[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 : 876 points
Date : 2023-04-18 14:13 UTC (1 days 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.
| mikeytag wrote:
| Unfortunately it doesn't matter. The law is explicit that any
| costs related to the development of any software must be
| amortized. Bug fixes included.
|
| Not only that but ALL costs. Salaries, benefits, servers,
| subscriptions, even the percentage of utilities that go to
| software development have to be figured out and amortized.
|
| This is insane and bankrupting a lot of small business if left
| in place.
|
| "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."
| 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.
| l33t233372 wrote:
| Where is the line?
| gamblor956 wrote:
| There isn't one yet. It's a facts and circumstances
| analysis.
| 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.
| iguana_lawyer wrote:
| "Software firms across the US have unsustainable business models"
|
| FTFY
| 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)
| verdverm wrote:
| Most economists would remove income tax in favor of sales /
| VAT, if the politics of the situation were not part of the
| equation.
| noelherrick wrote:
| Sales/VAT are regressive, so if by politics you mean "not
| hosing the already hosed (the poor)", and by most economists
| you mean folks from the Austrian school of economics, then
| sure.
| verdverm wrote:
| Sales and VAT do not have to be regressive, that is a
| shallow and incorrect talking point that has spread. Sales
| taxes today already make distinction between necessities
| and luxuries. In other words, there are many ways to
| implement sales/VAT taxes and the details matter for the
| outcomes
| btbuildem wrote:
| Somewhat related -- our company has been making use of "R&D
| credits" (Canadian thing), basically getting the govt to
| subsidize the business. This never sat right with me, but we were
| a struggling startup so fair is fair. We've been bought out by a
| big American corp, and they continue to leverage this approach
| (why wouldn't they? it's free money!), but it REALLY bugs me.
|
| Calling what software engineers do "R&D" seems such a stretch.
| You're not doing any research, you're not developing anything
| new. It's just a coincidence that the word "development" is in
| the job title. We're closer to factory workers than research
| scientists, by a lot. Just putting existing widgets together in
| well-defined ways to implement whatever business workflows.
| ActionHank wrote:
| Had a consulting CFO recommend the same to us, even mentioned
| they've done so for all other businesses with any software
| development costs.
|
| It's wild.
|
| I'm sure that at some point there will be similar fallout up
| here.
| garryindiana wrote:
| [dead]
| RamblingCTO wrote:
| And here I sit dreaming of how doing business in the US would be
| so much nicer than in Germany, where you pay multiple taxes on
| every Euro I make. Apparently not. I appreciate this thread very
| much!
| robocat wrote:
| Q: what workarounds are there?
|
| Maybe open source development and assign copyright to public
| domain? If you don't own the software, you don't have anything to
| capitalise?
|
| What are FMAANG doing about it?
| 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.
| dqh wrote:
| I wonder if this triggered the recent layoffs?
| 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.
| asd33313131 wrote:
| This could create a new industry of double Irish-style/sale-
| leaseback avoidance schemes that will be a boon to tech lawyers.
| E.g. Tech co sells its software to an Irish sister company and
| then its software engineers create software for that Irish firm,
| which in turn licenses its software _back_ to Tech co.
| cardosof wrote:
| The skeptical side of me is screaming "just now that the big
| techs face disruption, this comes up!"
| bigbacaloa wrote:
| "Developers don't come cheap, and until tax year 2022, these
| companies could fully expense those costs as R&D rather than
| having to amortize them over multiple years."
|
| Maybe stupidly high salaries shouldn't be considered R+D
| expenses.
| radium3d wrote:
| Sounds like something the same folks who think taxing unrealized
| gains is a good idea and won't instantly tank the entire world
| market would think up and then put into law.
| synergy20 wrote:
| this might encouag small tech biz to outsource even more, i will
| pay a standard professional service fee to them, will this help
| me to survive?
| galaxyLogic wrote:
| This can not stand. We are an innovation nation. Job-creation
| requires that employing people does not increase your tax burden.
| It should do the opposite.
| astatine wrote:
| I have seen several situations where this would be _desirable_ -
| notably bleeding startups with vc money. There is plenty of
| window dressing to capitalise expenses and show a better EBITDA.
|
| What this will do is immediately reclassify large chunks of
| people out of "R&D" into operational resources. Just enough to
| balance between nice looking EBITDA and low real profit (= low
| tax)
| hinkley wrote:
| Yes, let's make research taxable but leave advertising as a
| deductible expense.
|
| What could go wrong?
| xmcqdpt2 wrote:
| Advertising is also capex in some cases,
|
| https://www.journalofaccountancy.com/issues/1999/may/maples....
| 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.
| astatine wrote:
| There will be a significant drop in reported research spending.
| This will seem like China is doing more research than the US.
| There will be a hueb and cry. Congess will incentivise research
| spending. Back to where we were.
| [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.
| gamblor956 wrote:
| I love when people on the Internet tell me I've been
| doing my job wrong for a decade...
|
| It's research (as in new knowledge) _and_ development (as
| in new products based on existing research and
| knowledge). Software generally falls into the latter
| category. A scientific process is not required but does
| make it easier to document qualification for the R &D
| credit.
|
| And yes, a carpenter developing new cabinet designs
| absolutely would qualify for the R&D credit (and their
| salary could fall under the scope of this rule change).
| jdmichal wrote:
| > It's research (as in new knowledge) and development (as
| in new products based on existing research and
| knowledge).
|
| This is... Exactly what I said?
|
| > And yes, a carpenter developing new cabinet designs
| absolutely would qualify for the R&D credit (and their
| salary could fall under the scope of this rule change).
|
| I feel I pretty clearly alluded to the physical process
| of turning wood into a cabinet, not developing novel new
| techniques for doing such.
| tomrod wrote:
| What about work-for-hire?
| 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.
| alkonaut wrote:
| > If they built the software in 1 year for 1,000,000, they
| would carry an asset of 1,000,000.
|
| Isn't normal accounting principles usually that if a
| company pays $M salaries, then regardless of whether those
| salaries paid for an asset or not, they are an expense
| that's 100% deducted from the income when calculating
| taxes?
|
| Are we saying that at a company with 2 desks where 1 is a
| marketing person or accountant and 1 is a software dev,
| their salaries would deduce differently from the company
| bottom line, because the software developer is said to
| create "assets"? Isn't the marketing of that asset likely
| to be build the value of it in the same way as the research
| and engineering does?
| xmcqdpt2 wrote:
| A quick google search shows that advertising is also a
| treated as an asset, just like software, at least some of
| the time
|
| https://www.journalofaccountancy.com/issues/1999/may/mapl
| es....
|
| IMO it does make sense to amortize software expenses like
| other capital expenditures.
| alkonaut wrote:
| It does make some logical sense, but I don't see how it
| would be worth the hassle, especially when you consider
| that it only "works" in the long term scenario but
| creates all sorts of cash flow problems in the short
| term.
| phoehne wrote:
| And THAT is the real question. Does it make economic
| sense long term. I can't believe I got downvoted by
| saying from an accounting perspective it makes sense to
| test it like any other asset. But does it promote a
| better outcome if we do? We have all sorts of accelerated
| depreciation schedules for tax purposes, to promote
| certain activities. Note that for financial reporting
| purposes it's possibly what some companies already do.
| Even though they expense it for tax purposes. We're just
| talking about taxable, not GAAP income.
| phoehne wrote:
| Yes, that is the case. If you're building a warehouse,
| the wages paid to the construction workers are
| capitalized. The wages paid to your accounts payable are
| probably not capitalized with construction cost.
| 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.
| pc86 wrote:
| > _That could well be._
|
| No, it is. That's literally why this happened, it was
| used as a bargaining chip/to buy time and they never
| cleaned it up. It's not supposition or a guess, it's the
| stated intent and consequence.
|
| > _it 's not so obviously a good thing_
|
| Let's say you earn a million dollars before salary and
| you have 10 engineers working for you each making $100k.
| You pay out your salary and have $0 profit at the end of
| the year.
|
| With this change, you are taxed as if you made $800k
| profit, so unless you've got a couple hundred grand in
| your bank account this is easily enough to bankrupt a
| business and put those 10 engineers out of work.
|
| It would be one thing if the $800k was in the bank and
| this was Hollywood accounting to make it seem like it's
| not profit. But this is money that was paid to employees
| and now the business is expected to pay taxes on it as if
| it was never paid. It's absolutely farcical how anyone
| could look at this and not see it as ridiculous.
| SpaceManNabs wrote:
| > No, it is. That's literally why this happened, it was
| used as a bargaining chip/to buy time and they never
| cleaned it up. It's not supposition or a guess, it's the
| stated intent and consequence.
|
| Unfortunately, I think a lot of hacker news posters give
| plausible deniability to that leadership in order to
| avoid cognitive dissonance with how certain political
| leaders that they support are not business friendly at
| all.
| ottodebals wrote:
| > that you capitalize costs that provide a benefit over
| multiple years
|
| Do you see a difference between software development in a
| consulting business model (instant one-off benefit) and
| software development in a saas product business model
| (benefit over multiple years)?
|
| > There are good arguments on both sides. Can you provide
| the good arguments for capitalizing software development
| costs and not expensing it?
|
| Can you explain the reasoning of charging taxes to a
| company that has revenue beyond merely 1/5th of its
| expenses (actually 1/10th in the first year, or 1/30th for
| international operations) and hence still heavily investing
| cash?
| 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.
| thallium205 wrote:
| So are the taxes capped also? Didn't think so.
| pclmulqdq wrote:
| The gains on taxes are uncapped, but the losses are
| capped per year. I think if you have a bigger loss, you
| can carry it forward even as an individual and apply it
| against future gains (or take another $3000 deduction).
| Apparently the limit is $3000 for married couples, I
| thought it was $3000 for individuals.
| pc86 wrote:
| It's $3k period, for offsetting normal earned income.
| There is no cap on offsetting capital gains (for example,
| from selling stock). And you can do both, e.g. wipe out
| for example $20k in capital gains then another $3k in
| normal income.
|
| I sold a business at a $60k loss 4-5 years ago and
| between capital gains offsets and normal income
| deductions I still have about $30k in deductions left.
| 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.
| alkonaut wrote:
| Even during greenfield, you probably fix 5 bugs for every
| feature. It's just that the bugs you fix were ones you
| created yesterday and not something a customer reported
| in the version you shipped a year ago. Writing tax law
| that even makes people need to think about what is a bug
| and what isn't is insane. What was wrong with making it
| simple like (I assume) most countries where you just
| treat all salaries as expenses that are completely
| deducted? What would be lost?
| nocoiner wrote:
| Thank you for the first comment I've come across that
| points to the specific problem. Yes, this seems quite
| bad.
|
| One could probably apportion some blame to the businesses
| who assumed a fix from Congress would be forthcoming, but
| on the whole it seems to me like a spectacularly il-
| conceived bit of the tax code that never should have been
| passed in the first place.
| 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.
| jadbox wrote:
| I've been wanted to someday start an employee-owned, non-tech
| S-corp. However these changes are squeezing out small
| players.
| 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.
| tomrod wrote:
| It changes what is considered a deductible expense.
|
| Profits = Revenue net Costs
|
| Taxes are a cost. Taxes are defined as some rate t, tax = t
| * (Revenue net Deductible Expenses)
|
| So Profits = Revenue - t * (Revenue - Deductible Expense) -
| Non-deductible Expense
|
| Percent of t is small relative to the value of 100% applied
| to non-deductible expense. What this has done is to take
| salary, deployment infra, everything, from Deductible to
| Non-deductible expense, leaving 20% of what was there
| before. That is very large.
| 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.
| xmcqdpt2 wrote:
| Well no, you have a 1.2M profit, and decided to reinvest
| 1M into R&D to produce a software asset.
|
| It's bad that the tax treatment changes suddenly because
| businesses need stability, but the change itself is
| perfectly rational.
| 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.
| hedgehog wrote:
| Assuming you had no other expenses the tax bill would be
| $168k on the $800k right? So what we're saying is a business
| with $1M each in revenue and salary expense would have an
| additional $168k in current year tax expense?
| 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.
| grogers wrote:
| If you can deduct the remaining amortized expense
| immediately upon termination, could companies just fire
| everybody and rehire them the next day?
| 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.
| erik_seaberg wrote:
| Apparently the right number is 90% of 21+10%, because
| amortization starts at the midpoint of the first year. (If
| you take authoritative tax advice from me you will totally go
| to jail.)
| 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.
| x-complexity wrote:
| The one thing I'm rarely seeing in this thread is any discussion
| with regards to the continued expansion of tax bureaucracies as
| these new tax bills are implemented. There are a few threads here
| that I can find close enough to such discussion:
|
| https://news.ycombinator.com/item?id=35619941
|
| https://news.ycombinator.com/item?id=35615493
|
| https://news.ycombinator.com/item?id=35619572
|
| As noted in the top thread (
| https://news.ycombinator.com/item?id=35614968 ) but not discussed
| further, the tracking of such amortizations mean added accounting
| expenses for businesses where this would've otherwise been a
| straightforward deduction. This inevitably means that either
| additional people need to be brought in to track said expenses,
| or a business is increasingly reliant on an external service to
| manage their obligations, both of which are a net negative for
| the business compared to the straightforward 100% deduction
| model.
|
| Whilst amortization is beneficial for purchases / investments
| that can wear down with use, the application of such accounting
| practices towards R&D in general only serves to increase the
| burdens on businesses (small or large) for performing such R&D.
| Arguably, it's an attempt by the government to kill R&D within
| the US, and to force more companies towards acquisitions &
| mergers, whether intentional or not.
|
| Futurama's Central Bureaucracy is worryingly becoming a real
| thing.
| csomar wrote:
| It's interesting that no one sees this as it is: Killing the
| golden goose so that the IRS can get some meat.
|
| This change, theoretically, doesn't "add" to your tax bill.
| You'll be paying the same amount of taxes. However, as in the
| example outlined in the first comment, you'll continually have
| a credit with the IRS due to the amortization. The questions
| are:
|
| 1. Is this credit recoverable?
|
| 2. Why is the IRS doing this anyway? Just for a quick cash/tax
| boost?
|
| Because that's what failed states look like. The USSR is
| looking good in proportions...
| pc86 wrote:
| The IRS isn't doing this. Congress did it, because it's an
| accounting trick that lets them say something costs less than
| it actually does, because all of Congress' budgeting is on
| decade-long horizons, and they factor in theoretical
| wage/revenue/profit growth, so them front-loading the same
| tax receipts allows them to very easily lie about the actual
| cost of programs. They can pull 80% of the tax receipts from
| made up figures a decade from now into their government
| revenue calculations.
| winrid wrote:
| They're doing it this way because in the public eye big
| startups that write off salaries as tax expense look like tax
| avaiders.
|
| In reality it will just punish bootstrapped companies.
| csomar wrote:
| The public eye, as in the general public, has little idea
| of what's going on in the startup world and let alone
| specific issues like this one.
|
| > that write off salaries as tax expense look like tax
| avaiders
|
| This doesn't increase the tax burden. After 5 years, most
| companies will be back to paying what they are paying now.
| This gives you a cash boost for this year and next few
| ones. After that, you just killed bootstrapped companies.
| 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).
| [deleted]
| bandrami wrote:
| If it kills off most of the cryptocurrency ecosystem it will be
| worth it
| lobocinza wrote:
| So the politicians are killing their gold hens (again)?
| 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
| ericpauley wrote:
| It looks like the CFR (at least here) hasn't been updated to
| match the corresponding USC:
| https://www.law.cornell.edu/uscode/text/26/174
|
| See c(3). Any software development is unambiguously R&D.
| hartator wrote:
| > See c(3). Any software development is unambiguously R&D.
|
| "For purposes of this section" to me means you don't have to
| justify software development as R&E if you define that
| software development work as R&E.
|
| Being pedantic, but it's R&E not R&D.
| agwa wrote:
| Except the purpose of the section is to say that R&E has to
| be amortized. So it seems pretty clear to me that software
| development costs have to be amortized.
| ericpauley wrote:
| Exactly. I don't see how anyone can read this and tell
| the IRS with a straight face that their software dev
| doesn't need to be ammortized.
| hartator wrote:
| According to Bloomberg [1], for ongoing business
| expenses, it doesn't. For startup costs, it does need to
| if you want these RD credits.
|
| [1] https://news.bloombergtax.com/tax-insights-and-
| commentary/ch...
|
| It is ambiguous even if you disagree with Bloomberg.
| ericpauley wrote:
| Not one mention of "software" in that article. It's
| clearly written in a general context where this may be
| true. They don't mention c(3) at all:
|
| "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."
| bluepeter wrote:
| Section 174 intro: "In general in the case of a _taxpayer's
| specified_ research or experimental expenditures for any
| taxable year ".
|
| Note limiting phrase.
|
| Section 174 later: "For purposes of this section, the term
| "specified research or experimental expenditures" means, with
| respect to any taxable year, research or experimental
| expenditures which are paid or incurred by the taxpayer
| during such taxable year _in connection with the taxpayer's
| trade or business_. "
|
| Note the "in connection with the taxpayer's trade or
| business" and look up the definition of that phrasing versus
| "carrying on" business and compare to Section 162. (e.g.,
| Snow v. Commissioner of Internal Revenue, 416 U.S. 500
| (1974), Cantor v. Commissioner of Internal Revenue, 998 F.2d
| 1514 (1993), Scoggins v. Commissioner of Internal Revenue, 46
| F.3d 950 (1995))
|
| Section 174 later: " _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."
|
| Note the limiting phrase.
|
| Ultimately we need guidance from the Service but the above
| are (possibly aggressive) readings some CPAs are taking.
| ericpauley wrote:
| You don't specify which expenses, the USC does in the next
| subsection (if you got to specify it it would be "specified
| by the taxpayer". "For purposes of this section" is in the
| same section.
|
| Stranger things have happened but I don't see how someone
| can defensibly argue that software dev doesn't have to be
| ammortized.
| botswana99 wrote:
| Bootstrap software founder here
|
| This is just bullshit
|
| Unlike many companies in the software industry, we have grown
| profitably for nine years without the need for any funding. Our
| success has been fueled by our ability to invest profits into our
| business, allowing us to improve our software and expand our
| operations continuously.
|
| However, the 2022 Section 174 R&D tax credit changes have had an
| impact. This recent change affects many small, independent
| technology companies, including my company. We have been busy
| building products, making our customers successful, and making
| payroll. We are happy to pay our fair share of taxes on our
| profits. However, investing in software development is the engine
| that allows us to grow our company and hire more employees. Our
| tax laws must continue to reflect this reality.
| steve_taylor wrote:
| I think the point of this law is to capture tax from companies
| in their growth phase, as the general public sees these
| companies as tax avoiders and their lack of profit as an
| accounting trick.
|
| In reality, it will keep small companies small and less of a
| threat to big companies.
| aziaziazi wrote:
| Would you recommend to keep on with favoring this accounting
| trick for fairness because previous businesses took advantage
| of it? If so, how/when should the legislator changes laws
| when needed?
|
| > general public
|
| Not sure what's your definition, maybe "non-startup founders
| neither investors" ? I work in startup since a couple of
| years and all my employers did declare me as r&d while we
| where only implementing react or so without any "research"
| difference than a cabinet maker building a piece of
| furniture. This drives me nuts because I don't contribute to
| my country tax while my income is on the very upper side
| comparing median.
|
| Creative =/= Research
| SpaceL10n wrote:
| It seems like a wise idea then for Congress to allow small
| businesses to keep this tax credit.
| agwa wrote:
| It's not a tax credit. The tax credit is still there.
|
| It's the deduction which has gone away.
|
| And yes, small businesses are hit hardest by it going away.
| pc86 wrote:
| It isn't even that the deduction went away, it must now
| be amortized over five years (an accounting trick on the
| part of Congress to pretend they're not spending money
| they are).
|
| This hurts businesses more the smaller they are, but
| paradoxically it also hurts businesses more the higher
| percentage of their revenue they spend in payroll.
| Literally if you give your employees a bigger reward for
| their work, you're hurt harder by this ridiculous law.
|
| If you're a sociopathic CEO with 8-10 engineers whose
| work output isn't directly tied to profit, and you're
| paying out most or all of your profit in salaries, you're
| definitely going to be looking at letting a few of them
| go to ease the tax hit.
| 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.
| fogzen wrote:
| What about software agencies/consultancies? Their salaries would
| not be capex right? They don't own the software, they just
| develop it to spec and sell the development. Their client would
| be the one to claim R&E right?
| 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.
| js2 wrote:
| The CNBC article doesn't really explain the change, or why it's
| just happening now. I had to do a web search on "Section 174" to
| find this:
|
| > What are the changes to Section 174, and do they affect the R&D
| tax credit?
|
| > Among the sweeping changes to the U.S. tax system brought by
| the Tax Cuts and Jobs Act of 2017 (TCJA) was an amendment to
| Section 174 of the Internal Revenue Code. Many experts, however,
| believed -- or at least hoped -- that the scheduled change to the
| provision addressing the deductibility of research and
| experimental (R&E) expenses might never take effect.
|
| > But the amendment did indeed kick in, beginning with the 2022
| tax year. It's left many businesses that conduct qualified
| research activities confused -- about the change itself, how it
| affects the Section 41 research and development (R&D) credit, and
| the likely negative impact on their tax bills. Here's what you
| need to know.
|
| ...
|
| https://gusto.com/resources/articles/taxes/section-174-r&d
| IAmGraydon wrote:
| Who, exactly, is responsible for this? We need names of
| representatives who wrote this into tax law.
| agwa wrote:
| This was done by the Republicans' flagship tax bill, the Tax
| Cuts and Jobs Act of 2017.
|
| Voting records:
|
| House: https://clerk.house.gov/Votes/2017699
|
| Senate:
| https://www.senate.gov/legislative/LIS/roll_call_votes/vote1...
| [deleted]
| olliej wrote:
| Ok, so I was going to be glib, but this sounds like if you employ
| someone for "R&D" you can't report their salary as an expense
| during the period the expense is incurred? Ignoring entirely the
| matter of how the f is R&D expense any different from any other
| expense? (my assumption is that it's actually a tax break for
| already rich companies)
| 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.
| mscuwa wrote:
| How you raise money doesn't make a difference. What matters
| is how fast you can utilize your "engineering assets". More
| often than not startups don't sell anything (let's say
| "anything" is > 20% of developers' cost) in the first year,
| or even in the first 3 years. So for them it's not a problem,
| you simply carry forward losses until you start getting
| revenue, and at that point you have enough losses to offset
| those 80%. It doesn't work for companies which are lucky
| enough to make substantial (comparable to the salary) sales
| in the first year. It's like Ford built a new factory, made
| 600,000 F-150 and sold them and the factory is basically gone
| in one year, there is nothing left. Doesn't happen with real
| factories though and usually doesn't happen with startups,
| but there might be exceptions.
| 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.
| alkonaut wrote:
| Hot take: not one person on earth could make a good/useful
| distinction between "bug" and "feature" in software
| development. Some times that's clear, usually it's not.
| Making tax law depend on the idea that there is a
| distinction is pretty terrible.
| patmcc wrote:
| The current US tax law is flipping (with no rollout
| period) between dev salaries being 100% expensed (over 1
| year) and 100% amortized (over 5 or 15 years). You
| actually could make some distinction between those two
| poles without being able to perfectly categorize every
| line of code.
|
| A number of things the government could do:
|
| 1) Split it between the two. Need to amortize x% but can
| expense the rest. Maybe that % is mandated, maybe it
| depends on industry (i.e. if you make games vs an OS vs a
| SAAS vs embedded software for cars).
|
| 2) Tie it to company size, either headcount or revenue.
|
| 3) Allow different categorizations for e.g. R&D, product
| support, building internal tools, building SAAS for sale,
| whatever.
|
| 4) Roll out any changes gradually over x years.
|
| Tax law, over and over again, uses the idea that there's
| a distinction between CapEx and OpEx. It's not magically
| impossible to do the same for software.
| thfuran wrote:
| In a world where all software actually has a
| comprehensive spec, I think the distinction could be made
| pretty easily, but the line is definitely fuzzy in this
| one.
| alkonaut wrote:
| Yeah I don't think that has happened even in (say) the
| most extreme niches like some project with an embedded 8
| bit microcontroller in a space/military setting....
| 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.
| GoldenMonkey wrote:
| Classify 80% of your dev time as maintenance. 20% as R&D. Problem
| solved.
|
| Most companies I've worked for, using R&D credits. Have a
| timesheet tracker... tracking actual hours of R&D work. That
| sounds more critical now.
| 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).
| throwaway9980 wrote:
| > Also, your belief ... is irrelevant.
|
| This is true everywhere and always.
|
| I agree with you, lots and lots of software definitely
| has the properties of an asset. There's also plenty of
| software that's hastily written, untested, and basically
| not fit for use beyond a short expiration date. More like
| a jug of milk with a shelf life than a fine grand piano
| with resale value.
| jeremyjh wrote:
| If the software makes money for the business, it is an
| asset.
| throwaway9980 wrote:
| That seems like a very broad way of classifying assets.
|
| Are people assets? Certainly not on the balance sheet I
| hope.
|
| What about a contract? Is a contract an asset? I'm
| actually curious, not trying to be a smart ass.
| cj wrote:
| A contract for a typical SaaS company, billed annually,
| is actually a liability (from an accounting perspective)
| up until the point where the contract has been completely
| fulfilled.
|
| Others (say, an investor) might view a contract as an
| "asset" because of the future value it might bring, but
| not in a traditional accounting sense.
| DelaneyM wrote:
| The value people produce is an asset. After all, you
| don't own people, you buy their effort.
|
| A contract can be an asset. Usually the unrealized future
| value of the agreement has value should you need to make
| a deemed disposition (or have some other valuation
| event). It gets very obviously complicated and fuzzy
| though, which is where accountants make the big bucks.
| It's pretty rare that a company chooses to make a
| contract valuable, but it often comes up in bankruptcy
| proceedings.
|
| As an example of contracts having value, a few years ago
| I was involved in the acquisition of some media
| distribution assets, and one such asset was a
| transferable "MFN" contract with a major publisher. That
| was a very, very valuable asset.
| piperswe wrote:
| Another instance of contracts having value: bonds and
| options are just contracts, and it would be insane to
| consider a bond to not be 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.
| citizenkeen wrote:
| That's not how that works. The law is pretty explicit.
| verdverm wrote:
| How is the IRS defining "development"?
|
| I don't think it's the same as we do, and more akin to
| land development and improvement.
| phoehne wrote:
| I think that will actually be decided by IRS
| interpretation. I can't imagine an administrative judge
| would have that narrow a view, given the way other assets
| are treated.
| 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?
| whitemary wrote:
| Announcement: New Product v2.0 Features Less Bugs!!!
| 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 new products and features and bug
| fixes.
| whitemary wrote:
| Precisely. The difference with software is that the
| production process is so iterative that experimentation
| becomes a relatively rational tactic for getting things
| done.
| 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
| rodgerd wrote:
| I see that you are blessed to work in an environment
| where your day is not a stream of Jira tickets linked to
| timesheets.
| ajmurmann wrote:
| I do spent a lot of time in Jira and my teams do work out
| of Jira backlogs, but we don't have time tracking.
| [deleted]
| 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/...
| mschuster91 wrote:
| So what? It's not like that money is lost. It ends all
| back in the economy because people spend their wages.
| logicchains wrote:
| Money is just paper. The _value_ is lost; if the
| government buys itself a banana, that's one less banana
| available to the people.
| 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?
| rbultje wrote:
| Amortizing makes sense for things that have a huge up-front
| cost and value over time, like - indeed - a robot, or a
| laptop, or a house. But salaries are not that, they are a
| continuous cost. I can take a loan on a house (mortgage),
| and laptops can be bought on 0% payment plans over 3 years.
| But how would that work for salaries? I'm forced to take
| out loans to pay the duplicate tax over salaries (and other
| minor expenses) over the amortization period. That's the
| insane bit here.
| phoehne wrote:
| We do that all the time. If I were to build a power
| generator, it might take several years. During that time,
| the salaries of people directly building the project are
| capitalized. Even when the project is put in service and
| earning revenue, I still migh capitalize the wages for
| improvements versus repairs. That's why what you charge
| on the time sheets matter, if it's classified as an
| operational expense vs a capital expense.
| 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.
| diceduckmonk wrote:
| > the irs hasn't offered too much guidance on how this tax
| change works.
|
| They didn't offer too much guidance for trading crypto either.
| I reported my trades as you would for stocks. They ended up
| auditing me and charging me for $300k in profits when I made
| $3k (they did not recognize cost basis of my trades, yet
| decided to respect the sale proceeds) circa 2015. Meanwhile,
| people who did not report at all probably got off the hook.
| IAmGraydon wrote:
| Something doesn't sound right about this. On what grounds did
| they not recognize your cost basis?
|
| Edit: I'm guessing you acquired the crypto through some means
| that doesn't keep records/report to the IRS. In that case,
| what choice does the IRS have? You should never purchase an
| investment without looking toward the tax implications at the
| end of the year. It sounds harsh, but you should have known
| that claiming a cost basis you have no proof for would never
| fly.
| bagacrap wrote:
| Uhh, no exchange was reporting crypto tax basis to the IRS
| in 2015.
|
| I'm assuming gp won on appeal.
| sudohalt wrote:
| Thanks!! This is very informative
| notwhatyouthink wrote:
| Current senate bill to restore treatment of R&D expenses to pre
| 2022 treatment is S.866.
|
| https://www.congress.gov/bill/118th-congress/senate-bill/866...
|
| Call or write you senator.
| wavesounds wrote:
| With help from gpt4:
|
| "As a concerned citizen and advocate for the technology sector
| in our great nation, I am writing to express my strong support
| for S.866, the American Innovation and Jobs Act. I believe this
| legislation is crucial for fixing the unfair tax treatment
| faced by startups, technology companies, and software
| engineers, which together form the backbone of innovation and
| economic growth in the United States.
|
| The bill will make it easier for startups and small businesses
| to thrive, create jobs, and compete in the global market.
| Additionally, the legislation will also make it more attractive
| for talented software engineers to choose careers in this vital
| industry.
|
| Our nation's ability to maintain its competitive edge in the
| global market depends heavily on the health and vibrancy of our
| technology sector. By passing S.866, we can ensure that our
| startups and tech companies have the resources they need to
| innovate, create jobs, and contribute to the economy.
| Furthermore, this legislation will help attract and retain top-
| tier talent in software engineering, an essential component of
| our country's continued success in the tech industry.
|
| As your constituent, I kindly urge you to support and vote in
| favor of the American Innovation and Jobs Act, S.866. This bill
| is a vital investment in our nation's future, and its passage
| will undoubtedly lead to continued growth and prosperity for
| the United States in the competitive global market.
|
| Thank you for your attention to this important issue, and I
| appreciate your dedication to representing the best interests
| of our community and the nation as a whole."
| 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]
| Ghostt8117 wrote:
| Something that doesn't get discussed often when there is an issue
| is a possible solution. We all just complain or make fun of those
| who lose out. But the issue here is that sudden changes are a
| problem. No company should face sudden unexpected tax changes. It
| creates an unstable business environment and owners cannot
| adequately plan for the future. Congress needs to extend this
| write-off for a few years and make it clear that it will not be
| available in the future. They cannot leave it as a "maybe"
| situation.
|
| I have personal opinions on this matter that are irrelevant. What
| matters for the future is how this affects the U.S. competitive
| advantage with technology, and how this affects the job market.
| If the impact is significant, Congress needs to act. If not, i.e.
| if only a few smaller companies are affected, then nothing will
| change and everyone needs to adjust.
| johnnyo wrote:
| To be clear, its not a sudden change. It's been written into
| the law since 2017 that it was sunsetting.
|
| People incorrectly assumed that Congress would extend or repeal
| the sunset. But its not like the tax law was changed on Dec
| 30th and put into effect on the 31st.
| 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.
| EntrePrescott wrote:
| This makes zero sense to me. By what logic would a salary paid
| this fiscal year (be it for R&D or any other activity, I don't
| see why there would be any difference there) not be a simple
| expense to be fully deducted from the revenue in the calculation
| of the profit for this same fiscal year?
| xmcqdpt2 wrote:
| One of the goal of this kind of accounting is to make "building
| the thing" and "buying the thing" as closely equivalent as
| possible for tax purposes. If you treat all the salaries as
| expenses then
|
| * Company A has 1M in capital, and builds an in-house database
| with 1M$ of dev salaries. At the end of the year, company A is
| worth 0$ because they spent all the money.
|
| * Conpany B has 1M in capital and buys (wholly and exclusively)
| a custom database for 1M$. At the end of the year, Company B is
| worth about 1M$, because they have 0$ in cash and a 1M$
| database.
|
| Clearly there is an issue there, and the only way to make the
| two situations equivalent is to treat software development as a
| capital expenditure which is what it is.
| wussboy wrote:
| Doesn't Company A also have a DB worth $1 million? Or are you
| simply referring to the way these things are accounted?
| xmcqdpt2 wrote:
| It does! But the only way this makes sense is if you treat
| the expense required to build it as a capital expenditure,
| which was my point.
| 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
| vikramkr wrote:
| We're literally barely 5 years out from the last major tax cut
| which followed two Obama era tax cuts that followed Bush Era
| tax cuts. I'm, not exactly sure where your impression of only
| tax hikes is coming from
| 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.
| imtringued wrote:
| They get acquired by companies that have unused deductions.
| That is how monopolies form.
| snarf21 wrote:
| Software was targeted directly because they couldn't agree
| how to change 230. There are those who want to punish the
| "tech" people who were "censoring" things they didn't want
| censored. It was designed to be tactical retribution.
| nonethewiser wrote:
| I don't see any evidence of that. Care to share any?
| stephendause wrote:
| Do you have a source for that claim?
| xvector wrote:
| The general public absolutely despises software engineers
| for being able to earn good money with good work-life
| balance. It's pure jealousy. The general public has been
| cheering during the tech layoffs.
| frostje wrote:
| I haven't much evidence for that, and what little I did
| see was more about validation that a lot of large tech
| companies have insane, managerial bloat.
| ec109685 wrote:
| Software has a long life, like buildings and whatnot, so that
| is likely why it is singled out versus the office manager.
|
| If you buy a building, you can't depreciate the whole thing
| instantly, you do it over the life of the building.
| galaxyLogic wrote:
| > If you buy a building, you can't depreciate the whole
| thing instantly
|
| The same should hold of course if you buy software.
|
| But if you ask your employee to perform a task like writing
| a program you are not buying anything. You are paying the
| employee's salary whether the software they are writing
| ever gets out of the compiler or not.
|
| So wouldn't there be a way around this by changing the
| titles of software developers to "software janitors" for
| instance ?
| cwalv wrote:
| What about an architect's salary? Does the firm who designs
| the building amortize the cost of that labor, while the
| purchaser of the building also amortizes the entire cost of
| the building? How about EEs who design the hardware? Are
| they included?
| rvba wrote:
| After 5 years dont you end up with some "finished" R&D
| project that then can be later amortized, over say next 3 (or
| 5 years), so you reduce your tax base by those 2 million
| later on?
| Lazare wrote:
| No.
|
| After 5 years the first years salaries are considered to be
| a "finished" R&D project, which means there's nothing left
| to amortize.
|
| The only thing like that is that if, after a few years, you
| fire all your devs (or at least, all devs working on adding
| new features and building new products), then you can keep
| amortizing the last 4 years of salaries for your now-fired
| workers over the next few years, which reduces your tax
| base. But I mean, by that point, who cares? Any software
| business that has fired all its devs is over.
| sethammons wrote:
| Could start a rotating door policy. You have to be
| rehired every period.
| SaaStronomy wrote:
| When you lay it out like that...
|
| Feels like this is just a move to stop companies from gaming
| expenses to avoid profiting. Piercing the corporate veil, if
| you will.
| mort96 wrote:
| What part of it is gaming anything? They're not profiting
| from money they're paying to their employees as salary.
| jart wrote:
| That sounds pretty horrible. Am I correct in assuming though
| that once you get over the five year hump, you're OK? Also
| wouldn't startups mostly be paying devs out of VC funding
| rather than revenue the first five years?
| mwint wrote:
| Only if you're not growing.
| mikeytag wrote:
| No. If you are growing and increasing expenses you're
| always behind. The only case where you get ahead is if you
| stop growing or shrink.
| [deleted]
| jart wrote:
| That makes sense, thanks for clarifying. How do you think
| businesses would react to this? For example, I imagine
| self-hosted servers would need to be depreciated too, so
| the tech community invented cloud as the solution. Maybe
| this policy change will cause tech companies to hire more
| TVCs rather than FTEs?
| pclmulqdq wrote:
| Contractor expenses to develop software are also R&D. As
| would cloud expenses for your test environment, probably.
| More likely, companies will engage in activities that are
| arguably not "software development," including things
| like maintaining existing software.
| asvitkine wrote:
| Presumably if a company doesn't build software in-house
| and "buys a product", then that's not R&D? Then, the
| companies making said "products" would be based in
| countries that don't have such draconian laws...
| cwalv wrote:
| Have your 'office manager' do everything with 'no code'
| environments .. maybe with them using some sort of java
| to 'no code' compiler for parts.
| foobarbazetc wrote:
| No, you never "catch up" unless you fire every software
| engineer (so income and trailing five years of amortization
| cancel out).
|
| Year 5 is just a steady state of no more phantom profit
| taxes, but you never really get that extra tax you paid
| back if you want to keep operating at the same level or
| grow.
| [deleted]
| pcthrowaway wrote:
| > No, you never "catch up" unless you fire every software
| enginee
|
| So Musk was following a playbook after all...
| 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...
| [deleted]
| 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!
| majormajor wrote:
| Is a business that generates 1M revenue off of 1M salary
| for one year, and then nothing for 4 years, worth
| discussing here?
| kevingadd wrote:
| In markets like game development it's not uncommon to
| have one big release that generates a lot of revenue in
| one year, and then not release anything for a couple
| years and have minimal revenue as a result while you keep
| paying salaries. Carryforward won't help you in that
| case. Without this stupid amortization you could at least
| write off a full year's salaries against your launch
| income.
| pclmulqdq wrote:
| In a reasonable world where you can depreciate your
| assets over their expected lifespans rather than a fixed
| 5 or 15 years, video game dev would probably actually be
| fine with capitalization. A SaaS startup that fails fast
| still gets really screwed in that more reasonable world.
| 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]
| fisherjeff wrote:
| Also, to be clear, it will eventually stack up and roughly even
| out as you amortize 1/5 of each of 5 years' worth of R&D spend
| per year. Basically the part that sucks is that there was no
| 4-year phase-in period.
| nilsbunger wrote:
| It doesn't even out if the company keeps growing - if your
| headcount is growing 50% per year you can have very
| significant tax drag.
| fisherjeff wrote:
| I think you may have that backwards but yes. You are
| effectively always paying for expenses incurred 2.5 years
| ago.
|
| EDIT: Nevermind, you had it the right way.
| TootsMagoon wrote:
| ^^ This is the core issue.
| mscuwa wrote:
| 1,000,000 Revenue - 1,000,000 Salary expense
| ----------- 0 Profit
|
| We are talking about an extremely lucky company if it's the
| first year. How many startups are able to get revenue equal to
| salary expenses in the first year? While they might exists,
| it's not very common. For all others and if it's not the first
| year you already have losses carried forward which will offset
| those 800,000 (since you didn't amortize them in the previous
| years, right?), so in your example if it's the first year you
| get any revenue you would have (years since founding) *
| $1,000,000 in losses. What do I miss here?
| ilandsman wrote:
| Why are you only considering the first year? My company has
| been around almost 20yrs and is impacted. There's no years
| since founding in any part of the calculation.
| mscuwa wrote:
| If we are considering a stable company the only problem is
| that you expensed more since 2017 than you would have
| normally done, i.e. you effectively paid less taxes over 5
| years. Now you need to catch up. I admit it's not fun,
| especially if everybody expects it won't happen, but
| overall it's the same tax.
| robocat wrote:
| Here's a few thought experiments.
|
| 1. Your landlord decides that you needs to pay 5 years
| rent in advance. Each year you have paid off one year,
| however you need to pay another year to keep up. When you
| leave, the landlord will pay you back 1 year rent every
| year for 4 years. [landlord == government]
|
| 2. You develop an exact Facebook clone. The business
| tanks. How much was the software worth? Facebook's value
| is only minimally in the software itself. Facebooks value
| is mostly in daily user eyeballs and advertising
| contracts and network effects.
|
| 3. You get some VC funding and spend 5 years developing
| software. You start making a profit, so you can claim the
| prior losses. However, the losses are not inflation
| adjusted (nor risk adjusted, nor discount adjusted). Your
| taxes are not adjusted for inflation, so you earn less
| than you should fairly.
|
| 4. You sell your business. Now you need to decide on the
| a valuation of the software, since it affects taxable
| income in the future. Leads to valuation games that have
| no benefit to anyone.
|
| 5. You go bankrupt - software valued at zero. Now do you
| need to claim those R&E taxes back from the IRS? Does
| that cause a lump in your personal income that puts you
| into a higher tax bracket?
|
| 6. You spend a year writing v1. Next year you completely
| rewrite v2 using cleanroom techniques, and deploy it. Do
| you get to claim 100% depreciation on the now obsolete
| code?
|
| 7. A data analyst writes a one-off query that is never to
| be used again. Is the time they spent on it R&E?
| mscuwa wrote:
| 3. Agree, but this applies to assets depreciation too,
| how software is different?
|
| I understand the rest and I'm not saying it's a good law.
| It's just not as bad as in the example with $1,000,000
| above as IMO most companies won't be in that position,
| especially newly founded startups. The worst part is that
| it happens without a ramp up and with high interest
| rates.
| 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.
| ricardobayes wrote:
| Ever heard of that small German company called SAP?
| 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.
| foobarbazetc wrote:
| No one is talking about tax credits.
|
| The _expense_ of salaries isn't deductible against
| income.
| foobarbazetc wrote:
| That's if you could have afforded to pay the tax on the
| $2,000,000 of phantom profit you had until this point, which
| no one can.
|
| You don't get that back unless you somehow fire everyone so
| you can offset income and expenses without more amortization.
| hgsgm wrote:
| You can if you raise debt or equity to pay salaries.
| 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.
| uoaei wrote:
| That's a natural outcome in any complex system. It's not
| reasonable to assume that changes can only affect some
| parts and not others. What's important is not the first-
| order changes, but the second-order equilibrium that such
| a change engenders.
|
| What's important is that unconstrained growth is
| meaningfully checked. This at least makes it possible for
| others to thrive, even if they're asked to adapt to a new
| paradigm. I don't see how a thorough analysis could ever
| ignore this.
| 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.)?
| [deleted]
| SomaticPirate wrote:
| Without getting into the finer points, my understanding
| is this: My company needs to make metal squares. There is
| a defined process for it. I just need a welder to weld
| all four corners. No R&D here.
|
| I need a website with some features. Asking a sample of
| professional software developers how to build it, you get
| a variety of answers.
|
| If anything, that the basics of software development
| still requires R&D is an indictment of our fields lack of
| professionalism.
| eldavido wrote:
| > If anything, that the basics of software development
| still requires R&D is an indictment of our fields lack of
| professionalism.
|
| This is a bit much. "Research" maybe, but not
| "development". Many things are developed -- land,
| buildings, etc. Someone still has to do the work.
| bcrosby95 wrote:
| Wait, what? There's more than 1 way to make metal
| squares, and which you want to choose is gonna vary based
| upon your needs and the fabricator, even if you, for
| whatever reason, pre-determine you want them welded!
| robertlagrant wrote:
| > My company needs to make metal squares. There is a
| defined process for it. I just need a welder to weld all
| four corners.
|
| What are they welding that has four corners to make
| squares?
| 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.
| [deleted]
| 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.
| roywiggins wrote:
| A party gaining the majority but being unable to
| functionally govern is awful for democratic legitimacy.
| Why vote when _even if your party wins an election, you
| don 't get your preferred policy implemented, even
| partially_?
|
| And beyond that, it lets party politicians who don't
| really want to have to take hard votes hide behind the
| procedural hurdles.
| pjc50 wrote:
| Indeed. That results in the political system being
| bypassed, and so critical progress in America was made by
| the _judiciary_ , which doesn't have popular support and
| is vulnerable to court-stacking and now, it appears,
| bribery.
| bradleyjg wrote:
| There's already a de facto supermajority requirement in
| that you need the senate, which represents states, and
| the house, which represents people.
|
| Also, it turns out that when the legislature doesn't act,
| because it was deliberately hobbled by its designers, you
| end up with an ultra powerful executive rather than
| things being left to the states.
|
| It would be better if more Americans recognized the flaws
| in the design of our system of government instead of
| quasi-worshipping the Founding Fathers and insisting that
| any problems are because we are unworthy of their great
| design.
| brightball wrote:
| That's a valid point. IMO the executive should have been
| more limited.
| bink wrote:
| > hobbled by its designers
|
| Minor quibble, but the filibuster is nowhere in the
| Constitution. And it was most recently modified in 1975.
| bradleyjg wrote:
| The legislature was split in two because it was
| considered the most dangerous branch. Or at least that's
| one of the explanations they gave when arguing for its
| ratification.
| sanderjd wrote:
| It may have been beneficial on net at some point in the
| past, but it's just bad at this point.
| Spooky23 wrote:
| The filibuster is fine, in its original form. Manipulate
| the parliamentary process to push the date close to the end
| of session, then have some windbag with sufficient
| endurance read the phone book for a few days.
|
| The current version, where you declare yourself
| filibustered, is too cheap. In the old days, they just
| filibustered stuff like voting rights, not procedures for
| borrowing money to support the adopted budget.
| duped wrote:
| I think both are undemocratic, and doubly so since it's
| in the vestigial organ of our former slave-driven
| agrarian economy.
|
| There's no good reason to have the senate, let alone the
| filibuster and effective super majority required for
| legislation.
| ticviking wrote:
| A proper endurance filibuster is fine, the current
| version is just pretending
| graeme wrote:
| How does that happen anyway. Why does the party with the
| majority allow a filibuster to happen without an actual
| speech?
| roywiggins wrote:
| The modern ("two-track") system was designed to be less
| disruptive to the Senate overall because it allows votes
| to happen on other, non-controversial bills while the
| filibuster is ongoing.
| graeme wrote:
| Thanks. Seems it was put in place in the 1970s after the
| filibuster of a civil rights bill.
|
| Still think they should make someone talk somewhere to
| keep the filibuster going. Cure seems worse than disease.
| Doubt they expected routine filibusters
| 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.
| brewdad wrote:
| Income gets double-taxed and triple-taxed and more all
| the time. Sometimes even by the some government body.
| 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.
| Alupis wrote:
| The issue is, modernly, people equate not getting what
| they want with the system being broken.
|
| The idea of compromise rarely survives the day. It's a
| 100% or zero game, lest we look like we actually agree
| with some of the other side... oh the horror.
| PuppyTailWags wrote:
| I think the idea of compromise rarely survives actual
| scrutiny when it comes to specific values. I don't know
| what a compromise on the death penalty is to an anti-
| death penalty stance. I don't know what a compromise on
| abortion is to an "abortion is murder" stance. Even if I
| fully understand with and sympathize with someone I
| disagree with, I may not be at all willing to budge from
| specific positions I've taken because I believe there is
| no acceptable compromise. (e.g. I don't think I could
| budge from being against sex trafficking.)
| pc86 wrote:
| [dead]
| dragonwriter wrote:
| And even where it does survive scrutiny based on the
| values of the factions involved in the compromise, it may
| not for other people in different contexts. I mean, we're
| in an age where slavers are, like pirates and torturers,
| recognized as _hostis humani generis_ , but many of the
| compromises in the Constitution are between two major
| factions, one of which thought slavery should be legally
| tolerated but not especially protected and favored, and
| the other of which thought that slavery should be
| specially protected and slavers should be rewarded with
| full extra votes for each slave - and the compromises all
| throughout the Constitution between those two factions
| tended to favor the latter faction. Sure, where it
| _explicitly_ concerns slavery, those have been mostly
| reversed (outside of the open door for penal slavery),
| but the substructures agreed in compromises between those
| factions whose underlying _purpose_ related to slavery
| but which did not reference it have been in many cases
| preserved, and even there defenders often can come up
| with little beyond "It's working as designed".
| dragonwriter wrote:
| > The issue is, modernly, people equate not getting what
| they want with the system being broken
|
| Since value is subjective, there is literally no other
| viable definition of broken, and if you think this is a
| modern idea, you haven't seen much of history.
| 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)
| pc86 wrote:
| You're conflating something being _bad_ by definition, in
| an inexcusable fashion, with simply not liking it. There
| 's nothing inherently bad about the upper chamber of a
| bicameral legislature being explicitly _not_ designed to
| represent individual people in a perfectly proportional
| manner.
|
| As originally designed, the US is not a nation with a
| strong central federal government that happens to be made
| up up 50 weak states and a handful of territories and
| districts. It's 50 strong states who happen to be united
| under one central but relatively weak federal government.
| In that context, having _States_ represented equally,
| without regard to their populations, makes complete and
| total sense.
|
| Completely by chance, that happens to indirectly
| overrepresent people you disagree with. That's
| unfortunate (depending on your ideology), but it
| certainly doesn't make the entire system broken or bad.
| yamtaddle wrote:
| > You're conflating something being bad by definition, in
| an inexcusable fashion, with simply not liking it
|
| I would love to know what this by-definition version of
| "bad" is. That's a remarkable finding.
| abirch wrote:
| I think they got the Senate right by not allowing direct
| election the 17 Amendment screwed that up.
| 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.
| pc86 wrote:
| Each of those States is represented by two Senators. It's
| completely equal when you understand that as originally
| written the Senators represent the States, _not_ the
| people within the States.
| Dalewyn wrote:
| It is fair because States are sovereign. The United
| States is a Union of States, after all.
|
| The Union is predicated on the States agreeing to certain
| terms and conditions that guarantee certain State Rights
| while compromising on others.
|
| One such compromise is representation within the Union,
| whereby the Lower House (House of Representatives) has
| the States represented proportionally by population and
| the Upper House (Senate) has the States represented
| equally regardless their population. Territories that
| aren't a State receive no representation.
|
| Additionally, the Lower and Upper Houses each have
| different duties and powers afforded to them. The Lower
| House legislates matters concerning money, among other
| things, while the Upper House legislates matters
| concerning government appointments and foreign diplomacy
| (eg: treaties), among other things. Both Houses must also
| agree with each other on any bills that are intended to
| go to the President for signing into law.
|
| The States in the Union are tantamount to independent
| countries in most other contexts, so States' Rights are a
| very big deal.
| Matl wrote:
| The UN comparison doesn't make much sense to me; in the
| context of the UN these are states with often vastly
| different languages, cultures, histories etc. not the
| case for the U.S. or at least nowhere near the same
| extent.
| prepend wrote:
| Right the senate is kind of like how in the UN each
| country only has one vote. It's by design that Luxembourg
| and China have the same votes.
| svachalek wrote:
| This sounds like it was written in 1860. States have not
| been tantamount to independent countries in a time where
| anyone currently alive could remember.
| pc86 wrote:
| Almost a hundred years before that, but yeah that's kind
| of the point.
|
| Prior to 1913 Senators weren't even elected by the
| popular vote, they were elected by state legislators.
| Literally elected by the State. One could argue that
| actually makes more sense.
| pyuser583 wrote:
| It guarantees the federal government had a strong bias
| towards inaction.
| 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).
| dsfyu404ed wrote:
| The senate was never meant to represent people. It was
| meant to represent the interested of the states as
| sovereign entities. The house was supposed to be the
| populist dumpster fire.
|
| But then some geniuses decided that we should direct
| elect both and have two dumpster fires.
| turndown wrote:
| >But then some geniuses decided that we should direct
| elect both and have two dumpster fires.
|
| this was done because the election process via the state
| assemblies was so corrupt that Americans regularly made
| fun of the Senate for this fact.
| dsfyu404ed wrote:
| Sure, but so was everything else the states did at the
| time and they did eventually clean up their act. It's
| hard to say whether direct electing the senate was good
| or bad because it's not like there's a control country we
| can compare to. It certainly gave the states as entities
| less influence which is probably not great.
| abraae wrote:
| You could compare it to the UK's House of Lords, where
| seats are (unbelievably to me) hereditary - passed down
| from toffs to their children.
| robotresearcher wrote:
| Hereditary peers are gradually being phased out over a
| series of reforms over the last 200 years. Only about 10%
| of current peers are hereditary.
| robertlagrant wrote:
| And the House of Lords has very limited influence.
| derefr wrote:
| I've always thought of the House of Lords as a
| descriptive, rather that prescriptive, power structure.
| You don't intentionally design peerage into a system of
| government.
|
| Rather, you've just got these people who are, at the time
| of the government's founding, equally powerful (at least
| in sum) to the government -- thus, _peers_ to the
| government. These people can do whatever they like; they
| can even have their own private standing armies et al,
| because your own standing army -- the military -- _isn 't
| powerful enough yet to prevent that_.
|
| Thus, you have to give these powerful people a seat at
| the table, or they'll challenge the legitimacy of your
| government (or maybe even just get together to overthrow
| it.) Maybe that's even what they _were just doing_ ,
| until you got them to calm down and talk to you.
|
| One might say that the whole process of establishing a
| government out of a feudal or contested state, _is_ the
| bringing of these "peers" to a common table, convincing
| them that it's in their best interests to solve their
| problems with the nascent government using plain in-the-
| open debate, rather than violence or subtle manipulation.
|
| Whereever the peers meet to have that open debate, then,
| is a de-facto "House of Lords." It doesn't need any laws
| about it to make it so. The laws grow up over time to
| enshrine what would be happening regardless.
|
| And in that light, the way "appointment to" a
| Westminster-system House of Lords works, makes total
| sense. The government isn't _granting_ people a seat at
| the table just because; rather, it 's _tracing_ the
| transfer of political power through dynastic inheritance
| (and explicitly stamping whoever received it with a
| heritable noble title, so that there 's no argument about
| who the government thinks received the political power.)
| This is also why noble titles can be extinguished -- if
| _nobody_ directly inherits a lump of political power,
| then there should no longer be a seat at the table for
| "the person who currently holds that lump of political
| power."
|
| The ideal end to a House of Lords, AFAICT, is that
| eventually all the noble titles go extinct; all the seats
| are removed; and the House becomes obsolete. I'm not
| aware of that having ever _happened_ yet anywhere, but it
| seems to be the intention from the start of every
| government.
|
| (The American system, at first glance, is incompatible
| with this end; but it could in theory have approached it,
| if the American people had been less fans of federalism,
| and had instead insisted that their own states revert to
| territories in exchange for seats allocated in a central
| parliament. I think this could have even been likely, in
| an alternate world where any of the colonies went down a
| monarchic or oligarchic route with their state
| governments.)
| gehwartzen wrote:
| > This is also why noble titles can be extinguished -- if
| nobody directly inherits a lump of political power, then
| there should no longer be a seat at the table for "the
| person who currently holds that lump of political power."
|
| Isn't this "lump of power" just monetary wealth,
| property, social connections etc? Why does it have to be
| passed onto a relative instead of any other individual
| the current power holder chooses?
| anonymouskimmer wrote:
| > Why does it have to be passed onto a relative instead
| of any other individual the current power holder chooses?
|
| Rarely people were "adopted". But generally because any
| relative who might be in line to the power would also
| have enough power to object to the inheritance passing to
| another. The hundred years' war was bad enough between
| two states. Having it within a state is not something the
| state wants.
| derefr wrote:
| The 101-level crash-course on this is CGP Grey's video
| _Death & Dynasties_:
| https://www.youtube.com/watch?v=ig_qpNfXHIU.
|
| In est, your "social connections" -- Grey's "keys to
| power" -- value stability of their own powerful positions
| in your government (or noble house, or family-run utility
| company/industry monopoly, or whatever other forms lumps
| of power can take.)
|
| The key-holders' own political power exists regardless,
| but whether it translates to _active ability to affect
| change right this moment_ depends on favor of the current
| ruler. Who better to place their bets on, then, as a
| replacement for a ruler who will continue to favor them
| -- a ruler who will ensure the stability of the previous
| ruler 's power base -- than someone the previous ruler
| has been grooming for that very job from birth?
|
| But I would argue that, at least for non-totalitarian
| states, there's also another, more interesting and
| crucial influence on what makes power legitimate.
|
| When governments and noble houses generate revenue and
| get things done through _free people_ who they employ or
| contract -- not slaves or serfs or indentured servants --
| then it 's the opinion of those _free people_ on who is
| the legitimate next ruler, that actually determines who
| the legitimate next ruler will be. In a non-totalitarian
| state, a ruler cannot rule without the will of the
| people. To do otherwise provokes a _populist_ -led
| revolution to abolish the seat of power altogether.
|
| Looking at how lines of succession of royal seats of
| power work/are calculated can be enlightening, because
| there's a certain point where the rules cross over from
| "what anyone actually a part of the current royal house
| would want" into "what the population thinks makes
| someone a legitimate heir."
|
| (The particular thing the population thinks _makes_
| someone a legitimate ruler, is usually a result of a
| centuries-long propaganda campaign by those in power; but
| no individual who wants power can entirely overwrite that
| belief during a succession crisis, which is the important
| thing here.)
|
| Here's the way this works for the UK:
| https://www.youtube.com/watch?v=46N-bulO-aM
|
| Note in the above, the people that get referred to as
| "royals" and have little crown icons. Those are the
| people that the existing ruler grooms as potential
| replacements, trying to get them established in the minds
| of their power base.
|
| But note how there are so many _other_ candidates to
| succession outside of this small group. These other
| candidates are there not because the royal family would
| rather transfer power to them, but rather because the
| _will of the people_ in this case is to follow this weird
| rule (patrilineal primogeniture) wherever it takes them.
| (Which is a kind of rule-utilitarianism, in the sense
| that a society notoriously following this rule wherever
| it may lead, tends to result in the fewest wars of
| succession.)
|
| If Westminster gets hit with a nuke one day, and all the
| current UK "royals" die -- and then some con-artist pops
| up who was living in Morocco, and claims that they're the
| secret son-by-marriage-twice-removed of the Earl of
| Sandwich -- then what that person is trying to _do_ , is
| to claim legitimacy in the eyes of the people. They don't
| hold any of the current "keys to power"; but they think
| they might be able to _step into_ those relationships and
| _be accepted by_ those "keys to power", if they can
| first get the people who _work for_ those key-holders
| seeing them as the key-holders ' new legitimate boss.
|
| This is also true when deciding who initially forms
| government in a feudal/contested state. Who "won" the War
| of the Roses, between the houses of Lancaster and York?
| The entirely-separate House of Tudor. The houses of
| Lancaster and York, through their violent conflict, ended
| up killing all the groomed male heirs of both houses --
| making them both invalid choices for succession in the
| eyes of the people (because patrilineal primogeniture),
| _and_ in the eyes of the "keys to power" (because no
| established relationships left with anyone in those
| houses.)
|
| And yes, this all still applies even in a country with
| democratic elections.
|
| Most modern democracies are templated off the Westminster
| system, and so don't directly elect a president, but
| rather elect a legislature who in turn _appoint_ a Prime
| Minister, like a corporate board of directors appointing
| a CEO. Guess who 's getting appointed? Someone with
| established relationships with keys to power; perhaps
| hereditary ones. (Consider: Justin Trudeau.)
|
| For countries that directly elect a president _and_ have
| term limits, the choice might _seem_ to be more in the
| hands of the people... and often is, at the country 's
| founding. But you then get a primacy of _political
| parties_ as noble-house-esque government-in-waiting
| entities, each trying to find and groom politicians into
| figureheads for the "party line", such that it's
| actually the _party_ , and not the individual, that
| establishes the continuous key-holder relationships and
| carries them forward. The political party acts in lieu of
| a noble dynasty as the immortal entity conferring
| stability-of-power to key-holders.
|
| The one way in which political parties _aren 't_ just
| noble houses, is that they will sometimes voluntarily
| allow outside entities who _don 't_ "toe the party line",
| to come in and take over for a bit -- _if_ those
| outsiders hold their _own_ lumps of power. For a noble
| house, this would be suicide--they 'd be "overwritten" by
| the outsider's new dynasty. But a political party will
| continue on just as they were afterward... but now having
| _absorbed and digested_ the key-holder relationships that
| the outsider brought with them, into itself. (Consider:
| Donald Trump.) Though, note, noble houses _do_ absorb
| external key-holder relationships -- they do it through
| political marriages.
| thaumasiotes wrote:
| > You don't intentionally design peerage into a system of
| government.
|
| Says who?
|
| From _Red Roulette:_
|
| > The struggle pitted Xi Jinping against an official
| named Bo Xilai. Both were sons of Communist "immortals",
| veterans of Mao's revolution. And both owed their careers
| to a Party decision made in 1981 and pushed by a high-
| ranking Communist named Chen Yun to establish a special
| office in the Party's personnel department called the
| Young Cadres Section. That section's purpose was to
| ensure that the sons and daughters of senior Party
| members were given good positions in the government and
| the Party. "If our sons and daughters succeed us," Chen
| Yun declared, "they won't dig up our graves."
|
| > The Tiananmen Square crackdown of 1989 gave this work
| added urgency. A key lesson that the red aristocracy drew
| from that turmoil was that, as the saying went, "you can
| best depend on your own kids." Each leading family chose
| an heir to be groomed for political leadership. Nominated
| by their fathers, Xi and Bo rose through the Party ranks.
| singleshot_ wrote:
| There's a complex relationship here; the change
| diminished all states greatly, in favor of passing power
| to their citizens, but it also empowered the citizens of
| the big empty states in a way that the citizens of the
| small urban states were already empowered.
|
| It occurs to me after typing this that when you said "as
| entities" you were probably alluding to this dichotomy.
| turndown wrote:
| I did not really like how fast and loose with history you
| were, so I will just say that they did not clean up their
| act on their own, but were forced to. Many things have
| been forced on the states judicially, brown v board of
| education, baker v Carr/wesberry v sanders/reynolds v
| sims all forced more equitable voting schemes(ie,
| handling gerrymandering) etc are some easy examples I
| could think of for how your idea that the states figured
| themselves out is a misconception.
| themaninthedark wrote:
| I like the idea of moving back to having the Senate
| controlled by the States, I think it would help clean up
| some of the mess.
|
| I disagree on the point that the states have cleaned up
| their act, what has happened is that the Federal
| government has taken on more power and responsibility
| from the States, for better and worse.
|
| Meanwhile, people have become more disconnected from
| their state politics and only focus on the federal. Up to
| the point of blaming the federal government for not
| acting when it is the state's responsibility.
| Spooky23 wrote:
| It did no such thing. It gave state _legislatures_ less
| influence in Federal governance.
|
| If you're a big believer in the mythological principles
| of US government, the idea of people electing
| representatives shouldn't be seen as a diminishing of the
| state. State power is endowed by the creator to the
| people.
|
| Legislatures aren't states. The governor is the head of
| state executing the laws of the people as expressed by
| the legislature.
| NoMoreNicksLeft wrote:
| It turned a bicameral system into the crypto-unicameral.
|
| It removed one of the big checks of "checks and balances"
| fame.
|
| > Legislatures aren't states. The governor is the head of
| state executing the laws of the people as expressed by
| the legislature.
|
| I'd watch that clusterfuck on pay-per-view. But sure,
| it'd still be an improvement if you want governors to
| appoint them.
| Karrot_Kream wrote:
| The concept of a Federal government was only expanded in
| recent (post Commerce clause) times. Historically, the
| government was meant to be a thin layer uniting a bunch
| of States together. Within that framework, the Senate
| made more sense; it was meant to be more of a UN of the
| States than a representative body. The Constitution
| throughout was a balance between populist and non-
| populist interests as the founders had a strong distrust
| of purely populist rule.
|
| If you're a believer in the somewhat more modern American
| ideal of a purely populist government then yes, the
| current Senate makes more sense, but then it doesn't make
| sense as to why the Senate grants equal power to each
| state no matter how populous.
| anonymouskimmer wrote:
| > Historically, the government was meant to be a thin
| layer uniting a bunch of States together.
|
| This has been an argument since the beginning. The
| thinnest layer (Confederation) was found non-viable and
| was replaced by a somewhat thicker layer after about six
| years. There was a lot of argument then, and a lot of
| argument after the fact, leading to thinning and
| thickening of the layer.
|
| > but then it doesn't make sense as to why the Senate
| grants equal power to each state no matter how populous.
|
| Or, under the previous system, why Senators were elected
| for 6 year terms when they would more easily represent
| the states' current interests with 2 year terms.
| singleshot_ wrote:
| As it turns out, compared to endless war, global economic
| whipsaw manipulation, climate crisis, mass incarceration,
| widespread poverty, and heavily entrenched political
| corruption, the Articles of Confederation actually were
| pretty viable.
| anonymouskimmer wrote:
| Wars that were taking place under the Articles, the later
| two of which started during the time of the Articles:
|
| https://en.wikipedia.org/wiki/Cherokee%E2%80%93American_w
| ars
|
| https://en.wikipedia.org/wiki/Northwest_Indian_War
|
| https://en.wikipedia.org/wiki/Shays'_Rebellion - Note
| that this last one was a Civil War.
|
| The US is currently in 24th place on the corruptions
| index: https://www.transparency.org/en/cpi/2022/index/usa
|
| And it seems that corruption was not unknown in the
| states during the Confederacy period, and is claimed to
| have increased during the Confederacy:
| https://www2.byui.edu/i-learn/examples/AF_beforetext.pdf
|
| > Between 1776 and 1787 corruption in state governments
| increased. States where debtors gained control of the
| legislatures issued large quantities of paper money which
| depreciated rapidly in value. In Rhode Island the small
| farmers in the assembly adopted a Force Act requiring
| creditors to accept the money at original value.
| Creditors in other states were also discriminated against
| by mortgage stay laws which prevented mortgage
| foreclosures for indefinite periods. The problem of
| factions within a republic, that was supposed to be
| solved by keeping republics small like the states, seemed
| became acute as legislatures became controlled by one
| faction or another and those factions passed
| discriminatory legislation.
|
| > There were many disputes and tensions between the
| states that arose over foreign and interstate commerce.
| The states began using their power to levy tariffs after
| the war when England dumped such quantities of cheap
| goods in America that domestic producers were threatened
| with ruin. As the tariffs were not uniform among the
| states, commerce gravitated toward such low-tariff states
| as Rhode Island. Other states, jealous of this trade,
| began levying retaliatory tariffs against the goods of
| those favored states. Merchants and manufacturers wanted
| an end to destructive interstate tariffs and commercial
| rivalry, as well as aid in their dealing with foreign
| governments. States also began to argue with each other
| over the control of rivers and ports so essential to
| foreign and interstate trade; causing more bitter
| disputes between the states.
|
| I got the bookends, you can address "global economic
| whipsaw manipulation, climate crisis, mass incarceration,
| widespread poverty" if you want.
| singleshot_ wrote:
| A farmers' tax protest in Worcester was not exactly what
| I meant by "endless war" but I certainly appreciate how
| good you are at copying, and then pasting.
| dsfyu404ed wrote:
| Just be happy he's not one of those types that cites
| links that don't back up his claims as a debate tactic.
| [deleted]
| bryanrasmussen wrote:
| the Senate grants equal power because in this way the
| smaller states do not end up without an equal say.
|
| America built in its own rotten boroughs problem as part
| of the foundation
| soco wrote:
| That's an interesting take, to call democracy a dumpster
| fire. Some people I suppose would have rather kept their
| parties with tea.
| Spooky23 wrote:
| Lol. That was done to placate the slave owners.
|
| Just like modern reactionary politics isn't good for
| people or popular, the biggest fear of slave owners was
| that free whites would figure out that slaves gutted the
| value of their labors.
|
| It doesn't take a "genius" to figure out that having
| state legislatures select federal legislators is foolish.
| Anyone suggesting that the US Senate as constituted for
| the last century is a populist institution may require
| institutional help of another kind.
| galangalalgol wrote:
| While I agree that oligarchy has been the order of the
| day for some time, perhaps always, it is not self evident
| that having hierarchical elections is somehow worse than
| direct votes for people we see talk briefly on TV. I
| would actually prefer that I always get to choose between
| people I actually know face to face, that in turn select
| diminishing numbers of people. When we vote for sound
| bites it is simply a matter of who can comvince us they
| believe our own hastily formed opinions predicated on
| subpar government, economics, and history education
| combined with a complete lack of relevant work experience
| are in fact correct. If I select between my neighbors, it
| would be based on my perception of their character, and
| the ability to spot both expertise and bs.
| dsfyu404ed wrote:
| > Lol. That was done to placate the slave owners.
|
| The 17th amendment was passed ~50yr after the civil war,
| a point in time when the overwhelming majority of the
| electorate had no memory of overt slavery and the people
| who did or who's parents did were even less influential
| than before due to immigration waves and
| industrialization (which concentrated population money
| and power in the northeast and Midwest generally
| speaking). Please f right off with your revisionist
| history.
|
| >Anyone suggesting that the US Senate as constituted for
| the last century is a populist institution may require
| institutional help of another kind.
|
| This is rich coming from the guy that just said an
| amendment passed in the 1900s was done to placate slave
| owners.
|
| Regardless of the intent of the amendment, only a
| complete fool would claim that making appointed positions
| directly elected doesn't make the body formed by those
| positions more subject to populist sentiments than it
| previously was.
|
| I'm not entirely sold on the idea that direct electing
| the senate is a bad thing but it doesn't take a genius to
| look at the situation before and after and see that there
| are pros and cons to both. Like you can literally pick up
| a history book and look at the influences the senate was
| beholden to and strongly pushed around by before and
| after the change.
| [deleted]
| blululu wrote:
| >>some geniuses A super majority of both the house and
| senate with 3/4 of all state legislatures in accordance
| with the intention of the original founders that people
| update things as the times change?
| 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...
| sanderjd wrote:
| You don't deserve to be downvoted for just not knowing
| that this isn't how the filibuster works anymore. All the
| well known pop culture treatments of it - Mr. Smith Goes
| to Washington, The West Wing, etc. - show this form of
| it.
| 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. "
| Kon-Peki wrote:
| If you want to see a real filibuster in action, go to
| Nebraska!
|
| Machaela Cavanaugh has been filibustering the legislature
| for weeks! 12+ hours a day, weeks on end. She has
| monumentally impressive resolve.
|
| Actually, I think you missed it. The Nebraska legislature
| finally passed a bill today.
| eek2121 wrote:
| That is great and all, but what folks are communicating
| here is quite different. Filibusters in the Senate do not
| require you to even show up, you can simply claim a
| filibuster to stop a vote from happening.
| 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 reputational 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.
| MichaelZuo wrote:
| So it sounds like it's an even smaller minority rule now?
| sanderjd wrote:
| Yep, during the Obama administration, Sen. Ted Cruz
| famously shut down the government for awhile, nearly by
| himself, pissing everybody on both sides off, except for
| the small number of people who vote in Republican
| primaries, who ate it up.
| listenallyall wrote:
| In an effort to provide balance, I'll point out that
| months before Cruz's stunt, Wendy Davis, a Texas state
| senator, filibustered for about 11 hours to prevent a
| vote on an abortion bill.
|
| > people who vote in Republican primaries, who ate it up.
|
| To the best of my knowledge nobody made a movie about
| Cruz's speech. Davis's speech, on the other hand, became
| the subject of a documentary debuting at SXSW:
|
| https://spectrumlocalnews.com/tx/austin/news/2022/03/09/d
| ocu...
| lumost wrote:
| You could have a single senator block the entire senate
| from delivering anything. The only back stop on this is
| whether a party would kick out a miss behaving senator or
| primary them.
| lazide wrote:
| Eh kinda - it's that way because everyone wants the rules
| to be that way.
|
| A large enough majority can just change the rules. It
| isn't that hard to actually do.
|
| But they prefer it this way.
| prepend wrote:
| The filibuster decreases the rate of change.
| [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.
| MichaelZuo wrote:
| This sounds like a positive because it makes sure the
| support backing actually enacted policies is not balanced
| on a knife edge.
| yamtaddle wrote:
| This might be true, if the policies advanced by
| legislators more-closely reflected what voters want.
| Instead, we have a bunch of very-popular reforms that
| never get done for a variety of reasons, but the one-two
| punch of the two-party system and the Senate filibuster
| are a big part of why. Though, personally, I'd say our
| system naturally stabilizing at two parties is the bigger
| of those two problems--it's the core reason why major
| legislative bodies in the US can end up maintaining or
| advancing laws and policy that differ sharply from what a
| large majority of voters want, session after session.
| Unfortunately, fixing that would require a bunch of
| legislators or a bunch of states to vote against their
| own interests. So, probably not gonna happen, ever.
| 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.
| brookst wrote:
| The founders also designed a system that a very few
| people got to vote, and with the assumption it would take
| days for representatives to hear from their constituents.
|
| Yet nobody seems to be saying the answer is going back to
| horses and written mail in the name of making our
| government fit our lives better.
| chiefalchemist wrote:
| It's all in the name: The United States. States is the
| key word.
|
| No one is suggesting horses or written email.
|
| It's a simple understanding of history, and a practical
| and honest observation of how dysfunctional things
| continue to be. Yet we keep pushing that the answer is
| more of the same? That's naive. That's not sustainable.
| brookst wrote:
| We certainly need to improve.
|
| I am not convinced in the "go back to the way it was
| designed" argument, since you either have to cherry pick
| the aspects you like, or advocate for reversing women's
| suffrage, emancipation of slaves, etc.
|
| As soon as we agree that the founders got some things
| right and some things wrong, there is no more argument
| that they were prescient and we should revert to their
| designs.
|
| IMO better to take stock of the current situation and
| seek changes based on their merits today, independently
| of whether they align to the ideas of 250 years ago.
| shapefrog wrote:
| > difficult it is to predict policy outcomes
|
| Are they really - or are they pretty obvious to anyone
| who casually glances at the headline of the policy, but
| the consequences are a problem after the next election.
| If you win you can always just blame the _other side_ and
| if you lose you can blame the _other side_ as well.
| 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.
| rvba wrote:
| "Starve the beast" is a political strategy employed by
| American conservatives to limit government spending by
| cutting taxes, to deprive the federal government of
| revenue in a deliberate effort to force it to reduce
| spending.
|
| https://en.wikipedia.org/wiki/Starve_the_beast
| fwungy wrote:
| The most dangerous, murderous things in history are
| powerful central governments. They are like the Ring of
| Power, everyone thinks they can wield it for good, but it
| doesn't work out that way.
| throwaway173738 wrote:
| That's a nice general principle but you didn't provide
| evidence of specific harm. I think arguing past each
| other from first principles is exactly why the US is in
| this mess in the first place.
|
| The fact is that all these government agencies are
| preventing specific harms. Throwing them out because of
| some vague "big government is bad because it might turn
| into a tyrrany later" isn't an argument that the harms
| being prevented don't exist. It's a non-sequitor, like
| saying the sky is blue when someone complains about
| airplane noise.
| flangola7 wrote:
| Powerful and authoritarian are two different things. I
| want a powerful but democratically controlled via popular
| vote government.
|
| Power abhors a vacuum. I would rather that power be in
| the hands of the citizen votes.
| notch898c wrote:
| And what does spending indicate. Has the beast been
| starved?
| rvba wrote:
| I dont live in USA so I dont know. But here the ruling
| party is losing in local elections in town, so they cut
| the amount of taxes aplocated to muncipialities while at
| the same time they ask them to deal with more issues. So
| muncipialities are forced to degrade the quality of their
| services - since they dont have enough money. Then the
| ruling party claims that the local politicians cannot
| rule properly. What is just a lie. But this lie works.
| notch898c wrote:
| I believe it is possible it is happening at some
| municipal levels but my question was more directed
| towards your statement
|
| >employed by American conservatives ... to deprive the
| federal government of revenue
|
| which appears to refer to _federal_ level. The general
| trend of federal receipts have been fairly flat above 15%
| for decades (except during great recession circa 2009),
| and the spending slightly different rising a bit above
| and funded by debt and /or inflationary effects.
|
| My takeaway is here the beast has not been starved,
| although the beast is spending more of our children's
| future incomes in the form of increasing debt.
|
| https://stats.areppim.com/ressources/us_spendxrevxgdp_29x
| 10_...
| rnk wrote:
| We'd be so much better if there were no environmental
| rules, wouldn't we? Medical regulation, who needs it?
| 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.
| rjmunro wrote:
| It's not that the government is "large". It's that the
| representatives from different parties are unable to work
| together to get stuff done. I think it's mostly the way
| the media cover politics - they can't be seen to be weak.
| 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]
| nostrademons wrote:
| Large corporations are utterly dysfunctional too. The
| difference is that when a large corporation grows too
| dysfunctional, it's replaced by a small corporation. When
| a large government grows too dysfunctional, it's replaced
| by a small government too, but the process is
| significantly bloodier.
|
| Robust systems are made up of interacting parts that
| tolerate partial failures. The reason the U.S. economy as
| a whole remains strong is because its least efficient
| businesses are continually failing, and their resources
| get reabsorbed by more competitive parts. When this
| ceases to happen (eg. the "too big to fail" banks in
| 2008, "what's good for GM is good for the country" in
| 1953), the economy as a whole becomes much weaker. There
| is no similar ablation process for the U.S. government -
| lately, there hasn't been an easy way to let parts of it
| fail while still preserving the government as a whole.
| This will likely lead to the collapse of the _whole_
| government, which is unfortunate. It can 't avoid the
| dynamic common to all systems: the way to avoid total
| failure is to tolerate and adapt to partial failure.
| nemothekid wrote:
| The problem with comparing corporations with governments,
| is that corporations are (1) ephemeral and (2) have
| clearer measurable objective functions (profit). The
| government _should_ do things that are inefficient and
| unprofitable. Note that services can both provide value
| and be unprofitable (they can generate value but not
| capture it). A corporation that needs to cut costs can
| layoff workers. A government that is dealing with large
| unemployment can 't just do a genocide.
|
| All of this is to say is that even though large
| corporations and large governments are alike, the most
| efficient solution for a corporation (bankruptcy) is not
| a good solution for government and so _despite_ the
| inefficiencies we are sort of forced to accept them as
| the engineering realities of the situation. I fully
| understand large governments have large government
| problems, I just don 't agree with the notion that having
| a smaller government is a solution and that the small
| government meme has largely been toxic to the detriment
| of the middle class.
| nostrademons wrote:
| There has to be a check on the inefficient and
| unprofitable things that a government undertakes, though,
| because otherwise all of the citizenry gets tied up doing
| inefficient stuff.
|
| In theory democratic government is the check on this - if
| the government wastes too much money, the electorate is
| supposed to vote out their representatives and elect new
| ones that will cut the budget. (In this sense, Reagan-
| style conservatism is working as intended). In practice,
| this rarely happens, largely because the average voter is
| terrible about judging opportunity cost, and every
| expenditure seems worthwhile in a vacuum.
| govolckurself wrote:
| [dead]
| robertlagrant wrote:
| > and (2) have clearer measurable objective functions
| (profit)
|
| This is a bit like saying that the goal of government is
| GDP per capita. Yes, both are important, and both are
| indicators of doing a good job at something, but what a
| business does is the most important thing: how does it
| adapt to reality and make sure it is always doing
| something useful enough to pay for?
|
| Government doesn't necessarily do things people want to
| pay for, as then it might do much less stuff, but people
| do want to feel as though they're getting value for money
| from their taxes, and that the government isn't spending
| so much that taxes go up vastly and their currency is
| inflated so much their careful savings are wiped out.
| 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.
| MichaelZuo wrote:
| Well theoretically you could, it's just that the big
| states would have to offer up an amazing deal to entice
| the smaller states to agree to call a constitutional
| convention.
|
| The supermajority of the electorate in the smaller states
| might be willing to exchange future political influence
| for sufficient wealth or some other compensation.
| 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.
| nostrademons wrote:
| The long-term risk usually isn't disintegrating into
| smaller nations, it's being conquered by a larger nation.
| And that's exactly why it matters if your country is dead
| - you could have the greatest constitution in the world,
| but if everybody lives under the totalitarian
| dictatorship next door, it's not doing you much good.
| Realistic governance needs to be a balance between
| quality of life for citizens and the continued survival
| of the state and independence from conquering powers.
| Arguably many Native American tribes were a lot happier
| before the white man came, but that doesn't do you much
| good when you get genocided.
|
| Relatedly, I'm not sure if the GP's Scalia speech
| actually gets the causality right. I think we could make
| a good case that the United State's dominance and
| longevity comes from two oceans, fertile cropland, and
| advanced technology, and form of governance is a mostly-
| irrelevant sideshow. You could plop a different
| government down in North America, and as long as it had
| adequate incentives for individual innovation, it'd still
| end up a superpower.
| HDThoreaun wrote:
| The founders didn't create the filibuster because they
| already created a fuck load of checks on the majority.
| Making even more is senseless.
| dougdekins wrote:
| [dead]
| sanderjd wrote:
| "The founders" did not create the filibuster. They
| actively debated whether it should require more than a
| simple majority to pass legislation, and decided that was
| a bad idea. They had already designed a system with a ton
| of friction in it. It didn't need one more hurdle.
| 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.
| dsfyu404ed wrote:
| >But the writers of the constitution in 1788 wanted a
| strong one because the existing weak one sucked.
|
| The founders wrote reams upon reams discussing exactly
| what they wanted to do with the constitution and how they
| intended each and every bit of the constitution to work
| toward that goal. The intent was basically "we need just
| a little more centralization in order to deal with the
| truly national issues."
|
| The government they created to replace the articles of
| confederation was weak by the standards of the time let
| alone modern ones.
| 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.
| sanderjd wrote:
| I don't think this is right. I've read a bunch of people
| who didn't like The Constitution, but they weren't making
| full throated arguments for just keeping the status quo.
| Can you point me to arguments from "the founders in 1776"
| for just keeping the Articles in their form at the time?
| 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)
| dsfyu404ed wrote:
| >and increasingly need to be retired.
|
| There's ~150 million people that think the opposite
| should be done.
| tomrod wrote:
| Phew, just a minority in the US then that doesn't digest
| a whole comment. I was worried!
| snovv_crash wrote:
| I think you have it backwards. The states should be given
| more power, and possibly broken up. There's no
| accountability once your number of constituents exceeds
| about 1M people.
| lesuorac wrote:
| I think you're going the wrong way with this.
|
| The problem is that there are too few representatives and
| so they can build collations that explicitly exclude your
| interests while still representing you.
|
| I think it would be much better to have some dual-system
| to send representatives to congress where you could
| either Vote or Petition to get a representative. If you
| Vote its basically the same as currently. But if you
| Petition you and ~150k other people do not get to Vote
| but the person you're petitioning for is your
| representative.
| tomrod wrote:
| No, that duplicates fixed administrative costs, requiring
| more government.
|
| Also, prior commentator didn't fully read the comment
| they were responding to.
| 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.
| lr4444lr wrote:
| Same with gay marriage. Methinks the GP is taking a LOT
| for granted about federal programs being implemented well
| and not subject to the same malaise of partisan gridlock
| that prevents them from coming into existence.
| tomrod wrote:
| Something said in jest may yet contain elements of truth!
| :)
| rnk wrote:
| The states switched to the constitution because the
| confederation was too weak and didn't handle or clarify
| many important issues. Most of the founders were still
| around.
|
| https://en.m.wikipedia.org/wiki/Confederation_period.
| "...could not accomplish anything independent of the
| states. It had no chief executive, and no court system.
| Congress lacked the power to levy taxes, regulate foreign
| or interstate commerce, or effectively negotiate with
| foreign powers. The weakness of Congress proved self-
| reinforcing, as the leading political figures of the day
| served in state governments or foreign posts. The failure
| of the national government to handle the challenges
| facing the United States led to calls for reform and
| frequent talk of secession".
| bluGill wrote:
| The people behind the constitution were not the same
| people behind the articles of confederation. Yes they
| were around, but they were happy back on their farms and
| businesses and didn't even realize what was going on
| until the constitution was nearly a done deal. They
| rushed back and eventually came up with the bill of
| rights.
| freejazz wrote:
| And the federalists were correct about the Bill of Rights
| too
| 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?
| anonymouskimmer wrote:
| It doesn't matter whether slavery would have been
| abolished, because what wouldn't have been legally
| enshrined without the Constitution were the 14th, 15th,
| and 24th amendments (and later civil rights laws that
| finally gave power to these amendments), and possibly the
| 19th amendment.
| bugglebeetle wrote:
| Well, yes, this is effectively restating my point.
| Barring the constitution, there was little conceivable
| way for slavery to be abolished under the Articles of
| Confederation because there would've been insufficient
| authority to impose that on the states, nor likely the
| justification to enforce the wholeness of their union.
| 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.
| sanderjd wrote:
| The industrial revolution predated the abolition of
| slavery in the US by decades. Indeed, one of the (not
| very high minded!) gripes of the northern states was that
| their industrial economies had to compete on an uneven
| playing field, against states with free labor.
| zopa wrote:
| Go read a few slave narratives -- Fredrick Douglass's
| autobiography for one is great, extremely readable, and
| pretty short.
|
| And just notice how often the writers mention not having
| enough food, or basic clothing. Then get back to us on
| the idea that slave owners would have taken even minimal
| care of slaves.
|
| You've written how you think it ought to have worked. But
| that's not how it actually worked.
| bluGill wrote:
| There is a different between enough food and feeling
| full. Most people want to eat enough to get fat. A slave
| would be given cheap food, enough that they can work.
| Starving a slave to death isn't a good use of them.
| However feeding them so much they get fat isn't economic
| as well.
|
| Fredrick Douglas didn't have motivation to treat slavery
| fairly either. (few writers of the day did - thus making
| it hard for historians to figure out the truth, though in
| this area there is a lot more data than historians
| studying something of several thousand years ago).
| sofixa wrote:
| > A slave would be given cheap food, enough that they can
| work. Starving a slave to death isn't a good use of them
|
| You might want to check on accounts from e.g. Haiti where
| slaves' lives were considered very cheap and that's
| precisely why they were used for the dangerous labour
| around sugar production.
|
| > Fredrick Douglas didn't have motivation to treat
| slavery fairly either. (few writers of the day did - thus
| making it hard for historians to figure out the truth,
| though in this area there is a lot more data than
| historians studying something of several thousand years
| ago).
|
| How does an ex-slave treat slavery "fairly"? He lived
| that shit, he knows how despicable it is. What other side
| is there to present? The economic interests of the
| slaveowners?
| freejazz wrote:
| [flagged]
| fwungy wrote:
| Does it make logical sense to abuse and weaken your own
| property?
|
| If they were too harsh with slaves they'd spend a lot
| more time and energy managing their behavior. Even in
| prison privileges are given so they can be taken away.
| Slave owners probably treated their slaves well enough,
| in aggregate, that they were capable to work productively
| and did not have immediate cause for revolt. The slave
| owners had to live in close proximity to their slaves
| after all.
|
| The Hollywood portrayals of slavery as essentially
| unrelenting cruelty and sadism don't make sense, except
| for on TV. Any farmer would have known that you don't get
| the best work out of your horses or mules by abusing and
| starving them. There's a knee point of optimal treatment
| for all labor arrangements. The EVIL fact that slaves
| were property of their masters does not change this.
| bboygravity wrote:
| Anecdote is not data.
|
| Many types of slaves existed and still exist in the
| history of humanity.
|
| The slaves around Julias Ceasar probably had a different
| life than the average native Columbus slave (they where
| almost all quickly worked to death genocide style and he
| was a total sadist).
| freejazz wrote:
| We are talking about American slavery, no?
| pessimizer wrote:
| Slaves worked in a lot of crafts and services, not just
| field agriculture.
|
| It's weird that you think that they had it better than
| migrant laborers.
| prepend wrote:
| Slaves had it way worse than migrant workers. But slaves
| costed owners more than migrant workers cost employers.
| sanderjd wrote:
| Seems like a citation would be useful there.
| bboygravity wrote:
| No citation but in times of inflation the reasoning makes
| sense to me: a slave would not earn a wage, but the owner
| would have to provide a roof/bed/food + pay for whatever
| transportation was needed to/from work + pay for
| healthcare in case the return on investment would be
| worth it (probably would?).
|
| An (immigrant) worker gets none of that and might barely
| be able to get by even without counting the healthcare
| (in the US).
|
| Sounds to me like a slave might indeed be cheaper in
| some/many situations than a minimum wage worker. I'm not
| convinced either way.
| bluGill wrote:
| A migrant is more expensive when you have work to do.
| However a migrant is free when you have no work - they go
| elsewhere. A slave you need to feed year round, even when
| it is raining and thus you cannot work.
|
| A slave also needs more management. Migrants and free
| workers will get themselves to the job and in general
| work. A slave has no motivation to work harder so you
| need some form of "slave driver" to keep them working. If
| you try to move your slaves around like migrants move,
| then you need a manager to go with the slaves to keep
| them working - migrants manage themselves.
|
| A slave is cheaper if you have a lot of repetitive, low-
| skill, year round work that must be done by hand. However
| most of that type of labor is easy for the industrial
| revolution to automate.
| rnk wrote:
| You added a note to try to cover yourself but no, slavery
| is not comparable, not the same as migratory workers.
| Migratory workers have it very hard & it's to the shame
| of America how we treat those vulnerable people at our
| borders. For migratory workers, generally no one kidnaps
| their children, rapes them as part of their job, forces
| them to carry their children to term, murders them, sold
| them off. It's basically one step away from the classic
| "black people had it better as slaves" comment.
| schuyler2d wrote:
| The industrial revolution radically increased slavery.
|
| Read the history of the cotton gin and then how steam
| power made larger transportation easier and expanded
| populations to consume cotton and tobacco. Industrially
| produced guns and other tools helped "manage" slaves and
| later prisoners.
|
| Post-civil war, industrial prison system instituted chain
| gangs to recreate "legal" slavery and forced prison labor
| still exists in many states.
| bluGill wrote:
| Not really. It increased some types of slavery as before
| steam power those parts you name were not economical.
| However slaves were a major way to grow food prior to the
| industrial revolution. Industry created machine that
| needed only a few trained crew to operate. That you only
| needed a few meant that the slave master could do all the
| work without having to watch the slaves (who did tend to
| rebel or not work hard if you didn't watch them closely).
| You couldn't have a lone slave run a machine in general
| because the slave not being watched would find it easy to
| run away - possibly with the machine.
|
| The US south ended slavery with the civil war, but most
| places in the world had a peaceful end. It wouldn't have
| been peaceful if it was economical as the rich would have
| fought to keep it.
| 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-...
| fwungy wrote:
| 1) in the USA slavery would have eventually ended due to
| the economics. Steam engines are cheap compared to human
| manual labor.
|
| 2) Migrant labor is the replacement for slave labor in
| the USA. These are workers who do not legally exist and
| thus are subject to the worst of exploitations by
| employers and criminal concerns.
|
| 3) Human beings of all races have a pretty bad record of
| how they may treat other races/tribes/outgroups. Genghis
| Kahn killed and raped so many people that he altered the
| genetic profile of humans. African tribes routinely
| enslaved each other. Arabs took white slaves. People can
| be dicks. The list goes on and on: cruelty is a part of
| the universal human condition.
|
| As bad as the USA, it's the only country to go to civil
| war to free slaves of another race, even if that wasn't
| the complete reason for the Civil war.
| sanderjd wrote:
| Steam engines were widespread for half a century before
| the abolition of slavery. Your argument here is just not
| coherent.
| bluGill wrote:
| Not in a form that could replace slaves. The first
| traction engines were not until around the civil war
| time, and those were not practical for many tasks that
| slaves did. Steam trains did exist, but the idea of
| running a train engine off of tracks didn't really come
| around until the 1850s - just before the war - and those
| were very limited machines that couldn't work most soils.
|
| Even at that, the steam engine was in the process of
| replacing slaves for many tasks. There were just a lot of
| tasks left that the steam engine wasn't yet practical to
| replace slaves - but that would have happened anyway.
| anonymouskimmer wrote:
| > As bad as the USA, it's the only country to go to civil
| war to free slaves of another race
|
| "free slaves of _another race_ "? Some of those going to
| war were people of that race. On both sides.
|
| This is also a bit ahistorical as Lincoln was willing to
| allow slavery in order to keep the union. It was really
| the south who chose to go to war in order to guarantee
| slavery would stay; the north chose to go to war in order
| to keep the union. The slavery issue was used by the
| north, initially, to keep the anti-slavery UK from siding
| with the south.
| anonymouskimmer wrote:
| > free slaves of another race
|
| And I forgot to mention that some of those slaves were
| blonde-haired and blue-eyed with skin lighter than most
| Caucasians. Maternal inheritance of slavery rule.
| https://rarehistoricalphotos.com/white-slave-children-
| photog...
| 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?
| arrosenberg wrote:
| The legislative process changed when the baby boomers
| entered Congress in the 1970s and started opening up
| committee processes and requiring publicly recorded
| votes. At the same time, there was a corporate reaction
| to a glut of environmental and consumer safety
| regulation. In 1973, you see the birth of the lobbying
| industry as ALEC is the first of many "think-tanks" to
| form.
|
| Now legislators are accountable to corporate donors, not
| their constituents. It's easy to track which legislators
| provide a good ROI. There's more to it than that, but
| those are the major causal events that lead to the change
| in legislator incentives.
| coredog64 wrote:
| Prior to spending reform, the party had some broad
| behind-the-scenes levers to "encourage" support (read:
| pork). Today, power vests in subcommittee chairs which
| typically go to those with tenure (e.g. DiFi who can't
| manage to do her job because of old age but also can't
| really be kicked out by Schumer)
| singleshot_ wrote:
| I would imagine all politicians have always been judged
| similarly:
|
| The ones who represent me are highly skilled, very
| experienced, and have the seniority to ensure my hometown
| gets it's fair share,
|
| The ones who represent you are lazy, entitled scammers
| who should be prevented from fleecing my hometown by the
| imposition of term limits.
| anonymouskimmer wrote:
| Maybe 15 to 30 years ago. These days it seems more like:
|
| "The ones who represent me give me feelings of
| schadenfreude over how they deal with the other party and
| people"
|
| "The ones who represent you give me feelings of angst
| over how my party is treated"
| singleshot_ wrote:
| I think I just got called out as elderly, but I can't
| point to anything that you said that was false. Well put.
| cipheredStones wrote:
| > common in their current form since 1970 (that's 53
| years not 10-15)
|
| A chart of filibuster usage over the past ~century speaks
| for itself: https://bit.ly/3mL6IOU
|
| And that's not even fully up to date: the 2019-20 session
| ended with 298 cloture votes and the 2021-22 session with
| 289, per https://www.senate.gov/legislative/cloture/clotu
| reCounts.htm .
|
| > the first filibuster was 11 years after the
| Constitution was ratified
|
| Sure, whatever - your citation is
| "wikipedia.org/wiki/Filibuster_in_the_United
| States_Senate" and mine is
| "wikipedia.org/wiki/Filibuster#Senate". The exact details
| don't matter: the relevant points are that it's not a
| mechanism created by the Constitution, was not common in
| the lifetime of the Constitution's drafters, and has
| massively different effects on the governance of the
| country now than it did in the 20th century, much less
| the 19th or 18th.
| pyuser583 wrote:
| The filibuster began its current form almost immediately
| after the Constitution was amended to require the
| election of Senators.
| NoMoreNicksLeft wrote:
| Where not otherwise stated, the branches of government
| are free to decide how to conduct their own internal
| business. The House and the Senate, for instance, get to
| decide the rules on how to conduct the votes for
| legislation, how the bills are even made ready for voting
| in the first place, etc.
|
| It can really be no other way, short of stuffing all the
| parliamentary rules like that into the Constitution.
| fwungy wrote:
| The fact that they founded a nation that has last as long
| and successfully as the USA is extremely impressive, in
| the same way Apple is impressive even though Steve Jobs
| was not a perfect person, except the USA is orders of
| magnitude more impactful.
|
| Simply on the basis of accomplishments, whether for good
| or bad, the founders rank amongst the greatest people to
| ever exist.
| [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.
| singleshot_ wrote:
| Seems like a fair number of democrats probably thought
| Nixon was a criminal and Reagan was satan and ghwb was a
| liar and gwb was a warmonger and trump was a fraudster.
| Also seems like a fair number of republicans probably
| thought Clinton was a degenerate and Obama was subhuman
| and Biden is illegitimate, which makes 10-15 a pretty low
| estimate.
| Spooky23 wrote:
| Yet shutting down the government for sport wasn't a
| thing.
| cafard wrote:
| Were you working during the furlough winter of 1995-1996?
| eek2121 wrote:
| [flagged]
| singleshot_ wrote:
| Out of curiosity, which part of the statement did you
| think suggested drug abuse?
| freedomben wrote:
| > _Seems like a fair number of democrats probably thought
| Nixon was a criminal and Reagan was satan and ghwb was a
| liar and gwb was a warmonger and trump was a fraudster._
|
| Yes true, but it didn't feel widespread then. It was
| mostly just people who follow politics closely. Now it's
| nearly _everyone_.
| singleshot_ wrote:
| I would tend to agree. Hate is infectious, love is hard
| work.
| light_hue_1 wrote:
| You were not alive in the 80s then. Democrats and civil
| society hated Reagan for what he did to this country. He
| was definitely seen as evil.
| treeman79 wrote:
| No. The media and democrats hated him. He was an amazing
| president that ended the Cold War. Ended inflation and
| kick started 20 years of economic growth.
|
| People forget how quickly Carter screwed up the economy.
| dmix wrote:
| People's opinions are often formed by musicians, partisan
| journos, and modern documentaries/movies which they then
| translate to mean it was the popular perception of
| leaders or the bulk of the people who lived through it.
|
| Most of the journalists who remain popular tend to be
| those who are more radical/on the edge of cultural which
| is how they remained relevant beyond their era so it's
| easy to assume those people are representative of the
| population or even the educated class.
| anonymouskimmer wrote:
| > People forget how quickly Carter screwed up the
| economy.
|
| The oil shock and stagflation began under Nixon/Ford, and
| stagflation itself was spurred by Nixonian policy. People
| seem to forget this quite often. Carter was only
| president during the last 3 years of the 70s.
|
| Volcker was appointed by Carter and made things really
| bad for a brief time, but those 20% interest rates ended
| stagflation, leading to Volcker's reappointment by
| Reagan.
| treeman79 wrote:
| Ah typical response of bad things happen under democrat
| president, so blame the last Republican.
|
| Biden Abruptly Pulling out of an Afghanistan, was a
| complete utter disaster. Let's blame someone else!
| freedomben wrote:
| Yes many did, but it was mainly the activists and people
| who follow politics closely, not the average person. The
| average Democrat didn't think that about Reagan, as
| evidenced by the re-election results and the fact that
| H.W. rode Reagan's coat tails.
| pessimizer wrote:
| I'm not sure that makes sense. The modern filibuster is a
| bipartisan agreement for inaction.
|
| It's really a bipartisan agreement to defer to Senate
| Republicans on everything controversial, and to let them
| take both the blame and credit for it. Democrats are
| happy with that because when their votes don't count,
| they can pretend to support anything. When Democrats
| lose, it _energizes_ their base. Republicans are happy to
| take credit for economically liberal and nationalistic
| legislation. And for the legislation that just rewards
| the wealthy for being wealthy (say, bailouts), movement
| right-wing and libertarian Republicans can vote against
| it (and they 're mostly in the House) while small
| consistent groups of Democrats can cross over to make
| sure it passes anyway.
|
| This is friends cooperating.
| freedomben wrote:
| You definitely could be right. The motivations of the
| politicians there make perfect sense. Plus it allows them
| to fit in the "republicans are evil" to their base, and
| the republicans can fit in the "democrats are evil" to
| theirs. Meanwhile the politicians are working together.
| roywiggins wrote:
| I dunno, it still might be pretty tricky to put together
| 60 votes for cloture in a 3 or 4 party system. It might
| even be harder!
|
| Fractious multi-party coalitions in parliamentary systems
| commonly fail to scrape together bare majorities- they're
| not exactly known for making it easy to produce
| supermajorities either.
| specialist wrote:
| The US Senate is noteworthy for permitting unlimited
| debate. IIRC, no other legislative body has this trait.
|
| The filibuster was a hack which has since been
| weaponized. It should be eliminated. If only to
| rationalize and normalize the Senate.
|
| The anti-majoritarian case for maintaining the filibuster
| presumes that tyranny of the minority is preferable to
| the tyranny of the majority. Often dressed up dressed up
| in doublespeak slogans like "states rights" (John C.
| Calhoun) and "entrepreneurial freedom" (James M.
| Buchanan, Peter Thiel).
| soco wrote:
| Switzerland mandates (okay not by law but an old custom)
| the government to be put together by all major parties
| whatever they are at the latest elections. Right now
| there are 7 persons from 4 parties and lo, it works
| finely. The USA and its bipartisan system is not exactly
| the yardstick for functioning politics and
| (super)majorities should definitely never become goals.
| As surprising as it might come, negotiations can and do
| work.
| saiya-jin wrote:
| Can't agree more, super majority is a dangerous situation
| if folks laughing at democracy take helm (like it or not,
| Trump was a perfect definition of it within western
| democracies, although dictators like putin run circles
| with big grin around such people). 4 years is plenty to
| do a lot of damage if actors at power are malevolent.
|
| The problem of using Switzerland as a yardstick is that
| barely any population anywhere can match up maturity and
| morality of them, maybe some nordics. Give a glimpse of
| same freedom/responsibility to otherwise mature British
| folks and we have brexit.
|
| US has many fine things running for it, but politics (and
| healthcare, education, criminality etc) definitely ain't
| it and should not be taken as inspiration. The whole us-
| vs-them mentality that such longterm bipartisan system
| brings is very limiting. What if I like low taxes, while
| also supporting abortions and legal soft drugs? Or any
| other mix that would be pretty schizophrenic in US.
| Kbelicius wrote:
| > The problem of using Switzerland as a yardstick is that
| barely any population anywhere can match up maturity and
| morality of them, maybe some nordics.
|
| GP isn't talking about direct democracy but their
| governing cabinet which is basically how governing
| cabinets in the majority of Europe are formed.
| soco wrote:
| The majority of European cabinets are formed by a
| parliamentarian coalition which usually reached a
| majority. The Swiss cabinet is formed by design from all
| the major parties, so there's no coalition needed between
| them - once you get enough votes you're in. It's just
| when the ministers are in function they cannot publicly
| dissent from the governing line or they fly out (it
| happens) - which is forcing them to negotiate behind the
| scenes the governing line, of course each according to
| their party mandate.
| RugnirViking wrote:
| > The problem of using Switzerland as a yardstick is that
| barely any population anywhere can match up maturity and
| morality of them, maybe some nordics.
|
| I don't think that's fair, both to nordics and to British
| folks. People are mature because the system treats them
| as mature. If the system obviously has contempt for you
| and everyone like you, then of course you will act out
| like a youngest child.
| tankenmate wrote:
| Maybe the maturity and morality in CH and the Nordics
| comes from properly funded and independent curriculum
| education, which probably stems from good governance,
| which comes from a system that rewards rough consensus
| and compromise. It's a virtuous circle.
| vertis wrote:
| Various European democracies seem to have done fine, even
| if it is at times the coalitions become unstable.
|
| Australia, even with a 2 party preferred, still often has
| smaller parties hold the balance of power. Often this is
| quite beneficial since the big party has to water down
| their ambitions.
| tempestn wrote:
| It's the case in Canada right now too.
| tlavoie wrote:
| I sure would have liked to see the Liberal party follow
| through on their promise to engage in electoral reform
| though. It seemed to have completely slipped their minds
| once they found a majority.
|
| Perhaps related, but I find minority governments to be
| the most aligned to how I think things should work. It's
| not that they can't get anything done, but rather they
| have to actually engage with the other parties to find
| common ground. Crazy idea, I know...
| tempestn wrote:
| Agreed on both counts, with the added note though that
| minority government only works in multi-party systems.
| US-style split government is far less functional.
|
| My understanding of what happened with the electoral
| reform promise is that the Liberals wanted a specific
| form of electoral reform: ranked choice. Unsurprising,
| because as the centrist party, they would stand to
| benefit most from that system. Which isn't to say I
| necessarily disagree with it; personally I think a system
| that encourages moderation is probably a good thing.
| Anyway, when the committee they put together to study the
| issue didn't come back with that option, they just
| shelved the whole thing.
| tlavoie wrote:
| Ah, very interesting! It seems like some people are
| making noise about the issue again, so will be watching
| that closely. Here in BC, there was some attempt a little
| while back, but it did not gain sufficient support this
| time around.
| Offler wrote:
| I'd rather have the Irish electoral system then the
| American one any day.
| qikInNdOutReply wrote:
| That can be migated. Just make a pre-negotiation round,
| were post vote, those parties who are below n% can give
| there vote share to the parties who make it over the
| limit, for a negotiated "goals" contract. No vote is
| lost..
|
| It forces fringe, extremist and "eternal" oppossition
| parties to compromise and negotiate better terms and it
| can change elections that are really close.
| phpisthebest wrote:
| The filibuster rule is from a time when the Senate was
| selected by the States, not the people. It was designed
| as an effective State Veto.
|
| It works for that purpose and in that context and IMO is
| good.
|
| We should return the Senate to be the States
| representatives in congress, and the House is the People.
| Instead of having both the Senate and the House be
| popularly elected.
|
| Return to more republican (i.e Republic not the party)
| style of governance, and less democratic, but I know that
| is heresy today where democracy is the new religion and
| people fail to learn the lesson of Athens
| RugnirViking wrote:
| what would you say was the lesson of athens? a quick
| search shows a wide range of opinions on different
| subjects, many of which are interesting.
| phpisthebest wrote:
| Democracy tends to depend on Empire Building. The more
| democratic the US has become the more imperialist we have
| also become. This results in many of the problems we have
| were we look to nationalize more things to enable
| resources and power to be directed external.
|
| Ryan Chapman has a great video on DEMOCRACY: From
| Antiquity to Modernity [1]
|
| [1] https://www.youtube.com/watch?v=UplwT_a1IT8
| greedo wrote:
| So the Spanish American war was not imperialistic... Or
| the US controlling most of South America (Monroe
| Doctrine)... How about taking control of most of North
| America from the First Nations through genocidal actions?
|
| Your claim is not based in the actual history of the US,
| but instead viewing it through a politicized and
| simplistic lens.
|
| Other than an incredible brief era at the start of the
| US, we've been imperialistic in our foreign policy.
| kmeisthax wrote:
| "Republic" and "democracy" are not antonyms. This was a
| bit of linguistic prescriptivism put in by the John Birch
| Society that I feel the need to correct. "Republic" just
| means that the head of state is elected and "democracy"
| just means that there's voting. Whether they're voting on
| individual bills or voting for representatives, it's
| still democracy. Hell, people in the UK refer to
| themselves as "republicans" because they want to get rid
| of the monarchy, not because they oppose direct
| democracy.
|
| The problem with state-appointed Senators is that it was
| warping gubernatorial politics. If you didn't like your
| Senator, you had to have the state governor replace him,
| and in practice most people were treating their vote for
| state governor as a senatorial vote anyway. Direct
| election of Senators just cut out the middleman.
|
| Furthermore, we should be very careful with veto powers
| in a democratic system. Have you ever heard about a study
| which claims that the US is run by rich people? Well, the
| thing is, it's true, but not entirely. All classes are
| still capable of _advancing_ an agenda. Louis Rossman can
| sit on a chair and yell into the microphone about right-
| to-repair[0] and get a bunch of state bills proposed. But
| rich people uniquely have _veto power_. They can, say,
| have a 'robust conversation' with a Senator or
| Representative to kill an R2R bill, or have New York
| State's governor change the R2R bill at the last minute
| to completely remove the legislative intent.
|
| Filibusters are another veto mechanism; they raise the
| vote threshold from 50 to 60. Furthermore with the
| procedural filibuster they are significantly easier to
| use, so they get used all the time.
|
| You know how Brexiteers were _really mad_ about how the
| EU has a lot of unelected political appointees making
| law? They 're not wrong about that. You see, whenever a
| political party in Germany, France, or the UK (pre-
| Brexit) wanted to push an unpopular policy, they'd make
| it into an EU-wide regulation and then blame the EU for
| it, because they think voters are stupid[1]. They were
| able to do this specifically because the EU works exactly
| like how the US Senate used to, with member state
| representatives not elected by the people and thus not
| accountable to them. And the only democratic
| accountability provided to stop this is to replace your
| member state's government with one that'll replace the
| appointee in the European Commission, which is now two
| levels of indirection.
|
| Personally I'd rather live in the world with a
| straightforward democratic system with as little
| indirection as possible and few veto powers. Yes, you can
| point to rising populism as a counterargument, but the
| problem is that populism is rising _because_ nobody 's
| voice is getting heard. The more that the rich use their
| veto powers instead of relenting to the will of the
| majority, the more that the majority will turn to non-
| democratic means of power, and then we'll wind up in a
| dictatorship with exactly the kinds of people you don't
| want running things in office.
|
| [0] Right to repair is a political campaign to undo
| several harmful effects of copyright and trade secrets
| law by explicitly requiring manufacturers to sell
| replacement parts and provide unlock codes to pair them
| onto equipment. It does not actually obligate them to
| repair the device, in fact that's counterproductive to
| the actual point, which is to restore ownership of your
| device (or car, or tractor) back to you.
|
| [1] They're not.
| Slava_Propanei wrote:
| [dead]
| phpisthebest wrote:
| >a straightforward democratic system
|
| Is 2 wolves and lamb voting on what they will have for
| dinner. I have no desire to be ruled by the majority. If
| we had a a straightforward democratic system we would
| have no free speech, no gun rights, no rights at all
| really. We would be like Canada or the EU, I have no
| desire for that dystopia ( and yes I did call the EU and
| Canada a dystopia for which I am sure many will disagree)
|
| I abhor collectivism, and systems of government designed
| to promote majoritarianism over the minority... and the
| smallest minority is the individual
| kmeisthax wrote:
| What you're proposing to fix this is to make sure lamb is
| always on the menu, no matter how many lambs there are to
| outvote the wolves.
|
| And yes, there must always be dinner. Ok, we aren't
| literally eating people in real politics, but still,
| winners and losers must be picked on occasion. This is
| simply because political resources are limited.
| Furthermore, the "2 wolves and lamb" situation is less
| common than you think. Literally speaking, one lamb
| cannot support that many wolves. Applied to human
| politics in the real world, 70% of the population can't
| benefit from harming the other 30% - there's not enough
| "meat" to go around. But 1% can benefit _greatly_ from
| harming 99%. So in practice, democratic accountability
| puts bounds on how shitty governments can get.
|
| Free speech is not a pesky barrier that democracy tries
| to get around. It is a peace treaty; an agreement by the
| government that it will not prosecute culture wars.
| Furthermore, said culture wars are usually pushed by
| extremely small minorities - i.e. one wolf splits the two
| hundred lamb votes in half so he can eat one or two of
| them in the ensuing chaos. That's how you usually get
| "two wolves and a lamb" rather than the opposite of "two
| lambs and a wolf", which is more common
|
| And for the record: yes Canada and the EU have free
| speech. Maybe not as extremely guarded as America does,
| but it's still there.
|
| I'm not going to get involved in the gun debate aside
| from pointing out that guns are not a backstop against
| abuses of government power. You have a pistol, they have
| nuclear weapons.
|
| The only thing I can think of for why you'd argue that
| Canada or the EU are dystopias is that they have mildly
| more progressive governments and higher tax rates. While
| I'm _not_ going to argue that paying tax is a moral
| imperative, I will argue that this is the kind of
| argument a wolf would make. In fact, wolves have been
| pointing out the whole "two wolves and a lamb" thing for
| a while now. This isn't an argument against democracy,
| it's a threat. "Give us what we want, or we'll stop
| asking nicely."
|
| Collectivism and individualism are a false dichotomy. Any
| functional society requires both. Extreme collectivism
| was the fallacy of the Soviet Union, but extreme
| individualism has it's own problems.
| phpisthebest wrote:
| >>Applied to human politics in the real world, 70% of the
| population can't benefit from harming the other 30% -
| there's not enough "meat" to go around. But 1% can
| benefit greatly from harming 99%. So in practice,
| democratic accountability puts bounds on how shitty
| governments can get.
|
| I think we are seeing today that is not true. You seem to
| be under the same false narrative that the rich do not
| "pay their fair share", and the poor pay more than their
| far share when in reality nationally more than 50% of the
| population pays zero income tax, and 60-70% get more
| direct government transfer payments than they pay into
| the system
|
| The people have been continually voting for more and more
| government largess funded mainly by debt, and by
| continually moving the goal posts on what "fair share" is
| and who should be paying that "fair share"
|
| >>Free speech is not a pesky barrier that democracy tries
| to get around.... And for the record: yes Canada and the
| EU have free speech. Maybe not as extremely guarded as
| America does, but it's still there.
|
| Canada and the EU disprove your statement, when people
| are arrested / convicted because their dog raised a paw
| on video, or because someone was offended by a tweet or
| have compelled speech laws to force one person refer to
| another person based on their declared preference... you
| can not claim to have free speech. Sorry no the EU nor
| Canada has free speech today.
|
| >>I'm not going to get involved in the gun debate aside
| from pointing out that guns are not a backstop against
| abuses of government power. You have a pistol, they have
| nuclear weapons.
|
| I guess UKR should just give up to Russia then if that is
| your logic.
|
| In reality you can not control a nation or its people
| with tanks, jets, battleships and drones. The fighter
| jets can not kick down your door at 3AM to search your
| home... The military can not maintain a police state, and
| enslave a nation. Those weapons are for decimating,
| flattening, glassing large area's.
|
| The government would not want to kill all of this people
| and blow up its own infrastructure. These are the very
| things they need to be tyrannical in the first place.
|
| Remember it took 20 years, 4 presidents, trillions of
| dollars, and plenty of tanks, jets, and military arms to
| replace the Taliban with the Taliban.... All the nuclear
| weapons in the US arsenal amounted to nothing.
|
| So it is good you refrain from the gun debate as you
| would lose.
|
| >While I'm not going to argue that paying tax is a moral
| imperative
|
| not only is it not a moral imperative, Income based
| taxation is actively immoral and unethical.
|
| Some types of Taxation could be ethical such as a Single
| Tax system on natural resources. Income based taxation
| should be viewed for what is it, theft of labor,
| something I assume you accuse the evil rich of doing
| sofixa wrote:
| Funnily, my learnings from this are the exact opposite.
|
| The majority of US problems come from the inherent
| duality of the political system. Every matter gets split
| among political lines, with one party for, the other
| against, regardless of merits. What would fix that would
| be to move to popular votes (real, proportional popular
| votes, not first past the post disenfranchising the vast
| majority of the population), which would result in more
| parties emerging, which would lead to more nuance, actual
| debates and compromises.
|
| If your proposal is enacted, what changes? Governors,
| elected by first past the post (checking the stats for
| 2022, with 40-60% of the vote)[1], or state congresses,
| which are also elected by first past the post and thanks
| to gerrymandering are usually highly partisan with near
| total domination of one party[2], elect the two senators
| for the state. What's the difference? Same two parties as
| before, same stupid dividing lines on every single topic,
| same impossible to achieve supermajority needed to do
| anything significant.
|
| Oh, and actual political finance limits. Whoever came up
| with "companies donating millions to politicians is free
| speech so nothing can be done to limit that" is either a
| massive idiot or extremely biased towards big money
| influencing elections.
|
| https://en.wikipedia.org/wiki/2022_United_States_gubernat
| ori...
|
| https://en.wikipedia.org/wiki/2022_United_States_state_le
| gis...
| throw10920 wrote:
| > Whoever came up with "companies donating millions to
| politicians is free speech so nothing can be done to
| limit that" is either a massive idiot or extremely biased
| towards big money influencing elections.
|
| Isn't this a straightforward deduction from combining an
| extension of the first amendment with corporate
| personhood?
|
| I'd think that the actual problem (which manifests itself
| in many ways other than this one) is that latter legal
| situation, _not_ the first amendment or the logic itself.
| phpisthebest wrote:
| >>Whoever came up with "companies donating millions to
| politicians is free speech so nothing can be done to
| limit that" is either a massive idiot or extremely biased
| towards big money influencing elections.
|
| So Elon Musk wants to spend millions on politics it is
| OK, but if I and 10,000 of my friends want to form a
| corporation to spend millions it is idiotic??
|
| And if you want to Limit Elon how do you get around the
| 1st amendment ?
| sofixa wrote:
| Nope, do it the other way around. No political campaign
| can receive more than X money in donations / more than Y
| money of it's own funds, adjusted for inflation yearly,
| with highly public transparency lists on who donated to
| what campaign when.
| phpisthebest wrote:
| Well then, that will only service to make the media the
| selector then, as who ever can get the most "free" media
| air time would win. What if I went all Bezo's and bought
| a newspaper or TV Station... What about the corporations
| that own those networks, Does every time they talk
| favorably about Biden count as a Campaign Ad?
|
| I dont see how you can achieve that while maintaining a
| support free expression, unless of course you do not care
| about free speech?
| deelowe wrote:
| OK. And what do we do about Pelosi's husband? What about
| his brother? What about his business partner who lives in
| another country? The primary issue with this line of
| thinking is that it simply makes things more difficult to
| track. The idea with the current system is that at least
| it's all out in the open.
| ascagnel_ wrote:
| In general, our government is dysfunctional and has many
| points at which we may have a tyranny of the minority.
| I'd do a few things to resolve it:
|
| - greatly reduce the power of the Senate, effectively
| limiting it to the ability to veto legislation and
| judicial appointments with a two-thirds majority
| (effectively a "state's veto" over a runaway federal
| government)
|
| - the House of Representatives should be elected based on
| per-state proportional representation; districts are an
| antiquated concept from an era where people traveled by
| ship and horseback, and don't really make sense in an age
| of telecommunications, air travel, automobiles, etc.
|
| - the President should be elected by a direct majority,
| as the electoral college has outlived its usefulness and
| exists only to enable a president to win an election with
| a majority of votes
| phpisthebest wrote:
| I could see #1...
|
| I am not sure how that is different from today? Do you
| want all Reps to be "At Large" so instead of voting for 1
| person, in CA would would vote for 54 people?
|
| I am not sure that is tenable but an interesting concept.
|
| I have always supported the Wyoming Rule, and supported
| taking congressional redistricting out of the hands of
| legislatures moving towards fixed allocation based on
| something non-political like zip codes.
|
| On the Electoral College... 10000000% disagree. The
| President should absolutely not be elected by direct
| majority, that is taking the same mistake of the senate
| and making it for the president
|
| First and foremost the office of president should be
| reduced in power, Congress and abdicated far too much
| power to the executive, that is what has made the
| Presidential election soo important, is should not be.
|
| Secondly, I would be in favor of a change to the
| electoral process where by the votes are allocated
| proportional just like the house, instead of First Pass
| the Post like we do today, but I would Strongly Oppose
| just moving to a pure democracy system. That would
| effectively make many states have no vote in the election
| of the president and almost fully remove republicanism
| from the US system, if not completely put us on that path
| Spooky23 wrote:
| I don't know why you'd think it was an oversight. After all,
| they pushed SALT, which raised the taxes of any homeowner
| living in a high cost of living state, and further transfers
| wealth to flyover country and the south.
| rodgerd wrote:
| The thing that is most striking to me about your explanation
| is that the change was made six years ago; it seems that
| anyone responsible for a company's tax position and cashflow
| (CFO, accountant, etc) should have been planning for this
| between then and now. Much like the SVB panic, a great deal
| of this seems to be people running companies without either
| paying attention to things that could have a significant
| impact, or hiring someone who does.
| mjwhansen wrote:
| They have been. Large companies have been engaging with
| Congress since 2019 on this, reminding them that they
| intended to revert this before it took effect. CFOs wrote a
| letter to Congress in November.
| https://investinamericasfuture.org/Communications/letters/
| newswasboring wrote:
| Maybe they put too much trust in the US congress'
| functioning
| citizenkeen wrote:
| When I took tax law, one of the things that blew my mind is
| that it can be retroactive.
|
| An exemption might expire, but then be retroactively
| reinstated. This happens all the time.
|
| There is the tax law that applies to your 2022 income now,
| and then there's the tax law that will apply to your 2022
| taxes in five years.
| 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".
| YeBanKo wrote:
| I read the message you are replying to three times and I
| still don't understand who did this and why? Can elaborate
| more?
| AdamH12113 wrote:
| Sure. Here's the key sentence:
|
| > 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.
|
| In 2017, the Republican majorities in Congress passed a
| budget that would have increased the federal debt
| significantly over a ten-year period (i.e., it was a
| long-term deficit increase). Such an increase is not
| allowed under the rules of the Senate's budget
| reconciliation process, so they added sunset provisions
| that would have brought the deficit back down by making
| some of the deficit-increasing provisions (in this case,
| mostly tax cuts) expire early.
|
| The next sentence clarifies:
|
| > 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.
|
| These changes were made "on paper" to meet the
| reconciliation rules in time to pass a budget and avoid a
| government shutdown, but they were not intended to be
| permanent -- they were just a quick hack to work around
| procedural limitations. The intent was to fix this later,
| but the fixes were never implemented due to disagreement
| about how to handle other parts of the bill.
|
| The advantage of this kind of description is that it
| gives you a piece of a larger story and leads to some
| obvious follow-up questions. Why did it take until the
| last minute for Republicans to pass a budget when they
| had full control of Congress and the White House? Why
| couldn't they pass a budget that didn't increase the
| deficit? Why does the Senate have such weird procedural
| issues and why haven't they been fixed? You can find some
| of the answers by looking into the bill itself[1]. But
| even if you don't you can pick up other pieces later by
| hearing other bits of news. The factions and political
| processes that produce bad legislation can be understood,
| and with that understanding the power to alter them, even
| if only by voting.
|
| The other kind of description, which I see far too often,
| treats bad legislation the same way we treat bad weather.
| It can be predicted a few days in advance, but we have no
| control over it. It's just something that _happens_ , and
| all we can do is let it wash over us. The clouds bring
| the rain and Congress brings bad legislation; thus has it
| ever been. It's an ahistorical form of learned
| helplessness.
|
| [1] https://en.wikipedia.org/wiki/Tax_Cuts_and_Jobs_Act_o
| f_2017
| ec109685 wrote:
| To get the tax cut law through congress without requiring
| support from democrats, they had to raise revenue
| somehow, so they cancelled this provision, with the idea
| they would add it back later.
| Clent wrote:
| It's the House of Representatives. That body is the
| origin of all taxing. The leader of the House is Kevin
| McCarthy. It's is ultimately on him to lead the House (or
| get out of other's way) in passing a tax bill. The
| reconciliation process allows this to occur with less
| bipartisan support.
|
| The interesting part of this appears to be that the
| Republicans removed this from the tax code but were
| expected to add it back in a new form. This did not occur
| in time for tax bills to be due.
| [deleted]
| newswasboring wrote:
| This whole thing sounds so shady to me, can't believe this is
| how they are running a country.
| 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?
| tomrod wrote:
| Nothing. It's an oddball comment, for sure!
|
| As a minarchist (form of libertarian), I would love to
| see the state operate more efficiently. That would
| achieve a part of my own personal political beliefs. I
| recognize the need for a state and the role society must
| have in shaping it for it to be a stable, functioning
| state.
|
| Surprise rules dramatically increasing taxation due to
| political judo performed six years prior is horrible.
| TacticalCoder wrote:
| > The new law would instead work like this:
|
| Forcing sofware dev salaries to be considered R&D then forcing
| all R&D expenses to be amortized over five years? There's a
| name for that kind of behavior.
|
| It's _theft_.
| prepend wrote:
| Are software dev salaries treated differently than regular
| employees. I thought 100% of salary and benefits were
| deductible against revenue.
|
| I'm missing why software salaries are amortized against just
| straight expenses?
| 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.
| midoridensha wrote:
| The answer is simple: you just cut the developers' salaries
| to minimum wage. They'll all be happy to just have a job and
| will stick around, right?
| 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.
| hgsgm wrote:
| Penalizes shrinking _revenues_ , not shrinking firms.
| Shrinking firms who maintain revenue (layoffs!!) do well
| by winding down tax liability.
| fnordpiglet wrote:
| My bad you're right!
| 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.
| eldavido wrote:
| Real estate has this same problem but 10x as bad.
| analog31 wrote:
| I appreciate the suddenness of the change, but aside of that,
| how is this different than amortizing the cost of a million
| dollars worth of equipment? Couldn't they borrow the money for
| their taxes against future profits?
|
| Thinking about it more, perhaps it's a mistake to assume that
| the software being written has a service lifespan of five
| years.
| mr_toad wrote:
| > Couldn't they borrow the money for their taxes against
| future profits?
|
| In theory, but good luck getting a loan secured against IP
| for a reasonable rate.
| beezle wrote:
| The change isn't really sudden and honestly I have a hard
| time having sympathy for those firms that were caught
| unaware. This provision was in the law since 2017 - anyone
| taking a chunk of VC money (including the VC lending it)
| should have been well aware of what would happen if Congress
| did not strike it before it took effect.
|
| Honestly this is a bit like SVB all over again - poor
| management, in this case not knowing or understanding
| critical tax laws. And if you did know, shame on you for not
| contingency planning for Congressional ineptitude.
| dchftcs wrote:
| The only way to really plan for it, if you're running a
| small business with lower margins, is to raise prices, grow
| users or cut salary expenses. None of those are easy, even
| if you can see the tax bill coming.
| techolic wrote:
| Because you don't stop paying developers starting the second
| year?
| analog31 wrote:
| But aren't you deriving value from what they developed in
| the first year? I mean, maybe that's my mistake.
|
| If they spent a million, made a million, and are now back
| to square one, it would make more sense to not amortize the
| investment because it's not an investment.
| Filligree wrote:
| Yes, but according to this law you're not allowed to do
| that; you have to amortize it over five years.
| analog31 wrote:
| That seems to be the rub. It doesn't differentiate
| between different reasons and business models for writing
| software: Software as wealth, and software as pure
| expense.
|
| It's also pretty harsh on a business that's just plain
| unprofitable. The laws should be arranged so that if you
| start a business and it's a flop, but you have no debts,
| you can walk away pretty much unscathed.
| [deleted]
| 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?
| dboreham wrote:
| One reason is that sometimes companies claim money from the
| government for their R&D spend (some sort of scheme by
| government to incent R&D spending, presumably). In that event
| the government wants to prevent companies from gaming the
| system by simply saying that they spent all their profits
| each year on R&D. So rules are created that say you have to
| spread the spend over N years for tax purposes. Same as asset
| depreciation -- you're generally not allowed to depreciate a
| large asset in one year.
| maxerickson wrote:
| The R&D isn't a pure expense, it typically has a result. Say
| you spend a million dollars developing a widget and then sell
| it for 10 years. The money spent in year one results in
| multiple years of income.
|
| I don't have a strong enough understanding of the change to
| really have an opinion, but that seems to be the clearer
| description, the R&D spending is being treated as an
| investment in the business (which it probably is) that
| results in capital (who knows if that is true).
| eldavido wrote:
| As someone who's taken a couple semesters of college-level
| accounting, and filed my corporate taxes correctly many
| years without audit (but am not an accountant/CPA), this
| seems broadly correct.
|
| I'm actually surprised people are freaking out about this.
| Of course software is R&D. And of course you don't just get
| to expense it all at once. It's long-lived, like you said.
|
| Maybe we could have some tax breaks like our friends over
| in real estate, but I very much think the base assumption
| should be that software dev is capitalized.
| crazygringo wrote:
| I don't know why you're saying "of course you don't" when
| it's been that way every year until now.
|
| People are freaking out because it's a gigantic change
| that there wasn't any awareness around.
| pclmulqdq wrote:
| R&D spending used to be ridiculously privileged - you
| could operationalize your loss and in some cases still
| capitalize the transferrable portion of the resulting
| assets. People don't really understand that. However,
| this kind of accounting makes things like government
| grants work, so it's not exactly good that it changed
| this way.
| pclmulqdq wrote:
| FWIW when I was in business school, one professor strongly
| argued (based on an Aswath Damodaran blog/video - he is a
| business school "celebrity") that R&D should generally be
| considered a capital expense in terms of valuing companies
| even when it can be considered an operational loss on an
| income statement. Technically, this (likely catastrophic)
| accounting change may be kind of correct in a pure sense.
|
| However, the "asset" associated with software development
| seems pretty uniquely hard to transfer. Almost every other
| intangible asset has a strong marketable component (eg a
| patent on a widget, a copyright on a song), whereas
| software just doesn't have one. Licensing doesn't count
| here - that's not a transfer of the asset.
| mscuwa wrote:
| > However, the "asset" associated with software
| development seems pretty uniquely hard to transfer
|
| Isn't it what's happening when a company gets acquired?
| Buyer pays for a software _and_ a team (more for the
| latter usually, including business process as a whole),
| not for laptops or servers. It 's not "equal" to salaries
| but you can't create the former without the latter. So in
| a sense when you pay salaries your create the above-
| mentioned "asset".
| pclmulqdq wrote:
| Yes, but that's basically the only mechanism for this
| kind of IP transfer. Other types of IP are a lot more
| transferable and don't have to be tied to a team. Think
| about book/song copyrights or widget patents.
| maxerickson wrote:
| The rights to software get transferred all the time
| though. It doesn't have to be highly marketable to be an
| asset.
|
| For sure, lots of software is pretty tied up with the day
| to day operations of a particular company, but so are
| things like a specialized manufacturing line or whatever.
|
| Not really trying to argue how that should impact the
| accounting, just arguing the specific point.
| pclmulqdq wrote:
| Not disagreeing with you at all, but I want to suggest
| that we look at it another way - which is that accounting
| principles as a whole are really not built for technology
| companies, and we are straining them right now to fit
| ourselves in.
|
| When you build a manufacturing line, you usually buy your
| equipment off-the-shelf (capex, with good resale value)
| and hook it up in a semi-custom way with cheap, movable
| conveyors (also capex, with resale value). This means
| that you can make a "stuff" company with practically no
| R&D. In that world, you only do significant R&D of any
| kind once you are big enough that your chance of going
| bankrupt before the end of even a 15-year amortization
| period is pretty small.
|
| Even in those companies, the work product of R&D groups
| is often relatively modularizable and transferable. For
| example, your R&D group may modify a machine to produce
| coke cans 10% faster. That improvement is likely
| transferable to pepsi. You may also patent the
| improvement, but that's not required for it to transfer
| well. Your R&D can also be hard to transfer, like
| specific factory layouts to make $widget that only you
| would ever want to make, but you're only doing _that_
| research when you are an established manufacturer, which
| makes the depreciation not a big deal (you probably
| prefer to capitalize that expense anyway).
|
| The fact that the work product of R&D is somewhat
| transferable at a price near how much it cost to produce
| is what allows you to get loans backed by R&D work
| (technologies, patents). Without the secondary market
| value, you don't really have an asset.
|
| In contrast, companies whose primary work product is
| technology (software companies and some digital hardware
| companies) do significant R&D from day one, both before
| proving the value of the R&D work and in a way that it
| usually isn't sellable or modularizable.
|
| Like the coke cans, there's probably a market of people
| who would buy the product "patch that makes redis 10%
| faster," but the tech transfer mechanisms we have today
| don't support that market well (if at all), and most
| startups don't waste time improving redis. There is
| almost certainly no market that would buy "efficient
| database schema for a SaaS for gravediggers," which
| actually is what occupies your time if you're building a
| SaaS for gravediggers.
|
| That suggests, using the "capitalized R&D" and "software
| development is R&D" ideas, that the first few years of a
| software company will pretty much always involve vastly
| overpaying for an asset with likely no real resale value.
| That is very different than how a traditional capex
| works: usually the vast majority of the price you pay on
| a capex goes into the value of the asset.
|
| So that leaves us in a weird sort of void. I assume the
| very-long-term solution is to figure out how to make an
| IP rights system that actually works for software (eg a
| new kind of patent), so you can finance your software R&D
| the way you do a house.
| 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.
| ryanSrich wrote:
| How can you grow your R&D team when you're no longer in
| business because your tax bill is more money than you have?
| It makes zero sense.
| hgsgm wrote:
| It's the opposite. It disincentivizes growing all software
| dev (not just R&D) by front-loading taxes.
| 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.
| maga_2020 wrote:
| You hire consultants. You paid them a million, you also
| made a million on the product they produced that year.
|
| So they were not really 'researchers', working out on
| unknown with high risk probabilities, instead they were
| building an asset that made you money the same year.
|
| You would deduct the payment to these consultants as
| expense. they pay their own taxes on their salaries.
|
| You are left with an asset that you can make money on, year
| after year.
|
| That's, I think what they are thinking.
|
| But a) you were not prepared to turn your salaried
| employees into consultants b) the asset requires extensive
| up-keep, that costs as much as money as it was to 'create
| it' c) the asset value without the up-keep can become zero
| in year d) the asset itself is very risky and may not have
| value later on.
|
| So I overall agree with your sentiment.
|
| The gov does not want to classify software dev as
| 'research', but yet -- they have not established how to
| fairly classify it.
|
| This is a clustferfuck.
| 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.
| RC_ITR wrote:
| Weird to not include that in the example then.
|
| Maybe this will help you.
|
| If (as you imply) SW developers are critical to _this_
| year's revenue (vs. building for future years revenue),
| then why don't they go in COGS?
|
| Seems like an easy way to solve the problem...
| aarondf wrote:
| > If (as you imply) SW developers are critical to this
| year's revenue (vs. building for future years revenue),
| then why don't they go in COGS?
|
| Ok, so we're on the same page! Salaries should be
| expensed!
|
| Unfortunately, the page that you and I are on is NOT the
| page that United States Government is on. Which... is the
| point.
|
| You said in a parent comment
|
| > So this most affects companies that have a relatively
| large R&D org
|
| This has _nothing_ to do with R &D orgs. We're talking
| about software developer salaries, not R&D. According to
| the new change, all software developer expenses must be
| amortized over 5 years, which you and I both agree seems
| like a silly idea.
|
| I think you're arguing for a common sense approach of not
| categorizing them as R&D, which I would highly encourage
| you to run past your CPA before you accidentally commit
| tax evasion.
| RC_ITR wrote:
| Wait wait wait.
|
| You think that all sw devs now are in R&D and not COGS?
|
| Golly! Plenty of SW devs who work on _this years revenue_
| are COGS throughout the industry. The _game_ is putting
| sw devs who work on future years' revenue in opex.
|
| Since you're so attuned to cash accounting let's change
| up your example.
|
| I prepay $1mn in advertising cost for ads that will run
| over 5 years. I _spent_ that cash now, but should I be
| able to expense that whole $1mn this year?
|
| EDIT: Don't believe me, here's Airbnb:
|
| Cost of revenue includes payment processing costs,
| including merchant fees and chargebacks, costs associated
| with third-party data centers used to host our platform,
| _and amortization of internally developed software and
| acquired technology._
| aarondf wrote:
| Replying to your edit.
|
| That note is financial accounting, we're talking about
| tax accounting. Entirely different worlds with entirely
| different rules.
| aarondf wrote:
| > You think that all sw devs now are in R&D and not COGS?
|
| Huh? I don't think that, that's literally what this law
| is doing. Moving all software developer expenses out of
| COGS and into R&D that must be amortized.
|
| You're arguing what _should be_ , and I agree with you.
| It should be COGS. If you go read the law (or... even the
| article) you'll realize that what should be the case, is
| not the case.
|
| It has nothing to do with what I think!
|
| > Since you're so attuned to cash accounting let's change
| up your example.
|
| > I prepay $1mn in advertising cost for ads that will run
| over 5 years. I spent that cash now, but should I be able
| to expense that whole $1mn this year?
|
| Umm if you're doing cash accounting, yeah. Haha. That's
| not the point you were trying to make though. If you're
| doing accrual accounting, no. That's a prepaid expense
| (asset) which changes to an expense over time as you
| incur it.
|
| If you want to learn more about accounting, I have a
| website where I teach introduction to financial
| accounting topics at https://acct229.com. You might enjoy
| it!
| RC_ITR wrote:
| I appreciate the offer, but this level of
| misunderstanding makes me believe I wouldn't get a lot of
| value out of you as a teacher.
|
| My earnest advice to you is sometimes slow down and
| _really think_ about what other people are saying.
| aarondf wrote:
| Happy to schedule a call to better understand what you're
| saying. I'm pretty easy to find online.
| svachalek wrote:
| How is this relevant to one year old companies?
| RC_ITR wrote:
| If the developers worked on this years revenue, they
| should go into COGS, but if they are building things that
| will have value over many years they should be charged
| over many years.
| aarondf wrote:
| _Should_ go into COGS, yes. Unfortunately, that is now
| called "tax evasion."
| RC_ITR wrote:
| Yes, it's tax evasion because the value delivered by
| those engineers is realized over multiple years? Which is
| why this _old_ amortization rule is coming back into
| effect?
|
| EDIT: Just my final reply - this law has nothing to do
| with COGS. I'm saying R&D is _usually_ a category with
| multi-year amortization, it 's only _recently_ that an
| exception was made for political reasons.
|
| You are arguing that R&D expense should _always_ be
| expensed in year, which I assume is a product of not
| having seen what the _normal_ world was like.
|
| This isn't even a new law fwiw, it's not extending the
| exception to the existing law.
| aarondf wrote:
| You're missing the point entirely.
|
| You said:
|
| > If the developers worked on this years revenue, they
| should go into COGS,
|
| That's no longer legal.
| sheeshkebab wrote:
| Oh, hiring 1099 consultants now looking rather attractive
| jtaft wrote:
| Salaries aren't tax deductible normally? That seems wrong.
| 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.
| gamblor956 wrote:
| This is how it has always worked for non software
| companies...
|
| If your business isn't solvent without tax loopholes,
| your business isn't really a business.
| aarondf wrote:
| Businesses have always been able to deduct salaries at
| 100%. Software businesses are now not allowed to do that.
| I have no idea what you're talking about.
| [deleted]
| 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...
| ttul wrote:
| Yes, but have you heard of SR&ED?
| AmericanChopper wrote:
| You'd expect to run into transfer pricing issues if did that,
| unless you'd already structured your company avoid those
| problems. This problem here, and many others like it stem
| from the fact that corporate tax is a stupid concept. It
| doesn't generate any additional tax revenue, because any tax
| that is paid as corporate tax will simply be used to offset
| taxes that would otherwise be paid as income tax. It also
| simply preferences operating models which are more accessible
| to large companies, disadvantaging SMEs. Any company can
| theoretically choose to not be profitable, by reinvesting all
| of its profits, and investors typically don't care if their
| value is returned via growth or dividends. But many SME
| operators do, and the accounting and compliance costs
| associated with that place a higher burden on SMEs. But the
| whole debate around the topic is muddied by people who
| intentionally misrepresent how these systems work for their
| political gain, and their followers who don't understand how
| these systems work (until some stupid change like this
| affects them, and the stupidity of the system is made clear).
| dh2022 wrote:
| "Any company can theoretically choose to not be profitable,
| by reinvesting all of its profits, and investors typically
| don't care if their value is returned via growth or
| dividends. " - the Amazon model for its first 20 years :).
|
| Amazon was founded in 1994 and it started to make profits
| reliably in 2016 :
| https://www.macrotrends.net/stocks/charts/AMZN/amazon/net-
| in...
| ttul wrote:
| In Canada, qualifying R&D spending generates a tax credit
| that can be worth 60% of engineers' salaries. In other words,
| a company that spends $1M on engineers in Canada not only
| writes off the $1M in spending, but also gets a credit of
| $600,000.
|
| Fine print: this is only available to Canadian-controlled
| entities. Foreign-controlled entities can claim R&D tax
| credits as well, but the rate is far less generous.
| winter_blue wrote:
| Wow, this is amazing. Do you have any links with more
| details on this?
|
| It sounds like Canada is trying to make it as easy as
| possible for companies to set up shop in Canada.
|
| Personally, even incorporating in Canada is _so much
| easier_. A federal corporation just costs $100 to make, and
| even less to maintain annually. (In contrast, in the United
| States, an LLC set up through Stripe Atlas costs $500, and
| you have an annual recurring fee $300 owed to Delaware +
| registered agent fees.)
| ttul wrote:
| Google Scientific Research and Experimental Development.
| Personally I am not a fan of this system because I
| believe it distorts incentives and crowds out private
| investment. On the other hand, it is a pragmatic solution
| that relatively efficiently shifts investment activity to
| R&D and away from the Canadian traditions of shifting
| rocks and oil and trees around.
| 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.
| indymike wrote:
| There are none.
| eldavido wrote:
| No, this is completely wrong.
|
| It's not "just an expense". Think about an architect
| designing a house. The tax treatment depends on how the
| person spending the money "uses" the labor. It might be
| an ordinary operating expense (fully deductible), but
| could also be inventory, or a depreciated "capital asset"
| (closely related to the idea of "capital gains" taxes)
| whose value is spread over a long period of time,
| generally related to the asset's usable life.
|
| There is a large body of work around the correct
| treatment of this stuff, which sits at the core of
| accounting in the same way data structures sit at the
| core of CS. It's not the most straightforward thing to
| explain. The tax code contains a ton of exceptions, but
| in general, a thing that is long-lived, expensive, not
| routinely bought or sold, and provide some kind of long-
| lived economic benefit (e.g. shelter, the ability to
| produce something, or facilitate some kind of industrial
| process), is a capital asset. (Sounds a lot like
| software, doesn't it?) Inventory is something routinely
| bought and sold, generally for profit. A server is
| inventory for Dell. For a typical software startup, it's
| a capital asset.
|
| The whole point of accounting is trying to accurately
| measure economic activity. It's more complicated than it
| looks. If you agree to a five-year contract and get paid
| upfront, not all that money is "earned" (hence taxable)
| in the first year. If you're in debt and the debt is
| forgiven, no money changes hands, but that's very much
| beneficial (and taxable) to you. And if you own a long-
| lived asset, you don't just get to say, oh, I spent all
| this money upfront, that's an expense I can use to reduce
| my taxes. Not how it works.
|
| Just trying to shed some light on this. It is indeed
| rather complex.
| mindslight wrote:
| > _If I pay a worker to frame up a house it is an
| expense_
|
| If you are getting paid to build the house because you're
| in the business of building houses, then yes it is an
| expense. If you're building a house to keep ownership of
| and rent out, then _no_ , that cost has to be capitalized
| and depreciated over the expected lifetime of the
| improvement.
|
| The general question addressed by this law is "should it
| be allowed to reinvest profits tax-free and delay paying
| taxes indefinitely?". There are many places in the tax
| code where this answer is "no" (eg you pay taxes on bank
| interest yearly, even on a long term CD), and there are
| many places where this answer is "yes" (retirement
| accounts, US savings bonds, stock buybacks, 1031
| exchange).
|
| It's ridiculous that software development is getting
| singled out, given that for most business activity the
| answer is default yes, with only specific list of things
| that have to be capitalized. I'm just saying the right
| answer isn't set in stone, apart from of what the tech
| industry has gotten used to and how effectively abrupt
| this change was.
| eldavido wrote:
| Came here to say this. The level of general ignorance of
| how accounting and tax works on this thread (not you,
| others) is astounding.
|
| Of course, if anyone had owned real estate, they'd
| understand things like depreciation, and the fact that
| you can spend money without it being an 'expense', or
| that no, just because you 'made $1,000,000 and spent
| $1,000,000' doing something like building a house, or a
| piece of code, you could of course show an accounting
| profit. You created something of value--that's the point.
| There's something of value left over. Maybe there won't
| be in five years, but you can't expense the entire thing
| immediately.
|
| I actually think this treatment (capitalization of
| software R&D) is more "correct" from a theoretical
| accounting perspective. Clearly, software companies are
| creating something that has residual value with all those
| developer salaries. As for the politics, I'm not sure. I
| do know that RE has the same problem (accounting profit
| can run far ahead of cashflow), but has so much crazy
| advantaged tax treatment (arguably "loopholes")--1031
| exchanges, bonus depreciation--and that's on top of stuff
| like 179 expensing (not specific to RE I know, but
| still), that maybe software just needs to work more like
| RE, where the baseline is "many things capitalized", but
| all sorts of crazy loopholes driven by the whims of
| short-term politics.
|
| It certainly makes the accountants rich...
|
| FWIW, my wife's architecture practice is dealing with
| this 174 amortization (on their salaries, some of which
| were classified as R&D) and it's killing them, too.
| mindslight wrote:
| TBF I hate accounting too, and now that it's past tax
| season I look forward to pushing as much as possible to
| the back of my head...
|
| When you say some of your wife's architecture practice's
| salaries "were classified" as R&D, who/what did that
| classification?
|
| I'm wondering if a large part of the pain is businesses
| that were classifying as much as possible as R&D to get
| the R&D tax credit, and now that classification is a
| liability and they can't change so quickly. Otherwise it
| would seem that established companies could call much of
| their software engineer activity "maintenance" rather
| than "development" (and the change shouldn't really
| matter to pre-revenue startups).
| 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.)
| midoridensha wrote:
| The Trump voters will be happy with the software
| developers all fired and jobless, because it brings them
| down to their level.
| 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%
| foobarbazetc wrote:
| Uhhhhh... every single one up until this change.
| Lazare wrote:
| > 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.
|
| This is not about tax credits, this is about whether
| salaries are an expense. If Widget Inc makes and sells a
| bunch of widgets for $100m, and then they pay $20m in rent,
| and $30m for materials, and $40m for salaries, with $10m
| left over, with no other complexities (eg, interest,
| depreciating factory equipment, etc.), then is their profit
| this year:
|
| 1) $10m (or maybe a bit less, if they got any tax credits)?
|
| 2) Some other larger number closer to $50m?
|
| You'd be hard pressed to find many jurisdictionns where the
| answer isn't option 1. I certainly don't know any offhand.
| 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.
| iamflimflam1 wrote:
| There are various tax breaks for R&D spending - so
| companies try and classify lots of things that aren't R&D
| as R&D.
|
| There's been a bit of stink recently in the UK around R&D
| tax credits and how companies have been taking the tax man
| for a bit of a ride.
| 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.
| 908B64B197 wrote:
| > 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 would still count the later as R&D. It's akin to having
| an industrial engineer re-design the manufacturing floor
| to accommodate for the different manufacturing process of
| the anodes.
|
| As soon as you need to customize something, it becomes
| R&D (else you would have purchased it). The "just the
| job" part is invisible because, well, it's the machine
| who's doing it (applications auto-start, install, send
| updates).
| 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?
| maxerickson wrote:
| If you have an off the shelf solution, then close to 0
| development.
|
| If you have a clear, standard approach to the
| installation, then the development is likely to be a
| small portion of the work.
|
| If neither of those are true then you are in the hard to
| figure area.
| ikekkdcjkfke wrote:
| A carpenter building a custom solution for room x
|
| A programmer building a custom abstraction for domain
| feature x
|
| A plumber laying a new line from the basement to the
| second floor
|
| All require some surveying and development of a solution,
| gluing existing parts together in a unique way
| maxerickson wrote:
| Sure, I agree, but there are likely standard approaches,
| especially in the older trades, where the development is
| making ~1 decision and then measuring.
|
| Like if the carpenter is installing some shelves, they
| are most likely picking a shelving system or approach
| they know how to work with and measuring for fit, not
| coming up with a brand new way to mount shelves. They
| might come up with a new way, it just isn't all that
| likely.
| hellojesus wrote:
| The same can be said for a lot of software developers.
| How many people spend their days gluing together existing
| libraries vs. writing their own? This rule seems
| ridiculous; I fail to understand why they're are
| different tax write off rates for employees based on what
| they're doing. Either way they're being paid by the
| business!
|
| The entirety of the rule seems to exist to punish small
| players in the market. A barrier to entry to box out
| competition.
| bluGill wrote:
| The difference is repetition. Many welders work some form
| of assembly line, where they constantly are welding the
| same bracket on and sending the part down the line.
|
| Even if they are not on a line, few welders are designing
| the bracket, instead they cut it out according to
| blueprints (this might be a separate person) and then
| weld it on. Then they look at the next part of the
| blueprint and put it on.
| [deleted]
| aikinai wrote:
| Maintain services. Why was everyone expecting Twitter to go
| down after the layoffs if software developers only do
| research and development of new products?
| 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
| pclmulqdq wrote:
| The full IRS clarification on this will helpfully be
| available in a few months (a few months after the
| deadline), but it doesn't look like things like
| maintenance work will qualify, only new software
| projects. I'm expecting that a lot of savvy companies are
| going to decide that a lot of software development (using
| the common term) is not software development in the legal
| sense.
| anonymouskimmer wrote:
| > I'm expecting that a lot of savvy companies are going
| to decide that a lot of software development (using the
| common term) is not software development in the legal
| sense.
|
| Even if this risks an IRS judgement against them, a savvy
| company might want to take such a judgement to court, and
| let a jury decide.
| kaitai wrote:
| What I find most confounding is that I know some folks
| who do what I'd call research, in that they do EDA and
| develop models, but since those aren't necessarily
| destined for development of software, their hours are not
| counted in this exercise. It's too, um, researchy to
| qualify as research, I guess? or it's just classified as
| fancy analytics.
| zamnos wrote:
| > and develop models
|
| The debate over whether Excel counts as programming and
| thus software development just got a lot more heated. The
| question is how is "software" defined in the context of
| the tax code, in particular in the phrase "development of
| any software" from above.
|
| https://www.lawinsider.com/dictionary/software gives a
| couple definitions.
| 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.
| foobarbazetc wrote:
| That's literally the point of this entire thread.
|
| This change taxes you on profit you never made, and
| specifically targets software companies.
|
| It's insane.
| 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.
| jfengel wrote:
| Spending resolutions are more important than budgets. So
| much more important that they're usually just called
| "budgets" because nobody cares about the thing that is
| actually a budget.
| sethammons wrote:
| Kinda like options - you get taxed on imaginary numbers
| on money you don't have access to. You received zero
| profits but owe taxes.
| 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.
| makeitdouble wrote:
| I'm with you in that it probably needs more nuance on
| what exaclty the developpers are doing (TBF I haven't
| read the details, so maybe there is already a lot of
| nuance in all of it.)
|
| I kinda see many cases where a salary isn't as clear cut
| as a simple cost...for instance comparing two cases:
|
| - we buy for a million dollar an exclusive right on an
| innovative system from a freelance guy that developed it
| on his own
|
| - we contract for 10k a month the same guy to design and
| develop the same innovative system, he takes a year or
| two to develop it.
|
| In one case it's a purchase of an asset, in the other
| case it's a salary. The resulting asset is the same
| though.
| galaxyLogic wrote:
| If you buy something for a million dollar you are buying
| an asset.
|
| But if you make an employment contract with somebody it
| is totally unknown what is the value you are or will be
| getting out of the employee. You are not buying an
| "asset" because you can not own an employee. They can
| quit any time.
| makeitdouble wrote:
| I'm with you on the unknown part. We could this it as a
| risk, with the upside that you might have paid less in
| total by taking the risk and hiring the guy, than buying
| the proven end result at price reflecting the total value
| of the asset.
|
| > you can not own an employee.
|
| You own everything the employee produced during the
| contract, whenever they quit.
| tomrod wrote:
| First one is a product, second is a service.
| makeitdouble wrote:
| Second one you paid a service to get a product.
| 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...
| fogzen wrote:
| Is it? "In the case of a taxpayer's _specified_ research or
| experimental expenditures for any taxable year-- " is
| pretty clear. That means what someone wants to claim as
| research and experimental expenditures. "For the purposes
| of this section" also seems pretty clear. If you want to
| claim software development as R&E, it unambiguously
| qualifies. And now all R&E must be amortized.
|
| I am not a tax expert, but it doesn't seem like there's any
| reason you have to claim software development as R&E.
| dcow wrote:
| This is my understanding as well. This whole issue seems
| rather... sensationalized.
| anonymouse008 wrote:
| 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.
|
| I wonder what this section and any software means
| fogzen wrote:
| It means before you may have had to justify whether
| software development qualified as R&E, now you don't. It
| unambiguously qualifies, if you're claiming it as R&E.
| And unlike before, R&E must now be amortized.
|
| But AFAIK you don't need to claim it as R&E. That
| everyone has to claim all software development as
| "research and experimental expenditure" seems completely
| unfounded and a misunderstanding.
| bombcar wrote:
| I assume there were-are other benefits claiming software
| development as R&D/E - and that the vast majority of it
| probably shouldn't.
| fogzen wrote:
| Yup. Exactly. And from that perspective this is actually
| a good thing, because now you don't have to worry about
| whether software development qualifies as R&E.
| alkonaut wrote:
| > maintenance (bug fixes) wouldn't.
|
| Link [2] lists activities related to software development
| and includes maintenance and debugging. As I understand it
| this is for the older #41?
|
| * Programming
|
| * Tuning and benchmarking of software
|
| * Performing software maintenance and debugging
|
| ...
|
| Am I understanding this correctly that there are two
| different things at play here: the Section 41 tax credit
| which works in the companies' favor by allowing them to
| deduce R&D expenses. Then the Section 174 that requires all
| expenses to be amortized and the big issue for software
| firms is that the definitions of R&D differes where it's
| narrow R&D for the credit, but very broad for #174,
| resulting in a cash flow problem?
| g42gregory wrote:
| This calculation will apply with any level of profitability.
| The tax simply goes up. My questions is how the large software
| development companies (Google) are dealign with this? It would
| be $10s of billions of extra tax for each of them. We didn't
| hear the outcry. If they were to pay extra $10s of billions,
| presumably they could get the whole country up in arms quickly.
| Maybe this relates only to the portion of software development
| that us declared as an R&D expense? The regular software
| engineers' salaries would be the cost of goods/services sold?
| 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.
| erik_seaberg wrote:
| Great, now we have to ask tax accountants how long the
| Microservice of Theseus was officially in maintenance
| mode while we rewrote it.
| 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.
| brookmg wrote:
| Damn, what are they thinking right now?
| maga_2020 wrote:
| Not an accountant But I think, they are thinking that
| software devs should be consultants ( unless they are
| researches doing something very risky, something that may not
| work (from technical not business sense))
|
| This way, they are an expense to the corporation, and each
| one of the consultants pay their own income tax.
|
| In that way the corporation building software for sale/SaaS
| is treated the same way that a corporation that's buying and
| then renting out real-estate, for example.
| ckemere wrote:
| Just to clarify, if they last 5 years, then eventually it gets
| back to even by year 5, is that correct?
|
| Also, if you classify the employee differently, does that
| change situation?
| dkural wrote:
| Yes, you're correct.
| 1auralynn wrote:
| As long as you never grow.
| 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.
| [deleted]
| vertis wrote:
| Not forgetting that the government is ALSO taking money on the
| other side of the salary as well.
|
| I much prefer Estonia's system of taxation. Flat 20% on share
| dividends. Any money that stays within the business (or gets
| spent on wages, other expenses) isn't taxed (aside: there are
| social and income taxes on wages).
|
| Coming from Australia's system it's just so simple to be
| compliant. Feels designed to help businesses grow.
| robertlagrant wrote:
| I have been thinking this for a while. Corporation tax
| creates so much work, and it would be better to tax certain
| inflows of money.
|
| So my salary is taxed; my dividends are taxed; my purchases
| are taxed with VAT, that sort of thing.
|
| Stop making companies employ armies of accountants to figure
| out all the tax credits/implications/corporate structures etc
| so the government doesn't take too much.
| vertis wrote:
| I pay the Estonian accountant (xolo.io) ~100EUR a month and
| that covers just about everything required to keep the
| company in good standing. Minor amounts of admin to sign
| off the annual report (all done with my smart card).
| robertlagrant wrote:
| That sounds exactly as it should be. Very neat.
| dcow wrote:
| IMHO the solution is really more simple than people are making
| it out to be and it's weird politics among CPAs causing all the
| distress. To people wiling to challenge their CPAs style of
| doing things: don't classify your core expenses as "research
| and development". I believe this follows the letter and spirit
| of the law. R&D is extra stuff you do on top of an already
| profitable business. When you're building a product you're
| _implementing_. It's entirely a semantic problem that has
| happened because we call the job function "software
| development" and the tax code uses "research and development"
| (a different function) as the language. The CPA thing is caused
| by there being a central source of "doing things" that all the
| CPAs follow because they're not qualified to be a tax lawyer
| and think for themselves. So everyone is stuck in whatever rut
| their guild's status quo tax setup for #startups has caused.
| spiffytech wrote:
| From the Section 174 text: 26 U.S. Code SS
| 174 - Amortization of research and experimental expenditures
| (c) Special rules (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.
|
| https://www.law.cornell.edu/uscode/text/26/174
|
| To me it doesn't sound like classification is discretionary
| to me, or that splitting semantic hairs will prove effective
| (IANAL).
|
| (Additionally, the R&E classification is different from R&D)
| dcow wrote:
| Guys, this entire section is under the _ITEMIZED DEDUCTIONS
| FOR INDIVIDUALS AND CORPORATIONS_ section. Taking a
| deduction is never mandatory (though usually recommended if
| applicable). Context matters.
|
| > In computing taxable income under section 63, there shall
| be allowed as deductions the items specified in this part,
|
| Generally, these sections explaining deductions, including
| 174, are things you _adopt_. From the beginning of the
| section
|
| > (a) In general
|
| > In the case of a taxpayer's specified research or
| experimental expenditures for any taxable year--
|
| Everything that follows is subject your _specified_ R &E.
| Which is all part of the itemized deductions framework
| which is all completely discretionary.
|
| For instance, here's section 162
|
| > a) In general
|
| > There shall be allowed as a deduction all the ordinary
| and necessary expenses paid or incurred during the taxable
| year in carrying on any trade or business, including--
|
| > (1) a reasonable allowance for salaries or other
| compensation for personal services actually rendered;
|
| You are simply _carrying on_ business ordinarily. People
| don't operate businesses on R &E expenditure. It's just not
| a rational interpretation of the tax code and you don't
| even need to be a lawyer to read this document or form that
| conclusion.
|
| https://news.bloombergtax.com/tax-insights-and-
| commentary/ch...
| nocoiner wrote:
| You know, this is pretty clearly the right answer. Software
| developer salaries are ordinary business expenses. There's
| some alarming language in the section about deductibility of
| R&E expenses, but core business functions aren't R&E.
|
| Really perceptive comment.
| jbverschoor wrote:
| All sw dev is considered R&E. Soo you have no choice
| caseyohara wrote:
| This is categorically untrue, many developers are COGS.
|
| > The salaries of the team responsible for keeping the
| production instance of the software up and running should
| also be included in COGS. All other R&D expenses should
| not be in COGS.
|
| https://www.saas-capital.com/blog-posts/what-should-be-
| inclu...
| imtringued wrote:
| That doesn't make sense since there is both greenfield
| development and maintenance development. By this logic we
| would have to track our hours and write down when we do
| maintenance work and when we do R&D.
| mjwhansen wrote:
| You do, if you want to claim the tax credit. But the R&D
| tax credit and R&E under Section 174 are two completely
| different things.
|
| Until 2022, companies had the choice between expensing
| and amortizing software development under Section 174.
| (Section 174 specifically calls out all software
| development as falling under that section.) So they would
| only time track when they wanted to get the R&D tax
| credit, which only covers a portion of software
| development activities. R&D tax credit software
| development is a much narrower scope than R&E software
| development. So it didn't matter until now.
| dcow wrote:
| Honestly people like you posting these articles claiming
| that "weird legislative inaction is fucking over startups
| and small business" and further pushing the "all work
| that involves scripting a computer 110% _must be_
| classified as software R &E" narrative in comments, in
| spite of so many people telling you that such a
| conclusion is batshit stupid, makes me question whether
| there's some ulterior motive in play. Like what, are all
| the accounting firms realizing their CPAs don't
| outperform TurboTax if they can't use their secret
| software R&E magic loophole and have thus deployed the
| shills, who show founders ridiculous mega tax
| bills..obviously perturbing them into posting their re-
| shills? Anecdotally, I know exactly zero founders who are
| getting "fucked over" by this because they aren't stupid
| enough to structure their taxes in a way that causes
| their employees' salaries to magically become capitalized
| voodoo money. Like, man, cut the histrionics... and find
| a better tax person.
| fogzen wrote:
| "In the case of a taxpayer's _specified_ research or
| experimental expenditures for any taxable year" ...
|
| Seems pretty obvious to me that the section only applies
| to what is claimed as R&E. Software development doesn't
| have to be claimed as R&E, but if it is, now it
| unambiguously qualifies.
| Alacart wrote:
| Isn't the main problem that this change forces all
| software development, regardless of purpose, to be
| classified as R&E and therefore forced to be amortized?
| dcow wrote:
| No! That's what confused CPAs are telling gullible
| startup founders.
|
| Nothing forces you to classify engineering salaries or
| even contract expenses under the provisions of section
| 174 which describe "research and experimental
| expenditure". There are some reasons historically why
| people _elected_ to do that, but that may be a bad idea
| moving forward and honestly seems rather dishonest to me.
| No, your Jira clone is not "research and experimental
| expenditure", it's just a fucking database with a UI...
| just like 97% of all other startups. It's more like: if
| you can use section 174 because you spun up a project to
| research curing diabetes with nano bots, then your
| software development allocated towards the project also
| counts as R &E, cheers.
|
| Repeat after me: "my core business is not a _research and
| experimental expenditure_ , it's just a normal mundane
| boring operating expense".
| ericpauley wrote:
| You don't specify what is R&E, the _statute_ does. It 's
| specified in the next section, and section c(3):
|
| " "specified research or experimental expenditures"
| means, with respect to any taxable year, research or
| experimental expenditures which are paid or incurred by
| the taxpayer during such taxable year in connection with
| the taxpayer's trade or business."
|
| and
|
| "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."
| phkahler wrote:
| >> All sw dev is considered R&E. Soo you have no choice
|
| You certainly have a choice to claim it as such or not.
|
| More importantly, why TF has the government been paying
| software engineers salary all these years? That's the
| real question. Also, has it occurred to anyone that this
| may be why the big tech companies are laying off
| engineers in droves?
| bioemerl wrote:
| The government has not been paying software engineer
| salaries in any sense. This is in regards to profit
| calculation where business typically pays taxes on
| profits, so a zero profit company whose largest expense
| is developers gets a "fuck you, go out of business now"
| tax bill.
| logifail wrote:
| > All sw dev is considered R&E
|
| In the UK the relevant document is CIRD81900[0] which
| sets out what conditions must be satisfied to qualify for
| R&D tax relief. It's lengthy, but worth the read.
|
| One section that stands out is:
|
| "A process, material, device, product, service or source
| of knowledge does not become an advance in science or
| technology simply because science or technology is used
| in its creation"
|
| [0] https://www.gov.uk/hmrc-internal-manuals/corporate-
| intangibl...
| jsty wrote:
| Unsure if you were getting at this too, but software
| development in the UK can absolutely be ineligible for
| R&D tax credits yet still require treatment as capital
| expenditure for tax purposes (and thus not simply fully
| deductible in year 1 like revenue expenditure) - see [0]
| from the AAT on this.
|
| Disclaimer: Not an accountant, not your accountant, get
| professional advice.
|
| [0] https://www.att.org.uk/tax-treatment-software-and-
| website-co...
| spiralx wrote:
| Yeah we've helped hundreds of start-ups do their R&D
| claims, and you have to have specific projects that fall
| within the definition of "novel" and even then you need
| to explicitly specify exactly which people worked on it
| and for how long. It's not a blank cheque at all, and
| they've tightened the requirements this year on top of
| that.
| logifail wrote:
| > software development in the UK can absolutely be
| ineligible for R&D tax credits yet still require
| treatment as capital expenditure for tax purposes
|
| Indeed. Although:
|
| "If businesses develop their own software, the
| classification of expenditure relating to this (including
| salaries of in-house IT staff) should be assessed
| following the same principles. The fact that expenses
| such as salaries may be recurring does not on its own
| prevent them from being capital in nature. However, it
| should be noted that:
|
| The salaries of IT staff will not normally be capital
| expenditure unless some major new project can be
| identified. If staff are making only piecemeal changes or
| minor improvements to software, their salaries are likely
| to be revenue costs."
|
| Yet from the [US-based] contibutions in the thread it
| sounds as though _all_ in-house software developers'
| salaries may _have_ to be treated as capital expenditure
| for tax purposes in the US.
|
| This seems, frankly, bonkers. I appreciate that portions
| of the US tax code might well be exactly that(!)
| jbverschoor wrote:
| In NL, there's a tax relief for R&D, but it will have to
| be approved on forehand, and has to be described and
| estimated in detail, and will be audited. The tax relief
| gives you a discount on employee taxes.
| dcow wrote:
| Stop parroting this nonsense. If you really think gluing
| a React UI onto MongoDB and then jamming it into an
| Electron app so that you can charge a subscription for
| your juice-pulp-bag-squeezing-machine is "research and
| experimental expenditure" you have either drown yourself
| so far in Kool-Aid that your skin is blue or you're
| certifiably committing tax fraud.
| jbverschoor wrote:
| > (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.
|
| I'm just "parroting" from house.gov
| dcow wrote:
| _For purposes of this section_
|
| _This section_ describes how to handle expenses you
| consider to honestly be _research and experimental_
| expenditure. It does not supersede all other sections of
| the tax code and magically cause all software expenses to
| get sucked under this section. It simply instructs you
| how to proceed when evaluating your R &E expenditure, of
| which software development unambiguously qualifies.
|
| Section 174 literally begins with
|
| > In General
|
| > In the case of a taxpayer's specified research or
| experimental expenditures for any taxable year--
| jbverschoor wrote:
| And this section is "26 USC 174: Amortization of research
| and experimental expenditures"
|
| Why is it so hard to believe? The US has a credit
| problem. There's a ton of money going to software dev. It
| gives the government some easy access to capital. It's
| essentially a loan from tech companies
| dcow wrote:
| Amortization of research and experimental expenditures
| applies to _research and experimental expenditures_. It
| doesn 't apply to the money you spent paying a contractor
| to hook your PoS and Shopify into Stripe. If you're
| _researching_ how to cure brain cancer by _experimenting_
| on rats with gene therapy, then yeah, you might consider
| organizing your expenses under the provisions of section
| 174. But even then it's not a requirement.
| jbverschoor wrote:
| @dcow, sure, but it says, and that's what all the fuzz
| imo is about:
|
| "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."
| dcow wrote:
| I certainly agree the wording is wholly suboptimal and
| confusing, but what I don't understand is the
| determination to pick the obviously borked
| interpretation, especially after clarification is given.
| There is no honest fair rational interpretation of the
| tax code that would result in needing to e.g. capitalize
| your IT team's salary because they wrote a script to
| provision employee laptops. It _can't_ be interpreted
| that way because it's not just. The _for the purposes of
| this section_ caveat is really important. But also,
| pulling one sentence out of the document out of context
| is also somewhat fraught. The government isn't allowed to
| steal money from software companies just because. That's
| not remotely close to the spirit of the tax code.
|
| PS: if the reply button doesn't show up click the
| timestamp (X minutes|hours ago) on the comment you're
| wanting to reply to and you'll get a reply option.
| jbverschoor wrote:
| TIL hidden features of HN :-)
|
| Was clarification given? If so, it would be rather
| strange to see these posts pop up on cnbc and other big
| sites, as it was already known and discussed some time
| ago.
|
| I think that's up to the judicial branch to see if the
| new law/regulations are unconstitutional.
|
| Whil I do agree it's messed up, but they're not really
| stealing, they're just borrowing from companies. Timing
| is pretty shitty though; a year or two ago, it would've
| made less of an impact, as capital was cheaper and easier
| to get.
| dcow wrote:
| Is borrowing the right term here? You don't get the tax
| you paid on your phantom profits back if you lose money
| the next year. You just pay marginally less tax if you
| make money. You're spending money you would never have
| spent. A loan implies you get repaid.
|
| That's what is _really_ fucked up as others are pointing
| out. If I don't grow or grow slowly The gov't is flat out
| robbing me. If I start a venture that I don't expect will
| start generating revenue for 5 years, then the government
| has taken 5 * 1 /5(sw-expenses)(tax-rate). Thats not a
| loan, it's larceny.
| abofh wrote:
| If you don't generate revenue, you still have no taxes.
| fogzen wrote:
| I don't think the law says all software development has
| to be part of a mandatory R&E credit.
|
| It says "For the purposes of this section...", so it
| doesn't apply if you're not claiming R&E credit.
| jbverschoor wrote:
| From https://uscode.house.gov/view.xhtml?req=(title:26%20
| section:...
|
| > 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.
|
| Where "this section" is "SS174. Amortization of research
| and experimental expenditures"
|
| Tax credit is separate from amortization afaict.
| dcow wrote:
| Where does it say that all your business expenditure must
| be considered R&E and consequently are subject to the
| provisions of section 174?
|
| Yes, _if_ some of your expenditure falls under R &E, then
| you use section 174 which says any portion thereof
| involving software development must be amortized.
|
| What's described is a cause and effect relationship, not
| a global mutation of all expenses.
| jbverschoor wrote:
| @dcow
|
| > Where does it say that all your business expenditure
| must be considered R&E and consequently are subject to
| the provisions of section 174?
|
| It doesn't, and neither did I. It states that all
| software development is seen as R&E
|
| > Yes, if some of your expenditure falls under R&E, then
| you use section 174 which says any portion thereof
| involving software development must be amortized.
|
| > What's described is a cause and effect relationship,
| not a global mutation of all expenses.
|
| That's not how I interpret it. Section 174 states that
| all sw dev will fall under R&E. By your logic, you could
| rule out any "Special rules and definitions" of all
| sections. Again, it's not about "all expenses". It's
| about "any amount paid or incurred in connection with the
| development of any software". Basically payroll,
| contractors, and even outsourced companies.
|
| To prevent massive outsourcing, the amortization rate is
| 7% (15 years) instead of 20%.
|
| Look at it this way:
|
| A "machine" must be amortized. In its lifespan it wil
| generate some sort of income (almost by itself). Software
| can be seen as a "machine". Makes total sense.
|
| Here in NL, if you mine bitcoin. You'll have to pay
| income tax over it, as it's seen similar as "labor".
| dcow wrote:
| The section starts with
|
| > In general
|
| > In the case of a taxpayer's specified research or
| experimental expenditures for any taxable year--
|
| Note _specified_.
|
| Then the special rule says
|
| > 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.
|
| So the section says its purpose is to govern _specified_
| R &E expenditure. And the special rule regarding software
| is caveated to make it clear that it is subject to the
| general purpose of the section.
|
| To your analogy, if I pay an employee to build a machine
| rather than buy a machine, that's opex not capex. I don't
| amortize the labor cost of the machine out over 5 years
| and pay taxes on the 80% of the employees salary that now
| doesn't count as an expense because they made a machine.
| I also don't get to add the value of the machine as an
| asset and record losses as it depreciates over the years,
| either.
| jbverschoor wrote:
| But in "(b) Specified research or experimental
| expenditures" it says:
|
| > For purposes of this section, the term "specified
| research or experimental expenditures" means, with
| respect to any taxable year, research or experimental
| expenditures which are paid or incurred by the taxpayer
| during such taxable year in connection with the
| taxpayer's trade or business.
|
| So that's R&E expenditures. It's further specified that
| all swdev is R&E.
|
| My interpretation would be that sw dev = R&E. And R&E =
| specified R&E, UNLESS it's not in connection to the trade
| or business. (Not sure when that would happen though).
|
| Afaik, it works like that when activating any piece of IP
| using an expenses based valuation method.
|
| I'm gonna let it rest now. I'm not affected anyway. At
| least not directly.
| [deleted]
| bradleyjg wrote:
| How do you explain the CBO scoring?
| nonethewiser wrote:
| I think you're missing a variable here. Corporations == bad
| tomato_123 wrote:
| Luckily, barely any startups actually have revenue.
| aarondf wrote:
| Huh? It's not about startups. It's about small software
| businesses that were moderately profitable yesterday and are
| potentially out of business today.
| mohitc wrote:
| Is this applicable to different titles developing software,
| such as Member of Technical staff?
| 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.
| uoaei wrote:
| So then you agree that re-defining the law is the correct
| course of action, which is exactly what's being done in
| TFA.
| pclmulqdq wrote:
| Nobody disputed that...
|
| Also, what are you referring to as "TFA"? The 2023 tax
| bill?
| 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?
| agwa wrote:
| Right. The bank can generally resell a repossessed
| building to recover the loan principal, but repossessed
| software may be worth literally anything, including zero
| in many cases. That makes loans for building software
| extremely risky, which is why software companies are
| rarely ever funded by bank loans.
| ElevenLathe wrote:
| What about software written on contract? It's my
| understanding that a signed contract with a customer to
| deliver something for $x is usually enough to convince a
| bank to lend you $x for approximately the length of time
| until you get paid. IOW if I'm an engineering firm that
| has a contract with the DOT to design a highway
| interchange, I can go down to the bank and a get a loan
| to pay my engineers' salary until we deliver and get
| paid. Can I do the same as a software shop that has a
| contract to rewrite the DOT's payroll software? I guess
| this scenario is still different because I'm (probably)
| not paying the loan off over several years -- it's more
| like an inventory loan.
|
| In any case, it seems like the result of these changes
| (if they stand) will probably be to change in some way
| the amount /and type/ of software that gets written. If
| the tax treatment of software essentially requires it to
| be a capital asset, we will probably see people write
| more software that behaves like a capital asset:
| shrinkwrapped software rather than SaaS. This may not be
| a bad thing.
| plumarr wrote:
| It really depends of your business. Sure if your are a SaaS
| company, SAP, Google,... that's the case.
|
| But if you are a small shop that build software for other
| companies, it isn't. You write the software, get a one off
| paiement and you'll not be able to get more revenue from it
| in the future outside of a possible maintenance contract. You
| can't resale it to someone else.
|
| To summarise, the work of many software companies is akind to
| the work of design office : you do R&D for someone else. The
| amortization will have to be done by your customer, not by
| you.
| 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.
| eldavido wrote:
| >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.
|
| This is precisely what happens!!
| 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.
| vikramkr wrote:
| What's wrong with paying employees more? Income tax is a
| thing and that's on revenue, not profit. You'll get a
| bigger cut of that then other expenses. And a bigger cut
| of that than equity comp and share buybacks where that's
| cap gains. Income is great!
| jakear wrote:
| Are you arguing the government is actually getting less
| tax this way?
| bcrosby95 wrote:
| Why are you so hostile to startups? Maybe if you could
| articulate what small software companies are _actually_
| abusing when they offset their revenue with wages like
| _literally every other industry out there_ I could start
| to understand your viewpoint.
|
| But without that you just seem like you have a chip on
| your shoulder.
|
| You do understand that if this law were applied to any
| industry it would similarly kill small companies in
| those? Like if restaurants had this rule for wages it
| would devastate smaller, family run restaurants.
| jakear wrote:
| I'm simply stating the idea the P's present of "How
| terrible is this? I made 1,000,000, spent 1,000,000, but
| now I don't have money for taxes!" is quite literally a
| lesson any kid should have learned when they first went
| to the store to buy a $5 candy with a $5 bill and learned
| the way of the world.
|
| Given restaurants aren't in the business of R&D I don't
| see why you're trying to make an argument based on
| applying R&D tax law to them. It's disingenuous, at best.
| [deleted]
| 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
| aarondf wrote:
| This has nothing to do with year one though. This is hitting
| companies that are in year 5, 10, 20, etc.
|
| If you were running a small software company that make 2m in
| revenue and puts 200k to the bottom line, your business no
| longer works.
| phkahler wrote:
| Isn't this all referring to the "R&D tax credit"? My
| understanding of the word 'tax credit" is that any labor that
| could be classified as R&D would essentially be funded by the
| government. When this came out I thought "what a scam" because
| companies were going to develop their next-gen products anyway,
| but now some of our work could qualify as "R&D" and basically
| be free to the company. If my interpretation was correct, that
| would explain why big tech companies pay so many people so well
| - they weren't actually paying them at all, the government was.
| Even though I may benefit from that, that's not how I think it
| should be.
|
| OTOH, I'm not a biz guy but I was under the impression that
| paying employees was an expense anyway and would be deducted
| from revenue and not taxed. How is R&D different?
| aarondf wrote:
| > Isn't this all referring to the "R&D tax credit"?
|
| No, it is not.
| phkahler wrote:
| >> Congress failed to extend a key tax provision last year
| allowing companies to fully expense research & development
| costs in the year incurred, a blow to big corporations that
| had lobbied for it.
|
| OK, so what is it?
| rbultje wrote:
| > Isn't this all referring to the "R&D tax credit"?
|
| No. The terminology is confusing. Section 174, specifically
| point 3, classifies software development as R&E as of 2022
| and requires amortization over 5-15 years. This prevents
| software engineering salaries as a standard business tax
| deduction. This has nothing to do with the R&D tax credit
| (section 41).
| 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.
| 1auralynn wrote:
| Universities already have their indirect cost rate
| negotiated (most are like 80-120%). Default for newcomers
| is around 30%, until you can build up the history and
| wherewithal to navigate the negotiations for establishing
| your own rate.
| 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.
| tomrod wrote:
| NSF has safe harbor of fringe + indirect @ 50% of salary,
| IIRC.
| 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.
| brewdad wrote:
| So, as much as you are whining about a huge tax bill you
| are still clearly better off than you would have been
| without the money.
|
| Much ado about nothing.
| 1auralynn wrote:
| No, it adds a huge burden. It's already eaten up a large
| amount of my bandwidth. If they don't repeal it I also
| have to get some kind of VC or other debt funding, which
| is by no means guaranteed. Not to mention that writing
| these grants is not inconsequential in terms of effort in
| the first place. At any point the added strain and
| uncertainty could force me out of business.
| tomrod wrote:
| The man/woman in the arena. I recommend giving it a
| review.
| 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?
| foobarbazetc wrote:
| It is insane.
|
| If they don't fix it a lot of companies (and their owners)
| are going to go bankrupt.
| MikePlacid wrote:
| Only those where CFOs are incompetent. And the owner is not
| responsible for the company's debt, usually.
| tomrod wrote:
| Nope. CFOs are beholden to law as are others.
| throwaway292939 wrote:
| What could've been done differently with a "competent"
| CFO?
| HyperSane wrote:
| Is the IRS willing to let companies make payments of the tax
| over years? Would would the IRS want to put companies out of
| business?
| 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?
| light_hue_1 wrote:
| Republicans. As always they are the enemy.
|
| https://www.nytimes.com/2017/12/19/us/politics/tax-bill-
| vote...
|
| "the most sweeping rewrite of the tax code in decades"
| 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.
| nickjj wrote:
| This is a topic I know very little about but doesn't this
| type of "absolutely insane" thing happen to other small
| businesses due to estate taxes too?
|
| For example: - Your uncle owns a farm for
| the last 50 years - Over the 50 years the farm's land
| value has risen to $1,000,000 - The farm itself only
| generates $20,000 a year in profit which is spent on living
| expenses - Your uncle has no savings - Your
| uncle dies - A 40% federal estate tax is applied onto
| the farm's current value from your uncle's death (state taxes
| might also be added) - Whoever owns the farm is now
| responsible for coming up with $400,000+ or you're forced to
| sell the farm to cover the tax bill
|
| I might be butchering this so please correct me if I'm wrong
| but this feels like a system that helps larger companies
| because it prevents a smaller business being able to exist
| multiple generations.
| cced wrote:
| If this is true then the system is clearly made to funnel
| these lands into the hands of the ruling oligarchs.
| dllthomas wrote:
| Fortunately it's mostly not true.
| [deleted]
| dragonwriter wrote:
| Assuming your uncle was single and not able to leverage the
| double estate tax exemption for married couples, the
| $1,000,000 farm value is only $11.92 million short of the
| threshold at which estate tax would start to apply, and
| only to the amount above the threshold, at an initial
| marginal rate of 18%. It only reaches a marginal rate of
| 40% on the amount more than $1 million over the exemption
| threshold.
|
| If, instead of being $1 million, the farm (assuming it was
| the whole of the estate) was worth $13.92 million, the
| actual estate tax would be $345,800. Assuming the same
| ratio of annual profit to value in your hypothetical, the
| annual profit would be $278,400; so if you had no other
| assets to pay the tax, you'd probably need to borrow
| against the profits, but that shouldn't be too hard given
| their magnitude.
| williamDafoe wrote:
| Thomas Jefferson argued strenuously for the estate tax and
| for inheritances (without a will) to be divided evenly
| among the children. In Europe the law of primogeniture put
| inheritances in the hands of the firstborn male which
| guaranteed that a dynasty could always be preserved! Ick!
| tomrod wrote:
| Fortunately he has passed away and can no longer argue
| this idea with the hagiographic veil of authority.
| anonymouskimmer wrote:
| > it prevents a smaller business being able to exist
| multiple generations.
|
| In addition to what everyone else says, if you have a
| multi-generational business the owner should be bringing
| their child(ren) in as executives and part owners of the
| business. The estate tax would only apply to the part of
| the business the original owner still owned at their death,
| not the part of the business owned by the child(ren).
| jaggederest wrote:
| > Federal estate tax is due if an estate's value exceeds
| the estate tax exemption amount, which is $12.92 million
| for deaths in 2023
|
| The numbers are much, much larger than a simple $1m family
| farm.
|
| Also, remember, that cap is a exemption from the value. If
| you have a farm worth $14m, you will have to pay
| approximately $400,000 in estate tax (NOT 5.6 million like
| you would naively calculate). At that point, if the farm
| doesn't generate (effectively) any revenue, and it's not
| mortgageable or you can't secure a personal loan, it's
| probably best for everyone that it be sold. You certainly
| wouldn't be able to e.g. pay property tax on a property
| that size.
|
| The estate tax is the most widely misrepresented thing in
| the tax code. It's designed to prevent multimillionaires
| and billionaires from passing down their entire fortune to
| the next generation intact. It almost never affects anyone
| but the top 0.5% wealthiest people in the country, and only
| then if they do absolutely no estate planning whatsoever.
| bitL wrote:
| How does this work with consultants/contractors? Are they still
| booked under R&D expenses?
| mbesto wrote:
| Yes.
| 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.
| hgsgm wrote:
| It benefits VCs because it makes it impossible to sustainably
| self-fund a business.
| phkahler wrote:
| >> 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.
|
| So stop claiming software development as R&E and just say
| they're regular salaried employees. The government never should
| have been paying them in the first place!
| aarondf wrote:
| It's not up to you to categorize them one way or another.
| This law mandates that they are r&d and thus amortized.
| phkahler wrote:
| No, no it doesnt.
| aarondf wrote:
| I'm not sure how to convince you other than telling you
| to read the law (or the article.)
|
| That's why everyone is freaking out about this
| aarondf wrote:
| > Under new Section 174(c)(3), software development costs
| are treated as R&E expenditures and must also be
| capitalized and amortized in accordance with the new
| rules.
|
| https://www.grantthornton.com/insights/alerts/tax/2022/fl
| ash...
| say_it_as_it_is wrote:
| This ensures that every innovative company is owned by the
| financial markets. You cannot run a business unless you raise
| equity or take on debt.
| blitz_skull wrote:
| Is there any silver lining here at all?
| [deleted]
| g42gregory wrote:
| Ok, I don't understand this. It basically says that you can't
| completely deduct any software engineering salaries? This would
| affect all companies writing software, Google and Meta, for
| example. If this would affect Google's bottom line so much,
| wouldn't they change the tax code by now? If not, how are they
| avoiding these new taxes?
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