[HN Gopher] Software firms across US facing tax bills that threa...
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Software firms across US facing tax bills that threaten survival
Author : mjwhansen
Score : 428 points
Date : 2023-04-18 14:13 UTC (8 hours ago)
(HTM) web link (www.cnbc.com)
(TXT) w3m dump (www.cnbc.com)
| mountainofdeath wrote:
| Yet another self-inflicted wound the Congress of old men do to
| make the US software industry even less competitive. I would
| argue this is political because the tech industry is a convenient
| target at the moment, full of young people who tend to vote
| against the ruling party. That, and legacy industries don't care
| too much about R&D anyway.
| rootusrootus wrote:
| This section of the code was part of Trump's tax legislation of
| 2017. It is 100% ideological.
| tlogan wrote:
| The IRS hasn't provided a clear stance on this issue (ask your
| tax guy).
|
| However, this will definitely hurt a lot companies because they
| used R&D tax credit for salaries. Convincing the IRS that certain
| salaries suddenly don't qualify as R&D could prove challenging.
|
| It's worth noting, though, that the R&D tax credit has been
| raised to $500,000 per year, which could be beneficial for very
| small companies.
| taxopinion wrote:
| > Convincing the IRS that certain salaries suddenly don't
| qualify as R&D could prove challenging
|
| I always felt the R&D tax credit was too good to be true. Like
| how could a templated, computer generated report from a vendor
| ever pass muster with the IRS?
|
| Sure you could take the money, then you cease to exist later
| because you run out of money. And then there's no one to audit
| and no one to claw back from. But laws and enforcement changes.
| It's a crazy thing to gamble on.
|
| The IRS could audit every single R&D tax credit company and
| find loads of skeletons in those closets. Being a customer of
| an automated R&D tax credit vendor is the only thing on the APB
| for those offenders.
|
| What were people thinking?
| cpufry wrote:
| sucks to suck
| spacemanspiff01 wrote:
| I wonder how many companies will be doing more bugfixes now...
|
| For example, the initial product generates "hello world".
|
| What it was supposed to do was control a robot to automatically
| do pick and place.
|
| It's Definitely a bug that the program failed to work, it's even
| tracked as a defect in the issue management. No R&D involved just
| fixing a pretty severe software bug, namely that the product does
| not work.
| yetanotherloser wrote:
| I like your style.
| hinkley wrote:
| Time to update your MVP books and release a 2nd Edition, ladies
| and germs.
| gamblor956 wrote:
| No, because getting from "hello world" to "controlling a robot"
| involves a fair amount of research and development to "fix" the
| "bug" since you need to work out the code needed to get to the
| "fix". Attempting to treat such work as not R&D would be tax
| evasion.
|
| But yes, in the sense that work that should not be treated as
| development work will no longer be treated as development (and
| thus no longer eligible for the R&D credit). So, actual bug
| fixing should not be development work going forward if the fix
| is simple and straightforward to carry out.
| axus wrote:
| Somehow I'm reminded of delivering software licenses that don't
| actually activate, so that revenue could be booked now, and the
| software + functioning licenses delivered later.
| gumby wrote:
| It's not GAAP revenue until the product is out of your hands
| and in a usable state.
|
| So you can drop the license in an envelope and recognize the
| revenue immediately, but only if the recipient _could_ have
| used it if they 'd grabbed it from the mailbox.
|
| If the license isn't usable for another month, you can send
| it to the customer, they can pay for it, and you can even
| spend the cash, but the payment sits on your balance sheet as
| a liability until the moment the license becomes valid.
| natpalmer1776 wrote:
| And as with anything, sufficiently motivated legal
| representation will argue your way into the most favorable
| grey area possible. Arbitrary example being a license key
| that activates the software, but the activated software is
| effectively a hardcoded trade show demo version. The point
| most folks seem to be making is that "this isn't corporate
| america's first rodeo" and that like many other industries
| before software will end up with it's own numerous nuances
| and loopholes established by extensive litigation.
| mschuster91 wrote:
| Well... looks like everyone thought US Congress might come to its
| senses before it's too late.
|
| Personally, I'd be inclined to say: let it all fucking _burn to
| the ground_. Maybe that 's enough incentive for the GOP to come
| to its senses. But unfortunately, there is a pretty high chance
| the GOP is willing to risk a major economic crash just to push
| the responsibility on Biden.
| tourgen wrote:
| [dead]
| meowtimemania wrote:
| Taxes should be written in a way that incentivizes hiring
| individuals right? Salaries shouldn't be double taxed IMO since
| it reduces a companies ability to hire individuals. Maybe just do
| a VAT tax and remove other taxes. Is this a dumb idea?
|
| (Note: I have little idea what I'm talking about)
| garryindiana wrote:
| [dead]
| kazinator wrote:
| Yikes! R&D costs, meaning actually paying the devs to make stuff,
| is your biggest expense, and it's a big one. Rubber bands, paper
| clips and toner for the office printer don't cost anything.
|
| If your business has one large expense and you depend on writing
| it off, and suddenly can't, that's bad news.
| rootusrootus wrote:
| I wonder how many little companies are going to re-title their
| software developer as janitors. In many cases that description
| fits pretty well anyway.
| phamilton4 wrote:
| Excuse me! I am a Custodian.
| gumballindie wrote:
| It would appear there's a coordinated effort to diminish software
| engineering salaries across the board. Is the plan to decimate
| the industry and ship it all to india and china?
| phendrenad2 wrote:
| This tax change will still affect you if you hire developers in
| India & China. You have to actually move your office to India
| or China instead (which might be a good idea).
| rbultje wrote:
| Actually. For foreign expenses, the amortization period is 15
| years instead of 5, so the cash flow problem is even worse.
| :-(.
| commandlinefan wrote:
| > many small business owners ... the change to require R&D
| amortization
|
| So - I'm not super sympathetic to taxation in general but...
| small business are not doing R&D. Big businesses are hardly doing
| R&D. If anybody outside of _maybe_ Apple and Google are even
| _claiming_ they're doing enough R&D that not being able to
| expense it impacts their revenue, they're committing criminal
| levels on tax fraud.
| synergy20 wrote:
| this might encouaging small tech biz to outsource even more, i
| will pay a standard professional service fee to them, will this
| help me to survive?
| hinkley wrote:
| Yes, let's make research taxable but leave advertising as a
| deductible expense.
|
| What could go wrong?
| vlark wrote:
| Looks to me like a failure to plan properly. It's not like the
| companies didn't know this could happen. If you put your faith in
| Congress, be prepared to be disappointed by Congress.
|
| CFO heads should roll over this. It's their job to be up to speed
| on tax changes and plan for eventualities like this.
| mjwhansen wrote:
| CFOs have been quite vocal on this.
|
| https://www.wsj.com/articles/u-s-cfos-ask-congress-to-repeal...
|
| Small companies don't have CFOs.
| 1auralynn wrote:
| I own a two-person educational software company. We have a CPA
| that we engage once a year to do our business taxes and can't
| afford anything fancier than that. It's an LLC taxed as an
| S-Corp so all of the "profit" goes directly to me on my
| Schedule K. For 2022, if this is not reversed, I will owe
| around $100K in taxes. For reference, my salary was around
| $100k. I'll have to take out a payment plan with the IRS, and
| probably shut down the company if nothing changes because I
| can't do that again for 2023 and beyond.
|
| We aren't making huge profits to absorb the costs and give me a
| fat bonus to cover my taxes. In fact in 2022, I WAS expecting a
| nice $30k loss and a refund. Do we deserve to survive? Probably
| not in some peoples' minds, but we've been scrapping together a
| living so far. It sucks because we were actually growing and
| gaining some momentum: any further growth would now be pretty
| impossible because I can't afford to pay my personal taxes to
| cover additional dev salaries.
| gavinhoward wrote:
| Hey, fellow business owner here, but I am just getting
| started; haven't made a sale yet and haven't "paid" myself
| anything yet.
|
| I am a single-man business. Would your situation be better if
| it had just been you? In other words, was it the fact that
| you had that other employee that is going to cause you to
| shut down? Or would it have happened with just you?
| 1auralynn wrote:
| I'm no expert, but my understanding is that any expense
| related to software development would have to be amortized
| regardless of company structure or employees.
|
| So, two scenarios: a) If you were a sole-proprietorship,
| you made $100K revenue, paid $10k in AWS fees, you would
| pay personal taxes on $98k (100 - 10/5) that year. b) If
| you paid a contractor $50k that year, you would pay taxes
| on $88k. (100 - 10/5 - 50/5).
|
| In the past taxes base would be a) $90k (100 - 10) and b)
| $40k (100 - 10 - 50). So yeah larger tax implications for
| having employees, but the same would be the case with any
| expense.
| gavinhoward wrote:
| Thank you so much.
|
| It looks like I may have to shut down my business before
| I even get started.
|
| Good luck with your situation!
| agwa wrote:
| This is affecting companies with <$10m in revenue that don't
| have CFOs.
|
| I appreciate your point about not putting faith in Congress,
| but as a country we should not let them off the hook for
| passing batshit insane legislation that screws over small
| businesses.
| infamouscow wrote:
| Does it matter?
|
| Congress doesn't need to be involved to screw over small
| businesses.
|
| If the last few years have demonstrated anything, it's the
| government can freely destroy small businesses by forcibly
| shutting them down for completely intangible reasons without
| the slightest repercussion.
| rietta wrote:
| Ugg. Now I got to figure out how this impacts our small business
| this year. I just e-mailed our CPA so he would be able to look
| over the changes after their busy season ends. I hope there is
| some sort of threshold because as a small business some years we
| barely break even after paying salaries. I mean profit under $10k
| remaining to role over into January. I am driving a 16 year old
| Honda Civic. Not living a life of luxury over here :-/
| enginaar wrote:
| i'm in a similar situation building software and my
| understanding is while i cannot write off my expenses 100%
| because i'm building an asset, if you're operating business as
| usual, maintaining existing software/service then it's 100%
| expense.
| rietta wrote:
| My wife and I am getting a refund this year. Getting beat up
| in the business by inflation, all costs going up, and cutting
| income in half is not a great tax strategy.
|
| It is going to make me push tougher time code tracking onto
| my developers. Fixing a bug is different than feature work is
| different than legit R&D that might qualify for the actual
| R&D tax credit. As if software devs love doing time sheets
| (not!) :-/
| enginaar wrote:
| how subjective is it whether feature building qualifies as
| R&D?
| rietta wrote:
| I am not an expert, but there are rules. If it fits the
| definition of doing or managing the qualified work and
| "no one is paying for it" than it could count. This is
| for the R&D tax credit,see https://www.irs.gov/forms-
| pubs/about-form-6765.
|
| Here is a copy and paste from a e-mail from our CPA:
|
| To qualify for the credit, you have to have what's called
| "Qualified Research". Qualifying research typically
| meet's the following criteria ...
|
| 1. Was the research related to the development or
| improvement of the functionality, quality, reliability or
| performance of a business component (product, process,
| software, technique, formula or invention)? 2. Was the
| development technological in nature? 3. Was there
| technological uncertainty about either the capability or
| method of developing the business component or its
| appropriate design? 4. Was the developmental process
| experimental in nature?
|
| For wages to qualify for the credit, they have to be for
| qualifying research activities such as -
|
| 1. Conducting or executing the qualified research (e.g.,
| testing a manufacturing prototype) 2. Directly
| supervising the qualified research (e.g., managing a team
| of software developers) 3. Directly supporting qualified
| research (e.g., organizing test results on formulation
| trials)
| robocat wrote:
| I know nothing about this topic, But I think your
| accountant was talking about R&D tax credits, which is a
| different topic from R&D capitalisation and depreciation.
| The tax credits might be another reason why companies
| previously wanted to claim developers salaries as R&D.
|
| The issue here seems to be that software development
| wages are now supposed to be treated as R&D per
| https://news.ycombinator.com/item?id=35620164 combined
| with the fact the IRS wants R&D to be capitalised with a
| standard depreciation schedule.
|
| Hopefully someone who is an accountant can ELI5 this all,
| because this topic is mostly basic accountancy.
| https://news.ycombinator.com/item?id=35614721 explains it
| a bit, but misses the ELI5 part about what
| amortisation/depreciation is.
|
| A good example that is about building a thing rather than
| some software would help. Edit: Best example with good
| child comments so far:
| https://news.ycombinator.com/item?id=35615217
| enginaar wrote:
| thank you!
| moron4hire wrote:
| The big, overlooked thing here seems to be that the vast majority
| of software developers are employed as consultants. Here on HN,
| you're used to thinking in terms of startups creating products,
| doing real R&D: creating a product that is speculating that
| someone will buy it over the next X years. But that's just not
| how most people who do "computer programming" are employed. Most
| of us are working to build some stupid CRUD app that would be
| basically turnkey if it weren't for the fact that consulting is
| so cut-throat that it can't keep any talented senior developers
| around. To call what consultoware developers do "R&D" would be
| like calling a subcontractor who does construction for suburban
| housing developments an "architecture firm". There's, like, some
| tangential relation, if you really squint hard, but in reality,
| there are none of the necessary creativity, or the risks creative
| work implies, at play.
| [deleted]
| tgflynn wrote:
| I have a hard time understanding why this so bad and the article
| does nothing to explain it. As I understand it companies only pay
| taxes on their profits, which generally speaking is what's left
| after expenses, including salaries, are subtracted. If that's the
| case then why would higher taxes on profits force a company out
| of business or to layoff staff. If anything layoffs would tend to
| have the short term effect of increasing profits, which would
| only further increase taxes.
|
| I can understand how a sudden unexpected change to the tax code
| could catch people off guard and cause short term problems but
| overall I don't see why this particular change should be so
| devastating once any transient effects have been absorbed.
| mjwhansen wrote:
| The problem is that this tax change is artificially inflating
| profits. Companies previously had the choice between expensing
| (writing off entirely) and amortizing (spreading out) these
| costs, and now they must be amortized.
|
| It is especially problematic since it categorizes all software
| development as R&D even if we don't think of it as R&D. It's
| still unclear what the IRS considers "software development"
| since they've never had to define it, but the way most big
| companies with their well-paid accountants are proceeding are
| that it covers new product development AND new features on
| existing products, but not bug fixes/maintenance.
|
| Let's take a simple example. Imagine a profitable small
| software company that made $1M in revenue last year, spent
| $700,000 on developer salaries and $200,000 on other expenses.
| Ordinarily, they'd be able to write off $900,000 and have a
| taxable net income of $100,000 that matches their actual
| profit. Assuming a tax rate of 25% that's a $25,000 tax bill.
|
| Now, if you assume developers spent 50% of their time building
| new products and new features, and 50% of other expenses were
| on new features, only $420,000 of the salary costs and $110,000
| of other expenses are write-offs. Their taxable income just
| went from $100,000 to $470,000.
|
| Assuming a 25% tax rate, their tax bill is now $117,500 for
| 2022 -- which exceeds their actual net income. This also
| inflates their quarterly tax payments for 2023, both of which
| hit right now.
|
| This gets even worse for companies that aren't profitable, as
| they don't have the cash flow to cover a tax bill when they
| hadn't planned on having one at all. And given the current
| financial environment, it's hard for startups to get any kind
| of additional financing or funding.
|
| This news article about our effort gets into this a bit more:
| https://technical.ly/civic-news/section-174-small-software-c...
| gamblor956 wrote:
| R&D = "research and development"
|
| If what you are doing is software _development_ then
| obviously it is a _development_ activity that falls within
| the meaning of _development_ for purposes of tax laws.
|
| Software programming that does not constitute development,
| such as bug fixing, is not subject to capitalization.
| jdmichal wrote:
| R+D is "research and development", not "research" and
| "development". It's specifically development of research
| into new products. Otherwise a carpenter could be seen as
| "developing" wood into cabinets. If there's no research or
| experimental process involved in the work, then it's not
| R+D.
| robocat wrote:
| I can imagine Unicorn Research Inc deciding to rename all
| "developer" titles to "programmer" titles, and removing
| the word "Research" from the company name.
| pr337h4m wrote:
| Not very familiar with the US tax system, but is there no
| option to treat "R&D spending" as a normal business expense,
| forgoing all R&D incentives or tax credits?
| agwa wrote:
| There was before 2022. Not anymore.
| phoehne wrote:
| The burn cash but not necessarily profit. If they built the
| software in 1 year for 1,000,000, they would carry an asset
| of 1,000,000. They burned 1,000,000 in cash but have a
| 1,000,000 asset. They had salary expense of 1,000,000 and
| revenue of 0. Say they make 300,000 in revenue for the next 5
| years based on that software. That means they would be able
| to expense $200,000 against the $300,000 in income, paying
| taxes on just $100,000 in income each of those years. At the
| end of that time the asset has zero value.
|
| The other option is they take a 1,000,000 loss that first
| year, and then pay tax on all $300,000 for each of the
| succeeding years. Either way, at the end of six years, There
| was $1,500,000 in revenue and $1,000,000 in expenses.
|
| As far as the treatment of bug fixes, the rules around
| improvements and repairs probably cover that. If you fix a
| bug like a bad calculation - that's probably opex, like
| replacing a part on a machine. If you add a feature that
| extends the life of the product, like adding an API for
| outside developers, that would be an improvement and
| capitalized. This is like refurbishing equipment to extend
| its useful service life.
| tgflynn wrote:
| I've seen previous discussions about this on HN but there
| seemed to be disagreement about whether this change required
| developer salaries to be treated as R+D or only allowed it.
|
| If this is really the way it works, defining some salaries as
| necessarily not being deductible from revenues, then it makes
| no sense for multiple reasons.
|
| First the developers are still paying income tax on their
| salaries so that money is getting doubly taxed in the year
| the revenues are received.
|
| Second the government generally seeks to encourage
| employment. This would have the exact opposite effect because
| any employee you hire who's doing software development would
| cost you (1 + 4/5) times their salary in the near term.
|
| I wonder how much of the downturn in tech employment this
| year is being caused by this.
| scrozier wrote:
| > any employee you hire who's doing software development
| would cost you (1 + 4/5) times their salary in the near
| term
|
| How can that be true? You only pay them once, not 1 4/5
| times.
| tgflynn wrote:
| Yeah, what I said isn't completely accurate, because I
| didn't take into account the tax rate. But the factor is
| still larger than 1, assuming you have any revenue at
| all, because in addition to what you payed them in salary
| you have to pay tax on the 4/5ths of their salary you
| couldn't deduct in the current year.
| scrozier wrote:
| > The problem is that this tax change is artificially
| inflating profits
|
| Not exactly. It's a well-established accounting principle
| that you capitalize costs that provide a benefit over
| multiple years. Depreciation is an easy-to-understand
| example. It's more true that the historic practice of
| expensing R&D costs was artificially inflating costs.
|
| What the tax change _is_ doing is forcing amortization,
| which, for early-stage companies is difficult, because they
| have depended on expensing early and recognizing income
| later.
|
| It's a difficult issue. There are good arguments on both
| sides. But it sounds like this was a surprise, which is
| surely not optimal.
|
| fwiw, when I was running start-ups (80s/90s/00s), my
| recollection is that we amortized our software development
| costs. I guess this got turned around by the rise of the
| sophisticated startup world, with more accountants, lawyers,
| and lobbyists. And now the government is pushing back, not
| without reason.
| SpaceManNabs wrote:
| > And now the government is pushing back, not without
| reason.
|
| Is it? Seems like lawmakers just messed up in reaching an
| agreement to extend something that is usually extended.
| Typical congress games.
|
| From light reading, Republican leadership seems to be the
| main blocker since extending the provision has bipartisan
| support. You would think that extending this and child tax
| credits would be no-brainers for Republican leadership, but
| here we are.
| scrozier wrote:
| That could well be. But maybe it's not so obviously a
| good thing as it may sound to startup ears. Matching
| income and expenses is a pretty good way to keep your
| financial head about you.
| TuringNYC wrote:
| >> Not exactly. It's a well-established accounting
| principle that you capitalize costs that provide a benefit
| over multiple years.
|
| OK, so lets flip this. I'm a founder working for free, as
| many founders do. We code on nights and weekends and
| produce hundreds of thousands of dollars of capital value.
| If the business doesnt work out, can I claim all this as a
| loss?
|
| We cant have it both ways, can we? So I should be able to
| take losses on these hundreds of git repos I have with
| thousands of hours of unpaid work?
| scrozier wrote:
| Founders work for free because they're investing, taking
| a risk like all investments. If they lose the bet, they
| lose. No harm, no foul. That's true of any investment you
| and I make. People lose money on investments every day.
|
| There are a lot concepts being not very well defined
| here: employment, investing, taxation, salaries. It's not
| all one thing.
|
| What is it that you think "we" are having both ways?
| Implicated wrote:
| I've got lots of 'failed' projects I've spent obscene
| amounts of time on. Where's the Lambo dealership?
| pclmulqdq wrote:
| Technically, I would assume that you probably can claim
| this as a capital loss if you have actually realized a
| loss (eg you spent money on software related to the
| business or something), but those are capped at $6,000 a
| year. Those expenses previously could have gone on a
| schedule C, though.
| robocat wrote:
| Catch 22: if you claimed the loss for the value of the
| hours worked, you would also end up having to pay income
| tax on the value of hours worked.
|
| Paying yourself is a lose-lose game.
| usefulcat wrote:
| > And now the government is pushing back, not without
| reason.
|
| What reason is that? Increased tax revenue (in the short
| term at least)? Because if there's no difference in the
| long term then it seems pretty dumb to inflict financial
| turmoil for no net gain.
| [deleted]
| hesdeadjim wrote:
| You're off about the major problem with Section 174 -- money is
| being taxed *before* expenses, and there is no "out" because
| software has been labeled fully R&D back in 2017 (of course the
| republicans carved an out for oil, mineral, and gas lol).
|
| What makes it worse is that accountants at real deal firms like
| Plante Moran didn't bother sounding the alarm early because
| they figured like every time in the last 70 years Congress
| would push off the effects.
|
| It is an absolutely crushing situation that is going to put a
| lot of shops out of business unless they have cash on hand to
| weather the 5 year R&D tax amortization schedule.
| robocat wrote:
| Even if you have the cash, in a high inflation environment
| with higher costs of lending, paying tax on ~80% today and
| getting that tax back over 4 years, leads to indirect costs.
| Especially for startups.
| x0x0 wrote:
| Previously: fully deduct R&D salaries from income to calculate
| taxable profit.
|
| Now: deduct 20% of R&D salaries from income to calculate
| taxable profit, with the remaining 80% spread 1/5 per year over
| the next 4 years.
|
| For software companies, where costs are basically eng salaries,
| this is a huge tax increase. It will kind of even out over
| time, but it wacks new companies very hard.
| rqtwteye wrote:
| "It will kind of even out over time, but it wacks new
| companies very hard."
|
| Amortizing salaries seems really weird since they are
| recurring every year. After 5 years you can deduct your full
| salary expenses for that year. And after you have laid off
| everybody you can deduct for a few more years. Definitely
| makes it hard to hire a lot of people quickly if you don't
| have a ton of profit.
| yamtaddle wrote:
| > R&D salaries
|
| > For software companies, where costs are basically eng
| salaries,
|
| ... it smells like this might be fallout from mis-classifying
| workers and/or fudging categorization of labor for some
| benefit. Am I on to something?
| hedora wrote:
| The IRS forces the miscategorization, leading to tax bills
| that can exceed actual net income.
| agwa wrote:
| Even companies that _don 't_ take R&D credits (which is a
| benefit which can be fudged) are still forced to treat
| software development expenses as R&E subject to 5 year
| amortization. Companies have no choice in that matter (see
| https://www.law.cornell.edu/uscode/text/26/174 (c)(3))
| Kon-Peki wrote:
| Is there a legal definition of "development" that needs
| to be used? In the dictionary, the definition that most
| fits "software development" is "The application of
| techniques or technology to the production of new goods
| or services."
|
| Which means that at the very least, companies should be
| able to classify at least some portion of salary costs as
| "not software development". Maintenance, bug fixing,
| useless meetings, etc?
| agwa wrote:
| As far as I can tell, the law does not define it, and the
| IRS has provided no guidance.
|
| It would certainly be consistent with the spirit of R&E
| to not classify maintenance and bug fixes as R&E, and it
| would definitely reduce the sting of this change for
| established companies. Startups would still be pretty
| screwed.
| yamtaddle wrote:
| What's the reason for that? I can find a lot of coverage
| of the effects, and of efforts to change it, but why was
| it made that way to begin with?
| agwa wrote:
| I'm not sure if this is true, but I've heard that the
| Republicans needed ways to offset the tax cuts made by
| The Tax Cuts and Jobs Act of 2017. One of the ways was
| changing the treatment of R&E expenses.
| mjwhansen wrote:
| This is true - it was an accounting sleight of hand to
| make the tax cuts look paid for during Congressional
| Budget Office scoring
| LorenPechtel wrote:
| Because long ago the politicians got this "brilliant"
| idea of requiring many things to not increase the
| deficit.
|
| The result has been things that cost money are "balanced"
| by raising taxes somewhere--but politicians don't want to
| raise taxes. Thus we get all sorts of garbage that
| fiddles with the details without "raising" taxes, but
| "raises" revenue--often by pulling it forward rather than
| actually changing the total amount.
|
| We have also seen a lot of things that employers used to
| simply pay changed to income for the employee but
| deductible--but that causes the FICA taxes to be paid in
| all cases and since an awful lot of employees aren't in a
| position to itemize those deductions are lost. Something
| that was tax free now becomes income, but they didn't
| "raise" taxes.
|
| I'd like to take the idiotic idea and stand it on it's
| head: I would not permit *any* measure to fund itself. A
| measure would either be a tax bill or a spending bill, it
| would be prohibited for a bill to do both. That would
| remove much of the drive to create insanities like this
| and Congress could work on cleaning up all the garbage.
| To accomplish this, though, we will have to evict all
| those idiots who "promised" never to raise taxes (but are
| perfectly willing to vote for stealth increases that
| cause a lot more pain per $ raised than doing it honestly
| would.)
| hrunt wrote:
| The companies spent all the money this year on R&D
| expenditures. That was cash out of their pocket (they spent it
| this year, so it reduced this year's cash on hand). The effect
| of the rollback is that they can now only count 20% of those
| expenditures to reduce their profits (and, by extension, their
| taxes) this year, so they are paying taxes this year on the
| remaining 80%. While yes, the profits are higher, the cash is
| not any higher, and cash pays the tax bill.
|
| Note, this was not an "unexpected" change (it's been in the
| code), but it WAS unexpected that the provision was not
| extended.
|
| Note that this affects not just startups. My wife's firm is a
| small, employee-owned, non-tech S-corp. This hit them as well.
| It resulted in tax bills for the shareholders approximately
| 25-30% greater than the firm's accountants expected them to be.
| The shareholders are on the hook for those higher taxes,
| although the company did the right thing and distributed extra
| cash to them to offset the higher taxes.
| ricardobayes wrote:
| Well, yeah because you're a normal person who pays tax by the
| book and don't look at tax optimization schemes all your waking
| hours. Classing devs as R&D was morally wrong anyway due to the
| 100% tax credit. Although I think a better approach could have
| been an immediate credit in the same year, but a reduced
| amount.
| vb6sp6 wrote:
| [dead]
| crote wrote:
| The issue here is in the way it is deducted.
|
| Previously, $1.000.000 spent on R&D in 2023 would result in a
| $1.000.000 deduction on your 2023 taxes. Under the new system
| the same spending would result in a $200.000 deduction in 2023,
| $200.000 in 2024, $200.000 in 2025, $200.000 in 2026, and
| $200.000 in 2027.
|
| You still get the same deduction, but spread out over multiple
| years. However, it also means that you can now deduct $800.000
| less in 2023 than expected, resulting in a far higher tax bill
| _this year_! If you are a startup you probably don 't have that
| spare $800.000 just lying around doing nothing.
| eschneider wrote:
| That's still taxed off profits, not gross.
| qeternity wrote:
| Yes, but it's changing the way profits are calculated,
| which massively impacts cash flows.
| admax88qqq wrote:
| If I can only deduct 200k of the 1m I spent that inflates
| my net profits by 800k that I dont actually have, because I
| spent it on what I thought was an expense.
| lokar wrote:
| You deduct (eligible) expenses from revenue to get
| (taxable) profit
| mminer237 wrote:
| If you make $2,000,000 gross, spend $800,000 on operating
| expenses, and $1,000,000 on R&D, you practically have
| $200,000 profit; but you have pay $210,000 in federal tax
| on $1,000,000.
| 0zemp1c wrote:
| its like a weird inverse of paying quarterly taxes...the same
| goal - more of your money stays with the government longer
| deltarholamda wrote:
| >The issue here is in the way it is deducted.
|
| The issue is that the rules changed. Businesses that relied
| on the former rules are now faced with a (possibly
| insurmountable) challenge to accommodate the new rules.
|
| Washington loves to fiddle with tax rules, and lobbyists
| spend a lot of time and money encouraging it, but nobody can
| anticipate the ripple effects. It all looks great on CBO
| spreadsheets and congressional press releases, but the real-
| world impacts can be devastating.
| ricardobayes wrote:
| I only hope they include some kind of small letter that the
| same person needs to still be employed to get the
| amortization - I think that's actually implied by it. The
| same way you got to keep a machine to keep deducting it. I
| think the gov't got fed up of the mass layoffs and this is
| how they are fixing it.
| CRASCH wrote:
| Any startup that needed a year of runway now needs five years of
| runway. Runway is money needed before the company can survive off
| of profits.
|
| If company A has $1M in expenses and $1M in investment, after the
| tax change it will need ~$5M in investment.
| erik_seaberg wrote:
| This makes most salaries nondeductible, so you will need about
| 25% more revenue (80% of 21% federal and up to 10% state income
| tax) to break even than otherwise. If you're pre-revenue your
| runway doesn't change.
| taxopinion wrote:
| You've never filed an 1120.
| orangesite wrote:
| It's going to take a lot of arguing but I predict we'll end up
| back where we started some time ago in the 70's:
|
| The computer hardware is the asset.
|
| Software engineer salaries are the operational expense of that
| asset.
|
| Fanciful: It was only a brief period of time where some companies
| were able to resell the operational efforts of their in-house
| staff to other owners of computer hardware assets. Now it's all
| bespoke operational activities just like steel presses and
| sawmills.
| pitaj wrote:
| Quick reminder:
|
| - corporate taxes have one of the highest deadweight loss of any
| tax
|
| - corporate taxes get passed to consumers and employees as higher
| cost of goods and lower wages / benefits
|
| - the USA has one of the highest rates of corporate tax in the
| world
|
| - handling the complex tax code is more a burden on small firms
| (as this case shows)
|
| All of this together means we'd be better off dropping the
| corporate tax entirely and instead tax income, capital gains, or
| consumption at higher rates.
| SketchySeaBeast wrote:
| > the USA has one of the highest rates of corporate tax in the
| world
|
| That doesn't seem right. Apparently it ranks 81st?
|
| [1] https://taxfoundation.org/publications/corporate-tax-
| rates-a...
| pitaj wrote:
| My apologies, I was a little outdated. Unfortunately can't
| update the previous comment. What I said was true as of 2017,
| when the USA had a corporate tax rate of 39%, which ranked
| third highest in the world.
|
| It was changed to 26.8% by the Trump tax cuts, which ranks
| 81st in the world. But that's still higher than 144
| countries, including Switzerland, Finland, Sweden, Denmark,
| Norway, UK, and Spain (just to name a few).
| umayah wrote:
| If you're worried about this, check out neo.tax
| (https://www.neo.tax/). They are one of the few companies that
| anticipated this and built a product to solve it.
| xmagisterludix wrote:
| Disclaimer: I work with startups as a consultant (not on
| optimizing their tax burden).
|
| I know of two companies that used neotax and they were happy
| with the results.
|
| What I don't know is if there is there anyone else in the space
| or some of the disadvantages of neotax. But... if you're an
| exec at a small -> medium size startup and you haven't dealt
| with this yet you could do a lot worse than giving these guys a
| call.
| malfist wrote:
| [flagged]
| galangalalgol wrote:
| Forget software for a moment, this is just about full stack
| devs being called r&d workers (which is questionable), but we
| were apparently already treating r&d for other sectors this
| way, and that seems just as bad. This is anticompetitive
| policy. Policy like this usually has an employee or gross
| revenue exemption for small business, when it doesn't, it is
| because big software corps lobbied for it to be that way to
| prevent competition. This is worsened by the fact that big
| software corps don't spend on r&d to the extent bell labs and
| similar used to. So most of the r&d was small shops hoping to
| get bought, but now this batch will get bought at cut rates to
| pay the taxes, and the next batch won't arrive. R&D is only
| asset investment for large corporations, for small shops it is
| their actual product. And most software dev work doesn't come
| close to being real research, even if maybe you had to read an
| ieee paper to write up an algorithm, very few people are
| writing those papers in comparison.
| agwa wrote:
| Do you think explicitly singling out software development for
| unfavorable tax treatment while explicitly excluding oil and
| gas exploration from the same treatment is "fair"?
|
| https://www.law.cornell.edu/uscode/text/26/174 (c)(2) and
| (c)(3)
| aarondf wrote:
| If a company has a million dollars in revenue and spends a
| million dollars on the salaries of software developers, how
| much tax do you think they should pay in that year?
| 1,000,000 Revenue - 1,000,000 Salary expense
| ----------- 0 Profit
|
| If you said "no taxes!" we're on the same page. The new law
| would instead work like this: 1,000,000
| Revenue - 200,000 1/5th Salary expense
| ----------- 800,000 Profit
|
| Now the company must pay taxes on 800,000 of profit, because
| "R&D salaries," which includes software devs, must be amortized
| over five years.
| hedora wrote:
| Note that this is an infinity percent tax rate and mostly
| only hits small businesses.
| rootusrootus wrote:
| > this is an infinity percent tax rate
|
| Only if you consider just one year of it, though, unless
| I'm missing something. You eventually get to deduct 100%,
| just takes five years.
| agwa wrote:
| Only if the company still exists in 5 years time.
| einarvollset wrote:
| You know, if you don't understand something, it's totally fine
| to not immediately comment with whatever your political
| instincts tell you something might mean.
|
| Or perhaps you have some fresh insight on how the Section 174's
| changes (only passed to make the 2017 tax bill revenue neutral)
| on amortization rules meaning only being able to deduct 20% of
| salaries in the year paid is in fact totally fair and how maybe
| all salary deductions should work like this?
| geodel wrote:
| Could that mean no more migrating code from Lang A to Lang B,
| Framework C to Framework D and writing blogs about it?
|
| Or even worse no more _framework_ inventions, re-architecting
| SAAS platforms for _performance_ so they can provide even more
| features that customers never asked for?
|
| If that's the case I do feel it is indeed threatening startup
| ecosystem.
| nitrosn0w wrote:
| I've been closely following this tax change for some time now and
| I'm thrilled to see that major news publications are beginning to
| cover this monumental change.
|
| However, I haven't seen many companies step up to offer solutions
| to address this change, except for Neo.Tax. Based on my research,
| it appears that they're the only product in the market that's
| specifically designed to address R&D capitalization.
|
| Here are some helpful resources I've found about this topic:
|
| https://www.neo.tax/blog/a-simple-guide-to-r-d-capitalizatio...
|
| https://www.grantthornton.com/insights/alerts/tax/2022/insig...
|
| https://bench.co/blog/tax-tips/rd-capitalization-guide/
| hinkley wrote:
| I hadn't been following it but now understand why my company
| got weird about time tracking day one of this FY.
|
| I thought it was some weird M&A or bean counter power move but
| I guess it's taxes.
| mbrameld wrote:
| How long was the provision in place before Congress decided not
| to extend it?
| agwa wrote:
| R&E expenses were fully deductible since 1954.
|
| "Extend" is a bit of a misnomer because there was no expiration
| date. Rather, the The Tax Cuts and Jobs Act of 2017 made a
| change, effective 2022.
| phoehne wrote:
| To be fair, software development in 1954 is not software
| development today. It's less pure research. It's more akin to
| building the electrical infrastructure you need for a
| business. Even though I see the logic of treating software
| developed as a capitalized asset, I don't necessarily think
| the outcome will be net good.
| slavboj wrote:
| Look up section 162 vs 174 treatment and the distinction between
| "new companies" vs "carrying on a trade". It's far from
| unambiguous and as long as you have a defensible position you
| absolutely are entitled to push the envelope.
|
| Is implementing a specification a REE "in the experimental or
| laboratory sense"? I'd say it's not, and I don't have to explain
| my position unless I'm audited.
|
| https://www.law.cornell.edu/cfr/text/26/1.174-2
| phendrenad2 wrote:
| This is going to give huge amounts of power to non-software and
| software-adjacent companies. Because their revenue doesn't come
| from software, they'll be able to hire software developers to
| work on dream projects and eat the cost.
| Mountain_Skies wrote:
| For software developers, this likely will lead to even more
| micro-tracking of activities. Who doesn't love spending several
| hours each week making up wild estimates of how much time was
| spent in each of dozens of different categories? Now those will
| have to be broken down further into 'new' and 'maintenance' for
| most existing categories. For those who don't currently have to
| do any of this tracking, the taxes create quite the incentive for
| companies to start requiring it. Once the tracking starts, it end
| up creeping into more and more areas of smaller fidelity.
| mathgladiator wrote:
| What I don't understand is why software developers salaries are
| treated different than other salaries?
| [deleted]
| Nifty3929 wrote:
| They're lumped in with Research and Development, which in
| another more traditional context might make a bit of sense.
|
| If you build a factory or apartment building, you don't get to
| expense it all at once because it's a capital good and instead
| you depreciate it over time, taking the expense little-by-
| little. This kinda makes sense, because it's assumed that you
| started with (often borrowed) all the money to build the
| factory, but it's just a one-time expenditure. Then you get
| ongoing revenue from it, which is offset by the ongoing
| depreciation. It all works out.
|
| In the IP world, you could think of drug development the same
| way. We spend $1B to develop a drug, and then get income from
| that drug down the line. Same deal, conceptually.
|
| The main point is that there are two clear phases: 1. spend a
| big pile of money to build something, then 2. get income from
| it. In phase 1, you have a plan for how to fund all that from
| the get-go. Often just a huge loan. And there is no income to
| pay taxes on. By the time you get income and need to pay taxes
| you'll have plenty, because you're not still paying to build
| the thing.
|
| But then with software it starts to break down. Following the
| same model, you'd raise enough money to hire a bunch of devs to
| build your software ALL THE WAY DONE, finish it (like a
| factory), FIRE ALL THE DEVS because it's done, and then start
| collecting income from the software. You funded all the
| development up-front, and then by the time you're getting
| revenue there's plenty for profit and taxes. In some ways,
| LARGE companies do roughly do this.
|
| But of course we know that's not how startup software really
| works. For the most part, development is an ongoing effort that
| never stops, and in the startup world you don't get funding all
| at once up-front, you raise money as you need it, as you go
| along. You're not going to raise $1B up-front to build an ml-
| blockchain-chrome-extension thing. You spend a little, see how
| it goes, maybe raise a little more and get a few more
| customers, add a couple of features, raise a little more, etc.
| tgflynn wrote:
| If in your example you hired the construction workers as
| employees and, for what ever reason, kept them on the
| payroll, wouldn't you still be able to deduct the salaries
| you pay them each year ?
|
| If not it seems like a colassal disincentive to employment,
| which is the opposite of the result usually sought by
| government policies.
| rowls66 wrote:
| The argument is that the software developers are producing an
| asset (the software) that will produce revenue over time. There
| is an accounting principal to match revenue with expenses, so
| if the software will produce revenue in the future, the expense
| of developing the software should be delayed into the future to
| match.
| geodel wrote:
| Seems it is because companies claim it is R&D. I am not sure
| accountant's salary is in R&D category.
| agwa wrote:
| Companies don't have a choice. The law now requires
| amortization of software development expenses. Even companies
| that don't claim R&D tax credits are affected.
| chatmasta wrote:
| I'm not a CPA but I'm pretty sure companies have a choice
| whether to claim Software Development as R&D expense, or as
| regular payroll. It sounds like this change is only
| affecting employers who were previously "saving" payroll
| tax by classifying employee cost as R&D, and claiming "R&D
| credits" which can no longer be amortized [0]. That is not
| the default tax strategy of every tech company. There is no
| law requiring companies to file for R&D credits. The
| relevant changes under discussion only affect companies who
| chose to file for R&D credits.
|
| They should have known they were taking a risk by adopting
| that strategy. At our company, we got a bunch of spam
| emails offering to help us file for R&D credits - we just
| ignored them and continued to pay normal payroll tax.
|
| Searching my inbox for "R&D," it seems that Gusto was the
| most prolific spammer in this regard - they sent dozens of
| emails enticing us to save tens of thousands of dollars by
| talking to their R&D tax specialists. They even included
| case studies naming specific companies and how much they
| "saved." In retrospect, that looks like a big oof.
|
| [0] https://www.aprio.com/its-official-software-
| development-incl...
| agwa wrote:
| You are sadly mistaken.
|
| There are two different concepts at work here:
|
| 1. R&D credits (IRC 41
| https://www.law.cornell.edu/uscode/text/26/41). Companies
| can choose whether or not to pursue R&D credits. This is
| what Gusto was spamming you about.
|
| 2. R&E expenses (IRC 174
| https://www.law.cornell.edu/uscode/text/26/174) which as
| of 2022 can no longer be fully deducted, but must be
| amortized over 5 or 15 years. IRC 174 (c)(3) explicitly
| states "any amount paid or incurred in connection with
| the development of any software shall be treated as a
| research or experimental expenditure." This applies
| whether or not the company was treating software
| development as R&D under IRC 41.
|
| For more details, see
| https://www.striketax.com/journal/tcja-and-the-resulting-
| tax...
| chatmasta wrote:
| I'm not a lawyer nor a CPA, but my reading of that
| Cornell link is that the definition only applies to
| expenditures that the company deducts from their return
| as R&D expenses, which, again - is not the default
| strategy of every company.
|
| Note this would also only affect profitable companies
| (i.e., not most VC-funded startups), since there's
| nothing to deduct if you didn't make enough profit to owe
| tax in the first place (modulo some change in definition
| of "profit" based on how software development must be
| categorized - but still, this would only affect companies
| with fairly significant revenue; it's not like hiring a
| software developer suddenly costs 120% more than it did
| last year.)
| senko wrote:
| Because they're not expenses (according to the bill), they're
| investments in intagible property.
|
| So it stays on the books, the net income isn't lowered, causing
| a higher tax bill.
| patmcc wrote:
| They sort of are, and they sort of aren't.
|
| If Ford builds a car factory, that's a capital asset - the
| costs should be amortized against the useful life of the
| factory. So if it costs $10 million and lasts for 10 years,
| they can expense $1 million a year. Those costs will include
| the salary of the workers to build the factory. The workers
| inside the factory making the cars though, that's a cost that
| matches to the revenue from selling those cars, so their
| salaries are an expense, and they can be claimed in that year.
| For most businesses, most of the time, they're producing work
| product (or supporting that) to be sold as quickly as possible.
|
| Now - when Microsoft writes Windows or Excel, or Epic makes
| Unreal Engine, I think there's certainly an argument that it's
| a capital asset they're making, and maybe costs should be
| amortized over the useful life. I wouldn't even be surprised if
| their accountants have claimed the same thing. Is that
| universal across software dev? No. The problems with this
| change are:
|
| a) It allows no nuance. If I worked for 4 months on a game that
| I expected to have zero sales outside the first year, I think
| it's silly to call that a capital asset in any real way. Not
| all software dev work makes capital assets. The janitor at the
| Ford factory doesn't get his salary expense amortized, nor
| should the bug fixer.
|
| b) It's all taking effect in this year. Could have switched it
| gradually over 10 years or something (you need to amortize x%
| in year 1, 2x% in year 2, etc)
|
| c) It's especially tough on small businesses. Microsoft can
| borrow the cash and make it clear in financial statements that
| this is a weird tax rule, but according to GAAP/accounting
| rules it's fine. But a sudden big tax bill is really tough for
| years 1, 2, 3 of a small business.
| thfuran wrote:
| >nor should the bug fixer.
|
| Is a maintenance contract on a capital asset not capex?
| patmcc wrote:
| It depends. If you have a truck - capital asset - the oil
| changes are probably opex, but replacing the transmission
| is probably capex. Regular sweeping and cleaning of a
| building is likely opex, upgrading the wiring capex.
| Software I can certainly see getting tricky here - is
| updating dependancies an oil change or a transmission?
|
| "Betterment, restoration or adaptation" is the usual test
| for something being capex.
| thfuran wrote:
| Fixing bugs sounds like betterment to me.
| phoehne wrote:
| My guess is a reported bug is opex, since it's fixing a
| defect on something that exists. But adding an API would be
| capex.
| ipaddr wrote:
| Software is an ongoing expense.
|
| You spend a million a year each year you would have to break
| that out over 5 years
| flashgordon wrote:
| Also with the factory analogy - unreal is the car factory and
| you are like the worker who built the factory. (Asking out of
| ignorance) The workers wages are not treated as a capital to
| be amortized right?
| Nifty3929 wrote:
| For the factory - yes, your wages as a worker building the
| factory would be treated as a capital expense to be
| amortized, at least from the perspective of the factory
| owner. But in the usual case where the owner is hiring an
| outside contractor to build the factory, then from the
| perspective of the contractor, your wages would not be a
| capital expense.
|
| The company that pays for the factory would basically just
| pay $1B of capex for a factory. The contractor doesn't get
| the factory - they get income. And your wages from them are
| just an operating expense. The contractor is not making a
| capital investment - they are just doing a job for money.
| patmcc wrote:
| Nifty3929 explains this well, let me just add that good
| accounting rules try to minimize how much you can tweak by
| "build" vs "buy". Like building a $1b factory or buying
| one, if you intend to keep and use it to make cars, should
| be treated broadly the same way.
|
| If you bought a 10-year license to use Unreal Engine, you'd
| amortize that out. If you instead built it (to use it!),
| the same rules should (generally) apply to the expenses you
| incur. If you build it to sell it...well, that gets
| complicated, especially as it's tough to estimate the
| useful life of software, and it's tough to say whether
| certain costs are improvements or maintenance (which are
| treated differently), etc.
|
| Doing a sudden switch from salary costs being 100% expensed
| to 100% amortized (over 5 years for domestic, _15_ years
| for foreign) is really bad, it 's legitimately harmful for
| a ton of small businesses in this space. But honestly
| having it as 100% expensed is pretty silly. Hopefully this
| gets fixed with a middle ground and a gradual switchover.
| cj wrote:
| I'm guessing that this will result in many employers reclassing
| many engineers into COGS, S&M, G&A, etc (in other words, not
| calling their work R&D).
|
| This is relatively easy to do. If an engineer is fixing bugs,
| helping support team, helping sales in any way, participating in
| customer onboarding, keeping the servers online, etc, a company
| can argue the engineer is a cost of doing business rather than
| true "R&D".
|
| In reality, the % of time most engineers spend exclusively on
| 100% new products is much smaller than you'd assume at face
| value. Even at a young startup, I'd guess at most 50% of the work
| is true R&D.
|
| To reiterate, things like devops, managing infrastructure,
| patching servers, upgrading code, fixing bugs, professional
| services, etc... none of that is R&D and it's pretty easy for a
| small company to say that the majority of their engineering
| expense is not R&D (extremely difficult for the IRS to argue
| otherwise if they audit a company unless detailed timesheets are
| kept).
|
| Edit: I'm not an accountant, but pretty familiar with R&D / IRS
| stuff
| jaf656s wrote:
| it would surprise me if the IRS would resolve this favorably
| for you if your defense was "we didn't keep detailed
| timesheets"
| dafdaslkjvalk2j wrote:
| We won't know where the line is until we get guidance from the
| courts.
|
| A lot of things in real estate that you might think qualify as
| just maintenance actually have to be depreciated. Like,
| repairing a roof has to be capitalized since the roof will be
| around for awhile. The devops equivalent might be migrating
| from docker swarm to k8s-- the k8s cluster will be around for
| awhile.
| Aperocky wrote:
| > the k8s cluster will be around for awhile.
|
| without someone maintaining it, it would probably fail by the
| end of month. That's not considering the constant changes
| going into it.
| throwaway9980 wrote:
| The average roof has a lifespan at least an order of
| magnitude greater than a k8s cluster. Most roofs being put on
| today will outlast k8s itself.
|
| Software is a liability, not an asset. Treating the
| construction and maintenance of this horrible liability knows
| as "code" is a complete misunderstanding of what software
| actual is.
| fdsalkjfdlkj wrote:
| It's just an example. Another is paint. The rule is close
| to but not exactly "if it lasts more than a year it has to
| be depreciated instead of expensed."
|
| The book value of the k8s work could be completely expensed
| as soon as it is replaced.
|
| Also, your belief that "software is a liability" is
| irrelevant. What matters is that tax law calls software an
| asset (as does most everyone else, even ones who
| fundamentally understand it).
| jeremyjh wrote:
| If the software makes money for the business, it is an
| asset.
| albrewer wrote:
| https://www.law.cornell.edu/uscode/text/26/174
|
| > 26 U.S. Code SS 174(c)(3):
|
| > (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.
| phoehne wrote:
| My guess is they'll treat it like repairs and improvements on
| physical equipment. Fix a broken calculation, that's opex.
| Add an API for better Google integration, that's capex.
| whitemary wrote:
| "New product" is a distinction without a difference. Literally
| all software development efforts are in the interest of "new
| products" depending on your definition of "new product."
| rcme wrote:
| How is fixing a bug in the interest of a new product?
| oldmanhorton wrote:
| It's a bit strained, but car or TV companies often put out
| a new model that's identical to the old model +- some but
| fixes. There's a line somewhere but the law does not
| specify the line, it seems
| crazygringo wrote:
| Exactly. v4.2.34 is a new product compared to v4.2.33.
|
| Not defending this, but in the eyes of the law there's no
| distinction between products and features and bug fixes.
| ajmurmann wrote:
| Leaving arguments about new patch releases out, how could
| we practically track this? Would every engineer log the
| time they work and track feature work separately from bug
| fixes?
| paulddraper wrote:
| There are already tax credits available to "new
| development" that doesn't include fixes.
|
| So this isn't a new thing to track
| chrischen wrote:
| The US was practically founded on principle of refusal to pay
| unfair taxes. As the article suggests some are just filing
| incorrectly, what are the real risks and consequences of this?
| taxopinion wrote:
| > As the article suggests some are just filing incorrectly,
| what are the real risks and consequences of this?
|
| Provided you never used an R&D tax credit, none.
|
| But if you did, with a huge templated report report about
| software R&D, you have a verbatim provable record of doing R&D
| expenses. And those reports, they come from 10 different
| vendors who all use the same words and formatting. The IRS
| could easily solve one case and get everyone.
| ilandsman wrote:
| Just to clear this up, this change is unrelated to if you've
| taken the R&D credit. You should take it as it slightly helps
| offset this change, but regardless the calculation applies to
| dev salaries and costs without regard to if you've actually
| taken the R&D credit.
| dennis_jeeves1 wrote:
| >The US was practically founded on principle of refusal to pay
| unfair taxes
|
| What exactly is a fair tax?
| jokethrowaway wrote:
| No tax is fair. They're all involuntary transactions.
|
| The US is the textbook experiment which proves that even
| minarchy (a minimal government) can't work.
|
| All form of governments, no matter how small, tend to grow
| into huge socialist monsters (the usa is the largest employer
| in the world, second only to China, maybe).
|
| Even if that very first government was founded on not
| collecting very little taxes for this very reason.
| mschuster91 wrote:
| > All form of governments, no matter how small, tend to
| grow into huge socialist monsters (the usa is the largest
| employer in the world, second only to China, maybe).
|
| The USA have 330 million citizens and 10 million people
| without valid residency, in total something around 340
| million citizens. The public sector clocks in at 15%, which
| includes the military and USPS. That is, seriously, _not
| much_.
|
| [1] https://www.brookings.edu/policy2020/votervital/public-
| servi...
| hartator wrote:
| U.S. total public spending is around 40% of the GDP. [1]
|
| [1] https://www.imf.org/external/datamapper/exp@FPP/USA/F
| RA/JPN/...
| hinkley wrote:
| It's sort of like how when developers learn how much they
| cost the company per hour and they get mad about how they
| don't get to take more of that home.
|
| Well, say you work at a company with 100 developers.
| That's who's making the stuff. Everybody else is there to
| make sure the stuff gets made. There's a manager for
| every 6-8 developers (13-17), and there's a couple
| managers for those managers. Add in HR and you're already
| up to about a 25% overhead and we haven't talked about
| equipment and buildings and customer management and
| advertising and litigation and taxes and so on and so
| forth.
| yonaguska wrote:
| By the founders definitions? At least 90 percent of the taxes
| we pay are not fair.
| dennis_jeeves1 wrote:
| I was thinking more along lines of 100% ... But hey, point
| taken taken, we are generally in agreement.
| mellavora wrote:
| What percentage of the services provided by today's
| government were not around at the founding?
|
| I'd very much like to see government downsize, but if you
| want to pay taxes at the level at which the country was
| founded, you also have to restrict government activity to
| that level.
|
| Not sure if that is tenable.
| olyjohn wrote:
| Any tax others have to pay, that I don't.
| ceejayoz wrote:
| > The US was practically founded on principle of refusal to pay
| unfair taxes.
|
| Unfair because of _lack of legislative representation_. One can
| get into a debate over gerrymandering and whatnot, but American
| voters most certainly aren 't an overseas colony under an
| unelected king/queen anymore. There is non-rebellion recourse
| available to citizens if they don't like a tax.
|
| The newborn country (including President Washington himself at
| the head of the army) very rapidly demonstrated it wouldn't
| accept "we don't like the tax" as an argument from
| _represented_ citizens.
| https://en.wikipedia.org/wiki/Whiskey_Rebellion
| phoehne wrote:
| There's actually a pretty good argument to treat software as
| capex. It's an asset that allows you to earn revenue over
| multiple years, and apportioning part of the cost to each year of
| service is sound from the accounting side. Not a popular opinion,
| but this is not as arbitrary, crazy, or hidden deep in the weeds
| of tax law.
| coldcode wrote:
| It's not that that argument has no reason, it's that it is
| suddenly dumped on people without any ability to adjust.
| Similar to a car slowing to 0 from 60 mph over a minute is no
| problem, going from 60 to 0 in zero time is.
| phoehne wrote:
| I think it was part of the horse trade for the 2017 tax cut?
| Fire-Dragon-DoL wrote:
| I thought about that, but it's also true that most software
| without any developers maintaining it goes stale in 1 or 2
| years at most. I'm not sure if amortizing it over 5 years is
| reasonable.
| phoehne wrote:
| The same is true for other things you amortize and those
| maintenance costs are opex. If you don't change the oil,
| filters, spark plugs, etc. on your delivery trucks, they will
| break down before the end of their service life. Stale is not
| the same thing as useless. You might get bored by a game, or
| find the interface "old", but in enterprise environments, 10
| year old software is very common. Heck, 90% of your
| transactions run on a platform first developed in the early
| 1960's.
|
| The 5 year is arbitrary. Arguably, software doesn't really
| break or wear out, so the service life is arbitrary. (That's
| not to say that the OS it's running on doesn't break it
| during an update). 5 years matches the life of the
| capitalized equipment on which it runs. I don't have any
| insight as to the debate around 5 years, but my guess is
| computers are a 5 year asset.
|
| My guess is the rules apply from other assets, where fixes to
| bugs and minor updates are opex as maintenance costs. If you
| make a major change that extends the life of the asset, such
| as remastering a game or refreshing the UI, or adding a
| feature, might be capitalized. This would be like adding a
| lift to a delivery truck or replacing the engine to extend
| its life.
| erik_seaberg wrote:
| I happen to work on a system that launched more than five
| years ago, which at my company is pretty unusual (without
| at least one full rewrite). The teams working on
| generalizing use cases and new features have _expanded_
| every year since launch. Amortization makes sense for
| spreading out the tax deductions on an investment whose
| cost is fully front-loaded, but not on an investment whose
| cost is incremental and continually increasing over the
| entire lifetime.
| phoehne wrote:
| This is not that uncommon. It's a headache for the
| accounting, but if the change materially extends the life
| of the asset or improves the asset, then it has to be
| capitalized. So the schedule would look like 1,000,000
| for the original asset. Then depreciated 200,000 for the
| next year, taking it to 800,000 net of amortization.
| 150,000 of work is added and capitalized. The next year
| there's 200,000 of depreciation expense plus 30,000 from
| the improvements. The same thing happens to other assets.
| If you do it long enough, you amortize off the original
| investment and what you are amortizing/depreciating are
| the improvements.
| erik_seaberg wrote:
| If we spent $1M in year one, we are surely going to spend
| _more_ than $1M in year two because the same teams keep
| working and hiring, and we are incrementally building a
| system whose fully delivered cost as of its last day will
| be over $5M.
| phoehne wrote:
| The costs are usually capitalized until the asset is put
| in service and the amortized expense of the asset plus
| any maintenance can be matched to the revenue in that
| period. This is not different than a building that takes
| years to complete, or even completed in stages when you
| could have construction and occupancy going on at the
| same time. The accounting treatment as an asset doesn't
| require it to be completely built in a year, but until
| there's revenue to which expenses can be matched, you
| capitalize the construction/acquisition cost.
| Aperocky wrote:
| The argument only exist because the one who made the argument
| has never written a line of code in their entire life.
|
| You don't expect the warehouse to grow rooms and additional bay
| with each passing year. The warehouse is a capex, the software
| you bought and expecting to be supported down the line isn't.
| phoehne wrote:
| Really, you've never seen a warehouse complex get added to,
| or a building retrofitted with new loading docks or
| refrigerators? Hospitals are notorious for growing like a
| friggin' plant. They just keep adding wings.
| brentm wrote:
| Couldn't you say that about the salary of any employee working
| on a long term project?
|
| I think the problem is having essentially a tax on software
| development could discourage some investment in that area
| especially from the smaller companies that could benefit the
| most.
| phoehne wrote:
| There are a few tests for whether or not something is
| capitalized.
|
| First, the revenue is earned in future accounting periods.
| For example, you buy a delivery truck. You expect to earn
| money over several years with the delivery truck. To match
| expenses with the revenue generated, a portion of the expense
| of the truck is allocated to each accounting period. If the
| revenue is in the current period, then there's no reason to
| capitalize. For example, fast food worker's wages are not
| capitalized since the revenue is in the current period. The
| warehouse construction worker's salary is capitalized int he
| cost of the warehouse because it will earn revenue for
| several years.
|
| Another test is if it's assignable to the cost of the asset.
| The CFO's salary isn't capitalized as part of the investment
| (unless the company literally does nothing else), because
| there are a lot of projects and it's hard to specifically
| assign. Selling expenses aren't capitalized because 1) the
| asset is complete and 2) they are assignable to the sale and
| not the cost of the asset. Other costs to acquire the asset,
| such as delivery fees, installation fees, insurance, etc. are
| capitalized.
|
| Do you own the asset? If I hire a construction company to
| build a warehouse, they hae nothing to capitalize since they
| don't own the asset. I do.
|
| And material. If I have you write a shell script that we'll
| use for the next five years to copy backups between our
| servers and Azure, and it takes an afternoon, we don't
| capitalize that. It's just not material.
|
| If it's leased for 90/95% of the cost and for 90/95% of the
| useful life, it's capitalized. This prevents companies from
| treating capitalized costs as leasing expenses in the current
| period.
| youngtaff wrote:
| Amortising software development is just stealing from the
| future
|
| It's what software companies do to make themselves seem
| profitable than they are
| phoehne wrote:
| Actually, not amortizing makes them seem more profitable. At
| the end of the life of the asset, the totals are the same.
| However, under one model you show a giant loss, initially,
| and then profits for the next few years. If I expense the
| $1,000,000 in the year of acquisition, and show a 1,000,000
| loss, I then show my revenue as pure profit. Instead, if I
| have to amortize, I show no loss my first year (because the
| cost is on the books as an asset), but profit in future years
| only when my revenue exceeds 200,000 (1/5 the acquisition
| price). This is how all other assets that earn revenue over
| multiple accounting periods are handled. Why should Ford have
| to capitalize a welding robot, but not the software developed
| to control the welding robot?
| keeptrying wrote:
| If there was one useful thing a !@#!@#! VCs could do is help
| police things like this.
|
| Grumble grumble
| nitrosn0w wrote:
| If you're interested in learning more about this topic, check out
| this R&D capitalization guide Neo.Tax put out.
| https://www.neo.tax/blog/a-simple-guide-to-r-d-capitalizatio...
| anonymouse008 wrote:
| Cool - so I made a script that automates emails to outbound
| leads, does this mean my capital asset allocation is my _full
| commission_ since it is the software by which I made the sale? So
| even my normal SGA is now a capital expense?
|
| The law reads as this as a capital expense (anything to do with
| software [0]) - the IRS could use agency level logic to make it
| different, but all this exposes what's wrong with the US.
|
| What about chatGPT scripts? They too are connected to software
| and now a part of almost every workflow?
|
| [0]
| https://irc.bloombergtax.com/public/uscode/doc/irc/section_1...
| DanAtC wrote:
| Previously https://news.ycombinator.com/item?id=34627712
| armatav wrote:
| Ah, the mythical "regulatory capture" I keep hearing about
| sharemywin wrote:
| This seems like a great way to push all your development off
| shore.
| aarondf wrote:
| It's worse if you push it off shore, actually. Overseas
| salaries are amortized over 15 years instead of five.
|
| > The new Section 174 rules require taxpayers to capitalize and
| amortize specified R&E expenditures over a period of five years
| (attributable to domestic research) or 15 years (attributable
| to foreign research)
|
| https://www.grantthornton.com/insights/alerts/tax/2022/flash...
| bbarn wrote:
| If not corrected, the long reaching impact of this could snowball
| very badly in some places. Look at areas in California, which are
| largely economies based on software development. If taxes cause
| those businesses, and jobs to disappear, the impact to
| unemployment, housing markets, etc. could be quite dire in some
| areas.
|
| Even in large business, it could make life for engineers harder.
| Sure, the business can weather the change, but any amount of
| excess staff? Tax liability now and no longer a write off that
| can offset other income taxes. I think it's short sighted to view
| it as a small business only problem.
|
| Which, might actually help it get resolved faster.
| Osiris wrote:
| Why are software developer salaries classified as R&D expenses?
| cryptonector wrote:
| R&D == research and development. Now, what do software...
| developers... do?
| jeffwask wrote:
| Not research and development in the traditional sense which
| was tied to the creation of a new product, drug, etc. It was
| intended to offset the cost and risk of invention.
|
| I would not describe what most software engineers do as
| invention.
|
| Applying this broadly to most software engineers, many who
| are now more akin to digital plumbers than research
| scientists, was a lucky break for however long it lasted.
| HEmanZ wrote:
| I think the issue is that for much software it's not a
| clear distinction.
|
| For a few years of my career, I spent about half of my dev
| time improving a gigantic distributed system. Much of this
| work was inventing a new algorithm somewhere in the stack,
| A/B testing it to see what effects it had, and repeat. Lots
| of algorithm papers and patents came out of it. At the same
| time, I also had to keep the systems running well enough to
| do this, and technically no new customer "product" came out
| of it (although some open source database features did).
|
| Is this R&D? Seems like much is, and much isn't. What do
| you want to incentivize?
| c-hendricks wrote:
| > What do you want to incentivize?
|
| An environment where Americans correctly classify R&D
| instead of just saying everyone's an engineer doing R&D?
| rmah wrote:
| Simply put, they are not. Unless you want them to be.
| Previously, there were some situations which made doing so
| favorable. Now, there are not.
|
| I don't know how contracted/outsourced development payments
| (i.e. non-employee compensation) will be treated.
| aibrahima wrote:
| the good news: your tax strategy *can be optimized* against this
| new tax change.
|
| full disclosure: im the ceo of neo.tax (https://www.neo.tax/)
|
| we anticipated this tax change and built (the only) solution for
| it, because we unfortunately didn't have enough faith in congress
| to repeal it. there's still a small chance it gets repealed, but
| headwinds have only increased.
|
| i'll try to offer some perspective to help, without being self-
| serving (though, candidly, we are more than happy to -- and can!
| -- help everyone)
|
| the good news: your tax strategy *can be optimized* against this
| new tax change:
|
| 1. balance the impact of capitalization with the benefits of r&d
| tax credits
|
| r&d is simultaneously punished with capitalization and rewarded
| with credits ...and to varying degrees! -- depending on revenues,
| expenses, NOLs, etc. the only way to get the optimal tax strategy
| is to solve both at the same time.
|
| in recent years, startups have been claiming the r&d credit
| against payroll taxes, which was subject to a $250k/yr limit and
| stopped once you hit $5m in revenue.
|
| it did not make much sense in the past to claim an r&d credit
| against income taxes, as most startups aren't profitable and
| simply didn't have income taxes to offset. but now -- and this
| blows -- nearly every startup has income taxes to offset.
|
| 2. the irs hasn't offered too much guidance on how this tax
| change works.
|
| for most CPAs, this is a bug. but really, you should think of it
| as a feature. understanding the black and white rules (guidance)
| permits you to navigate them. surprisingly, this leaves a decent
| amount of room for tax strategy to do its thing. the irs has no
| problem that you take full advantage of every tax advantage, as
| long as you report everything accurately, transparently,
| consistently.
|
| 3. don't half-ass this: there's extra scrutiny because the irs
| knows its a big pain point
|
| the key here is documentation, substantiation, and rigor.
| sudohalt wrote:
| Thanks!! This is very informative
| alex7734 wrote:
| Seems like a perfect way to prevent software companies from
| quickly growing their engineer count.
|
| The question is, was this done on purpose?
| brentm wrote:
| It was done as part of the Tax & Jobs Cuts Act of 2017. It was
| probably partly done to help offset some of the taxes that were
| being cut.
| htrp wrote:
| Talk about doing your lobbying in public
| [deleted]
| elzbardico wrote:
| So, cui bono?
|
| Bigger, stablished companies, for them, this is just an anoying
| accounting rule, but they surely have the cashflow to sail
| smoothly over it.
|
| Who is fucked? Workers and small, new companies, and absolutely
| terrible news for job seekers.
|
| For anyone not living under a rock, it is pretty clear that this
| was not an accidental decision.
| m1117 wrote:
| Why the taxes are only growing and never go down? Is there going
| to be a day when they'll be like "We'll reduce taxes"?
| meowtimemania wrote:
| Lots of politicians campaign on tax cuts, they've definitely
| been reduced in US history
| aarondf wrote:
| (I put this in a reply further down, but bringing it to the top)
|
| Previously if a company has a million dollars in revenue and
| spends a million dollars on the salaries of software developers,
| this is how their taxable income might look:
| 1,000,000 Revenue - 1,000,000 Salary expense
| ----------- 0 Profit
|
| The new law would instead work like this:
| 1,000,000 Revenue - 200,000 1/5th Salary expense
| ----------- 800,000 Profit
|
| Now the company must pay taxes on 800,000 of profit because "R&D
| salaries," which includes software devs, must be amortized over
| five years. Obviously the company has no wherewithal to pay,
| given that they made a million and spent a million. That's the
| problem.
| foobarbazetc wrote:
| Also: this specifically singles out software development for
| ??? reasons.
|
| Office Manager: 100% expense.
|
| Software Engineer: 20% over 5 years (actually only 10% for the
| first year).
|
| If they're international then 6.67% over _15_ years.
|
| Not only that, but the effect "stacks" over the years.
| So year 1: 1,000,000 - 100,000
| ----------------- 900,000 Profit Year 2:
| 1,000,000 - 200,000 - 200,000 - 100,000
| ----------------- 500,000 Profit Year 3:
| 1,000,000 - 200,000 - 200,000 - 200,000
| ----------------- 400,000 Profit Year 4:
| 1,000,000 - 200,000 - 200,000 - 200,000
| - 200,000 ----------------- 200,000 Profit
| Year 5+: 1,000,000 - 200,000 - 200,000
| - 200,000 - 200,000 - 200,000
| ----------------- 0 Profit
|
| By the time you get to year 5, you've paid tax on $2,000,000 of
| phantom profits you never had.
|
| If you're a C Corp that's $420,000 in extra federal taxes (plus
| whatever state tax).
|
| If you're a smaller company you're probably a S Corp and
| federal and state tax could be ~50% passed through to your
| personal return.
|
| How any owner survives that, I'm not sure.
| gorkish wrote:
| There are means to offset, defer, and reduce tax burden that
| you also get from doing R&D, so honestly the change in the way
| the salary is treated is somewhat balancing these other tax
| benefits that startups are also taking. It's a balancing change
| to a larger system, not a targeted change to screw startups. A
| comparison over just Year #1 is disingenuous.
| aarondf wrote:
| Let's say you have to pay 30% tax on 800,000 of profit, so
| now you're 240k in the hole. That's your year one! If you
| don't survive to take the future deductions it's kinda moot
| right?
| mjwhansen wrote:
| Only a small portion of activities count as R&D for R&D tax
| credit purposes. R&E is a much bigger category and where the
| problem lies. This write up has a good graphic showing the
| magnitude (scroll halfway)
| https://www.striketax.com/journal/tcja-and-the-resulting-
| tax...
| majormajor wrote:
| After 4 years are you back to where you started? With the fifth
| year stacking on top of the other 200K chunks from the first
| four years?
|
| (If your hiring keeps accelerating I guess not, so major
| scaling of your team would seem to be discouraged by this
| change.)
| pclmulqdq wrote:
| Assuming everything stays the same, this rule actually
| results in marginally lower tax burden (since progressive
| income tax means that 5 years of tax at $800k < 4 years of
| tax at $1 million). Assuming that it changes, no. In a worst
| case scenario, you may be paying a lot more if you do most of
| your development in a peak year and then lose the revenue
| stream later.
| majormajor wrote:
| I would assume you aren't laying off your whole staff after
| year 1, so the comparison if costs stay the same seems like
| this instead?
|
| Old:
|
| Year 1: 0 Profit
|
| Year 2: 0 Profit
|
| Year 3: 0 Profit
|
| Year 4: 0 Profit
|
| Year 5: 0 Profit
|
| New:
|
| Year 1: 800K Profit
|
| Year 2: 600K Profit
|
| Year 3: 400K Profit
|
| Year 4: 200K Profit
|
| Year 5: 0 Profit
|
| E.g. stack another amortized round of annual salary each
| time.
|
| Even if revenue stays the same but costs increase, your
| Year 5 total for each is "X Profit" where X is the amount
| of revenue delta from Year 1 to Year 5?
|
| If rapid hiring growth followed by layoff scenarios, you
| are worse off here: you pay the tax on the hiring boom for
| at least the first year or two before your revenue might
| drop enough to make it not matter?
|
| If you're further away from profitability, it's maybe still
| a wash.
|
| Hire up to 10 Million in salaries in 1 year, but your
| revenue after 2 years is just 4M - you're still under the
| window. You only get hit by the difference in the bill if
| your revenue accelerates a lot (which is an OK problem to
| have)?
|
| So on one hand it seems like it could reduce poorly planned
| impulse hiring by spreading out the costs, but on the other
| hand the "run big losses until we make it" plan is less
| affected anyway because of the "big" in "run big losses"...
| so it seems to hurt the sustainable folks more in that
| case.
| jdmichal wrote:
| The flipside is that that 5-year amortization continues
| even if you did fire everyone, right? Because the costs
| already happened. So if we consider forward from year 5
| of your example, with everyone being fired at year 5:
|
| Old:
|
| Year 6: 1000K profit
|
| Year 7: 1000K profit
|
| Year 8: 1000K profit
|
| Year 9: 1000K profit
|
| Year 10: 1000K profit
|
| New:
|
| Year 6: 200K profit (End of year 1 amortization)
|
| Year 7: 400K profit (End of year 2 amortization)
|
| Year 8: 600K profit (End of year 3 amortization)
|
| Year 9: 800K profit (End of year 4 amortization)
|
| Year 10: 1000K profit (End of year 5 amortization)
|
| Of course this "wind-down" period is unhelpful if you're
| actually shuttering the business...
| taxopinion wrote:
| You didn't generate an additional $1m in revenue in years
| 2-5. So in a situation where you get paid a $1m contract
| once, and pay $1m in salaries every year, here's what
| happens.
|
| Year 2022: $1m revenue, -$1m expenses amortized to $200k:
| $800k profit, approximately 20% ($160k) is paid to tax.
|
| Year 2023: -$1m expenses amortized to $200k, previous
| year's $200k: -$400k loss, carryforward. You cannot
| carryback 2023 losses to 2022 taxes.
|
| The carryback is how Congress will resolve the issue for
| people who paid the tax.
|
| The dispute is that you paid $160k in tax in year 1. Is
| that inefficient? In my opinion, it is. You paid $1m in
| salaries!
| jdminhbg wrote:
| > (since progressive income tax means that 5 years of tax
| at $800k < 4 years of tax at $1 million)
|
| This is corporate tax, not income tax, so is not
| progressive.
| pclmulqdq wrote:
| It's not progressive as of 2018, but it may return to
| being progressive over the next 5 years.
| jdminhbg wrote:
| It might, or it might be cut across the board, meaning
| you paid more by having profit recorded during a time of
| higher rates. Congress can do anything with those rates.
| pcthrowaway wrote:
| At the same time, wouldn't it discourage reducing headcount
| (or at least headcount expenditure) for companies with
| roughly flat or linear revenue growth (see all the big tech
| layoffs), because you'd be paying more in taxes next year,
| etc. ?
|
| edit: never mind, I completely misunderstood. It really only
| seems to harm "moonshot" companies; big tech and sustainable
| companies appear to be largely unaffected. If anything they
| may benefit as it will be more costly for upstarts to try
| competing
| medellin wrote:
| I was wondering how the end of highly paid engineers like
| myself would come to an end. Maybe this is it.
| dpifke wrote:
| Even worse: amortization under SS 174 begins at the mid-point
| in the year in which the expense was incurred, so it's actually
| 1/10th salary expense in the first year (6/60 months).
|
| I have a favor to ask HN: is there anyone going through this
| that would be willing to share a redacted version of their
| accounting change statement[0] required to comply with this law
| by Rev. Proc. 2023-11? It's not at all clear to me (not a CPA
| or tax lawyer, but normally perfectly capable of doing
| bookkeeping/accounting for my single-member LLC) how specific
| _" (D) a description of the type of expenditures included as
| specified research or experimental expenditures"_ is supposed
| to be. I filed an extension today because I'm now second-
| guessing what I wrote; my Google-fu has thus far turned up zero
| examples of a CPA-blessed version of this statement. (Probably
| because one of the other statutory requirements is that it
| includes the taxpayer's identification number.)
|
| [0] Rev. Proc 2023-11: https://www.irs.gov/pub/irs-
| drop/rp-23-11.pdf [PDF]
| Terretta wrote:
| Ok, but in year five, it would look like this again:
| 1,000,000 Revenue - 1,000,000 1/5 Salary expense x 5
| years rolling ----------- 0 Profit
|
| So really, it's removing (deferring, or peanut buttering) the
| startup and ramp up "invent new things" subsidy, while not
| really affecting steady state R&D if you're not growing talent
| ahead of revenue.
|
| So even in year 5, it's an adverse incentive for putting
| new/more talent to work.
|
| Even big business may not be able to make as many growth
| project budgets work.
| whimsicalism wrote:
| Startup subsidy?
|
| This seems to be penalizing competition and new competitors,
| for literally no reason.
| RhodesianHunter wrote:
| No reason? Regulatory capture is the reason.
| robomartin wrote:
| No
|
| Year one: You go broke. Everyone loses their jobs. You file
| for bankruptcy. Game over. There is no year 5.
| ricardobayes wrote:
| European software companies don't go broke and AFAIK they
| have 0% tax credit for salaries (in most countries, I know
| there are some R&D schemes in UK).
| l33tman wrote:
| In Sweden, salaries are 100% deductible. You pay company
| taxes on the profit you make. There is an _option_ to
| capitalize some R &D expenses if you can show that they
| are directly responsible for a future asset that you can
| set a value on (like, a startup where all engineers work
| on a single product).
| JamesBarney wrote:
| You think European software companies count software
| engineering salary expenses as profit that they are taxed
| on?
| coldtea wrote:
| > _European software companies don 't go broke_
|
| They don't do that well either. Which is perhaps why the
| biggest ones are all American
|
| > _they have 0% tax credit for salaries_
|
| At least in some countries I know that's totally wrong,
| but depends what you mean by "credit". Salaries are
| expenses, are not counted in profit.
| kgwgk wrote:
| > 0% tax credit for salaries
|
| I don't think that's what's being discussed here. The
| question is whether salaries are (completely) expensed
| immediately (reducing profits) or whether they are
| (partly) capitalised (which will reduce profits later but
| not now).
| aarondf wrote:
| We're not talking about a tax credit at all though...
| We're talking about being able to deduct salaries paid.
|
| A tax credit is usually an incentive, like if you spend
| 10k on solar panels you get to deduct the 10k and then
| the government might say "hey thanks for pushing
| renewable energy, deduct an extra 2k from your tax bill."
| That's a credit, which we're not discussing here.
| uoaei wrote:
| Unconstrained growth is not tolerated anywhere else, but
| somehow people bend over backwards to explain how actually
| any constraints on business growth are Very Bad And Evil.
| AnotherGoodName wrote:
| Unsustained growth is just one type of growth though and
| this affects all growth so I don't see you point as
| relevant here.
| taxopinion wrote:
| The lack of specificity in your little table should
| illuminate for you why this is such a complex issue to
| comprehend. I understand there is some fictional, meaningless
| interpretation hidden inside your head where that table is
| "right," but for all normal interpretations, it's wrong.
| cj wrote:
| IANAA, but very important to remember that:
|
| 1) R&D classification of a single employee should be a
| percentage. Accountants don't list employees one by one on a
| tax return, they're grouped together and a percentage of their
| wages can be allocated to different functions of a business
| outside of R&D.
|
| 2) A lot of things do not qualify as "R&D". For example...
|
| - Fixing bugs
|
| - Maintaining existing features
|
| - Improving existing features (even enhancing functionality)
|
| - Building a feature because sales promised it to a customer
|
| - Refactoring code
|
| - Anything related to devops/infrastructure, upgrading servers,
| updating dependencies
|
| - Anything related to customer support, onboarding or retention
|
| - Anything related to helping Sales/Marketing close new
| business or get more leads
|
| - Anything related to supporting day-to-day business operations
|
| I'm not an expert, but I think it will be relatively easy for
| accountants to do some magic behind the scenes by classifying
| only a small percent of wages toward R&D.
|
| I think the average engineer spends less than 20% of their time
| on "true" R&D, and if that's the case, 80% of wages can be
| deducted as an expense without amortizing.
| hinkley wrote:
| It would be interesting if this reintroduced "10% time" with
| strict wording about not working on R&D in your 90% time.
| Just to simplify the labor involved in calculating it.
| ativzzz wrote:
| > I think the average engineer spends less than 20% of their
| time on "true" R&D
|
| Based on all of the items in #2, the average software
| engineer spends close to 0% of their time on R&D - with rare
| exceptions for those working on cutting edge tech, in
| research roles or maybe super senior engineers figuring out
| how to solve complex technical problems
|
| The rest of us just write code and sit in meetings
| dahfizz wrote:
| Do you have a source for this? The law seems pretty clear to
| me:
|
| > ANY amount paid or incurred in connection with the
| development of ANY software shall be treated as a research or
| experimental expenditure.
|
| https://www.law.cornell.edu/uscode/text/26/174
| nokcha wrote:
| I guess there might be a distinction between "development"
| of software and "maintenance" of software (e.g., bug
| fixing, refactoring, etc.)?
| bcrosby95 wrote:
| Lol. It was literally a bunch of politicians trying to
| force through something, and this was a budget trick they
| could use to get it through. Do you really think any of
| them were thinking through the finer nuances of software
| development?
| grumple wrote:
| There's a very important clause immediately before that
| though: "For purposes of this section".
|
| Also the parent clause says: "In the case of a taxpayer's
| specified research or experimental expenditures for any
| taxable year--"
|
| So just don't specify the expenditures as research or
| experimental if you don't want this section to apply.
| chrisfosterelli wrote:
| There's a lot of attacking in this thread from people who
| haven't bothered to think about the math. It's an existential
| risk to some companies, and one that wasn't more widely planned
| for because it wasn't even believed to be intended to actually
| occur.
|
| Most tax experts considered the removal a budget gimmick so
| that the 2017 December republican majority could quickly pass a
| new budget using the budget reconciliation process, which can't
| be used to increase the deficit after a 10-year period so they
| had to add a time limit to a bunch of benefits "on paper" to
| use the reconciliation process. There appeared to be broad
| support for fixing it later, but the bipartisan spending bill
| expected to include it fell apart because they couldn't get
| agreement on other parts of it.
|
| To the best I can tell this isn't tech companies complaining
| about paying fair tax; it's a congressional oversight that is
| quadrupling the taxes of small business out of nowhere which
| nobody in power has bothered to fix.
| fredgrott wrote:
| It gets worse, we do not reach true majorities in the House
| and Senate until 2030. Thus until then budgets get passed
| under budget reconciliation.
| missingcolours wrote:
| I understand the arguments for it, and maybe even on net it's
| beneficial because it prevents other bad things from
| happening, but the amount of byzantine dysfunction that's
| downstream of the United States Senate Filibuster rule is
| really something to behold.
| bradleyjg wrote:
| The filibuster continues to exist each new day because a
| simple majority of senators continue to want it to exist.
| Don't let that majority off the hook for anything by
| pointing to a rule they could remove at will.
| brightball wrote:
| IMO doing anything at the federal level should require a
| supermajority anyway. The country shouldn't swing back
| and forth due to a simple majority. If a supermajority
| can't agree, leave it to states.
|
| We would all be a lot better off.
| dahfizz wrote:
| What other bad things does this prevent from happening? I
| can't think of anything, unless you think double-taxing
| income is good.
| yamtaddle wrote:
| To the extent that the filibuster's beneficial, I'd say
| it's only so because of our bad electoral system that
| stabilizes at only two viable parties, and sometimes
| results in minority rule.
| ChrisLTD wrote:
| The filibuster guarantees minority rule, in the Senate.
| abirch wrote:
| The Senate enables minority rule due to state size as
| well. Unfortunately we're hostages of the past
| pc86 wrote:
| The Senate doesn't represent people, it represents
| States. The Representation is exactly equal, as intended:
| 1 State == 2 Senators.
| dragonwriter wrote:
| No one is questioning that it is working as designed.
|
| That something is working as designed is not an
| endorsement if the design is bad.
| yamtaddle wrote:
| Right, there are two failure modes in the US governmental
| system, basically:
|
| 1) Things the founders got wrong _on purpose_. We 've
| fixed a bunch of these, by e.g. broadening the franchise
| and ending chattel slavery with that whole Civil War
| thing. The way our Senate is composed is arguably an un-
| fixed one of these--it's that way on purpose, but it's,
| you know, _bad_.
|
| 2) Things they got wrong by accident. These are usually
| cases where politicking, application of game theory, and
| bad actors in general conspire to make things work
| differently than they were intended. This is stuff like
| the system stabilizing at two viable political parties,
| and the way the electoral college has worked in-practice
| almost from day one (but _not_ the way the electoral
| college favors low-population states, because that part
| was on purpose, so would go under point 1 if we 're
| regarding it as an error)
| Matl wrote:
| As a non U.S citizen, sounds like a state with a million
| residents is represented as much as a state with 10
| million residents. Not sure that's fair, be it I get you
| don't want to be underrepresented based on where you live
| either.
| gopalv wrote:
| > minority rule, in the Senate
|
| If you look away from the senators and consider the
| people the senators represent, it was intended to be even
| without the filibuster.
|
| But what should be truly opposed is the cowardly way in
| which the filibuster is done today.
|
| You should make 41 people vote against the bill, on
| record with their names, then go back to their
| constituents and explain why they did it in a town hall
| sometime soon.
|
| Right now a senator can rely on the fact that their re-
| election is five years away when killing a bill which is
| supported by their constituents.
|
| 41 of them cannot assume they have years for the public
| to forget their vote on this particular thing (like
| hurting small businesses by inaction too).
| overboard2 wrote:
| The one person performing a filibuster is presumably
| doing so very much on record, complete with soundbites.
| dataangel wrote:
| Yes but you have that be the person in the safest seat.
| sp332 wrote:
| Not since 1972.
| https://www.cnn.com/2021/03/17/politics/filibuster-joe-
| biden...
| rpearl wrote:
| No, fillibusters are a matter of procedure now. Nobody's
| standing up there talking to perform a fillibuster
| anymore.
|
| From https://constitutioncenter.org/blog/filibustering-
| in-the-mod...
|
| "When a Senator signals the intent to filibuster, an
| informal cloture process starts to determine if 60 votes
| exist to move a measure forward in two ways. One cloture
| vote is to approve a motion to consider a measure; the
| second vote is on the actual measure. If either cloture
| vote fails, the measure remains in limbo. "
| yamtaddle wrote:
| That's not the kind anyone means anymore, at least when
| it comes up in relation to the US Senate. They generally
| don't _actually_ filibuster, they place a procedural hold
| that requires 60 members to agree to override it.
| lumost wrote:
| This is where the insanity really started. It used to
| require 8-20 senators to _physically_ filibuster to
| actually kill a bill. On a major bill, the small number
| of senators also risked reputations harm from the sound
| bites of them reading their phone books.
|
| Now anyone can start a filibuster, it largely goes
| unrecorded - and pressure for party unity prevents it
| from being killed.
| [deleted]
| yamtaddle wrote:
| Yes, but it also means that the minority is less
| effective when it gains an _electoral_ majority and takes
| 'hold of the gavel. That makes it harder for them to,
| say, change things to further entrench minority rule--
| which is real problem in several state-level governments.
| adamsb6 wrote:
| A supermajority threshold requirement is not minority
| rule. It's supermajority rule.
|
| Minority rule would be if 40% of the Senate could pass
| laws at will.
| [deleted]
| filibustedbyD wrote:
| This is why the civil rights act was never passed, and
| schools in the US are still segregated to this day,
| because Sen Byrd (D) filibustered
| fwungy wrote:
| The founders designed a system that was slow to act on
| purpose. They did not want a strong federal government.
|
| Given how difficult it is to predict policy outcomes this
| is probably a good idea. Even if a collection of policies
| are good on the individual level there is no way to
| figure out if the interaction will be net positive, nor
| if the cost of remedy reverses the calculus.
| chiefalchemist wrote:
| > The founders designed a system that was slow to act on
| purpose. They did not want a strong federal government.
|
| Spot on. Yet we continue to insist on using the system in
| a way (i.e., overly strong fed gov) that it's not good
| for. This isn't a Dem or Republican issue. It's history.
|
| And the more taxes Uncle Sam collects, the stronger and
| more bloated he gets. At some level we need to come to
| terms with the fact that we're using a screwdriver as a
| hammer. That doesn't work well. Ever.
| candiddevmike wrote:
| But now we have a strong federal government that can't
| agree enough to keep up with the needs of it's citizens.
| The worst possible outcome, IMO.
| SoftTalker wrote:
| Or perhaps the predictable outcome?
| carom wrote:
| The problem now is that the government is large and it is
| nearly impossible to shed the cruft that has accumulated.
| datavirtue wrote:
| Nothing ever gets shed or revised. The stale regulatory
| agencies are captured, corrupted, and stale/weak.
|
| OSHA has no teeth (they are just a nuisance to the
| scofflaws)
|
| FTC is underpowered
|
| EPA needs shut down
|
| FDA is on record for enabling very harmful medical
| devices
|
| I remember something about Boeing colluding with
| regulators to put people in harms way.
|
| I could hop on a search engine and dig up a tome-worth of
| completely unacceptable shit from the last 40 yrs in this
| regard.
| yamtaddle wrote:
| The size is less a problem than our system stabilizing at
| two viable parties, both of which would stand to lose a
| great deal of power if they actually _fixed_ some of the
| core problems with the Constitution.
| coliveira wrote:
| That might had make sense 200 years ago when Fed
| government was small. Nowadays it is a slow death
| sentence to the country.
| pc86 wrote:
| "Weak government made sense when it was small but we made
| it bigger so we should make it stronger now too" is
| certainly _a_ take, but not a particularly good one.
|
| The vast majority of things the government touches turn
| to shit, including things with wide bipartisan support.
| How does making government able to do more, faster, fix
| that?
| nemothekid wrote:
| > _The vast majority of things the government touches
| turn to shit_
|
| Overtime I've really begun to see this as propoganda that
| Reagan invented based on little to no empirical data. I'm
| not convinced that the government is anymore
| dysfunctional than any large corporation. The belief that
| the everything the government touches turns to shit does
| far more harm than good; and furthermore gets in the
| federal government's way of actually solving problems.
| The federal government may have a problem with incentives
| (like any corporation), but it's hard for me to believe
| they are inept. It ends up being a self fulfilling
| prophecy - the government tries to do something, a
| hundred road blocks are put up for fear of ineptitude,
| then when the government is slow due to said roadblocks,
| they are called inept. When those roadblocks are removed
| - for example in the vaccine distribution of 2020, it's
| clear that the government is capable of good outcomes.
| Millions of highly controlled and sensitive vaccines were
| deployed across the country in only a couple months under
| an administration that nearly became hostile to its
| deployment.
| 8675309t wrote:
| [flagged]
| yamtaddle wrote:
| Several features of or accidents-resulting-from the US
| constitution amount to that. With the added "fun" that
| they also create a system in which fixing any of them is
| unlikely, from within the system.
|
| There's a reason even _we_ don 't tend to push a US-style
| system on fledgling democracies, when setting them up.
| It's got well-known, grave, fundamental, and avoidable
| flaws.
| coliveira wrote:
| The big problem is that neither party in power wants to
| change the system. After all, they're beneficiaries and
| creators of the status quo. This could only change if
| somehow a new party emerged, which is quite unlikely.
| yamtaddle wrote:
| Right, that's why, despite its being about as close to a
| dull, settled fact in policy-wonk and poli-sci circles as
| anything is, that the US system sucks in about a dozen
| important ways that other modern democratic systems do
| not, we _cannot_ fix it.
|
| The system is broken in ways that _prevent fixing that
| very brokenness_. We know exactly what 's wrong, but
| can't do anything about it. You'd have to get a whole
| bunch of people whose personal power is tied up with the
| status quo, to, all at the same time, vote to weaken that
| power _and the power of the organizations that put them
| where they are_. Or you 'd have to get at least some of
| the states that benefit from the brokenness to agree to
| weaken themselves. Neither is likely to _ever_ happen--
| short of some very risky and probably-bad-rather-than-
| good developments that are more likely to end in
| authoritarianism than an improved democracy.
| jimbob45 wrote:
| Quite the opposite! Scalia had a great speech[0] where he
| argued that our Constitution is weak compared to other
| nations of history but had outlived those nations because
| of its slow nature to act. The point being, it doesn't
| matter how great your constitution is if your country is
| dead.
|
| [0]https://www.youtube.com/watch?v=Ggz_gd--UO0
| jussaying2 wrote:
| > it doesn't matter how great your constitution is if
| your country is dead.
|
| Why is the longevity of a nation more important than the
| values it stands for (as laid down in its constitution)?
| One could argue that it's better to have a great
| constitution that treats its citizens equally and fairly,
| even if the nation is short-lived and eventually
| disintegrates into smaller nations.
|
| The interpersonal equivalent of this would be "It doesn't
| matter how great your relationship is if your marriage is
| dead". I'm not sure many would agree with keeping a
| marriage alive at any cost.
| downWidOutaFite wrote:
| The founders added a bunch of checks and balances but not
| the filibuster. The fillibuster was more of a gentlemanly
| agreement until the 1970s and it wasn't until the Obama
| era that it was regularly used on almost every single
| vote.
| lesuorac wrote:
| Sure, the founders in 1776 desired a weak federal
| government.
|
| But the writers of the constitution in 1788 wanted a
| strong one because the existing weak one sucked.
| bluGill wrote:
| The founders in 1776 were happy with things in 1788 and
| generally opposed the constitution. After reading the
| articles of confederation (yes I actually did that),
| there are some things that should have been cleaned up,
| but overall I think it was a good enough system that
| didn't need to be replaced.
| tomrod wrote:
| It wasn't, then or in the 1860s, hence the strong,
| modern, adaptive federalism we have today that treats
| states as provinces and makes important things move
| quickly.
|
| One could squint and say states matter today, but that's
| just admitting a need for glasses. They are ghosts of
| what they were, and increasingly need to be retired.
|
| It will be nice when we put to pasture the policy-as-
| experiments across states for things that are clearly
| universally demanded: finance, health insurance, women's
| medical care, education, defense, gun control, decreased
| corporate control of the food supply, transportation,
| environmental regulation, and so forth. It's amazing how
| much the modern GOP has pushed folks towards this, may
| they continue their business Republican-led shenanigans
| to unite the country and encourage progress when
| otherwise we would be slovenly.
|
| Why is this the case? Duplication of fixed costs are
| expensive.
|
| Let's get rid of these crufty overindulgent home-owners-
| associations-on-steriods and federalize already.
|
| (paragraphs 1, 4 serious, the rest in jest)
| lesuorac wrote:
| While paragraph 3 may be in jest, the non-standization
| meant that some states did allow women to vote long
| before it was constitutionally mandated. Of course it
| also meant some people were enslaved long before it was
| explicitly constitutionally allowed.
| tomrod wrote:
| Something said in jest may yet contain elements of truth!
| :)
| bugglebeetle wrote:
| That only makes sense if you think slavery should've
| never been abolished. How would it have ended under the
| Articles of Confederation?
| fwungy wrote:
| It would have ended because the Industrial Revolution
| made slave labor un-economic, in the worst case.
|
| Modern capitalists prefer seasonal labor for agriculture.
| They don't have to feed/clothe/house people year round,
| and have no personal investment. Seasonal migrant
| agriculture labor cheap and easily exploited, with little
| legal protection. Slaves, like domestic a nimals
| (reprehensible as that simily is), must be treated well
| enough to keep working productively. There is no such
| need with migrant labor. If they are abused or killed it
| is easy to sweep under the rug. There'll be new migrants
| available next year.
|
| NOTE: I'm not saying slavery is good, or even better than
| migrant labor. They are both highly unethical if you
| consider how corporations treat migrant labor today.
| bugglebeetle wrote:
| > It would have ended because the Industrial Revolution
| made slave labor un-economic, in the worst case.
|
| ...except slavery still exists all over the place in
| industrialized countries? There's nothing incompatible
| between industrialization and slavery, as myriad historic
| and contemporary examples have shown.
|
| https://www.walkfree.org/reports/global-estimates-of-
| modern-...
| SoftTalker wrote:
| The system the founders designed didn't even have an
| income tax. We should go back to that.
| cipheredStones wrote:
| 1. The much-mythologized founders disagreed on how strong
| the federal government would be; the first political
| parties were the Federalists and Anti-Federalists
| (technically the Democratic-Republicans, but carrying on
| that same ideology).
|
| 2. Filibusters are not in the Constitution, weren't
| possible for decades after it was signed, weren't used
| for half a century after it was signed, and didn't become
| the "sixty votes required for anything" tool they are
| today until 10-15 years ago. The founders had nothing to
| do with it.
| pirate787 wrote:
| You're incorrect, the first filibuster was 11 years after
| the Constitution was ratified and have been common since
| 1917 and common in their current form since 1970 (that's
| 53 years not 10-15)
|
| https://en.wikipedia.org/wiki/Filibuster_in_the_United_St
| ate...
| ajmurmann wrote:
| Using the filibuster the way it's used now and not
| actually trying to come to a compromise is definitely
| new. It's not something that changed about the rule
| itself, but about the way it's used. See the graph in
| this article:
| https://www.statista.com/chart/25929/number-of-senate-
| filibu...
|
| IMO it all comes down to the insight that the opposition
| party has nothing to gain from cooperating. If something
| good gets passed, the majority party gets the credit. If
| nothing gets passed, the majority party gets the blame,
| regardless details how that outcome was achieved and what
| role the minority party played. So blocking everything is
| the best strategy. IMO, it's disgusting to have
| politicians put party over country, but here we are.
| lumost wrote:
| I wonder if there has been a change in how senators are
| judged by their constituents. We're they judged on their
| individual records rather than party records in the past?
| [deleted]
| freedomben wrote:
| Not coincidentally, 10 to 15 years ago is around when
| people started viewing the "other" party as "evil." You
| can justify a lot of behavior when you declare yourself
| full of righteous indignation.
| Workaccount2 wrote:
| Good, maybe we can claw back some of the egregious amounts of
| PPP money handed out without at all being necessary.
| AdamH12113 wrote:
| Thank you for providing the actual political context. It is
| much more helpful to know who did this and why then to
| complain about an amorphous and unchanging "Congress".
| [deleted]
| taxopinion wrote:
| > ...it wasn't even believed to be intended to actually
| occur... which nobody in power has bothered to fix.
|
| One way to think of libertarians is that they do secretly
| want all the same levers of political power, they just want
| different people in charge (themselves).
|
| So while I am not endorsing a specific person, consider this
| next time you dismiss outsiders out of hand. Some people
| really do pay more correct attention to shit than all elected
| people in both parties in our government. It seems valid to
| complain about "amorphous" government sometimes.
| pc86 wrote:
| What does any of this have to do with libertarians?
| kazinator wrote:
| More like: 1,000,000 Revenue -
| 1,000,000 Salary expense # this does not magically shrink to
| 200K - 200,000 tax on revenue (random percentage out of
| a hat) ----------- (200,000) In the red!
|
| If paying salaries isn't an expense you can write off, you
| still have to pay all those salaries, and then pay tax on the
| money used for those salaries.
| alchemist1e9 wrote:
| I don't think you understand amortized expense accounting and
| income tax, you have a line item labeled tax on revenue.
|
| What you are showing is cash flow not the income statement
| and also you don't understand the tax is based on the income
| statement and not the salaries being paid or the revenue, but
| the calculated income for tax purposes.
|
| In the 2nd year it will be 2/5ths, $200K, amortized expense
| of prior year plus current year, assuming same numbers, and
| by the 5th year would be full amount.
|
| Your cash flow is correct and yes it becomes -$200K which is
| really bad. However I wanted to clarify the mechanics.
| kazinator wrote:
| Here in Canada we have similar fractional write-offs called
| CCA (capital cost allowance). That's for assets though,
| like a company building, car or equipment.
|
| I've written an accounting system before for business
| activities and successfully used its reports to win a tax
| dispute.
|
| I'm not so interested in the details of this, particularly
| because it's in another country, but I do understand the
| implications of suddenly not being able to entirely write
| off the likely most important and large business expense.
| alchemist1e9 wrote:
| Ok so you understand but your original comment, before
| you changed it, talked about a tax on revenue, which
| isn't accurate.
|
| I also wrote my own accounting systems based on ledger-
| cli and regularly deal with amortization of assets.
|
| The change is extremely bad and I'm not trying to say
| otherwise. Just wanted to clarify the exact calculation
| and difference between income statement and cash flow
| calculation.
| aarondf wrote:
| Yeah that would be the cash flow, my example was taxable
| income. But yes, that's the whole problem!
| fnordpiglet wrote:
| I've not read all the comments but I'd note that this issue
| becomes less serious every year as you build a pipeline of
| amortization. Assuming 1mm stays the same YoY in 5 years you're
| paying no taxes again. Each year taxable income reduce by a
| further $200k until year 5. That provides no relief now but
| even without action it resolves eventually - except for new
| firms.
| KMag wrote:
| ... growing firms are also penalized. Also, if a company goes
| bankrupt (like the majority of companies), those last 4 years
| of amortization just go into the government's pocket. Even if
| you could ignore the time value of money, it doesn't actually
| even out over the long run.
| fnordpiglet wrote:
| Yes. It also penalizes shrinking firms as you simply lose
| the benefit of amortization if you can't use it.
| servercobra wrote:
| > Assuming 1mm stays the same YoY in 5 years
|
| That's a pretty big assumption.
| RhodesianHunter wrote:
| But the first year is the hardest...
| adrr wrote:
| Something is getting lost translation here. You can capitalize
| certain projects of that meet a certain threshold. I can't
| capitalize something as trivial as changing some colors. The
| capitalization is based on the expected lifespan of
| deliverable. Web pages is like 2 years. Bug fixes/maintenance,
| and project management are not capitalizable and its common to
| use 80/20. Public companies want to capitalize everything to
| improve earnings and kick up their stock price but they are
| kept in check by auditors.
|
| How is this going to change?
| aarondf wrote:
| As it relates to developer salaries, you don't have an option
| to decide if you're going to capitalize or immediately
| expense. With this bill, you _must_ amortize over five years.
|
| You're talking about deciding whether or not to capitalize a
| laptop, a piece of equipment, a vehicle, etc, and over what
| period. There's lots of guidance for that. This is very
| specifically affecting the salaries you pay software
| developers.
| adrr wrote:
| I just figured out the disconnect. This is only for tax
| reporting and not financials. This is going to be fun.
| loandbehold wrote:
| Do these companies have an option of moving overseas to avoid
| this?
| dataangel wrote:
| What is the rationale for amortizing R&D expenses in general?
| Even outside software, what is the motivation for this?
| RC_ITR wrote:
| This is disingenuous though, because they would also have 4
| other years of salaries to amortize.
|
| If anything HN should be cheering this law since it
| incentivizes growing your R&D team quickly and consistently.
| aarondf wrote:
| If you make a million and pay a million in salaries, you have
| no cash left, right?
|
| But! You get to pay taxes as if you made 800k in profit. So
| lucky you, you have zero dollars and now you get to pay
| 240,000 in tax (800k * 30%) to the government.
|
| You're now 240k in the hole. Game over, no year two, three,
| or four.
|
| This doesn't affect venture funded companies as badly because
| they have millions in funding and they can ride out the
| amortization. It does, however, affect bootstrappers trying
| to start a thing. Perhaps you could call them small, indie
| hackers?
|
| If anything, HN should not be cheering this law as it doesn't
| affect large incumbents and those with millions in VC
| funding, but crushes the little guys.
| RC_ITR wrote:
| We aren't supposed to ask direct questions on here, but you
| "get" that a company charges 20% of each of the past 5
| years, right?
|
| Like, we agree that's what depreciation/amortization is,
| right?
|
| So this most affects companies that have a relatively large
| R&D org relative to the past few years (aka my point about
| growing R&D ahead of other functions).
| aarondf wrote:
| I'm a CPA, so I super do get it.
| tempsy wrote:
| Seems like a big deal but have not heard it come up til now?
| Maybe cause tax season?
| gamblor956 wrote:
| It's not a big deal because this change affects very few
| companies outside of Silicon Valley and it only affects
| companies at the start of the R&D process.
|
| After 5 years, the tax impact evens out to be the same as
| currently expensing R&D salaries.
|
| And generally, software companies have gotten the benefit of
| the R&D credit even for things would not have qualified for
| the R&D credit if it had not involved software, so this
| change was merely seen as correcting a tax loophole that the
| software industry has been exploiting (and arguably abusing)
| for several decades.
| aarondf wrote:
| It very much affects bootstrapped companies building a
| software product. I'm not sure where you got the idea that
| it only affect Silicon Valley companies?
|
| If you bootstrap your company to the point where you can
| afford one engineer's salary, you can only deduct 20% of
| that against your revenue. I.e. you've paid out all the
| cash and but you still have to pay taxes on the 80% that is
| not allowed to be expensed this year.
| winter_blue wrote:
| This sounds like sheer madness.
|
| Does anyone know what the situation is in other countries (in
| particular, in Canada) for the same situation as above?
|
| One option companies have, if this isn't fixed, might be to re-
| incorporate, or relocate their company to Canada[1].
|
| [1] Assuming Canada taxes sensibly (and allows R&D or developer
| salaries to be deducted).
| dh2022 wrote:
| Canadian corporate taxes are quite a bit higher than in the
| US - 33% vs 21%. So not an easy decision...
| sangnoir wrote:
| Is it mandatory for software companies to classify engineer
| salaries as "R&D"? I haven't yet gotten an answer for this each
| time this issue comes up.
|
| I know it used to be advantageous due to the R&D amortization
| period, and I feel this was abused in cases were there was
| effectively no research or development (in the traditional
| sense). How is your example materially different from a
| furniture shop that has similar revenue & salary numbers, but
| previously wasn't able to amortize salaries as "R&D"?
| ricardobayes wrote:
| Honestly this whole thing looks like a huge tax loophole, now
| being closed. I don't know of any jurisdiction (apart from
| the US, apparently) which allowed 100% non-amortized tax
| credit for loosely defined R&D salaries. No wonder everyone
| and their dog started software companies in the US.
| indymike wrote:
| It is not. If I pay a worker to frame up a house it is an
| expense. If I pay a swe to frame up a mobile app it is R&D.
| Again NOT a loophole.
| noughtme wrote:
| ?
|
| Are you just framing up a mobile app for funzies?
|
| Wouldn't it be a professional service, therefore an
| expense, therefore fully tax deductible?
| agwa wrote:
| No, that's what's changing and it's why everyone is
| freaking out - software development is no longer a fully-
| deductible expense.
| noughtme wrote:
| Sorry, I couldn't tell which side of the argument you
| were on, so I was curious if there were good reasons to
| defend the proposed change.
| nine_k wrote:
| Maybe it was the point? Didn't you notice that the US
| gained certain lead in software technologies?
|
| The developers, who are paid rather handsomely, also pay
| rather large amounts of taxes from their salaries. (If
| fired and jobless, they stop doing that.)
| coldtea wrote:
| Well, salaries are expenses though. And software
| development is not necessarily R&D, so if 99% of software
| development has to be classified as such, that's a problem.
| agwa wrote:
| We are not talking about a tax credit here, but a
| deduction.
| dahfizz wrote:
| What jurisdiction doesn't count employee salaries as an
| expense?
|
| Salaries are already taxed as individual income. Taxing
| them as corporate profits _and_ individual income is not
| closing a loophole, its double-taxing.
| 1vuio0pswjnm7 wrote:
| 100%
| avsteele wrote:
| This is misinformation. You owe this tax even if you do not
| claim any R&D tax credit.
|
| https://www.grantthornton.com/insights/articles/tax/2023/se
| c...
| 1vuio0pswjnm7 wrote:
| "I haven't yet gotten the answer for this each time this
| issue comes up."
|
| Asnwer: It's not mandatory.
| cdot2 wrote:
| What would a software developer do that isn't research or
| development? Maybe my understanding of "research and
| development" is wrong. Is there a formal definition that I
| can go by?
| sangnoir wrote:
| What would a welder do that isn't research or development?
| I believe for both jobs certain tasks are journeyman-like,
| but others are legit R&D. I don't think software ought to
| be blanket-exempted because its done on a computer.
|
| Here's the IRS' guidance on software:
| https://www.irs.gov/businesses/audit-guidelines-on-the-
| appli...
| TylerE wrote:
| > What would a welder do that isn't research or
| development?
|
| Weld stuff?
| jdmichal wrote:
| Isn't welding just "developing" metal products?
|
| That's why you have to take into account that it's
| "research and development", and not "research" and
| "development". As in research and the development of that
| research, not separately research and development.
| function_seven wrote:
| Yeah, forcing physical-world norms into technology will
| always result in weird shit like this.
|
| For the "real" world, Research would be studying
| different compounds to see which ones work well as anode
| or cathode.
|
| Development would be creating the industrial processes
| required to scale up manufacturing, or the ancillary
| infrastructure to support the new battery, or designing a
| new package for this awesome new cell. All the things
| that take the new thing from the lab to a marketable
| product.
|
| So if you come up with a new method for welding ("My new
| filler alloy reduces argon requirements by half!" or "My
| new pulsing methodology results in 23% stronger welds
| between dissimilar alloys.") That's Research. Then the
| Development of that might be "How do we manufacture these
| new filler rods to the exacting specs required?" or "We
| need to have the EE people incorporate my pulsing algo in
| our welders. Right now it's running on an Arduino in the
| lab, we need it included in next year's Welder XL4000
| model."
|
| Actually doing the weld is just doing the job.
|
| So, back to software. What kind of coding is considered
| R&D and what is considered "just doing the job"? I guess
| creating new algorithms, or new features that you expect
| to be in the product for years to come; those would be
| R&D. Whereas fixing bugs, working on Kubernetes stuff,
| writing database backup routines, etc. would not be?
|
| I don't know. This is just my impression of the
| difference. I'm no economist.
| hellojesus wrote:
| Welding stuff is developing a product. Basically the same
| thing software developers do. It seems like a nonsense
| differentiation if those are categorized differently for
| taxes.
| TylerE wrote:
| As some one who took a welding class.. no it isn't. It's
| production.
| bluGill wrote:
| It can be development, if you are building a prototype
| for example. a good welder will notice that a bracket is
| missing and design one one the spot so the whole can be
| built for now - while telling the engineers about the
| problem.
|
| That is a small % of welding though. Most is just
| straight production work. The % is open to question - if
| I ask you to put a winch mount on my trailer how much of
| that is custom R&D, and how much is production of the one
| off product?
| [deleted]
| jdmichal wrote:
| In "research and development", that typically means
| "research of new ideas and methods, and developing them
| into commercially viable products". So are there things
| that software engineers do that fall under R+D? Absolutely!
| Is adding a sorting feature to a grid in your app one of
| those things? Probably not!
| commandlinefan wrote:
| > Is adding a sorting feature to a grid in your app one
| of those things?
|
| Yeah, the love the tax write-off - they don't love paying
| people to actually research anything.
| dahfizz wrote:
| You should never assume legal terms mean what they
| colloquially mean.
|
| Just like how "work" in physics has a precise definition
| which doesn't mean what it colloquially means, or "tree"
| in computer science.
|
| In this case, software development of any kind is
| _explicitly_ included:
|
| > 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.
|
| https://www.law.cornell.edu/uscode/text/26/174
| darth_avocado wrote:
| I still don't understand why it has to be RnD? If I made a
| million dollars and spent a million in salaries, I made no
| profit. The government shouldn't be taxing me on no money
| made. They already get taxes on the salaries I'm giving
| out.
| jfengel wrote:
| Because it was a way to get the budget "balanced". They
| declared R&D expenses to be different from operating
| expenses -- if you have the money to spend on R&D then
| you have money to spend funding the country.
|
| It's never supposed to be about what's "fair" or what
| they "should" do. It's about the fact that they want to
| spend $X, and need to raise $X one way or the other.
|
| In this case, though, it was purely a trick. They were
| required to balance the budget over the long term, so
| they spent money now and identified a pot of money they
| could take from later. They just kicked the can down the
| road, and now we've arrived where the can landed. They
| actually don't think it's fair, or reasonable, or
| productive. But changing it does make somebody
| responsible for a huge increase in the deficit... and
| it's the people who spent the money 5 years ago.
| SoftTalker wrote:
| There is no budget, for a long time. Only spending
| resolutions. And they're not b balanced.
| makeitdouble wrote:
| It comes down to whether these salaries were a sheer cost
| and not partly an investment.
|
| If you made a million dollar and bought a million in
| patents, you still would have no money but wouldn't
| expect to be paying 0 tax, would you ? How RnD should be
| taxed is up for debate, but at least the logic is that
| it's not a simple cost (in comparison to paying a janitor
| to clean the office for instance)
| darth_avocado wrote:
| Fair enough. If you made a million dollars and bought
| land with it, sure you can tax it. But something as basic
| as employee salaries that are a cost to any business
| should definitely be deductible from the profits as cost
| of running the business. Especially when the company is
| supposed to pay payroll taxes and the employees
| themselves pay income tax on their salaries.
| bcrosby95 wrote:
| For many small software companies, making software is
| more like making a custom table rather than an actual
| investment.
| mjwhansen wrote:
| This is a complicated question.
|
| On the one hand, Section 174 clearly stipulates: "(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]
|
| Section 174 R&E expenses are much more expansive than what
| qualifies under the R&D tax credit criteria. This article has
| a rundown of some of the activities included in 174. It's
| well beyond software or salaries -- it also includes things
| like market research. It also includes any expenses in
| connection with R&E, so for example time using a server for
| new features or new products would have to be amortized but
| maintenance (bug fixes) wouldn't. Even if a company files for
| R&D tax credits, they won't be able to offset this increase.
| [2]
|
| Lastly, since Congress was widely expected to revert this
| before it took effect, the IRS didn't issue full guidance on
| how to implement it. They've never had to define software
| development before, but the interpretation that Big 4
| accounting firms are taking is that it covers new products
| AND new features on existing commercial products, but not
| straight maintenance.
|
| [1] https://www.law.cornell.edu/uscode/text/26/174 [2] https:
| //www.forbes.com/sites/lynnmucenskikeck/2023/03/24/fiv...
| lifeisstillgood wrote:
| This seems a silly question but are you _forced_ to label
| software development as "R&D" instead of just expensing it in
| the first year.
|
| I mean this is an accounting trap, it seems the best way to get
| out of it is to use accounting.
| rhaway84773 wrote:
| It doesn't matter what you label an expense. Accounting
| principles and regulations decide what category expenses fall
| into. That's a major reason CAs exist, to ensure that your
| expenses are correctly categorized.
|
| I am not an accountant, but I took 2 years of accounts, and
| learning to categorize expenses correctly was probably 75% of
| the classes.
| jsmith99 wrote:
| The accounting standards forbid expensing things that should
| be capitalised, and if you go ahead and do it anyway your
| investors will wonder why your accounts show you have no
| assets.
| rhaway84773 wrote:
| Your CA would certainly prevent that from happening well
| before your investors look at your accounts.
| jabart wrote:
| The law has a call out that software development costs are
| all R&D now. So yes according to my understanding (as one of
| the signers) and those who have written about this as well.
| taxopinion wrote:
| Yes. You could look at this as an indictment of the tax
| system, in that the plain language says what it says, but
| the IRS expects you to hire an account to make an
| "appropriate determination."
|
| No small business accountant is incentivized to give you
| creative opinions, they're just going to go with whatever
| is the most popular practice. They don't give a fuck how
| much tax you actually pay.
| reaperman wrote:
| When you say "as one of the signers" do you mean you signed
| the federal bill which modified this tax? i.e. you are a
| congressperson? Surely I'm misunderstanding you; your post
| history is utterly incompatible with any sitting
| congressperson. But I can't figure out what you meant by
| it.
| mikeyouse wrote:
| Per the article, some 600 business owners signed a letter
| to congress asking for urgent relief;
|
| > As the House legislation is introduced, a grassroots
| effort is gaining momentum among software developers,
| with nearly 600 small business owners including Landsman
| and Bennett signing a letter to the Hill desks of House
| Way and Means Committee chair Jason Smith (R-Missouri)
| and Senate Finance Committee chair Ron Wyden (D-Oregon)
| on Tuesday morning, asking for "urgent relief" and
| warning that failure to bring back full R&D expensing may
| wipe out their companies.
|
| I assume that's what he signed.
| reaperman wrote:
| Oh, thank you so much. RTFA...
| jdmichal wrote:
| To be fair to you, I certainly read that but didn't
| associate that letter to the comment until mikeyouse
| pointed it out. A lot happened between reading the
| article and reading that comment.
| jabart wrote:
| Yeah now that I read that it's missing context. My bad.
| vlovich123 wrote:
| I think this is flawed in both directions. Sure when you're
| primarily building new stuff maybe the cost of that should
| be amortized. What happens if you're just maintaining a
| product though rather than actually developing new stuff?
| That doesn't feel like R&D effort.
| pclmulqdq wrote:
| Maintenance of existing software doesn't count as R&D
| under this categorization. The IRS will have some helpful
| guidance available in June. You know, two months after
| the deadline.
| vlovich123 wrote:
| Good luck figuring out how to do that accounting when
| teams are blended and all your workers are salaried.
| pclmulqdq wrote:
| Right now, adding features to an existing SaaS is looking
| a lot like maintenance work to me.
| brightball wrote:
| What happens if they pay an 3rd party company?
| MagicMoonlight wrote:
| Wages aren't R&D lmao
| aarondf wrote:
| Unfortunately, the Government of the United States disagrees
| with you.
| mitjam wrote:
| It can also be positive to amortize r&d and software
| development costs eg. when you have no revenue this year but
| expect revenues the following years, you pay less taxes then
| and overall. In Germany software development and r&d with
| unknown outcomes cannot be amortized whereas you have the
| choice with say self developed factory equipment.
| aarondf wrote:
| Agreed, options are great! Unfortunately this bill removes
| all options.
|
| Also operating losses can be carried forward and used for 20
| years, so recognizing a big loss in a single year isn't
| really that bad.
| ElevenLathe wrote:
| IANA accountant but this seems...fine? The point of writing
| software is typically to get some benefit from it in future
| years, just as GM expects to get more than one year's use out
| of a lathe or a sheet metal press. Of course they won't be able
| to cover the entire expense of buying the lathe entirely out of
| revenue they receive in the same tax year that they buy it. Why
| should they expect to be able to do the same for software?
| cryptonector wrote:
| It might be fine if that's how it long had been, maybe.
| What's definitely not fine is the sudden change of rules that
| an entire industry had been relying on for all their expense
| planning.
| uoaei wrote:
| Then the argument would be "let us transition smoothly to
| the new mode". But all we're seeing in these threads is
| "bad bad no good very bad" with relatively little nuance.
| mjwhansen wrote:
| The key problem here is that for 70+ years companies have had
| the option to amortize or expense these costs. This change
| was made as an accounting sleight of hand to make the 2017
| tax cuts look paid for over a long-term basis, but Congress
| never intended for this change to take effect. They know it
| isn't good tax or economic policy.
|
| So now small businesses and startups are being thrown into
| crisis because Congress has accidentally implemented policy
| that they haven't gotten around to fixing.
| [deleted]
| lesuorac wrote:
| How closely did you read the line items?
|
| In the example given they received a revenue that covers the
| entire cost of the software. The problem is that they then
| used that revenue for payroll which would be fine previously
| as if you make $X and pay $X in payroll then you pay ($X -
| $X) 0 in taxes and there isn't a cash flow problem.
|
| To stick with the apples-oranges lathe example. Imagine GM
| got a loan of $1M for the lathe and they can only depreciate
| 1/5 the cost of the lathe. So come tax time, GM has to pay
| taxes on their 800K of "profit" since they can't fully count
| the cost of the lathe against the loan.
| uoaei wrote:
| I think I'm failing to see your point, as I cannot find one
| here.
|
| If GM needs a lathe and has a reasonable business strategy,
| they should be able to get their accounting office and
| their leadership to align on how to make it make sense over
| 5 years. If they can't, it's a business run poorly, and
| according to the basic tenets of free market capitalism
| (which you seem to be leaning on heavily) that business
| would and should fail.
|
| More generally, this seems a natural consequence of the
| impersonal ways that businesses treat employees, aka "human
| capital stock" to use the term of art. Capital stock /
| assets used for generating revenue should be taxed the same
| across the board.
| pclmulqdq wrote:
| In a world where you venture-fund software development,
| this is fine, since the venture funding isn't revenue. In
| a world where you fund software development with revenue,
| this hurts a lot, particularly for young companies (and
| _especially_ for companies that get research grants,
| which are revenue).
|
| Established companies can probably debt-finance
| development the way GM would debt-finance a lathe (yes,
| large enterprises often use debt to buy _everything_
| possible). Small companies likely won 't have that
| benefit. Particularly because that software isn't
| necessarily a capital asset that can back a secured loan,
| the way a lathe is.
| uoaei wrote:
| Software definitely is a capital asset: if it weren't, it
| wouldn't be IP and all code would be open-source.
|
| VC has spoiled software folks for the past decade. This
| is just how small businesses become bigger businesses.
| The dogma of "bootstrapping" in software circles has been
| distorted into what is now clearly, retrospectively, an
| unsustainable means of developing industries. There
| doesn't seem to be any reason to treat software
| differently from others.
|
| The arguments here given scream of panicked, defensive
| rationalizations how actually we're super special and
| saving the world through technology, and how dare they
| claw back the rewards we're given for enabling humanity's
| progress.
| pclmulqdq wrote:
| I point you to IRC 1221(a)(3):
| https://www.law.cornell.edu/uscode/text/26/1221
|
| Arguably, software fits this definition, and under
| 1221(a)(3)(C) it would not be a capital asset for most
| closely-held companies (eg a lot of bootstrapped firms).
| uoaei wrote:
| Considering that this entire discussion revolves around
| how the law is misaligned from the economic impacts of
| business activities, it is a circular argument to use law
| to explain and justify your argument.
| pclmulqdq wrote:
| Considering that this entire discussion revolves around
| what is and isn't a "capital asset," which itself is a
| legal term, I would suggest to you that the law is all we
| have to argue about it. And the law, in general, sucks
| here.
|
| For most companies, 1221 doesn't apply, but some
| companies are going to get screwed on this front by
| having to incur a capital loss to pay for something that
| is not a capital asset.
|
| In a less legalistic sense, I'm not sure if there are
| many companies who provide software-backed debt anyway.
| That would make software less of a "capital asset" than
| almost any other intangible asset out there.
| gamblor956 wrote:
| Revenue Ruling 55-706 provides that IP created by
| employees of a corporation does not fall within the scope
| of 1221(a)(3).
|
| And generally, corporate-created IP is treated as a
| capital asset on the books. This is in line with how
| capital assets are generally treated; as other commenters
| have noted, the expense of building a factory (including
| the salaries of the construction workers, if employed
| directly by the taxpayer) is also subject to
| capitalization.
| lesuorac wrote:
| I'd prefer to get away from the lathe example because
| it's not actually a great example of whats going on. I
| solely used it because the person I was responding to
| used it.
|
| So back to software. If I have an idea for some company
| (lets say Twitter2.0) and I bring in ~10M in revenue from
| selling ad slots but I also paid a bunch of programmers
| ~8M over the course of the year and somehow the rest of
| overhead/expense was 1M. I think we can both agree 10M >
| 9M and so my business venture is profitable.
|
| However, come end of year I have book 10M - (1M + 1.6M) =
| 7.4M of profit. You may wonder how I can book 7+M of
| profit when I spent 9M on 10M of revenue and this is
| exactly what this whole thread is about, programming
| salaries must be amortized.
|
| This leads to the problem I have to pay taxes on 7.4M of
| profit using the 1M that I actually have left over so as
| long as the tax rate is below 13% there's no problem but
| if its any higher than I need to take out a loan to pay
| taxes.
| reaperman wrote:
| Loan example doesn't work because it's not revenue used to
| buy the lathe. That type of loan situation is exactly what
| depreciation/amortization/MACRS is for. If the company
| brings in $500,000 but buys a $1,000,000 lathe with a loan,
| they have a net cash flow of +$500,000. Their NPV isn't
| immediately affected by the loan liability because it's
| offset by the positive value of the lathe asset.
|
| Then they pay taxes on $357,100 of adjusted earnings
| because under a 7-year MACRS depreciation, it's assumed the
| lathe lost $142,900 of value in its first year of ownership
| (under double-declining or straight-line methods).
|
| Your first part is accurate though.
|
| Anyways, this tax law is fucking terrible. W2 Wages should
| not be capital expenses because you generally won't be
| using loans to pay them.
| troupe wrote:
| One potential difference is that for many things that are
| capital expenses (a building for example) a business is
| likely to take out a loan in order to buy it, so they don't
| have the full expense up front. A bank is probably not going
| to loan you money to pay your developers at the same terms
| they will loan you money to buy a building.
| ElevenLathe wrote:
| Makes sense, but why not (genuinely asking)? Is it just
| that the bank can repossess the building if necessary, but
| repossessing bespoke software is kind of pointless?
| rhaway84773 wrote:
| This is backwards. Capital expenses are amortized because you
| purchase an asset that will give you value over multiple
| years. So, for example, if you buy an office building, you
| amortize the capital expense.
|
| But what this does is says that if the product you created is
| an asset, the salaries that go into creating that asset
| should be treated as if it were purchasing that asset. The
| office building equivalent would be the builder having to
| treat the salary it paid its labor as a capital expense and
| amortizing it.
|
| That sounds beyond insane.
|
| That being said, it's not a material change, if phased in
| properly, so companies have time to spread their expenses
| over a period of time.
|
| But it looks like neither was this planned for (not
| surprising because it's ridiculous on its face), nor does the
| legislation phase it in a manner that can be properly
| absorbed.
|
| In practice companies will get hit hard the first year, but
| save the equivalent amount over the next 3-4 years. So after
| 5 years it will be a wash (ignoring the time value of
| money...factoring in that makes it a loss, but not as much of
| a loss). The problem is that it will create tremendous cash
| flow problems as 5 years of tax is paid in 1 year.
| amluto wrote:
| > Capital expenses are amortized because you purchase an
| asset that will give you value over multiple years. So, for
| example, if you buy an office building, you amortize the
| capital expense.
|
| Even that seems like a pretty weak argument for what is
| essentially a tax penalty.
|
| At least for a purchase of a _liquid_ (or somewhat liquid)
| capital asset, one could, in principle, re-sell it. But
| most R &D has essentially no direct resale value and is not
| being done to create a salable asset. It's done to create
| knowledge or IP, which, in turn, is used to create
| something salable.
|
| I assume the purpose of requiring amortization of capital
| expenses is to prevent abuses like buying an extremely
| liquid asset, deducting the purchase price, and thus
| deferring a tax bill.
| dfkljsdlakj wrote:
| > The office building equivalent would be the builder
| having to treat the salary it paid its labor as a capital
| expense and amortizing it.
|
| If the builder is building the thing for themself, they do
| in fact have to depreciate over the IRS-provided lifespan
| of the building.
|
| The software equivalent to a builder is an agency. If the
| agency is building their own software, they now have to do
| the same thing. If the agency is building for someone else,
| they expense the labor immediatley.
| ricardobayes wrote:
| Honestly if a company's business model revolved around
| getting 100% tax credits for dev salaries, that company
| should in fact go away. A 100% rebate on taxes on an
| already high margin and low expense business segment just
| feels wrong.
| grumple wrote:
| It's not a rebate, it's salary. For a company bringing in
| 1 million in revenue and paying 1 million in salary, they
| literally don't have any money in the bank to pay taxes
| because they haven't profited yet. If they profit the
| next year because of their new "asset" giving them long
| term benefits, they would pay then.
| jakear wrote:
| Isn't the simple solution to just not give away all of
| your revenue before you pay your taxes?
|
| The two constants are death and taxes, if you don't have
| the revenue to pay them at your current burn rate, you
| either find a way to burn less or your company just isn't
| viable.
| vikramkr wrote:
| The idea of corporate taxes is to tax profits, not
| revenue
| jakear wrote:
| Which just ends up with corporate accountants structuring
| the books to minimize "profit".
|
| I for one can't find it in me to get all that upset about
| startups paying their fair share of taxes instead of
| artificially inflating salaries to consume all of their
| "revenue", thereby hoarding talent away from the labor
| pool that would likely better serve the country as a
| whole by working in... really anything besides risky
| chronically unprofitable startups.
| dahfizz wrote:
| If the company has high margins and low expenses, then
| their profits are already taxed. Its not like hiring one
| SWE makes your tax bill go to zero.
| rr808 wrote:
| Realistically though the first year is:
| 0 Revenue - 1,000,000 Salary expense -----------
| - 1,000,000 Profit
|
| So doesnt really make much difference
| pclmulqdq wrote:
| This also looks like it completely screws people who get
| government research grants for their for-profit companies (eg
| SBIRs). When I was thinking about one, my accountant was
| telling me that the grant is technically revenue, which would
| make it convert to taxable income less expenses. Forcing
| companies to capitalize R&D basically means that you have to
| pay tax on the grant funding first, leaving only the after-tax
| value of the grant for actual R&D.
|
| I doubt most grant proposals have a 20-30% haircut built into
| the budget like that...
| ModernMech wrote:
| > I doubt most grant proposals have a 20-30% haircut built
| into the budget like that...
|
| Most university research budgets do yes, and actually more
| than that.
| mjwhansen wrote:
| They are indeed hard hit as well. SBIR grant awardees sent
| their own letter to Congress about this a month ago:
| https://sbtc.org/sbtc-letter-to-congress-on-sec-174-tax-
| conc...
| 1auralynn wrote:
| Yup, I am screwed because I got an SBIR grant in 2022. The
| default indirect cost rate is ~30%. In this new scenario, it
| should be something more like 60%, which reduces the usable
| funds that can be spent on actual development (IF you can
| even get a high rate like that approved by the govt agency)
|
| EDIT: By "screwed" I mean that I'm facing a $100k personal
| tax bill because the company is an LLC taxed as an S-Corp.
| You can say all you want about lack of planning, etc, but the
| reality is that many times very small business do not have
| the budget for a high-end business accountant on retainer. If
| I were to try to "plan better" to avoid this situation, I
| would have just not written the grant or tried to do any of
| it and gotten a FT job or something instead. It's an
| innovation-killer.
| mNovak wrote:
| Which agency is this from? 30% is an insanely low indirect
| rate. My experience comes dominantly from DoD SBIR, where
| for Phase I's you propose your own indirect rate.
|
| But yes, this law is awful for SBIR companies, because
| we're forced to give a giant out of pocket interest-free
| loan back to the gov
| pclmulqdq wrote:
| I'm guessing this was NSF or HHS, both of which have tons
| of rules. DoE and DoD are much less controlling.
| 1auralynn wrote:
| NIH, it's 32%. You can negotiate a custom one somehow,
| but I haven't waded into those waters yet.
| pclmulqdq wrote:
| I am personally very happy that my LLC's SBIR grant
| proposals in 2022 were all turned down, because I wasn't
| thinking about the disastrous tax consequences.
| 1auralynn wrote:
| Right? Like, should I even bother applying for Phase II
| in September? There is no way I could afford to pay taxes
| on $1.8M.
| pclmulqdq wrote:
| IMO you should talk to an accountant. It's pretty cheap
| to do that in comparison to the tax bills (my accounting
| bills are <$1000/year for a similar situation to you).
| Phase II is a lot of money, and you may be able to get
| some venture debt now that you're past Phase I to cover
| what the SBIR doesn't (ie the taxes). There's also some
| chance that the law around this will be reversed.
| 1auralynn wrote:
| Thanks - yeah, I was mostly being dramatic for effect,
| there's no way I'm not applying for Phase II.
| dcchambers wrote:
| When seeing it written out like this is simple math, this tax
| change seems absolutely insane. It would mean some (many?)
| small businesses will face tax bills that are far higher than
| any actual cash they have on hand. How did anyone ever think
| this was a good idea?
| bradlys wrote:
| It was written to fuck over smaller companies. That was the
| point of it.
| pjdesno wrote:
| The amortization change was a deliberate part of the 2017
| tax cut. One of the express purposes of the tax changes was
| to raise taxes on liberals, and I guess they figured that
| companies that take the R&D credit are run by liberals.
| dmix wrote:
| Written by whom? What was the original bill?
| ineptech wrote:
| Answered upthread:
| https://news.ycombinator.com/item?id=35615264
| fragsworth wrote:
| If it wasn't done by accident, then it was likely lobbied
| for by bigger tech companies that are already profitable.
| They stand to benefit the most from this kind of
| legislation by destroying all the small competition, and
| by being able to buy them up for cheap.
| bitL wrote:
| How does this work with consultants/contractors? Are they still
| booked under R&D expenses?
| celestialcheese wrote:
| So doesn't this just incentivize replacing FTE's with
| contracting firms when starting up?
| shagie wrote:
| https://www.claconnect.com/en/resources/articles/2023/a-cos
| t...
|
| > The amortization period is five years for domestic
| expenses and 15 years for foreign expenses. Additionally,
| for the first year of the amortization period, the expenses
| are "placed in service" at the midpoint of the tax year.
| Thus, the deduction in year one is only half the amount it
| will be in subsequent years.
| dfkljsdlakj wrote:
| yes.
| SomeBoolshit wrote:
| That sounds a lot like that delicious regulatory capture that
| giant companies like very much.
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