[HN Gopher] Thousands of small businesses are struggling becaus...
___________________________________________________________________
Thousands of small businesses are struggling because of R&D
amortization
Author : IndoCanada
Score : 277 points
Date : 2024-01-20 11:53 UTC (11 hours ago)
(HTM) web link (twitter.com)
(TXT) w3m dump (twitter.com)
| pettycashstash2 wrote:
| Not much detail available
| itsoktocry wrote:
| > _A handful of these small business owners have bravely spoken
| to journalists from the Wall Street Journal and CNBC[...]But the
| vast majority are hesitant to speak to journalists as it might
| give their competitors free intel or make their employees nervous
| that they might lose their jobs._
|
| This seems a tad overblown? "brave", "free intel"? Why would we
| need to hear the same thing from thousands of small businesses?
| This stuff is all over the industry, but employees are oblivious
| unless their company is explicitly interviewed?
|
| It's a bad law, but I'm not sure what is interesting about this
| Tweet.
| alephnerd wrote:
| > Why would we need to hear the same thing from thousands of
| small businesses
|
| That's how lawmakers prioritize work.
|
| It seems some kind of lobbying organization for early stage
| companies might be needed - maybe some think tank funded by a
| couple early stage focused VCs
| ChrisMarshallNY wrote:
| Sounds like this community would be an ideal place to start.
|
| _Disclaimer: I 'm retired, so I don't have a dog in this
| race._
| sokoloff wrote:
| As an employee, if I hear my CEO/CFO saying how this law makes
| it hard to employ SWEs, I will be likely to worry about my job.
|
| I pay attention to news coverage and interviews of my company
| execs, whatever they're talking about. I don't pay attention to
| all other company execs talking about tax law.
| MasterYoda900 wrote:
| I don't see why software should receive special treatment when
| 99.99% of software engineers/developers are not in any way
| engaged in what might be considered genuine scientific research
| and development, which R&D tax advantages should be reserved for.
|
| > Changes to R&D amortization were a rude surprise to them, as
| they'd never had to amortize software development before, and
| didn't think of the work they do as R&D.
|
| Precisely. They didn't think of their work as R&D because it was
| not R&D. Frankly, they should have seen this coming.
|
| > These are small businesses we're talking about. Almost all of
| them make under $10M in annual revenue, and the vast majority are
| under $2M in revenue.
|
| What about the millions of other small businesses that don't get
| special tax treatment? Restaurants, bars, plumbing companies,
| landscaping companies, accounting firms, etc.? Software engineers
| are not scientists. At the end of the day, a company is supposed
| to be able to stand on its own two feet, not rely on government
| handouts. Allowing otherwise unprofitable businesses to stay in
| business disincentivizes innovation and efficiency, which harms
| productivity growth and makes us all poorer in the long run.
| kleinsch wrote:
| I don't think you understand what they're discussing.
|
| If you run a plumbing company, make $100K in revenue, pay a
| plumber $100K, you have no profits, owe no corporate taxes.
|
| If you run a software company, make $100K in revenue, pay a
| software engineer $100K, section 174, which just went into
| effect recently, means you now owe taxes on $90K of profit.
| This is because you must spread dev costs over 5 years, you
| can't deduct them in the year they happened.
|
| https://blog.pragmaticengineer.com/section-174/
| nerdponx wrote:
| I assume you meant 80k instead of 90k?
| moron4hire wrote:
| The code defines that you start with the midpoint of the
| taxable year, so even though it covers a five year period,
| it will also cover 6 tax years. Because of that, the first
| tax year (which was 2022), only 10% can be deducted. Tax
| years 2 through 5 is 20%. You can deduct the last 10% in
| the 6th tax year.
| itsoktocry wrote:
| > _Precisely. They didn't think of their work as R &D because
| it was not R&D. Frankly, they should have seen this coming_
|
| Don't you have this backwards, or do I?
|
| Software development is _now_ going to be treated as R &D,
| which means that costs have to be amortized. That's not an tax
| advantage, it's a disadvantage. All the other businesses you
| list get to expense their labour costs. But we agree, software
| dev should not be treated differently.
| john-radio wrote:
| Yes, my (lay) understanding is that MasterYoda has it
| backwards and your explanation is correct.
| welder wrote:
| MasterYoda900 has it backwards. However, my CPA said software
| engineer salaries are only categorized as R&D before the
| product is launched. So this only affects new startups pre-
| launch... if my CPA is correct.
| indymike wrote:
| There will be lots of confusion and litigation on this
| exact issue.
| nickjj wrote:
| > However, my CPA said software engineer salaries are only
| categorized as R&D before the product is launched
|
| I wonder how this one will pan out.
|
| Let's say you build out a landing page with a way for folks
| to input their email address which demonstrates interest in
| your product. You've released it and people can sign up.
|
| Did it launch? You could make case it did and now you're
| iterating on the product from here on out. You've launched
| phase 1 of the product which is probing for demand.
| brianwawok wrote:
| If you are a one man startup it doesn't apply. This would
| only matter for employee salary.
| MattRix wrote:
| Your CPA is incorrect. The law now applies to ALL software
| development and related activites, regardless of what state
| the product is in.
| mjwhansen wrote:
| Your CPA might be referring to rules for R&D tax credits,
| which covers a much, much more narrow scope of business
| activities. R&D credits cannot offset the impact of the
| amortization rules.
| PaulDavisThe1st wrote:
| Your CPA is _not_ correct.
|
| Any software development costs related to improving the
| product by providing new features must be amortized. Only
| clear bug fixes can have costs that are expensable.
|
| This is made extremely clear in the IRS guidance document.
| Retric wrote:
| They have it backwards in two ways. Software isn't Research,
| but Software Developers are generally doing Development ie
| improving existing products or developing new ones.
| tester756 wrote:
| I used to have similar mindset about this like you, but let's
| read what's an actual definition of R&D:
|
| >Research and development is the set of innovative activities
| undertaken by corporations or governments in developing new
| services or products, and improving existing ones.
|
| >R&D activities differ from institution to institution, with
| two primary models of an R&D department either staffed by
| engineers and tasked with directly developing new products, or
| staffed with industrial scientists and tasked with applied
| research in scientific or technological fields, which may
| facilitate future product development. R&D differs from the
| vast majority of corporate activities in that it is not
| intended to yield immediate profit, and generally carries
| greater risk and an uncertain return on investment.
|
| and as you see "R&D department either staffed by engineers and
| tasked with directly developing new products, or staffed with
| industrial scientists and tasked with applied research in
| scientific or technological fields, which may facilitate future
| product development"
|
| developing new products falls under R&D
| Shrezzing wrote:
| > I don't see why software should receive special treatment
| when 99.99% of software engineers/developers are not in any way
| engaged in what might be considered genuine scientific research
| and development, which R&D tax advantages should be reserved
| for.
|
| Why? There's a clear relationship between R&D spend and
| economic growth. This is including R&D spend on non-scientific
| endeavours like commercial products + processes, which the
| majority of non-maintenance software work falls into.
|
| Estimates vary, but I've never seen a cost/benefit analysis of
| unrestricted R&D that finds anything lower than a $2 return for
| every $1 spent in unrestricted R&D.
| marcus0x62 wrote:
| > Comment from MasterYoda900
|
| > The whole thing backwards, he gets.
|
| Not too surprising, I guess.
| foooorsyth wrote:
| >software engineers/developers are not in any way engaged in
| what might be considered genuine scientific research and
| development
|
| Have you forgotten the D in R&D? Software engineers are
| building the product. That's development.
|
| What do you mean by "genuine scientific research"? I suppose
| you think ML researchers aren't doing "genuine science" because
| they wear hoodies instead of lab coats?
| anothernewdude wrote:
| That's a different word that is merely spelt the same.
|
| My programmers build software.
|
| Should builders building a house amortise their development
| work?
| Macha wrote:
| I think the theory is that you can't keep selling the same
| house each year so you've just developed inventory and not
| long term assets.
|
| Though, the country where I work and live, R&D has more
| profitable tax treatment, your employee costs are a same
| year expense, but you can get some relief on the rest if
| your tax bill if you proactively document what's R&D about
| your work and it doesn't get rejected by the tax department
| Frost1x wrote:
| Do your builder developers build the same thing over and
| over again like builders who build identical houses over?
|
| I get the point but software really is different. Rarely
| ever are you building the same thing over, both from a
| "structural" or "architectural" perspective and from a
| functional perspective.
|
| If your builders are creating a brand new blueprint for
| every house /structure and designing everything from
| scratch then I think it's more similar, probably closer to
| commercial property builders with large structures.
|
| Now under that perspective, I still don't exactly
| understand why you'd treat labor cost deductions
| differently. Maybe the fact that these more complex
| products and services being built have higher return
| potential? I don't know, I'm searching for a rational
| reason.
|
| But, I do disagree treating software like something as
| commodified as many forms of labor. Someday we may get to
| that point with simple principles and procedures to follow,
| albeit technically, but we're not there yet. At higher
| levels that may not be much "research" that's needed but
| where the rubber meets the road, your engineers are
| checking to see what exists and doesn't, designing new
| solutions to fill gaps in between, testing things, digging
| into previous things that don't work and trying to fix
| them... it's research.
|
| As we continue to move more professions to an intellectual
| economy, many roles are becoming more and more like this,
| not just software. I'd say loading more roles and
| expectations on labor is also creating this situation where
| we're asking more people to do more things they don't know
| or can't possibly know everything at a proficient level and
| the things we're asking them to do don't have solutions
| that can be written down and quickly referenced when needed
| as a simple recipe to follow. If you make the recipe
| general enough (e.g if a problem arises, find a solution
| and fix it at a low cost) then one might point to such
| highly generalized solutions and pretend it's a solved
| problem but it's not, it lacks any useful concretization.
| "You're not doing research, I told you 'if a problem arises
| fix it'! There's nothing to research you just do that!"
| doesn't cut the muster.
| PeterisP wrote:
| Yes, if your company has builders that build you an asset
| (like a warehouse or a factory or office building) then you
| always had to amortise those salaries together with all the
| other expenses for building that capital asset.
|
| That's not the case if you contract your builders out to
| build a house for someone else and they pay you for the
| hours, but IMHO it's also not the case (even with the new
| changes) for software developers being 'rented' as
| contractors to build stuff for others and the company
| getting paid for their hours.
| the_mitsuhiko wrote:
| Note that the current tax code implies that all software
| development requires amoritzation of salaries. This is as far
| as I can tell internationally quite unique. Usually you can
| write off all salaries as expenses.
|
| I don't have a fully formed opinion on this aspect of the
| taxation, but it's pretty evident that this is out of the norm.
| Agathos wrote:
| > Restaurants, bars, plumbing companies, landscaping companies,
| accounting firms, etc.?
|
| Do any of those businesses owe taxes before they've collected
| their first cent of revenue? That is the situation a software
| startup is now looking at.
| IggleSniggle wrote:
| You only get taxed on the revenue. So no, if you don't have
| revenue, you're not paying taxes. But all those businesses
| CAN deduct their expenses, and only pay taxes on profit.
|
| Software is now in the unique position of being required to
| pay taxes on revenue _instead_ of profit. If you spent $5M on
| development and raked in $100k, you 'll be taxed on $100k
| (minus expenses, where the $5M must now be spread over 5
| years). Of course, with those numbers, the company might want
| to spread costs over 5 years _anyway_ (which they could
| already do).
|
| So really, it's as if the tax code is specifically targeting
| bootstrapped companies that are reinvesting their profits
| back into the company. IMHO, the worst possible option of any
| that could have been chosen to milk software companies. Large
| established companies can afford it, VC companies were going
| to amortize anyway.
|
| Yeah, you "eventually" can expense your costs. But that just
| means that it's a tax grab on the smaller companies that will
| be put out of business by this move. They pay all the tax
| this year, go out of business, and never get to reap the
| profit of the development work.
| FrustratedMonky wrote:
| ? Was there a change in the tax code?
|
| Then why not provide some links, it isn't secret then?
|
| Why wouldn't people be able to talk about it.
|
| What is brave about discussing a tax policy? There was not
| context given about what it is, what is is causing.
| acdha wrote:
| This is a much better article: basically these companies are
| paying for the tax cut Republicans gave the to the top bracket
| in 2017:
|
| > In 2017, then-President, Donald Trump, signed the 2017 Tax
| Cuts & Jobs act, which overhauled tax codes and reduced tax -
| for example, it reduced the top tax bracket from 39.6% to 37%.
| To make the bill pass strict budgetary rules, the Senate used a
| process called reconciliation: adding in tax code changes that
| delayed tax increases. These delayed increases "balanced out"
| the tax reduction.
|
| https://newsletter.pragmaticengineer.com/p/the-pulse-75
| mhluongo wrote:
| You're getting down voted for sounding partisan I suspect,
| but regardless of the politics, you're absolutely right. That
| bill was a huge change across the US tax system.
| acdha wrote:
| Yeah, it's an election year so even a literal statement of
| fact is going to be downvoted by some people. Hopefully at
| some point they'll have an epiphany about whether they
| should self-identify with a party so strongly when an
| accurate descriptions of its actions feels like an attack,
| but I'm not as optimistic about that as I used to be.
| edgyquant wrote:
| It's a partisan statement since you only mention the
| upper tax bracket and not that it also slashed taxes for
| the lowest one completely and reduced them for basically
| everyone while making changes to a ton of other things
| (like child tax credits) as well.
|
| You're over simplifying and singling out your pet
| political issue in an effort to sway opinion to your
| political leaning. If you had just said it was due to
| those tax cuts you likely wouldn't have been downvoted.
| acdha wrote:
| The reason the author I quoted said that is that most of
| the cost comes from the top. If we were taking on a
| couple trillion in extra debt, that seems like a rather
| minimal benefit to give 2/3 of it to the richest
| people.
|
| https://www.taxpolicycenter.org/publications/distribution
| al-...
| wrs wrote:
| Most of the need for the reconciliation was the cut to
| the top tax bracket, where most of the the tax revenue
| comes from (e.g., the top 1% of earners pay 42% of the
| taxes [0]). So focusing on that bracket seems valid in
| this context.
|
| [0] https://taxfoundation.org/data/all/federal/summary-
| latest-fe...
| mjwhansen wrote:
| This is correct. Since it was basically accounting sleight-
| of-hand to get a better score from the Congressional Budget
| Office, they knew this would be disastrous if it took effect,
| and were widely expected to repeal it before it did. That
| deal, which also paired fixing it with the child tax credit,
| fell apart in December 2022.
| acdha wrote:
| I think of that every time someone proclaims that some time
| bomb like that will force the Congress to make a deal.
| That's the instinct of a bygone era and I no longer feel
| safe counting on it.
| kleinsch wrote:
| More detail with math here. Lawmakers are discussing delaying
| these changes for a few years and/or allowing deductions for
| domestic employees, but all depends on signing a budget, which is
| never certain.
|
| https://blog.pragmaticengineer.com/section-174/
| osigurdson wrote:
| >> let go of 23 engineers employed in India
|
| >> lots of devs in Switzerland starts to make a lot more sense,
| especially now.
|
| This seems contradictory.
| moron4hire wrote:
| They're talking about incorporating in Switzerland, which
| allows 135% deduction for R&D costs. Yes, Switzerland _pays
| you_ to run a startup.
| IndoCanada wrote:
| But it is difficult to fire them which is a big problem for
| tech companies where hiring and firing are common
| rafaelmn wrote:
| Use international contractors ? Or is the deduction for
| local devs only ?
| moron4hire wrote:
| I hear this a lot and it's difficult to reconcile with my
| experience. Every US company I've worked at (and that's
| always been in at-will states) has not made it easy to
| get rid of people. Even people with woefully bad records
| of losing money every year and having multiple harassment
| complaints filed against them were kept for _nearly a
| decade_. With one exception (I personally got fired from
| a tiny startup because I refused to commit timesheet
| fraud for the CEO), the stories I 've heard of the
| lengths that European companies have to go through to
| fire someone sound exactly the same to the processes I've
| seen at all of my employers.
| refulgentis wrote:
| You describe a scenario where management didn't want to
| fire someone - that's why it was harder. In the U.S. only
| two things get in the way: A) venial corruption B)
| worrying about unemployment insurance (that's why HR
| makes you do paperwork documenting an issue).
|
| In many European countries you have to file a ton of
| paperwork and justify it: ex. at Google, they're still
| working through _January 2023_ layoffs because you have
| to work with the government itself and there isn't a
| good* financial reason for it
|
| * by European standards. "we need stonk to go up" doesn't
| fly if you're massively profitable
| steezeburger wrote:
| Ive worked at a lot of different earlier stage software
| companies in the US and we've always fired very quickly,
| especially if there was harassment, but also just for low
| performance. Were you working at bigger companies? (aside
| from the tiny startup where the ceo wanted you to commit
| fraud) This hasn't been my experience at all.
| brianwawok wrote:
| Own a small startup in US. Not hard to fire people. Can
| do it same day I decide to.
| jjav wrote:
| > Every US company I've worked at (and that's always been
| in at-will states) has not made it easy to get rid of
| people.
|
| That's an internal choice they do, to avoid having a
| reputation of a company that fires people any second (but
| then you have companies like netflix which take pride in
| having that reputation, but make up for it by paying
| more).
|
| However, it's very different from European companies
| where these processes are (often) driven by laws. In the
| US there are no employee protection laws (aside from
| protected classes) so even if the company has a rigorous
| internal process, they could at any second override it if
| someone high up says so and you'll be fired in the blink
| of an eye.
| saiya-jin wrote:
| You are mixing up EU and Switzerland, employment laws are
| _very_ different (and each EU state has its own, but
| generally much more protective of employees than Swiss
| ones).
|
| One of the reasons Google has long term big center in
| Zurich, if grass would be greener (since cheaper it is)
| in say Germany or Austria they would build there
| bbojan wrote:
| > One of the reasons Google has long term big center in
| Zurich, if grass would be greener (since cheaper it is)
| in say Germany or Austria they would build there
|
| I don't think Google has an office in Zurich because it's
| cheap. It's mostly due to a lot of talent available
| (ETHZ, EFPL, etc).
| iancmceachern wrote:
| And it's hard and time consuming to hire in the EU also
| bbojan wrote:
| It's very easy to fire in Switzerland. The notice periods
| are usually longer than in North America, but everyone
| having unemployment insurance where they are paid ~80% of
| their salary for up to 2 years makes is not such a big
| deal.
| KittenInABox wrote:
| Can you say more about unemployment insurance? I haven't
| heard of this [a us worker] and honestly I also wouldn't
| mind being more aggressive with my career if I can
| guarantee ~80% of my income for 2 years should I lose a
| job.
| Leherenn wrote:
| You have a mandatory deduction on your salary (2.2%, a
| bit less effectively if you make over 150k). You need to
| have contributed for at least a year in the past 2 years
| before you're eligible.
|
| You get 70% of your salary (or 80% if you have children
| under 25) for two years, capped at 70% (or 80%) of 150k.
|
| There are a lot more exceptions, special cases and so on,
| but that's the gist of it.
| moron4hire wrote:
| It's state by state and different states have vastly
| different rules.
|
| Here in Virginia, the max, regardless of how much you
| made, is $378/wk, for a max of 12 weeks.
|
| You can't claim it if you're also receiving a severance,
| and you also have to record at least 4 job applications
| each week, but the documentation required needs to
| include information like the hiring manager's full
| contact information, which usually means the company
| needs to have replied to your application within that
| week.
|
| I got laid off back at the end of April last year. I got
| a month of severance, so I couldn't claim UC in May. In
| June, I was able to do some online sleuthing to figure it
| out for a few applications out of the dozens I was making
| in a week, but there were some weeks I wasn't able to
| scrounge together even 4. I ended up with 2 UC checks for
| a total of $756 gross (yes, had to pay taxes on it). I
| don't remember exactly how much, but I do remember I
| calculated it was less than 20% my original take home pay
| for a month.
|
| Luckily, by the end of June I had a good line on a job
| and started in July. I got lucky that we could bridge a
| month of basically "no" income from me. I can't imagine
| what it would be like for a single-income family living
| here in one of the most expensive areas of the country.
| krab wrote:
| It's a kind of a tax - computed from your income. Similar
| to health insurance (in Europe). There are caveats like
| "you must be actively looking for a job" and "you weren't
| fired for an offense".
| edgyquant wrote:
| Especially since it seems like you can spread it out over 15
| years, 3 times as long, if you have overseas devs.
|
| >These costs have to be capitalized and amortized over 5
| years - or 15 if labor is done outside of the US.
|
| I'm not an accountant so maybe I'm reading that wrong, but if
| so that's insane.
| MattRix wrote:
| You MUST spread it over 15 years, which is brutal for most
| companies and will mean no longer hiring any foreign R&D or
| software development contractors.
| edgyquant wrote:
| Why is spreading something out over 15 years harder than
| spreading it out over 5?
| brianwawok wrote:
| This isn't like a loan where the longer the term the
| smaller the payments. It's the reverse.
|
| You essentially pay taxes now on income, and can't deduct
| costs for 5 or 15 years. So it's kind of like pre-paying
| taxes and not getting the money back for 5/15 years. Say
| that you need to go borrow cash to cover the shortfall.
| Is it cheaper to borrow money for 5 or 15 years?
| phkahler wrote:
| Hah I'm still trying to understand how software developer
| pay should be a deduction at all.
| PaulDavisThe1st wrote:
| It's like any payment to any contractor.
|
| If my business makes 400k/year, but I pay a contractor
| 100k during that year, my effective income is reduced by
| 100k.
| alwa wrote:
| As far as I understand it, it's normal to deduct most all
| kinds of payroll as an operating expense, and
| historically that's included software developers too. The
| way it was explained to me, the tax man gets his bite
| when the people receiving the paychecks pay their own
| income taxes.
|
| The recent changes mean you can still do that for most
| staff EXCEPT developers, even if the devs are doing
| operational work instead of work that feels more
| conventionally like R&D. So you have to come up with a
| bundle of cash now to pay tax on most of the developers'
| salaries, even though they'll give it back to you over
| 5-15 years.
|
| Essentially you making a free loan to the government for
| a decade or whatever, except the money's probably not
| free to you.
|
| Of course I can think of situations where the development
| effort really was more R&D than operational, and the
| revenue stream matched: the first few years operated at a
| loss already, and the deductions might have more been
| useful in 5 years when the revenues were flowing in from
| a mature product. But I think they might have ways to
| carry forward losses to future tax years or something to
| deal with situations like that?
| MattRix wrote:
| So this year if I spend $150k on foreign research (which
| includes ANY software development), and then I also earn
| $150k in revenue: despite me having $0 in the bank, I
| will only be able to deduct 1/15 of that, or $10k. In
| other words, I'll be taxed as if I made $140k of profit,
| despite me not having any actual money left over.
|
| You can see how if this was 5 years, then I could deduct
| 1/5 and I would be taxed on $120k profit, which is still
| bad, but not nearly as bad.
| Uw7yTcf36gTc wrote:
| I thought employee wages were always deducted. Is that
| not the case ?
| PaulDavisThe1st wrote:
| Under the new section 174, software developer salaries
| are no longer expensable.
| patmcc wrote:
| Just as an aside - as a general accounting principle, no,
| wages are not always deducted.
|
| The easy example is a car company, like Ford. If they buy
| a car factory, that is a capital asset, and the cost
| needs to be amortized over x years. If they decide to
| instead BUILD a car factory...they still end up with a
| capital asset, and the costs (including wages) need to be
| amortized over x years.
|
| In most cases this is what companies want - they'll have
| revenues over x years and matching costs over x years is
| generally better for everyone.
| pcthrowaway wrote:
| I don't think it will _stop_ foreign hiring for R &D,
| since the cost differential is often greater than the tax
| obligation would be.
|
| E.g. if you pay $150K for local research, you expense
| $15K (10%) the first year (and 30K the subsequent year).
| You pay taxes on $135K of 'profit'. Let's say that's $45K
| (I have no idea what's realistic here.
|
| Alternately you pay $130K for a dev from Canada, expense
| $4,333 (1/30) the first year, and pay tax on the
| remaining 'profit' of $125,666. Even after admin costs
| you're coming out ahead
| dzdt wrote:
| Most small businesses exist for less than 15 years.
| throwsec7492 wrote:
| @edgyquant, not harder, more tax efficient
| User23 wrote:
| So far as I can find the last time Congress bothered to pass a
| budget was 2016 with the prior one in 2010.
|
| The government has been funding itself instead with "continuing
| resolutions" which pretty much just continue spending as the
| prior year modulo marginal changes. Incidentally this is why
| federal deficits have exploded since 2010: the financial crisis
| "one time" trillion dollar stimulus has been continued every
| year since.
| phkahler wrote:
| Don't forget the $3Trillion deficit for Covid. First done
| under Trump in 2020 then repeated by Biden in 2021 so it's
| not a partisan thing.
| cplusplusfellow wrote:
| But it would be so draconian to not increase spending
| insanely every year!
| raphman wrote:
| FWIW, Gergely Orosz provided some helpful background on Twitter
| and in his newsletter:
|
| https://twitter.com/GergelyOrosz/status/1735030983173230944
|
| https://newsletter.pragmaticengineer.com/p/the-pulse-75
| mjwhansen wrote:
| Thanks for sharing this! Gergely asked me to review this post
| before it went live, and his interpretation of the issue is
| correct.
| pavlov wrote:
| Here's an article with more info about what changed and why:
|
| https://www.theregister.com/2024/01/12/us_tax_research/
|
| This change was actually part of the Trump tax cuts in 2017. It
| was delayed by five years as an accounting trick to make the bill
| look better at the time: the tax cuts' projected long-term impact
| on the deficit didn't look quite so bad when they tacked on a
| bunch of tax increases that would take effect in the distant
| future of 2022 (and with the assumption that this could of course
| be repealed if Republicans stayed in power).
|
| Why target software companies? I guess because their owners look
| more like Democratic voters than, say, real estate investors who
| benefit from massive tax breaks that remain untouchable.
| the_mitsuhiko wrote:
| Since this is already hanging around for an entire tax year a lot
| of companies are 1/5th into that pain. If this does not get
| changed in the next few months it would not surprise me if this
| becomes the new norm. Which would also be quite interesting to
| see how that would play out. Some companies apparently have
| already been amortizing salaries for a while in anticipation of
| this (eg: Google). Given that this also greatly punishes
| outsourcing I would not be surprised if at least that aspect will
| remain even if some of the rest will be rolled back.
| tinyhouse wrote:
| Is it true that they are 1/5th into the pain? What about every
| new hire? That's the part I don't understand. It seems to
| discourage companies from increasing their headcount. Also,
| what happens when an employee leaves after 2 years? The company
| paid 2 years of salary but expensed only 35% of year 1 and 15%
| of year 2.
|
| Update: Now thinking about it, it doesn't matter if an employee
| leaves, since the company will expense their salary portions
| that they haven't expensed yet in their future tax bills.
| the_mitsuhiko wrote:
| You already have such amortizations for a lot of things. In
| some cases this even gives you possibilities to improve your
| tax burden. It just means that you cannot deduct it all in
| one year. If you downsize a company to zero employees you
| still get to subtract salaries for a few more years against
| your profits.
|
| It will set different incentives wiring wise and I'm not
| convinced they are good ones, but from this rule some people
| will benefit so they might fight the rollback.
| jdjskiaka wrote:
| > Some companies apparently have already been amortizing
| salaries for a while in anticipation of this (eg: Google)
|
| > Given that this also greatly punishes outsourcing
|
| Anyone help me understand these more? My understanding was that
| instead of deducting the costs of paying software devs the year
| it happened, it will be spread over 5 years. Which leads to a
| bigger tax bill now, and benefits bigger companies with deeper
| pockets as opposed to smaller businesses which have to raise
| moneny to pay taxes (or lower costs, potentially lower hiring).
| This should also push companies towards outsourcing, since not
| all places have similar laws? Is my understanding wrong?
| moron4hire wrote:
| It won't push people to outsourcing, because the same code
| change requires 15 year amortization for foreign R&D
| expenditures.
| jdjskiaka wrote:
| Perhaps not as straight forward, outsourcing is generally
| lot cheaper.
| MattRix wrote:
| This applies to all foreign R&D, not just where it is
| much cheaper... and unless it is many times less
| expensive, it will not be worth it. Only being able to
| deduct 1/15th per year is absurd.
| hobofan wrote:
| If you believe the Accenture pitches from 2010, sure.
| the_mitsuhiko wrote:
| For foreign contractors the time frame is 15 years instead of
| 5.
| wrsh07 wrote:
| If you're not yet profitable it doesn't matter, so you can do
| this accounting and once you are profitable (in five years)
| you'll be caught up
|
| What the (possibly temporary) temporary law probably actually
| does is decrease the incentive to become profitable for the
| next couple of years (assuming your business is strong and
| you can raise another round)
| spacecadet wrote:
| Sorry, Im pretty anti-tax, but this is the mature way to run a
| software business... I remember starting my career and presenting
| amortization sheets for software R&D and not a single exec giving
| a shit, whole industry gave up if you ask me.
| p_l wrote:
| Salaries being amortized never made sense
| spacecadet wrote:
| Please explain then. Because if you spend $2m on an idea,
| layoff half the company, pivot to a new idea, rehire. You
| think it's fair on the rest of us you get to write that risk
| off? This. Is. Why. People. Hate. Tech.
| brianwawok wrote:
| I amortize a server because you buy it now, it does work,
| then is eventually obsolete and you toss it.
|
| Does a developer keep doing work for me after he
| quits/dies?
| atherton33 wrote:
| The code you hired the developer to write/maintain should
| keep working for you after he quits/dies. Or you made a
| real bad investment.
| PaulDavisThe1st wrote:
| Do you want hiring people to be considered as an
| investment?
|
| I think that might have a lot of unintended side-effects.
| renewiltord wrote:
| With a startup you're running a search function. The code
| you hired the developer to write often does stop working
| because you've been forced to pivot as you search for
| product-market fit.
| p_l wrote:
| Pretty much everyone else works on the idea that salaries
| are operational expenses and not subject to amortization.
|
| I have yet to see any other case of salaries being turned
| into Capital Expenses (aka something that requires
| amortization/depreciation). I'd understand if outsourcing
| (or otherwise contract work) would be treated as something
| to be amortized, but we're talking _SALARIES_.
| notamy wrote:
| https://nitter.net/mjwhansen/status/1748345492998696961
| telesilla wrote:
| Take action and sign up for the Small Software Business Owners
| Association newsletter and petitions to the government:
|
| https://ssballiance.org/
|
| Michele Hansen is doing an incredible job here and should be
| recognized for it. Latest news was sent yesterday:
|
| _Republicans and Democrats finally struck a tax deal that
| includes a partial fix for Section 174. It includes expanding the
| Child Tax Credit, a key Democratic priority, with a handful of
| business tax issues where were Republican priorities_...
|
| Not sure if there is a public copy of that email, but the core
| info is on the site, it has a list of ways to get your
| representative's attention and a script to follow. Please call.
| addicted wrote:
| They're calling this a business priority for the Republicans
| when it was a Republican House, Senate and President that
| passed this measure.
|
| That's a bit too "must make it seem bipartisan" when there is a
| clear partisan direction.
|
| Even when this fix is passed, it will be voted for unanimously
| by Democrats and only a small fraction of Republicans will vote
| for it.
|
| Explain again to me how that makes it a Republican priority as
| opposed to a priority of the endangered species that is the Pro
| Business Republicans?
| pclmulqdq wrote:
| You should note that these sorts of tax law changes are
| largely a revenue game: Someone wants to cut some other tax,
| so they find a place to raise taxes elsewhere without
| thinking about the consequences. But also, the vast majority
| of people employed by R&D-heavy companies are Democrats, so
| it's hard to impute motive one way or the other.
| ecocentrik wrote:
| Independent/unaffiliated voters are now 47% of the
| electorate in the US so that last statement probably
| doesn't hold water. Are educated voters, regardless of
| party affiliation, more likely to vote for serious
| candidates that focus on issue resolution over culture
| signaling? Sometimes, but that no longer has much to do
| with party affiliation.
| 0cf8612b2e1e wrote:
| Of those 47% independent, what fraction consistently vote
| for a particular party?
| nullc wrote:
| > Even when this fix is passed, it will be voted for
| unanimously by Democrats and only a small fraction of
| Republicans will vote for it.
|
| Like the unanimous democrat vote to repeal the SALT limits
| that overwhelming impacts people in California and NY?
| tchock23 wrote:
| Nice whataboutism. What does that have to do with the topic
| at hand?
| nullc wrote:
| It's was part of the very same tax package and
| implemented for the same reason: It made the trump tax
| cuts look economically more reasonable by sticking in
| time delayed increases on tax burdens that would land on
| disproportionately on democrats. Yet democrats were
| unable to undo it because dem platform programs need the
| funding.
|
| On what basis will it be different here? Dems are almost
| completely disengaged on the bill intended to fix this,
| almost all the activity for and against appears to be
| republicans.
|
| Addicted's confident statement "Even when this fix is
| passed, it will be voted for unanimously by Democrats"
| seems misplaced and unlikely. If that were likely we
| would have seen broad dems support on fixing the SALT tax
| limits and we just didn't.
| jjav wrote:
| A lot of politics consists of quietly creating problems and
| then loudly coming in with tons of press coverage to solve it
| later so you look good and get reelected.
|
| I wish there was a good way to prevent such behavior.
| mjwhansen wrote:
| Thanks for linking to SBBAlliance and for the kind words! But
| seriously, thank me when it's fixed. (Counting chickens before
| they've hatched, etc etc)
| telesilla wrote:
| Sounds promising -
|
| https://www.cnbc.com/2024/01/19/bipartisan-tax-bill-
| clears-k...
|
| _The strong bipartisan showing in the House Ways and Means
| Committee adds more momentum to the proposed changes, which
| include allowing the immediate expensing of research and
| development costs._
| michaelbuckbee wrote:
| Huuuuge thanks to Michele for leading the charge on this.
| Dalewyn wrote:
| >a script to follow
|
| Going on a tangent here, but I always hated this idea of
| reading off a script to try and lobby politicians. If I were
| the politician, I would ignore all such communiques as
| indoctrinated spam.
| mjwhansen wrote:
| Totally fair! I provided a script because many people have
| never contacted Congress before and might not know what to
| say, so it's a way to make them more comfortable with the
| idea. They don't necessarily have to use it.
|
| Now for tweets, it's important that each tweet is unique.
| Otherwise it's clearly coordinated/automated. But as a casual
| scroll of Twitter shows, many people hate comfortable
| expressing themselves through that medium.
|
| Also, I kinda wrote a whole book with scripts (for customer
| interviewing)... if I didn't provide scripts, it just
| wouldn't be true to my work!
| massysett wrote:
| Typically staff answer the phone. They're making tally marks.
| If the script tells the staffer what the issue is and the
| caller's position so an appropriate tally can be counted, it
| does the job.
| thebeardisred wrote:
| Having worked for years in this field (at a non-profit called
| "Democracy In Action") I can tell you: the scripts work.
|
| It moves the calculus of measuring sentiment from a fuzzy
| game of figuring out how to classify opinion to one with very
| clear quanta.
| vlod wrote:
| Good use of ChatGPT (to reword it).
| kolanos wrote:
| Thanks for sharing this, called my representatives.
| djoldman wrote:
| How does one determine whether work done by an employee is
| classified as R&D or as an immediate expense?
|
| If a programmer is building an app that isn't yet offered as a
| product, is that R&D?
|
| If a programmer is maintaining an app that is offered as a
| product, is that NOT R&D?
| MattRix wrote:
| Well the "good" thing about this law is that it also classifies
| ALL software development (and any supporting activities!) as
| R&D. And yes that's as absurd as it sounds, but it's true.
| geraldwhen wrote:
| This is a good thing. Prior to this, I had to make up a paper
| explaining why my team was R&D with help from an outside
| consulting group annually.
|
| It was always a sham. We were building product.
| hyperpape wrote:
| My understanding[0] is that building product was always
| categorizable as R&D (though it was up to the company to
| choose to categorize it that way). What was not R&D was
| operational expenses (production support, etc).
|
| [0] This is based on working at a company that went through
| a brief period where we had to do extra tracking to be able
| to capitalize our time if it was possible, and then reading
| up on the matter to try and understand what the hell the
| purpose was. Possible I'm wrong about the matter--I've
| never been the one doing the finances.
| AlotOfReading wrote:
| The IRS definition of R&D is intended to encompass product
| development. Quote the tax code: The term
| generally includes all such costs incident to the
| development or improvement of a product.
|
| [0] https://www.law.cornell.edu/cfr/text/26/1.174-2
| agwa wrote:
| Your consultants were helping you get a tax credit for R&D
| under section 163. That has not changed - not all software
| development is R&D for section 163 purposes, and you still
| need to justify why you're classifying software development
| as R&D for section 163.
|
| What has changed is section 174 - previously all software
| development could be expensed (without any justification
| needed) and now it must be capitalized.
| PaulDavisThe1st wrote:
| That's not strictly correct.
|
| Bug fixing, for example, is not covered by Section 174.
| agwa wrote:
| See section 5 of this IRS guidance:
| https://www.irs.gov/pub/irs-drop/n-23-63.pdf
|
| tldr: if they're developing new features, it has to be
| capitalized; if they're doing maintenance then it can be
| immediately expensed
| ryandrake wrote:
| This is actually great if true! Maybe companies will finally
| be incentivized to start fixing their bugs rather than
| cramming unwanted features and UI re-designs into their
| software products!
|
| However I doubt they'd leave such an obvious loophole. Surely
| the IRS's definition of R&D includes all types of software
| development activity.
| agwa wrote:
| > _However I doubt they 'd leave such an obvious loophole.
| Surely the IRS's definition of R&D includes all types of
| software development activity._
|
| I literally just linked to the IRS' definition that says
| not all software development activity is included.
| ryandrake wrote:
| No, it's really cool, totally glad to see!
| PaulDavisThe1st wrote:
| It's not an "obvious loophole". They are quite specific
| about this. New features, new capabilities: R&D, must be
| amortized. Bug fixes for existing features: expensable.
|
| The gray zone comes when a bug fix actually provides a new
| feature (e.g. something that wasn't actually usable
| before).
| jay_kyburz wrote:
| You get an AI to write your new features (free). And your
| developers can fix the bugs and change the UI.
| pcthrowaway wrote:
| I wouldn't say it's good. Startups are going to axe their
| QA teams and ship broken software so they can fix it after
| the fact
| stefan_ wrote:
| Can't wait for the JIRA workflows around this
| 55555 wrote:
| Am I correct that if this does not get fixed, it's a huge boon
| for dev agencies as paying them is an immediate expense for the
| startup, while paying in-house devs is not?
| moron4hire wrote:
| From my reading, that would be an expense directly related to
| the development of the software, which also must be amortized.
|
| What I haven't figured out is what the Dev agency has to do.
| They don't own the software being developed. Unless they have
| in-house libraries they develop...
|
| And how does this work for open source projects that have
| corporate support to be developed on during company time? If
| you amortized the "R&D excited" of the developer's salary on
| the premise that the software will make long-term, recurring
| income, what does that mean for software that isn't being sold?
|
| My previous job, I was the only software developer, making a
| tool that employees and customers in the company used together.
| We didn't sell the software, we sold a service completely
| unrelated to the software, the software was just a supplement
| to the service.
| mjwhansen wrote:
| The agency gets to expense it, as they do not bear the risks
| and benefits of commercialization. Their client has to
| amortize it, though.
| mjwhansen wrote:
| That's incorrect - client would still have to amortize the work
| mensetmanusman wrote:
| Any accidental policy that disincentivizes R&D is stupid, but par
| for the course in recent history for the U.S.
|
| Major materials innovations are discovered here, but the only
| nations that want to actually invest and build upon them are
| currently in Asia.
|
| The argument was that the US wants to transition away from
| building things towards building software which is more
| profitable, and then this...
|
| This is what happens when a monoculture of business/law/finance-
| thinking takes over political leadership.
| PaulDavisThe1st wrote:
| > Any accidental policy that disincentivizes R&D is stupid
|
| The problem with section 174 is not that it disincentivizes
| R&D. These rules were already in place for R&D spending, and
| were generally welcomed by companies with actual R&D
| expenditures.
|
| The problem with section 174 is that it essentially forces ALL
| expenditure on software development to be treated like R&D.
| minton wrote:
| I'm confused why this is so impactful. If you have software devs,
| even if you don't classify as R&D, you can deduct their full
| salaries, right?
| hobofan wrote:
| How would you classify software _developers_ if not under
| Research & _Development_?
| kody wrote:
| "Hey boss, can you go ahead and change my job title to Code
| Janitor?"
| icedchai wrote:
| We'll call them "sustaining engineers" and define most
| features as "bug fixes." Problem solved.
| agwa wrote:
| No, the law defines _all_ software development costs as R &D
| (technically "R&E") for the purposes of requiring
| capitalization: https://www.law.cornell.edu/uscode/text/26/174
| (c)(3)
|
| This is regardless of whether you classify the costs as R&D for
| the purpose of claiming a tax credit under Section 163.
| jrdnh wrote:
| The IRS provided incrementally helpful guidance on the types of
| costs that must be capitalized in September. The capitalization
| requirements are generally more restrictive than GAAP where only
| ~30% of costs are capitalized for book purposes at many
| companies. There are some types of software development that are
| outside the scope of 174 though such as UI changes that don't add
| new capabilities.
|
| https://www.irs.gov/pub/irs-drop/n-23-63.pdf
| ryanwaggoner wrote:
| If this persists, it seems like it'd make sense for many software
| companies to shift the development _and ownership_ of their
| software outside of the US, and then pay licensing fees to those
| overseas subsidiaries for the use of the software, which isn't
| taxed as R &D.
| exabrial wrote:
| We need temporary relief, immediately. But long term, how about
| we shrink the size of the federal government? Then we don't have
| to flog small businesses to death to feed the massively
| inefficient and wasteful machine!?
| PaulDavisThe1st wrote:
| These changes came about as part of the Trump administration &
| Republican efforts to reduce taxation. Because you can't
| trivially just cut taxes (as was done in 2017) without showing
| how you will either make up the missing revenue or reduce
| spending, they threw in a time-deferred measure - the new
| Section 174 that "demonstrated" how the tax cuts in 2017 would
| be paid for in the future. It was all sleight of hand, but
| what's new?
|
| Republicans have been talking about shrinking the size of the
| federal government for decades. They routinely fail to come up
| with substantive cuts in spending that would not set off a
| disaster for them at the polls, or for the country
| economically, or both.
|
| There is this perception that the federal is full of wasteful
| spending, but this perception is false (there is waste, it's
| not a large percentage of the huge overall federal budget).
| This means that to actually cut the revenue needed will require
| truly substantive cuts to the services provided and performed
| by the federal government.
|
| Maybe you could be more successful at proposing what those cuts
| would be than any Republican has for 50 years, but it seems
| unlikely.
| thinkerswell wrote:
| What the recent Argentinian president had proposed for his
| country would be a good start for the US
| PaulDavisThe1st wrote:
| US voters have consistently rejected such policies for
| nearly a century, if not longer.
|
| While there are certainly people who believe as you do, you
| are not in a majority. There are also a lot of people in
| Argentina (possibly a majority) who don't agree with those
| policies either.
| gavinhoward wrote:
| This is exactly why I decided to not make my single-member, zero
| employee LLC an S Corp; if I'm paying no salaries, I don't have
| the Section 174 craziness.
|
| With an S Corp, you have to pay yourself a salary, and if your
| work is primarily software development, Section 174 might hit
| you. (IANAL or accountant. Talk to one of them.)
| mjwhansen wrote:
| Unfortunately, this doesn't erase the impact. This applies
| beyond salaries to all resources used for what 174 considers
| R&D. Servers, software, the desk chair you sit on to do
| development --- all have to be amortized under 174.
| gavinhoward wrote:
| Those are physical things that had to be amortized anyway,
| and I had planned for that.
| volkk wrote:
| what about as a sole proprietorship?
| icedchai wrote:
| What if I'm doing mostly "maintenance and operations", not
| "R&D"? I still need those servers and software...
| siliconc0w wrote:
| You got it all wrong, sure that first commit was R&D but the rest
| of the year? Maintenance.
|
| Or- sure we launched the platform and that was R&D but now we're
| just doing data entry.
| PaulDavisThe1st wrote:
| The IRS document
|
| https://www.irs.gov/pub/irs-drop/n-23-63.pdf
|
| is extremely clear on this. New features, improvements? All
| costs must be amortized. You can only expense bug fixes and GUI
| changes that don't add features.
| jagged-chisel wrote:
| Aha! I can now put all this stuff into the backend now, and
| the UX people can futz with how to present it to the users
| over time. Brilliant!
| mannyv wrote:
| Mock all the changes now, then file a bunch of bugs against
| the non-working feature. Win!
| AlbertCory wrote:
| I've been researching this for another issue. Anyhow, expensing
| R&D is a perennial political issue. Logically, if you're creating
| an income-producing asset, then you have to depreciate it over
| its useful life. The theory is sound, but of course politicians
| can mess with it, as they do.
|
| But I _thought_ the "useful life" of software was 3 years. No?
| marcosdumay wrote:
| You usually want to incentivize R&D, messing with that simple
| theory is the standard.
|
| Anyway, even that 3 years common knowledge number is biased
| into long-lived code. Do you spend work time putting out fires?
| Do you write code that is immediately discovered to be wrong so
| you have to take more time and fix it? Those 3 years are only
| for software that already passed through all of that.
|
| (Anyway, I don't have any interest on that fight, I'm just
| watching from a safe distance.)
| AlbertCory wrote:
| I'm not an accountant but I did take a basic course.
|
| I don't have a dog in this fight either. Does "maintenance"
| on an amortized asset have to be amortized as well? Don't
| know.
| marcosdumay wrote:
| > Does "maintenance" on an amortized asset have to be
| amortized as well?
|
| Usually not. Also, from other comments here, it looks like
| bug-fixing doesn't count as R&D (anyway, in a development
| focused company, you'll probably spend more deciding what
| is or isn't bug-fixing than you'd get from the difference).
|
| Still, there are many more things that make software
| disappear just after being written. It's actually similar
| to most of R&D, so it makes little sense to count it the
| same way as capital investment.
| pclmulqdq wrote:
| I have said this before and attracted downvotes for it, but here
| goes.
|
| There are two possible arguments here to try, and I have only
| ever seen people lobbying against this change use the one, less
| persuasive argument. That argument is what I will call the
| "incentives" argument: that change in the rule provides bad
| incentives against doing R&D. This argument goes along the lines
| of "this will cost jobs for R&D workers" or "this will reduce the
| competitiveness of the US." The other possible argument (that I
| have not seen cited) is that "R&D" work can be operational, and
| that forcing capitalization of R&D expenses is a bad accounting
| practice. This Twitter thread only argues the former.
|
| The glaring problem with the incentives argument is that it gives
| up the point that the ability to operationalize R&D work is a
| subsidy for technology and software companies. This is equivalent
| to asking for a subsidy at a time when startups can pull $100
| million with no product and other technology companies are
| reaping record profits. _That is not a particularly persuasive
| argument_ , and it triggers bad emotional reactions from people.
| If not for the SBIR companies getting absolutely shafted, the
| responses to this argument I have seen from non-tech people range
| from "fuck you" to "deal with it."
|
| The accounting argument is boring and sort of technical, but also
| a lot harder to argue against and doesn't trigger a negative
| emotional reaction. All of the people making the rules will
| understand it, and the IRS could even make the clarification on
| what is and isn't "R&D" on an accounting basis without an act of
| congress. They have _kind of_ done this, but have not been pushed
| nearly far enough.
| tracerbulletx wrote:
| Having been an accountant early in my career before becoming a
| software developer, I'm amazed that this isn't the primary
| argument.
| pclmulqdq wrote:
| I (shamefully) have an MBA, and I learned a lot about
| accounting during that process. Whether basic research ought
| to be operationalized or capitalized when looking at company
| valuation was actually a bit of a point of debate, but both
| sides have strong arguments. What definitely shouldn't be
| capitalized is "new feature for my existing software" which
| pretty clearly is capitalized under the current rules.
| Dalewyn wrote:
| >the responses to this argument I have seen from non-tech
| people range from "fuck you" to "deal with it."
|
| Two factors also don't help matters either:
|
| * Most people, which perhaps surprisingly includes most
| commenters here, don't understand what taxes are levied against
| or what losses and amortization even are. You can't effectively
| argue against something you don't understand.
|
| * Of the people who do understand taxes and income/loss sheets,
| it's only the business owners and accountants who _like_
| putting as big a number as possible under losses to reduce net
| profit and thus taxes owed. The commons rightfully see it as
| tax avoidance, which unsurprisingly is met with "fuck you".
| wernercd wrote:
| "tax avoidance" Otherwise known as what every sensible and
| smart person does because that's not the "governments money".
|
| AKA: "How dare people want to keep their own money and not
| freely give up larger and larger percentages to ever larger
| government programs that are inefficient cesspools of
| mismanagement and corruption".
|
| I'll match people saying "fuck you for wanting to keep your
| own money" with a fuck you for supporting the destruction of
| businesses on the notion that it's the governments money in
| the first place.
| BenFranklin100 wrote:
| I bet you if the commentator you're responding to owns a
| home, they take the mortgage home tax deduction.
| kolanos wrote:
| Can't you only deduct the mortgage interest? Or are you
| referring to something else? The mortgage interest
| deduction turns out to not be very much in practice, in
| my experience, anyway.
| ghaff wrote:
| It _used_ to be a bigger deal. Yes, housing prices (in
| some US geos) have gone up a lot but so have standard
| deductions and interest rates are still relatively low
| historically. Absent relatively large charitable
| donations, big mortgage interest payments, etc.,
| itemizing doesn 't make a lot of sense for _many_ people.
| mixmastamyk wrote:
| Front loading taxes on a new business makes little sense no
| matter the industry. Long term view is that more taxes are
| generated from a surviving, healthy business.
| jackthetab wrote:
| So, just what _is_ "the accounting argument"?
|
| I don't know enough accounting to figure it out for myself.
| BenFranklin100 wrote:
| For one, companies will be encouraged to classify R&D as
| operational expenses where they can. This distorts the
| overall picture of the business's fundamentals.
| username332211 wrote:
| I was under the impression American companies already have
| to maintain 2 sets of books anyways.
|
| After all, the IRS doesn't use GAAP.
| ghaff wrote:
| It's probably more than that. You have external GAAP,
| non-GGAP, constant currency vs. non-constant currency
| metrics, all sorts of internal accounting measures. With
| larger companies it's complicated. (Smaller companies
| it's more about cash flow even if they consider taxes as
| well.)
| BenFranklin100 wrote:
| Many early stage SBIR companies, especially those in the life
| sciences which are always very R&D heavy, will be forced to
| close up shop.
| BenFranklin100 wrote:
| This is going to wipe out a lot of small businesses, including
| innovative software dev startups.
|
| Here's a simplified example of this works: Let's say you're a
| four person software dev startup. Everybody is making, say, $125K
| to get by. That's $500K in salary expense which normally you can
| write off as expenses against revenue/funding. For this example,
| let's say somehow you also generated $500K in revenue/funding,
| i.e. you just broke even.
|
| Currently, you would (of course) owe zero taxes. Under the new
| tax rules, you couldn't write off those R&D salaries as expenses,
| only amortize them over 5 years. That is, your salary expenses
| for this year is only ~ $100K, and this you made a $400K 'profit'
| (!!) on which you owe taxes ($100K).
| matsemann wrote:
| I don't get it. How is this not just $500k salary? How is it
| R&D?
| jiveturkey wrote:
| under the new regs, software work is required to be
| classified as R&D.
| j16sdiz wrote:
| The idea is: You can hire a R&D team for one year, fire the
| entire R&D team and still benefits from their works in the
| next few years.
|
| In terms of tax, should we average out these expense over the
| years?
|
| These can have huge difference because how complex our tax
| and accounting rules are.
| BenFranklin100 wrote:
| Further, R&D is at best a bet, as any of us who has ran a
| technology business well know. It's not at all clear one
| will be able to take the research to market and monetize
| the R&D investment. Doing that is called founding a
| successful company.
| PeterisP wrote:
| It is salary, but it goes not into operational expense (that
| applies directly creating the things you sell right away) but
| into building a capital asset that helps you generate future
| revenue and can depreciate over a number of years.
|
| It's just as if you pay the salaries of some construction
| workers to build you a new factory - those salaries are part
| of the capital investment for creating that factory (and
| depreciated as that asset), not your operating expenses.
| jiveturkey wrote:
| As a SMB, if your salary expense is $500k and your revenue is
| $500k, you are absolutely struggling, no matter the tax
| situation. In this case you "just" need another $100k in
| revenue. After all, you are throwing out theoretical revenue
| numbers anyway. So it just moves the needle somewhat for you to
| still break even. You could game it just a little if there's
| revenue at end of year that you can book in the following
| quarter instead -- companies do the reverse of this all the
| time. Perhaps you can shift some of the expenses as well.
|
| Note that in year 2, you get 20% of the year 2 salary expense,
| plus 20% from year 1. So the impact is less. By year 5 you are
| "caught up".
|
| Indeed the first years are harder.
| BenFranklin100 wrote:
| Companies don't do "this all the time". In your hypothetical
| example, you"d have to essentially forge the quarterly 941
| reports to shift the salary R&D expenses. Also 'gaming' which
| quarter revenue occurred is technically tax fraud, certainly
| if one is on an accrual basis. And it doesn't mean one is
| 'caught up' by year five. Any time a company increases R&D
| expenditures, it will have an impact.
| pcai wrote:
| This is wrong because you are speaking on an accrual basis
| but you have to consider cash. The cash (salaries and taxes)
| is paid out in year 1 regardless of what year you try to book
| it in your p&l statements
| nullc wrote:
| The same continuing income occurs for journalists and other
| fields that produce copyrighted output, in fact it's more true
| there since there isn't a substantial bug fixing load.
|
| So why just software and not all fields that produce durable
| intellectual property?
| erichocean wrote:
| It's even more clear with copyright what the amortization
| period should be.
| nullc wrote:
| Yep, 120 years until the work is published then accelerated
| to 95 years.
|
| Lets pass that law and see how Disney feels about Founders'
| Copyright. :D
| slotrans wrote:
| Possibly the most unpopular argument of all: do not comply.
|
| Change your employees job titles and/or tax classifications if
| you have to. Whatever it takes to say "these are salaries, not
| R&D".
|
| If you're big enough they'll notice, but for a 10-person company
| the risk of a bad audit beats certain bankruptcy.
| VohuMana wrote:
| Maybe unpopular but I assume this is just what is going to
| happen. I remember awhile back when I was visiting Ireland one
| of the tours mentioned that modern whiskey and beer in Ireland
| came about because of taxes. I wish I could remember more
| details but the story went along the lines of each time a new
| tax on some type of alcohol happened the producers would
| reclassify their beverage or change the method which produced
| it to avoid the new taxes.
|
| I assume this will be the same in the US, software R&D is now
| some other title with less taxes. When the small companies do
| it the IRS isn't going to care but then big ones will do it and
| the tax law cat and mouse game will continue.
| tchock23 wrote:
| Yeah, that's what I'm guessing many smaller companies will do.
| Does the developer talk to customers or do customer
| success/support? Great, they are now "Sales Engineers" for tax
| purposes.
|
| (Note: not recommending to do that, but guessing that is a
| natural byproduct of an unfair tax code).
| jayd16 wrote:
| Would be pretty ironic if this forces the drop of "exempt"
| status and overtime pay comes into the picture.
| Steven-Clarke wrote:
| Yes Section 174 is a huge issue for US companies of all sizes. We
| are seeing a shift in companies and other decentralized projects
| explore places like Panama. The blockchain industry is dealing
| with IRS, SEC and other regulatory challenges. Some companies are
| choosing to leave the US.
|
| There are options and advantages to operating outside the US. US
| timezone, a USD economy and a territorial tax system makes it
| easy to operate from my home country.
|
| interview on this topic:
| https://www.youtube.com/watch?v=BzUAJzKb8bA
| thinkerswell wrote:
| If you are a US business, it's hard to escape the overly
| burdensome US taxes.
| dang wrote:
| Related. Others?
|
| _Section 174 removed in new Senate tax agreement_ -
| https://news.ycombinator.com/item?id=39013863 - Jan 2024 (3
| comments)
|
| _Ask HN: IRS section 174 - cause of layoffs?_ -
| https://news.ycombinator.com/item?id=38957651 - Jan 2024 (21
| comments)
|
| _Will US companies hire fewer engineers due to Section 174?_ -
| https://news.ycombinator.com/item?id=38931860 - Jan 2024 (38
| comments)
|
| _Will US companies hire fewer engineers due to Section 174?_ -
| https://news.ycombinator.com/item?id=38870429 - Jan 2024 (19
| comments)
|
| _IRS tax code change in Section 174: R &D is an expense_ -
| https://news.ycombinator.com/item?id=38642461 - Dec 2023 (23
| comments)
|
| _Guidance on Amortization of Research or Exp. Expenditures Under
| Section 174 [pdf]_ -
| https://news.ycombinator.com/item?id=38637540 - Dec 2023 (2
| comments)
|
| _Tell HN: People laid off in my company due to IRS Section 174
| changes_ - https://news.ycombinator.com/item?id=38633668 - Dec
| 2023 (6 comments)
|
| _Tell HN: Submit comments to IRS re tax treatment of software
| dev expenses_ - https://news.ycombinator.com/item?id=38120388 -
| Nov 2023 (227 comments)
|
| _Tell HN: New IRS guidance on software development for Section
| 174 amortization_ - https://news.ycombinator.com/item?id=37494601
| - Sept 2023 (3 comments)
|
| _Software firms across US facing tax bills that threaten
| survival_ - https://news.ycombinator.com/item?id=35614313 - April
| 2023 (985 comments)
|
| _Ask HN: How are you handling Section 174 changes for
| bootstrapped companies?_ -
| https://news.ycombinator.com/item?id=34627712 - Feb 2023 (187
| comments)
| jgalt212 wrote:
| The long and the short of it is only the well-heeled are allowed
| exploit tax loopholes.
| jodacola wrote:
| This is a topic about which I'm very passionate. I've written my
| congressional representatives several times. I've posted on
| LinkedIn. I'm raising awareness with my close colleagues. I'm
| trying to beat the drum as much as I can.
|
| There is a _minor_ win that was just advanced in the House
| yesterday[0] to delay US onshore amortization through 2025 via
| The Tax Relief for American Families and Workers Act of 2024[1].
| It doesn 't touch offshore amortization.
|
| It's not enough. I was geared up to start a business this year;
| this, specifically, has put the brakes on it. I've written as
| much to my congressional representatives. I'm doing research into
| what it would take to incorporate in another country, and the
| implications therein, if it comes to that.
|
| I'm going to sign up to https://ssballiance.org/, as telesilla
| recommended.
|
| Let's beat the drum together, folks.
|
| [0] https://www.voanews.com/a/7448071.html
|
| [1]
| https://www.finance.senate.gov/imo/media/doc/the_tax_relief_...
|
| edit: formatting
| eropple wrote:
| _> It 's not enough. I was geared up to start a business this
| year; this, specifically, has put the brakes on it._
|
| I've read a little about this, but not a lot. How has this put
| sufficient drag on starting a business that it's impractical to
| go from zero to one? Is there an aspect of the business model
| that's particularly impacted?
| bjclark wrote:
| Zero to one is considered "R&D" and that's what this entire
| thing is about.
| eropple wrote:
| I am aware of that part, yeah. It's a shitty change, one
| hundred percent, and I'm glad to see folks like Wyden
| trying to unwind it. At the same time, I've owned small
| software businesses before, and I've started/not started
| new ones based on whether I thought it would work out.
| Where I am unclear is what sorts of business plans, on day
| zero, would be suddenly nonviable when it was viable
| before, so suddenly overwhelmingly difficult, as to cause
| such discouragement.
|
| Is there a good chance of recategorization pushing a very
| marginal business off the cliff? Sure--that Twitter thread,
| where there are enough details to read in, has a lot of
| examples of marginal businesses having trouble (mostly
| because of not being able to plan in the change, which
| _really_ sucks). But you don 't have that on day zero, and
| going in with the aim to be that very marginal business is
| probably not the best of ideas. It's not a day-zero
| problem, and I am struggling to see where a small business
| with a business plan that was previously worth executing on
| is now not worth it because of this change.
| p_l wrote:
| Having to amortize salaries mean that a freshly starting
| company has to include any salaries paid as (software
| devs salaries) _4 /5_(corporate tax rate) extra thing to
| budget - if they don't have access to necessary reserves
| up front, it might be enough to turn a marginal business
| out from starting at all.
| pcai wrote:
| imagine in year 1 you grossed 100k, spent 200k on
| salaries, but the new irs rules say you owe taxes on 60k
| of profits.
|
| To slightly simplify: it forces startups to pay taxes on
| profits that only exist on paper, with cash that is now
| much more scarce
| ghastmaster wrote:
| This explains why I have seen so many tech companies doing
| layoffs. They layoff now, wait for the fix(hopefully), then hire
| people again(hopefully). And here I thought it was AI replacing
| the workers.
| nsxwolf wrote:
| What does this mean if you're trying to start your own 1-person
| SaaS company?
| pcthrowaway wrote:
| IANAL. IANAA. As a sole proprietorship it's likely very good
| for you (until the tax code is fixed). Your potential clients
| can write off your subscription costs as immediate expenses,
| rather than building in-house and amortizing the R&D costs over
| 5-15 years.
|
| As a different entity type, if you pay yourself a salary, I
| believe you amortize that like any other company would. But if
| the U.S. is anything like Canada, you can pay yourself a much
| lower salary, and then pay yourself through dividends as well.
| ultra_nick wrote:
| Now my managers have even more reason to rush out broken
| "features" and use bugs to "fix" them later.
| jdksmdbtbdnmsm wrote:
| Why would I be on the side of someone willing to go through all
| this trouble just to avoid paying American wages? Frankly, I
| would prefer you not start a business or do it elsewhere.
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