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> 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 f

> 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 ago
Yeah 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 ago
  I 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 ago
    this change was a timebomb used for CBO engineering purposes: to make a particular budget appear to have a specific delayed deficit behavior.
  - mdavidn 1y ago
    The 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.
    - kgwgk 1y ago
      > In other words, the IRS receives more upfront but less total in the end. How so?
    - thayne 1y ago
      > In other words, the IRS receives more upfront but less total in the end. Assuming positive inflation, the IRS receives more total, because the taxes they get paid now are worth more than the same amount of dollars they give back in later years. And if the company goes out of business, the IRS never has to give those taxes back.
  - rayiner 1y ago
    The tax code strives to minimize distortions (except insofar as they are deliberately introduced). That is, it seeks to minimize how much the existence of the income tax changes people’s economic conduct. To minimize distortion, the income tax must accurately compute “income”—the actual increase in wealth. Depreciation is part of that. To compute income, the net increase in wealth, you need to subtract costs from revenue. When you buy an asset, your wealth doesn’t immediately increase or decrease—it simply changes form (from cash to an asset). The actual cost is the depreciation on the asset, which occurs over time. Say you buy a delivery vehicle for $50,000. In the first year, you make $100,000 in revenue and have $20,000 in operating expenses. What’s your income after one year—the actual change in wealth? You have $80,000 in cash after operating expenses, plus a vehicle that you can sell for maybe $40,000. So you have $100,000+$40,000 in cash and assets in minus $20,000+$50,000 in cash and assets out, for a $70,000 increase in wealth. Calculated another way, you have $100,000 in revenue-$20,000 in operating expenses-$10,000 in depreciation = $70,000 in income. Now, over say 5 years, you’ll depreciate the full $50,000 cost, and the total dollar amount the IRS gets will be the same. But it will get more taxes in the first year, which due to the time value of money is worth more than getting the money in subsequent years.
    - LorenPechtel 1y ago
      For clear, fixed assets this is a quite reasonable approach, although in some categories the depreciation rate isn't an accurate model of reality. The problem is those of us who deal with code only rarely are actually just building a vehicle. It's an ongoing activity that more resembles maintenance than the outright purchase of an asset. Look at how much software is going to a subscription model. That only makes sense if there is ongoing improvement to the software.
- daxfohl 1y ago
  What about oncall? What about fixing bugs, or KLO, or security patches, or devops, or tweaking feature flags, or dealing with customers? If you're 100% allocated to a greenfield project that's behind closed doors until 2027, sure. But it doesn't seem like most software engineers are in that bucket. If anything, the industry has been consistently moving further away from that, with more agile methods, tighter feedback loops, etc.
  - saltcured 1y ago
    Right, many software jobs are more like being a janitor or repairman. Or even more of a personal assistant or retail worker who is providing ephemeral service to another participant in the whole organization.
    - daxfohl 1y ago
      Though put that way, it seems hard to rationalize high salaries for software roles where this tax deduction would apply. Granted, supply-and-demand, but still.
      - LorenPechtel 1y ago
        Why? Just because it's mostly maintenance doesn't mean it isn't a high skill job.
        daxfohl 1y ago
        Good point. One could say a doctor is the same job as a mechanic, but that doesn't capture the whole story.
hosh 1y ago
The difference between a fermentation system and software is that right now, software changes fast enough that five years is a long time. While there are software that are still in use from five years ago, there are plenty of obsolete software no one is still using made five years ago.
- rayiner 1y ago
  The tax code accounts for that by providing different depreciation schedules for different kinds of assets. For software the catch-all depreciation schedule is 3 years: https://www.irs.gov/publications/p946 https://www.irs.gov/publications/p946.
  - hosh 1y ago
    Is 3 years reasonable? If we are making say, a point-of-sale software rolled out in a fast food franchise (let’s take Chick-fil-A since they have edge Kubernetes deployments), is it reasonable that we won’t add features to that software in 3 years? Perhaps. What about bug fixes? Is that expense or should we expect time spent on bug fixes to also be depreciated in 3 years? What about configuration? Does configuring that POS for new menu items count as software development, and therefore needs to be depreciated over the next 3 years? Chick-fil-A has edge Kubernetes. Does the install and implementation itself counts as “R&D”? If we argue that configuration can be expensed, then would writing manifests be depreciable or not? What if we use “infrastucture as code” tools such as Chef? What about say, excel sheets and macros? Or forget macros — just basic use of a spreadsheet. Some manager add in a summation to a column to compute totals. Very basic stuff. Is that software development? If it is, would that be depreciated over 3-years? If we argue that this is normal use of excel and should not be depreciated, then why wouldn’t my normal use of a compiler and editor also count as normal use and should not be depreciated? Whether it is 5 years or 3 years, the point is that unlike physical capital goods, software changes very fast, even if the underlying hardware wasn’t changing that fast. It is not always that expert designers build them — software can also be written in a way where end users modify them. We also use software to make software, and can rapidly change our tooling in a way that we cannot with physical capital equipment. I see the merit in categorizing software as capital, from an economic theory point of view, but software also has its own dynamic that is distinct from physical capital equipment. A tax code that does not acknowledge that can bring more overall harms to the society.
thayne 1y ago
But in that case, once the fermentation system is built, the brewery no longer needs that employee. A better analogy is a brewery hires someone who builds a fermentation system, then continues to operate, maintain, repair, and improve the system over time. Some of the employee's time is spent on work that could probably considered R&D, some of it is on work that is clearly operation, and some isn't clearly one or the other. So how do you determine how much of the worker's salary is R&D vs operational expense? You can try and estimate some percentage, but that breakdown is at best an educated guess, and having to try and figure that out just adds pointless friction. But that still isn't a great analogy, because in that case the fermentation system isn't the product, the beer is. So for a company that sells software, it would be more like if it wasn't a company that sold brew, but a company that rented out or sold its brewing equipment to other companies that made beer. Also, the same argument about creating value that pays off over time could be said about most employees. An accountant could find a more efficient way to keep the books that pays off over years; the CEO could create a strategy that pays off over years; customer service staff could create a reputation for high quality customer service that pays off over years; etc. And then, even if you assume that an engineer's salary is entirely R&D, then the only reason I can see to want that salary taxed at a higher rate is if you want to disincentivize R&D. R&D is already a large expense now in the hopes of a payoff later, and by increasing the tax burden now, you are making that upfront cost even higher.
- saltcured 1y ago
  How does a chef get categorized? They develop recipes which have future value but also do a lot of ephemeral work product. I think the issue is this fantasy that a software develop only produces long term IP. Or how is it different from an executive who is developing strategy and market positions that have future value? Maybe it would make sense if we could distinguish such work products as a fraction of their total output, tracked as actual inventory that accountants have to assign value and track capital gains on?
  - rayiner 1y ago
    I think the fantasy is that software is mostly like inventing the transistor. Most software is CRUD apps that are more akin to a company’s profit-generating physical infrastructure.
anon946 1y ago
How are other kinds of engineers such as automotive engineers treated at companies like Ford, or aerospace engineers such as at Boeing?
kelnos 1y ago
If I hire a bunch of people to build me an apartment building, I deduct the full cost of their salaries in the year I pay them, even though once they build the apartment building, I get the value of that work over the following years. How is that any different from hiring a bunch of people to write some software, that I then get the value of over the following years?
- kgwgk 1y ago
  > If I hire a bunch of people to build me an apartment building, I deduct the full cost of their salaries in the year I pay them That’s not how it works in general (there are exceptions though): https://www.law.cornell.edu/cfr/text/26/1.263A-1 https://www.law.cornell.edu/cfr/text/26/1.263A-1
deleted 1y ago
[deleted]
iczero 1y ago
Software engineering is not just about building new things. I'd propose that by far the majority of the time of software engineers is spent on maintenance, bug fixing, minor incremental improvements, etc. Almost all software is either sold directly as a service or as a product with a servicing agreement. > most software development is creating an asset that pays off over time This is a fantasy.

MichaelZuo 1y ago

Yeah 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 ago
I 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 ago
  this change was a timebomb used for CBO engineering purposes: to make a particular budget appear to have a specific delayed deficit behavior.
- mdavidn 1y ago
  The 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.
  - kgwgk 1y ago
    > In other words, the IRS receives more upfront but less total in the end. How so?
  - thayne 1y ago
    > In other words, the IRS receives more upfront but less total in the end. Assuming positive inflation, the IRS receives more total, because the taxes they get paid now are worth more than the same amount of dollars they give back in later years. And if the company goes out of business, the IRS never has to give those taxes back.
- rayiner 1y ago
  The tax code strives to minimize distortions (except insofar as they are deliberately introduced). That is, it seeks to minimize how much the existence of the income tax changes people’s economic conduct. To minimize distortion, the income tax must accurately compute “income”—the actual increase in wealth. Depreciation is part of that. To compute income, the net increase in wealth, you need to subtract costs from revenue. When you buy an asset, your wealth doesn’t immediately increase or decrease—it simply changes form (from cash to an asset). The actual cost is the depreciation on the asset, which occurs over time. Say you buy a delivery vehicle for $50,000. In the first year, you make $100,000 in revenue and have $20,000 in operating expenses. What’s your income after one year—the actual change in wealth? You have $80,000 in cash after operating expenses, plus a vehicle that you can sell for maybe $40,000. So you have $100,000+$40,000 in cash and assets in minus $20,000+$50,000 in cash and assets out, for a $70,000 increase in wealth. Calculated another way, you have $100,000 in revenue-$20,000 in operating expenses-$10,000 in depreciation = $70,000 in income. Now, over say 5 years, you’ll depreciate the full $50,000 cost, and the total dollar amount the IRS gets will be the same. But it will get more taxes in the first year, which due to the time value of money is worth more than getting the money in subsequent years.
  - LorenPechtel 1y ago
    For clear, fixed assets this is a quite reasonable approach, although in some categories the depreciation rate isn't an accurate model of reality. The problem is those of us who deal with code only rarely are actually just building a vehicle. It's an ongoing activity that more resembles maintenance than the outright purchase of an asset. Look at how much software is going to a subscription model. That only makes sense if there is ongoing improvement to the software.
daxfohl 1y ago
What about oncall? What about fixing bugs, or KLO, or security patches, or devops, or tweaking feature flags, or dealing with customers? If you're 100% allocated to a greenfield project that's behind closed doors until 2027, sure. But it doesn't seem like most software engineers are in that bucket. If anything, the industry has been consistently moving further away from that, with more agile methods, tighter feedback loops, etc.
- saltcured 1y ago
  Right, many software jobs are more like being a janitor or repairman. Or even more of a personal assistant or retail worker who is providing ephemeral service to another participant in the whole organization.
  - daxfohl 1y ago
    Though put that way, it seems hard to rationalize high salaries for software roles where this tax deduction would apply. Granted, supply-and-demand, but still.
    - LorenPechtel 1y ago
      Why? Just because it's mostly maintenance doesn't mean it isn't a high skill job.
      - daxfohl 1y ago
        Good point. One could say a doctor is the same job as a mechanic, but that doesn't capture the whole story.

hosh 1y ago

The difference between a fermentation system and software is that right now, software changes fast enough that five years is a long time. While there are software that are still in use from five years ago, there are plenty of obsolete software no one is still using made five years ago.

rayiner 1y ago
The tax code accounts for that by providing different depreciation schedules for different kinds of assets. For software the catch-all depreciation schedule is 3 years: https://www.irs.gov/publications/p946 https://www.irs.gov/publications/p946.
- hosh 1y ago
  Is 3 years reasonable? If we are making say, a point-of-sale software rolled out in a fast food franchise (let’s take Chick-fil-A since they have edge Kubernetes deployments), is it reasonable that we won’t add features to that software in 3 years? Perhaps. What about bug fixes? Is that expense or should we expect time spent on bug fixes to also be depreciated in 3 years? What about configuration? Does configuring that POS for new menu items count as software development, and therefore needs to be depreciated over the next 3 years? Chick-fil-A has edge Kubernetes. Does the install and implementation itself counts as “R&D”? If we argue that configuration can be expensed, then would writing manifests be depreciable or not? What if we use “infrastucture as code” tools such as Chef? What about say, excel sheets and macros? Or forget macros — just basic use of a spreadsheet. Some manager add in a summation to a column to compute totals. Very basic stuff. Is that software development? If it is, would that be depreciated over 3-years? If we argue that this is normal use of excel and should not be depreciated, then why wouldn’t my normal use of a compiler and editor also count as normal use and should not be depreciated? Whether it is 5 years or 3 years, the point is that unlike physical capital goods, software changes very fast, even if the underlying hardware wasn’t changing that fast. It is not always that expert designers build them — software can also be written in a way where end users modify them. We also use software to make software, and can rapidly change our tooling in a way that we cannot with physical capital equipment. I see the merit in categorizing software as capital, from an economic theory point of view, but software also has its own dynamic that is distinct from physical capital equipment. A tax code that does not acknowledge that can bring more overall harms to the society.

thayne 1y ago

But in that case, once the fermentation system is built, the brewery no longer needs that employee. A better analogy is a brewery hires someone who builds a fermentation system, then continues to operate, maintain, repair, and improve the system over time. Some of the employee's time is spent on work that could probably considered R&D, some of it is on work that is clearly operation, and some isn't clearly one or the other. So how do you determine how much of the worker's salary is R&D vs operational expense? You can try and estimate some percentage, but that breakdown is at best an educated guess, and having to try and figure that out just adds pointless friction. But that still isn't a great analogy, because in that case the fermentation system isn't the product, the beer is. So for a company that sells software, it would be more like if it wasn't a company that sold brew, but a company that rented out or sold its brewing equipment to other companies that made beer. Also, the same argument about creating value that pays off over time could be said about most employees. An accountant could find a more efficient way to keep the books that pays off over years; the CEO could create a strategy that pays off over years; customer service staff could create a reputation for high quality customer service that pays off over years; etc. And then, even if you assume that an engineer's salary is entirely R&D, then the only reason I can see to want that salary taxed at a higher rate is if you want to disincentivize R&D. R&D is already a large expense now in the hopes of a payoff later, and by increasing the tax burden now, you are making that upfront cost even higher.

saltcured 1y ago
How does a chef get categorized? They develop recipes which have future value but also do a lot of ephemeral work product. I think the issue is this fantasy that a software develop only produces long term IP. Or how is it different from an executive who is developing strategy and market positions that have future value? Maybe it would make sense if we could distinguish such work products as a fraction of their total output, tracked as actual inventory that accountants have to assign value and track capital gains on?
- rayiner 1y ago
  I think the fantasy is that software is mostly like inventing the transistor. Most software is CRUD apps that are more akin to a company’s profit-generating physical infrastructure.

anon946 1y ago

How are other kinds of engineers such as automotive engineers treated at companies like Ford, or aerospace engineers such as at Boeing?

kelnos 1y ago

If I hire a bunch of people to build me an apartment building, I deduct the full cost of their salaries in the year I pay them, even though once they build the apartment building, I get the value of that work over the following years. How is that any different from hiring a bunch of people to write some software, that I then get the value of over the following years?

kgwgk 1y ago
> If I hire a bunch of people to build me an apartment building, I deduct the full cost of their salaries in the year I pay them That’s not how it works in general (there are exceptions though): https://www.law.cornell.edu/cfr/text/26/1.263A-1 https://www.law.cornell.edu/cfr/text/26/1.263A-1

deleted 1y ago

[deleted]

iczero 1y ago

Software engineering is not just about building new things. I'd propose that by far the majority of the time of software engineers is spent on maintenance, bug fixing, minor incremental improvements, etc. Almost all software is either sold directly as a service or as a product with a servicing agreement. > most software development is creating an asset that pays off over time This is a fantasy.