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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
by 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.
- procaryote 1y agosource?
- kgwgk 1y agohttps://www.law.cornell.edu/cfr/text/26/1.263(a)-2 https://www.law.cornell.edu/cfr/text/26/1.263(a)-2 Example 4. Acquisition or production cost. D purchases and produces jigs, dies, molds, and patterns for use in the manufacture of D's products. Assume that each of these items is a unit of property as determined under § 1.263(a)-3(e) and is not a material and supply under § 1.162-3(c)(1). D is required to capitalize under paragraph (d)(1) of this section the amounts paid to acquire and produce the jigs, dies, molds, and patterns.
- procaryote 1y agowhich applies for the part of the work producing a tangible asset; it was an option for software development before. Now all software is considered such an asset, which is a huge change and distinct from how other labor works
- kgwgk 1y agoYou asked for a source for https://news.ycombinator.com/item?id=44233155 https://news.ycombinator.com/item?id=44233155 I thought it was for the first paragraph. But I was wrong about 174, maybe you meant that.
- bunnie 1y agoFair enough, that was not the best example. But I'd also observe that since business owners have to capitalize the wages of the machine operators producing injection molds, then there is an advantage to outsource the whole operation. Comparing a procurement manager and a CNC operator [the person running the milling machine making a mold] paid the same amount, the CNC operator has a bigger negative impact on the businesses' bottom line, because the business can't expense most of the CNC operator's wages in the current tax year, whereas the procurement manager is generally accepted as fully deductible expense. Of course, the labor that went into making the mold is effectively built into the acquisition price of the mold, so you haven't gotten rid of it by outsourcing it. But, by building it into the price of an outsourced mold, one can delay the purchase of the mold to next year to improve the P&L this year, but you can't similarly delay the wages of the tooling operator to a later date. So, when a CFO is looking for a way to improve the P&L in a given calendar year, there's an incentive to cut operators who build factories, tools, and other assets that have to be amortized, and replace them with more flexible outsource options. Of course, part of the reason mold making left the US is wages are lower outside the US. But I'd say the current situation with software engineers is a datapoint that demonstrates the impact of expensable versus amortizeable labor on employee retention. It could be that if the tax code is not fixed, the same "CFO logic" would lead to more and more software being outsourced over time, as management is an immediate expense, but software engineers are not. I suppose one can then argue, why should software engineers get special treatment compared to tooling operators; but then I would counter-argue that perhaps tooling operators should have gotten better treatment so we could have retained more of them in the US.
- kiba 1y agoTaxes on income or capital inherently reduce income and capital. Ditto for sale taxes, which reduces transaction volume. This is bad for the economy and ultimately reduce our tax base. About the only thing that doesn't happen is for non-reproducible privileges such as land, intellectual properties, the electromagnetic spectrum, etc.
- happymellon 1y agoTaxes reduces taxes? So are you saying that 0% rate taxes would capture the most tax?
- eadmund 1y ago> Taxes reduces taxes? Yes. It’s a second-order effect. Imagine if there were a 100% tax: the government would probably get no taxes, because there would be no economy. > So are you saying that 0% rate taxes would capture the most tax? No. There’s a sweet spot. Everyone argues about where it is, but obviously 0% and 100% tax rates would both be problems.
- kiba 1y agoThere are taxes on things which generally don't have this kind of effect on supply such as land, because land is an inelastic supply because it cannot be destroyed. However if the tax is too high then it would cause land abandonment.
- dsr_ 1y agoIt all depends on where you apply the taxes. If you tax inputs but not outputs, then a 100% tax rate increases the cost of goods and services but does not necessarily kill the business. If you tax income, then a 100% tax rate kills all income. However, income taxes are usually progressively, so a 100% marginal tax rate places a cap on income, but income below that can exist. If you tax profit, a 100% tax rate leads to shifting profits to reinvestment and salaries and benefits.
- 1y ago
- Plasmoid2000ad 1y agoThis wasn't my first impression of this, but the more I heard this dicussed the more I'm forming an opinion that there might be some intentional parts of this that while maybe not being good, make sense from a certain narrow perspective. My assumption is, if tax folks in the US were looking Jealously at US companies with large Multinational presence declaring a lot of their profits abroad. They might have noticed that some of them have large dev presence in US, but through complex accounting, IP transfers, licensing and other actions are able to claim that majority of the value is generated outside of the US. If a company had, say, 100k software devs, 50k in the US, and 50k scattered across other countries, but claimed the value of it's software was primarily in Puerto Rico and Ireland... In that case, I'd expect questions around the 50k devs in the US. Is software dev the only activity where this is possible - no, but is currently by the far the largest and the largest growth industry.
- rbultje 1y agoIf the issue is with general tax compliance of large multinationals, then congress should have done something about that. This tax rule has hit small software businesses particularly badly, so much so that it'll practically strengthen the quasi-monopoly of established players.
- lores 1y agoOh, no! Anyways. /Congress, probably
- echelon 1y ago> strengthen the quasi-monopoly of established players. When are we going to break the majors up already? Google should be like seven different companies. YouTube is bigger than Netflix for Christ's sake. Demand antitrust enforcement! There's so much value pent up and wasted in Google today that it'll be worth more as divisible parts. They're practically giving half of the value away for free and wasting it on implementing the same thing four times before cancelling it. And Apple and Amazon... These giants are basically stifling the US startup ecosystem and putting a valuation cap on innovation. They're also ripping apart other industries by moving in and undercutting costs with subsidized offerings detached from the underlying economics. They're like invasive species destroying the ecosystem, eating up everything, completely immune to competition. And if that's not reason enough for you, they're putting massive wage pressure on our profession.
- rayiner 1y ago> 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. The question is: are you getting the value of that work in the same tax year, or is it creating an asset that creates value over time? If you hire a guy to brew a batch of beer, you’re getting the value with that batch of beer. Once you sell that beer, the value is gone. But if a brewery hires someone to build a fermentation system, then that person’s salary cost must be allocated to capital expenses that must be depreciated over time. There’s a good argument that most software development is creating an asset that pays off over time. If you hire someone to upgrade the payroll software, you’ll get the value of that in future tax years.
- MichaelZuo 1y agoYeah this is the most plausible interpretation. Software engineers being taxed similar to brewery design engineers seems reasonable, not the person literally brewing each batch of beer.
- crimsonpowder 1y agoI don't understand the reasoning behind this, however. Why depreciate anything over multiple years vs just deducting it in the current year? Does it not all come out to the same amount to the IRS in the end?
- markhahn 1y agothis change was a timebomb used for CBO engineering purposes: to make a particular budget appear to have a specific delayed deficit behavior.
- mdavidn 1y agoThe usual thinking is that a business wants an asset’s upfront expense spread over the years that asset earns income to reduce taxable profit in future years. In other words, the IRS receives more upfront but less total in the end. The problem is that R&D and software development behave more like recurring annual expenses, not upfront investments in something like a building or industrial equipment. Small VC-funded startups may not exist long enough to reap the long-term benefits of depreciation.