Post AU4ozW76qXxFODLdCK by mjwhansen@bbiz.io
(DIR) More posts by mjwhansen@bbiz.io
(DIR) Post #AU4oX7qbTSzS1M5b7Y by mjwhansen@bbiz.io
2023-03-28T14:10:49Z
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FOR US SOFTWARE BUSINESS OWNERS:There’s a lot of concern over the Section 174 tax changes in the US. In short, it means that software development and other R&D activities cannot be immediately written off as expenses, but rather amortized (spread out). This thread tries to answer some of those questions.If you already understand how big of a problem the Section 174 changes are, I’ll save you some reading and skip right to the CTA: Sign our coalition letter to Congress. This letter will be delivered directly to Congress, and is the most impactful thing you can do right now to fix this mess.https://ssballiance.org/It’s increasingly clear to me that the Section 174 changes requiring R&D amortization are an existential threat to small software businessesEven if they don’t think they do R&D. Even if they don’t file for R&D tax credits.Even if they don’t have employees.But first, obligatory disclaimer: I am not a tax accountant or a tax attorney. These answers have been checked with professionals, but check with a professional for your specific situation. This thread is not tax advice. (This disclaimer is how you know this thread has been reviewed by pros. 😉)Since 1954, companies have been able to immediately deduct their R&D costs. Software development (whether new products or just new features of an existing product) is included in this definition.
(DIR) Post #AU4oa0rVtz4pE0tLtI by mjwhansen@bbiz.io
2023-03-28T14:11:21Z
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However, in 2017, Congress changed the rules, starting with 2022.Starting in 2022, companies must now amortize their R&D expenses over five years (15 years for international expenses).Among its several definitions, Section 174 includes software development as a R&D expense. NOTE, since there is a lot of confusion about this:This is different from the R&D tax credit. You’re probably impacted even if you don’t take the R&D tax credit.(But if you do take the R&D credit, you are almost surely impacted.) R&D isn’t just building a new product. There may be other things you’re doing that you may not think of as R&D but the IRS probably does.Think: building new features for an existing product, or market research.So, if you’re making software, taking an R&D credit, or doing other activities the tax code considers R&D, your taxes are likely higher in 2022 because of Section 174.If you haven’t heard from your accountant about this, you should ask. Section 174 R&D costs can include salaries. But also much more than that. Servers used for testing product improvements? Probably R&D. Tools you buy to improve your existing product? Probably R&D.We’re still waiting for full IRS guidance on what is and isn’t R&D.But on a simple level, this could mean that a portion of your server costs and software subscriptions are no longer regular write-offs but R&D that must be spread out.
(DIR) Post #AU4odlsdXvQ5uyD2US by mjwhansen@bbiz.io
2023-03-28T14:12:02Z
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This means that companies of every size and type will need to split out R&D expenses – even if you don’t think of them as such – from non-R&D expensesLLCs. C-Corps. S-Corps. Sole proprietorships. All company types and sizes may have R&D expenses.Alarm bells starting to go off in your head about Section 174?They should be. Get involved and sign the small software business coalition letter to Congress https://ssballiance.orgLet’s say you pay a US developer a salary of $100k. Instead of being able to write off (expense) $100k of the salary immediately, you can only write off a portion of it per year. This means fewer deductions. And fewer deductions = higher taxes. DRAMATICALLY higher taxes.Or, let’s say you have $1,000 a year in AWS bills for the new SaaS you’re launching. Instead of being a $1,000 expense, you can only write off $100 of that for 2022. The other $900? Taxable “profit.”This isn’t a hypothetical problem.Small software business owners are already getting dramatically higher tax bills because of the Section 174 changes.
(DIR) Post #AU4ohnsy24EJIOHpiK by mjwhansen@bbiz.io
2023-03-28T14:12:46Z
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You may have heard Rob Walling talk about how you can only deduct a portion per year on Startups for the Rest of Us.Here’s how you’ll have to amortize R&D costs*10% the first year20% years 2-510% year 6https://www.startupsfortherestofus.com/episodes/episode-652-mixing-no-code-with-code-developer-superpowers-5k-angel-check-and-more-listener-questions*And yes, the tax code is weird that you will spread US expenses over for five years….but it’s really six.(For simplicity, I won’t get into that here.)Ok, so what exactly does this mean? What does software *development* mean? The short answer is that we don’t really know. The IRS never explicitly defined software development. The IRS hasn’t issued full guidance on Section 174 yet since Congress was widely expected to delay/repeal the change before it took effect.But companies are already getting hit with higher tax bills because of the 174 changes.https://saas.transistor.fm/episodes/banking-meltdown-more-taxes-on-small-software-companies-take-me-back-to-the-beach Generally, R&D development costs refer to expenses related to eliminating uncertainty or improving a product, but not quality control. That means bug fixes may not fall under Section 174, but new features could. (Again! Still waiting for IRS guidance.)IRS will have to define what does and doesn’t constitute R&D software dev.
(DIR) Post #AU4okC92o91r76wlJw by mjwhansen@bbiz.io
2023-03-28T14:13:14Z
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Hours spent upgrading dependencies? Unclear. Making a UX change to confusing functionality? Unclear. Only thing that’s clear? Section 174 is a giant mess.Section 174 might also mean that all software developers have to start time tracking, even if they aren’t doing client work. If bug fixing time doesn’t count and can be expensed as normal but feature dev does & has to be amortized, all of that will have to be meticulously tracked. Section 174 isn’t just about salaries. It’s also about other expenses. ANYTHING you use to create or improve a product could be R&D. Salaries, servers, component libraries, analytics tools, the list goes on. You can see how Section 174 will quickly become an onerous administrative burden for companies, and especially small ones. You might have to track the amount of minutes you used a staging server for bug fixes vs new feature dev. It’s a nightmare.Since I’ve seen this come up: You can’t get around Section 174 amortization of software dev salaries by changing job titles. That would probably be considered tax fraud. (I’m not an attorney, and this is not legal advice. But, y’know, fraud = bad)The R&D tax credit can offset some of this, if you qualify and have kept the required records. However, it is unlikely to offset all of this. Talk to your tax preparer for information on your specific situation. https://www.thesaasacademy.com/podcasts/the-saas-cfo/episodes/2147905458So that’s the mess we’re in with Section 174.
(DIR) Post #AU4oqWjRB93khUzMTA by mjwhansen@bbiz.io
2023-03-28T14:14:19Z
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Next, let's talk about what people and Congress have been trying to do about it, and what YOU can do about it. The R&D Coalition, which includes Microsoft, Intel, Netflix, Zoom, and more, has been engaging with Congress on fixing Section 174 since 2019, along with many other business groups. Last year, 178 public CFOs told Congress to fix this. (This never happens!)https://investinamericasfuture.org/rd-coalition-cfo-letter-to-house-and-senate-leadership/But it’s only recently that Congress has started to understand the impact of Section 174 on small businesses. We’ve just come out of the woodwork in the last few weeks, as we’ve started receiving our tax bills. Reminder: Sign the small software business coalition letter to Congress. Congress needs to know that the Section 174 changes are an URGENT problem for small businesses.It is the most impactful thing you can do right now to fix this mess.https://ssballiance.org You probably haven’t heard anything about Section 174, nevermind the work large companies have been doing on it, until now because it’s a wonky tax issue. “Amortization rule change” doesn’t make the headlines often. But the WSJ did cover the effect on small businesses recentlyhttps://www.wsj.com/articles/small-businesses-face-big-tax-bills-from-research-deduction-change-a189b113The most unbelievable thing about all of this bad tax policy?Congress understands that Section 174 amortization is a bad policy, and they never even intended for it to go into effect.
(DIR) Post #AU4otVgJXZU8JNwymm by mjwhansen@bbiz.io
2023-03-28T14:14:53Z
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Congress was widely expected to delay/repeal this before it took effect.Last session’s House bill had 114 co-sponsors, and the Senate bill had 34 co-sponsors. Both were almost evenly bipartisan. (When does broad bipartisanship happen these days?!)https://www.congress.gov/bill/117th-congress/senate-bill/749/cosponsors https://www.congress.gov/bill/117th-congress/house-bill/1304Thankfully, the current legislation would reverse Section 174 amortization retroactively to 2022 (meaning you could get a refund in the future). This session’s Senate bill also has bipartisan support, with 21 co-sponsors and counting. https://www.congress.gov/bill/118th-congress/senate-bill/866/cosponsorsDespite the fact that Congress never intended for the Section 174 changes to take effect, and despite the fact that fixing it has broad bipartisan support…Congress still hasn’t felt the urgency to act. So now, unless WE fight like hell, we’re stuck with this mess.Big companies might be able to absorb a higher tax bill because of Section 174. But many small businesses can’t.Congress must hear from *us* – small business owners – to help ensure Section 174 gets fixed. Folks are freezing hiring, laying off staff, taking out loans, and worse because of the Section 174 changes. So I’m spearheading an effort to help get our stories in front of policymakers. They HAVE to hear from *us* – YOU! – in order to have any chance of fixing this.
(DIR) Post #AU4ozW76qXxFODLdCK by mjwhansen@bbiz.io
2023-03-28T14:15:59Z
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Let me put it this way: Small businesses are the cute kittens of the policy world. Everybody loves us. 😻But right now, we’re getting run over by a truck because of Section 174, and Congress is hardly aware.🐈 🚚 ☠️ => ☎️ 🏛️You know me as a fellow indie founder. But you may not know I used to live and work in DC. So I’m getting us plugged in and directly involved in fixing Section 174.Almost 100 founders have already signed up to help fix Section 174. Hill staff and members have already started hearing the stories of small business owners because of this effort.But we need to do more.The Section 174 changes are an existential threat to software businesses. Join 100+ founders who are doing their part to fix Section 174. Sign the letter from the small software business community telling Congress to immediately repeal R&D amortization: https://ssballiance.org/The deadline is April 10th so we can deliver this letter to Congress before tax day.And our goal is 1,000 signatures. If you're a US small software business owner, sign the letter and share it with your founder friends.