgets are capitalized into inventory. Next year you sell them all for $2M. Capitalization rules would say you had no profit or loss in the first year, and $1M profit in the second year because the cost of the inventory gets expensed when the inventory is sold. Fixed assets like buildings, machinery, and now software have pre defined lifetimes that the expense is realized over. In the case of software, it’s 5 years. Tech companies don’t like this because they want to front load recognition of expenses to pay less taxes today.
MrDarcy 1y ago
This comment is misleading and misses the point. When you buy an office chair you capitalize the asset on your books. The chair manufacturer in turn pays wages to a person to construct the chair. Those wages are not capitalized, the manufacturer deducts them fully when they are incurred. The main issue is that “software manufacturers” must now depreciate those same wages over 5 years. Which is unique and does not pass a basic common sense sniff test.
- jncfhnb 1y ago
  That is not correct. The chair manufacturer capitalizes the costs of factory wages into inventory. They are expenses as cost of goods sold when the inventory is sold. Which makes sense because they have realized 100% of the value of those expenses when it is sold.

PaulDavisThe1st 1y ago

> I'm genuinely struggling to understand why the labor of software engineers would be treated differently from other kinds of work Trump wanted a large tax cut. To make the numbers look better (notably the CBO reporting), Congress looked for ways to increase revenues. For whatever reason, they settled on software development, and devised Sec 174 to generate tax on 80% of s/w developer salaries in the first year it went into effect. Why s/w development? I have seen no indication of the reasons for this; I suspect it was perceived as a "rich field" and thus suitable for this sort of treatment. Also, somewhat more fairly, s/w developers do tend to produce semi-durable assets that in some ways are like capital goods.

nikkwong 1y ago
Machinists also produce semi-durable assets. Should we depreciate the output of their labor, too? Like others in the thread, I view this as an assault on blue states or maybe to soften my vindictive tone, as an assault on those who are not his core constituents.
- projektfu 1y ago
  If the machinist is doing r&d, it's essentially the same. Suppose you pay a machinist to build parts for a new machine. This cost would be capitalized. But if you pay them to repair a machine, it's expensed.
- andrewlgood 1y ago
  IF the machinists are doing R&D, they get the same treatment as software engineers.
  - PaulDavisThe1st 1y ago
    Nope. For machinists, it is up to the employer whether to treat their work as R&D or a regular expense. After Sec 174, for s/w developers, there is no choice.
rkagerer 1y ago