[HN Gopher] The time bomb in the tax code that's fueling mass te...
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The time bomb in the tax code that's fueling mass tech layoffs
Author : booleanbetrayal
Score : 377 points
Date : 2025-06-04 13:30 UTC (2 days ago)
(HTM) web link (qz.com)
(TXT) w3m dump (qz.com)
| dtagames wrote:
| This doesn't explain the mass tech layoffs. According to the
| article, the rule applies to R&D. The vast majority of tech
| workers laid off in the last two years didn't work in research
| and development. They wrote regular software for sale, like
| games, for example.
|
| The games industry, while hugely profitable and bigger than TV,
| movies, and music combined, laid off tens of thousands of people.
| It's unmitigated greed is all it is.
| tjchear wrote:
| > For almost 70 years, American companies could deduct 100% of
| qualified research and development spending in the year they
| incurred the costs. Salaries, software, contractor payments --
| if it contributed to creating or improving a product, it came
| off the top of a firm's taxable income.
|
| According to the article, as long as the tech workers
| contribute to improving or creating a product (be it games or
| apps), they count as R&D cost.
| dtagames wrote:
| I worked in games 2 years before the studio shutdown. It
| wasn't because of "R&D" tax breaks. None of the recent
| layoffs or studio closures are explained by that. Nor are the
| Microsoft, Dell, or Intel layoffs which aren't game-related.
| gregw2 wrote:
| To qualify for R&D tax breaks, IIRC having identified
| qualifying work for a segment of my firm, there must be
| elements of hypothesis, experimentation, results, etc that I
| would consider more science-y 'Research' than just turn the
| crank software 'Development.' It has to be both. And that has
| to be documented. And offshore research+development doesn't
| get you a tax break. The irony is that the R+D tax actually
| discourages onshore pure development as a 'trade' and
| encourages a split of onshore R+D and offshore D.
|
| This sort of thing appears to be self-reported; I don't know
| if it ever gets audited. I don't know if big tech lies or
| creatively interprets what counts and that has contributed to
| the issue. But this article sort of over-represents what
| qualifies as R&D for US tax purposes.
| ghc wrote:
| Under the new rules, _all_ software development, excluding
| bug fixes, _must_ be expensed in this manner. "Turn the
| crank" development is included.
|
| https://larsco.com/blog/section-174-updates-navigating-
| the-i...
| ndriscoll wrote:
| Which makes sense. Software is functionally a capital
| asset, so really it should be depreciated across the
| length of the copyright term (unless the company wants to
| release it to the public domain to fully depreciate it
| early).
| robocat wrote:
| Maybe software should be a capital asset, but these
| depreciation rules don't fix that issue.
|
| The rule says if you pay someone $200k to develop
| software: then you now have a $200k asset that then
| devalues to value of $0 over 5 years (starting midyear).
| That's just plain _weird_.
|
| For our example a depreciation table might look like:
| Year, %Amortized, Amount 2025 10% $20,000
| 2026 20% $40,000 2027 20% $40,000 2028 20%
| $40,000 2029 20% $40,000 2030 10% $20,000
|
| The final effect of the 174 rule change is that you still
| finally end up with a software asset worth $0. However
| you now have taxable income of $200k in year one and
| expenses equalling $200k spread over 5 years. The taxes
| paid could be a lot: although the taxation money is
| really just being lent to the government for a few years
| at 0%. The actual financial costs are fucking
| complicated.
|
| Understanding accounting and taxes are two absolutely
| essential skills if you ever wish to be a founder (and
| useful anyways).
|
| Finding a solution to dealing with the valuation of
| assets is difficult. The historical solution of
| depreciation is broken for software, intellectual
| property and goodwill. In theory, taxes on dividends and
| capital gains taxation already deal with the issue
| (company taxation at x% kinda ends up at $0 because the
| shareholder pays y% and claims back the x% through
| imputation).
|
| And remember that salaries are properly taxed.
| ndriscoll wrote:
| Right, that weirdness is why it should be depreciated
| over the length of the copyright term. You spend $200k
| this year, and now you have a useful asset for the next
| 95 years (or 120 years if you never publish it).
|
| If it turns out it's not useful, we could then allow
| companies publish the source and release it into the
| public domain to immediately "destroy" the asset (the
| copyright) and claim their deduction. So failed r&d
| projects would be deductible right away as long as the
| public gets them, and ones that result in a useful asset
| get depreciated based on how long they actually last,
| which is currently potentially multiple lifetimes.
| jameshart wrote:
| I get your thinking here but copyright isn't the only
| relevant intellectual property constraint.
|
| Software built by a business is a trade secret
| independent of its copyrightability. Even after the
| expiry of copyright a business can continue to exploit it
| as a proprietary asset.
| kelnos wrote:
| I don't think copyright term is a good rubric/measure
| here. For SaaS, a company can keep the software locked up
| indefinitely, regardless of copyright term. Employees can
| be contractually obligated not to publish source code,
| even if the copyright has expired.
|
| Amortizing development cost over the useful life of the
| software is maybe a reasonable thing to do (I don't think
| it is, but let's for a minute say I agree), but
| determining "useful life" is not simple.
| nitwit005 wrote:
| At the last couple of companies we worked at, they just
| sent out surveys on what time went to different activities.
| We couldn't possibly fill that out honestly, as that wasn't
| tracked.
|
| Which, I think is an overlooked part of this. They must
| constantly have gotten feedback that people were lying to
| them.
| jewelry wrote:
| Greed is too easy as a target.. industry space has shifted
| because of slower innovation and less growth, so cost cutting
| being more a focus would be a reasonable strategy
| dtagames wrote:
| If your company is already profitable to the tune of billions
| annually, "cost cutting" isn't necessary. You're just cutting
| people out of jobs and out of economic participation in
| society -- which affects a far larger group than just
| themselves when those folks can't spend their salaries in
| other businesses.
|
| There is no justification for "cost cutting" when it hurts
| the larger economy. If the company were _losing_ money, that
| would be different, but these mass layoffs are all from firms
| that make obscene, enviable levels of profit. It 's greed.
| RobGR wrote:
| You can call any self-interested decision "greed" if you
| need to just turn off your brain and emote.
|
| But they were making high profits for decades, and being
| greedy for decades. Then there were a lot of layoffs. What
| changed ?
| orangecat wrote:
| If a company is making $10 billion in annual profits, and
| they discover that they're spending $100 million on a
| useless project, are they morally obligated to continue
| that spending indefinitely?
|
| _There is no justification for "cost cutting" when it
| hurts the larger economy._
|
| It is not good for the economy to have people doing work
| that doesn't produce value.
| jokethrowaway wrote:
| You are correct saying it's not the R&D deductions.
|
| But it's not "greed": it's the end of zero interest rate
| policies.
|
| https://newsletter.pragmaticengineer.com/p/zirp
| mywittyname wrote:
| > The vast majority of tech workers laid off in the last two
| years didn't work in research and development.
|
| I bet they were classified as R&D for accounting purposes.
| Product development largely falls into R&D - it doesn't matter
| what the product being developed is for.
|
| Every job I had at a megacorp was classified as R&D, and I know
| because I had to track hours against such.
| demosthanos wrote:
| > I bet they were classified as R&D for accounting purposes.
|
| It's not just that. Section 174 now explicitly calls out
| Software as always being an R&D expense:
|
| > (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
| kelnos wrote:
| > _They wrote regular software for sale, like games, for
| example._
|
| Even though it sounds unintuitive, that activity is considered
| R&D for tax purposes.
| jen20 wrote:
| > They wrote regular software for sale, like games, for
| example.
|
| Wrote software, like, you know, "developed" it?
| potato3732842 wrote:
| >The delayed change to Section 174 -- from immediate expensing of
| R&D to mandatory amortization, meaning that companies must spread
| the deduction out in smaller chunks over five or even 15-year
| periods.
|
| Doesn't this just amortize out to be roughly the same amount of
| deduction over the long term?
|
| All the big companies mentioned should be relatively unaffected
| over an N>5 year time period. Also this was something that's been
| in the works for years so their accountants should have been
| planning for it so it wasn't a financial shock (and company
| financials seem to indicate no such shock).
| yesfitz wrote:
| If you look at the time value of money[1], a $1,00,000
| deduction this year is worth more than $200,000 deductions over
| the next 5 years.
|
| But more importantly, the article claims it was used as a tax
| shield to grow.
|
| "Basically, as long as spending counted as R&D, companies could
| report losses to investors while owing almost nothing to the
| IRS."
|
| "Once those same expenses had to be spread out, or amortized,
| over multiple years, the tax shield vanished. Companies that
| were still burning cash suddenly looked profitable on paper,
| triggering real tax bills on imaginary gains."
|
| 1: https://www.investopedia.com/terms/t/timevalueofmoney.asp
| potato3732842 wrote:
| Sure, but that doesn't account for the allegedly apocalyptic
| layoffs from companies that don't fit into the "real taxes on
| imaginary gains" mold.
|
| I get that this is bad for the VC monopoly bucks scene, but
| they were already down for the most part. If the changes are
| as the article alleges than all these big tech companies that
| are posting huge layoffs should mostly be fine because it's
| not a serious change from status quo for them.
| JamesBarney wrote:
| Interest rates are bigger motivator of the layoffs than
| these changes. When interest rates are high that means
| investors far more heavily prioritize profits today over
| profits tomorrow.
|
| This tax change just made it worse.
| TheTaytay wrote:
| My company was affected. The amount of money paid in taxes
| more than quadrupled from one year to the next.
|
| It hurt small businesses that were slightly profitable. No
| one else. VC shops aren't profitable anyway, so no taxes to
| pay. Microsoft took a 4 or 5 billion dollar write off, but
| they can literally write a 5 billion dollar check.
|
| The issue is that the IRS wants you to pay them today on
| profits and cash that literally don't exist. You make $1M
| in revenue and pay 5 developers 200k/year? You have no
| money left at the end of the year, but you pay taxes as if
| you profited about 900k.
| HWR_14 wrote:
| > Doesn't this just amortize out to be roughly the same amount
| of deduction over the long term?
|
| With steady enough employment numbers, sure. Google has a weird
| one-time cost where they get hit with extra taxes at 80%, 60%,
| 40% and 20% of their employee's salaries for five-years and
| then it's all balanced. You can turn the money Google needs to
| borrow (or not invest) at some interest rate into a known
| number.
|
| Any startup that is cash poor and especially one that is
| growing struggles. In year 3 you get to write off 20% of year
| 1's salaries, 20% of year 2's salaries and 20% of year 3's
| salaries.
| ak217 wrote:
| Yes, if you are a profitable company operating at a steady
| state and your investors have a time horizon of (in other
| words, are locked in for) a decade or more.
|
| Most companies in question don't fit these criteria. They are
| either large public companies subject to the reactions of the
| market to quarterly earnings, or small private startups that
| have limited cash (a runway of far less than 5 years) and are
| facing a perfect storm of a historic rise in the cost of
| capital coinciding with this change.
|
| In either case, their cost of labor just went up by a lot and
| will continue to cause layoffs, labor market shrinkage, and
| diminished ability to develop new products.
| kelnos wrote:
| > _Doesn 't this just amortize out to be roughly the same
| amount of deduction over the long term?_
|
| Yes, but if your business is not yet profitable, having to pay
| tax on money you don't actually have in the bank (because
| expenses exceeded revenue during the year) will cut into your
| runway, perhaps to the point that your company might not exist
| in five years... or even two or three.
| rvba wrote:
| Google, Facebook, Microsoft and many other of those old big
| companies are profitable though and they dont go anywhere in
| next 5 years (even if first 2 bleed out users)
| mensetmanusman wrote:
| I wonder if this was an unintended consequence, or if the
| politicians backed by big business really wanted to disrupt the
| software infrastructure.
| LiquidSky wrote:
| If this article is accurate it doesn't sound like it. The
| change was a political tactic to make the tax bill it was part
| of comply with Senate budget rules on paper. Apparently this is
| a common tactic with tax bills, with the expectation that the
| changes will be repealed or altered in a later bill. There is a
| movement to repeal this change, but the effects have already
| been felt.
| bigbadfeline wrote:
| > Apparently this is a common tactic with tax bills, with the
| expectation that the changes will be repealed or altered in a
| later bill.
|
| None of this adds up. You're saying, the legislators were
| trying to cheat and because it's a "common tactic" that kind
| of cheating is somehow good, but it's bad when the cheating
| doesn't go through?
|
| On the other hand, being a common tactic implies that the
| possibility of it remaining in the books was well understood,
| and the declared "expectations" carry zero weight as
| evidence, even less than zero when coming from politicians.
|
| Legislation like that has far reaching consequences and
| pretend "surprise" just confirms the intent behind it. It's
| only prudent to assume that we have a common tactic case of
| throwing sheet at the wall to see _for how long_ it 'll
| stick. If there's no backlash the "tactic" will remain there
| forever.
|
| As another example of the same common tactic, consider the
| fact that all popular browsers have been used as Trojan
| horses into the users' local networks for like forever. At
| some point back in 2015 somebody objected so the browser
| makers started talking about fixing the problem but then
| stopped talking without fixing it because public opinion
| moved on to other areas affected by abundant sticky
| materials... Thus, that particular sheet remained on the wall
| for another 10 years and counting, and the story may repeat
| itself again.
| jrs235 wrote:
| When using bill reconciliation in order to avoid Senate
| filibusters to pass a budget, certain conditions must be
| met otherwise regular Senate rules and the need for 60
| Senators to be onboard to avoid a filibuster come into
| play.
|
| It's not cheating, it's playing by different rules to get
| most of what you want/need done and then sometimes those
| that played and gambled were intending to, or hoped to,
| make the changes later that require rules. Their hope is
| that 60+ Senators would be onboard for those changes
| because they (those that gambled and pushed the budget bill
| thru) managed to get what they wanted at the expense of
| #$%#ing something up that most others would then be willing
| to fix/address.
| axus wrote:
| Agreed. If the members of the majority party can
| compromise within their single-party system, and play by
| certain rules, everyone else is powerless to amend or
| block the legislation.
| snowwrestler wrote:
| In tax policy, every single change looks reasonable to one
| interest group, and like a cheat to a different interest
| group. That is just the nature of tax policy. Any change
| hurts some people, harms others.
|
| Changes to Section 174 happen rarely and are not a "common
| tactic." Changes to tax policy in general are common,
| especially in the reconciliation process. They can have
| unforeseen side effects. As well as side effects that are
| foreseen but considered more acceptable than other side
| effects.
| macintux wrote:
| > Any change hurts some people, harms others.
|
| Not quite the sentiment you intended.
| snowwrestler wrote:
| Ha! Call it a Freudian slip...
| kelnos wrote:
| > _You 're saying, the legislators were trying to cheat and
| because it's a "common tactic" that kind of cheating is
| somehow good, but it's bad when the cheating doesn't go
| through?_
|
| I don't think GP made any kind of value judgment either
| way; they were just stating how things seem to usually
| work.
| glookler wrote:
| Around ~2010 I still had a lot of coworkers who claimed tech
| was basically incapable of defending its interests against
| other sectors. Maybe a bit different than today. I don't doubt
| that they thought they would get this repealed, but I would
| suspect the risk of the live grenade went to the sector with
| the least lobbying competence per revenue for the tax
| equations.
| creer wrote:
| It was a very explicit change with its own very specific
| paragraph. Some stuff can be unintentional. This could not.
| dashqueen wrote:
| This doesn't quite fit into the article and is probably too
| inside baseball for a general business audience, but as I see it,
| there's a real and serious argument to be made here about how
| Section 174 changes restructured the cost architecture of tech
| employment (yes, even for big, cash-rich companies). When
| salaries could be fully expensed, the effective marginal cost of
| headcount was lower. Amortization means the same engineer now
| triggers a significantly bigger near-term tax bill. At scale,
| that's a serious shift in how labor costs flow through the P&L...
| functionally, op-ex becomes capex, and cash flow implications for
| big players run into the billions. But maybe it's me!
| walterbell wrote:
| _> op-ex becomes capex_
|
| i.e. some humans get the same tax treatment as humanoid robots,
| while LLMs ("AI") are always deductible as op-ex, regardless of
| function.
|
| Draft 2025 spending bill in Congress would revert Section 174
| changes for 2026-2029.
| nickff wrote:
| Only external LLM use is 'always deductable as op-ex'. If you
| build your own server farm and/or developer your own LLM,
| those are capital expenses which must be depreciated.
| reactordev wrote:
| Contractors licking their lips at the prospect of being a
| clients op-ex. I think you're right and hence the slow down in
| hiring top talent for top dollar.
| demosthanos wrote:
| Isn't this literally the content of the article? What you just
| wrote down is basically this paragraph from TFA:
|
| > And so, on schedule in 2022, the change to Section 174 went
| into effect. Companies filed their 2022 tax returns under the
| new rules in early 2023. And suddenly, R&D wasn't a full,
| immediate write-off anymore. The tax benefits of salaries for
| engineers, product and project managers, data scientists, and
| even some user experience and marketing staff -- all of which
| had previously reduced taxable income in year one -- now had to
| be spread out over five- or 15-year periods.
|
| [0] https://news.ycombinator.com/item?id=34627712
| subarctic wrote:
| Agreed that's literally what the article is about
| potamic wrote:
| This is insane, how does it make sense? Employee salary expenses
| are no different from other expenses to run your business.
| Imagine they did this for raw material instead, a restaurant
| could only expense 20% of the food that they sell. If they
| purchased $100 worth of food, but could only sell $50 worth of
| it, they have to pay tax on that even when making a net loss
| overall. It just does not make any sense. There would've been a
| huge uproar if this was done for cost of goods. Why are employee
| salary expenses any different?
| UncleMeat wrote:
| There are other expenses that are also amortized.
| sokoloff wrote:
| Now imagine that a restaurant buys 100 tables, 500 chairs,
| kitchen equipment, cutlery for 800 people, signage, a security
| system, and does a remodeling before opening. (Or an airline
| buys an airplane. Or a hotel chain builds a hotel.)
|
| Should they be able to expense all of those items that provide
| value for multiple years in a single year?
|
| Does software development provide value exclusively in the year
| it's done? Or over multiple years?
| londons_explore wrote:
| It's only shifting what year the government gets its revenue.
| The government should simply let the company choose how to do
| it, but if they choose anything other than year 1 interest
| will be payable at government bond rates.
| warkdarrior wrote:
| It's also massively shifting the companies' cash flows. The
| company paid $X for R&D this year, but for tax purposes 80%
| of that $X expense is moved to next four years. So for this
| year's tax purposes, the company R&D expenses are much
| lower than what the company paid.
| demosthanos wrote:
| The reason that we require you to deduct an expense over
| years for _some_ things is because they have a resale value
| that needs to be accounted for. It 's not a pure expense
| because you have an asset with real value that came out of
| the purchase. Employee _time_ has no resale value. Once used
| it 's gone, so employee salaries are expenses, not
| investments.
|
| The only possible justification for the Section 174 R&D
| changes is that employees working in R&D theoretically are
| producing something which _does_ have a resale value, so
| there 's a small tax dodge enabled by direct-expensing your
| R&D costs but then ending up with an infinitely-copyable
| asset that came out of it.
|
| If that's what you're saying, then I'd reply to that argument
| by saying that paying humans to design new things has
| historically been a business strategy that the government has
| wanted to incentivize in a way that buying and holding
| physical assets has not been. I've seen no justification for
| the government deciding that from 2022 on we should actively
| discourage R&D, it just seems to be a mistake.
| Retric wrote:
| > I've seen no justification for the government deciding
| that from 2022 on we should actively discourage R&D, it
| just seems to be a mistake.
|
| Removing a specific tax exemption to create a level playing
| field isn't discouraging R&D.
|
| That's the thing, every year such exemptions exist the US
| taxpayers are handing out money. Just because we subsidize
| say EV's or Corn doesn't mean that's the baseline forever
| more.
| demosthanos wrote:
| Level playing field for whom? Who does incentivizing R&D
| disadvantage?
|
| Restaurants weren't competing with R&D-heavy corporations
| in any way. R&D-heavy corporations competed with each
| other, on a level playing field where _all_ of them can
| build new stuff without having to pay taxes on negative
| income in their early years.
|
| The only change this has made is un-level the playing
| field in favor of old, established corporations that
| already have the revenue streams in place to fund their
| new R&D projects.
| Retric wrote:
| > Who does incentivizing R&D disadvantage?
|
| Taxpayers who end up with the bill and every company is
| competing for workers, office space, etc. Incentives
| across decades shift what people study, what business get
| created, etc. R&D sounds great abstractly, but it's not
| some panacea where unlimited funding results in pure
| gains.
|
| The economy is generally more efficient without central
| planning, and dumping money into anything that can be
| classified as R&D is simply inefficient.
| demosthanos wrote:
| > every company is competing for workers, office space,
| etc
|
| My company is all-remote and none of us would work for a
| company that isn't doing R&D. Most of an _entire
| profession_ now has to be amortized over 5 years.
|
| > The economy is generally more efficient without central
| planning
|
| The old tax code isn't "central planning", it just had
| the very reasonable property that the government wouldn't
| force you to pay taxes on a loss.
|
| This scenario [0] is now possible. It wasn't before. That
| is a catastrophic level of stupidity, and you can't
| justify it with invisible-hand nonsense.
|
| https://news.ycombinator.com/item?id=44204353
| Retric wrote:
| > none of us would work for a company that isn't doing
| R&D
|
| So you'd just be unemployed for the rest of your lives?
| That's a possible edge case not worth adjusting the tax
| code for, but it seems unlikely.
|
| > wouldn't force you to pay taxes on a loss.
|
| R&D is an investment, you only pay taxes if the rest of
| the company is profitable.
|
| If your company is spending 1M / year on R&D and not
| adding 800k in long term value then in theory you'd be
| correct. But at that point you either aren't doing R&D,
| or are doing such a poor job of it that the government
| shouldn't be encouraging that activity.
| HillRat wrote:
| The problem here is that _all_ software development
| (excepting that done for hire) is classified as R &D. The
| software developer working on your Wordpress or Magento
| site (and arguably the accountant building a spreadsheet,
| to take the statute at face value) isn't an operational
| expense, they're now an R&D expense that has to be
| amortized and can't be taken as an expense against
| revenue. Previously, this was an optional choice (and
| many large and mature companies were amortizing anyway),
| but under the current tax treatment it's required, which
| essentially turns early-stage startups into cash
| bonfires, given how many small companies don't make it to
| year five.
| Retric wrote:
| > Early-tags startups into cash bond fires
|
| As a practical measure it's really not. The transition is
| difficult for existing companies, but a future startup is
| going to be minimally impacted.
|
| Year 0 you're unlikely to have any profits, future years
| you have multiple years of R&D to offset with.
|
| But let's assume the worst case. Taxes are 21% of profits
| and at minimum deduction 20% of R&D so the theoretical
| maximum distribution is 0.8 * 0.21 = 16.8% increase in
| R&D expenses if profits = R&D year 0. But that maximum
| case is only year 0, you'd be able to fund R&D with those
| same profits and easily be profitable after that.
|
| If profits where say 40% of R&D in year 0 you'd have to
| pay 16.8% of 40% so an increase is only 6.72% hardly
| likely to tank the business if it's already generating
| that kind of income year 0, and again after that point
| you'll deduct for multiple years.
|
| More realistic numbers are going to be really low
| multiples here, _more importantly they represent
| significant investments not operating expenses._
| jt2190 wrote:
| It sounds like you're talking about government funding of
| research? This is about private companies funding the
| costs of making product ideas into actual sellable
| products.
| Retric wrote:
| Money is fungible there's zero difference between a tax
| break for 100$ and handing out 100$ directly.
| jt2190 wrote:
| Are you asserting that software and other labor-heavy
| startups should raise additional private capital so that
| they can pay taxes _before_ they've established
| themselves in the marketplace? I'm not sure what you mean
| to say exactly.
| Retric wrote:
| I'm saying investers should pay the full cost of R&D
| without assistance from taxpayers.
|
| When the non R&D portion of the business is profitable
| they should start paying taxes. Assuming a company isn't
| miss classifying operations as R&D it shouldn't be a
| major issue.
| jt2190 wrote:
| Thanks for clarifying.
|
| This will of course discourage "riskier" startups and
| dampen innovation and give more power to profitable
| incumbents who will have less incentive to innovate.
| (Perhaps the result of this looks like Europe?)
| Retric wrote:
| Risky startups with multiple years of R&D before revenue
| would be the least impacted.
|
| You're only paying taxes if the business is profitable
| ignoring investments like R&D spending.
| kelnos wrote:
| > _The economy is generally more efficient without
| central planning_
|
| Big fat "citation needed" there. I know you chose the
| term "central planning" to try to invoke the communism
| boogeyman, but overall, free markets do not exist, and
| have never existed. Governments constantly use various
| levers (taxation being one of them) to encourage or
| discourage certain kinds of business activity. This is
| nothing new, and I find it laughable to suggest that this
| kind of thing should be done away with entirely.
| Retric wrote:
| There's a lot of evidence for this outside of communism.
| Housing markets for example are a clear example of
| economic inefficiency created by subsides. But you also
| see problems with farm subsidies, flood insurance, and a
| host of other related issues.
|
| Markets operate on revealed preferences, which is just a
| massive advantage in terms of giving people what they
| want. There's definitely a role for governments in
| economies around information asymmetry, safety, etc, but
| allocation of resources specifically doesn't work well.
| kelnos wrote:
| > _Removing a specific tax exemption to create a level
| playing field isn't discouraging R &D._
|
| If the end result of removing this exemption is that
| there is less R&D done in the US, then yes, empirically,
| removing the exemption discourages R&D. Assuming the mass
| layoffs were indeed fueled by the removal of this
| exemption (I don't know if the article is correct or
| not), then it is reasonable to assert that it is true
| that removing the exemption has reduced the amount of R&D
| done.
|
| Or, you could also say that the "default state" is some
| low level of R&D, and the tax exemption encouraged and
| incentivized more of it.
|
| Either way you slice it, though, the status quo prior to
| 2022 was some level of encouraged/incentivized R&D. That
| status quo changed to encourage/incentivize less R&D, and
| companies have followed these lack of incentives and have
| fired a lot of their R&D staff. Is that a good thing for
| the US? I can't see how it could be.
| Retric wrote:
| > empirically, removing the exemption discourages R&D.
|
| Not clearing a road means fewer people use it, but you
| not going out with a shovel to clear a public roads isn't
| you discouraging their use _nor is you canceling your
| plans to clear said roads._
|
| Having zero subsidies is the default situation.
| profile53 wrote:
| It didn't create a level playing field, it just
| discouraged a very specific type of R&D while ignoring
| all others. All other types of employee salaries follow
| certain rules and some can optionally follow R&D rules.
| Software is now the only one required to follow 5 year
| R&D amortization so the deck is now stacked against
| software.
| Retric wrote:
| Software is an asset. If you pay people to build a
| building you don't get to deduct their salaries as an
| operating expense.
| anp wrote:
| The default situation is whatever was yesterday. I'd be
| astonished to learn that even a single significant
| civilization functioned without subsidies or patronage of
| priorities held by a society's leaders.
| twoodfin wrote:
| What about construction worker and other labor time to
| build a factory? That's the analogy being made here by the
| tax code: Software whose development is a capital expense
| with value returned over time.
| demosthanos wrote:
| From a quick search it appears to me like construction
| labor is deductible as an expense in the year it is
| incurred. Do you have evidence that says otherwise?
| kgwgk wrote:
| > Dear ChatGPT, is construction labor deductible as an
| expense in the year it is incurred according to GAAP?
| Please answer in a few lines.
|
| Under GAAP, construction labor is not immediately
| deductible as an expense in the year it is incurred if it
| relates to the construction of a long-term asset (like a
| building). Instead, it is capitalized as part of the
| asset's cost and then expensed over time through
| depreciation. Only labor costs not tied to asset creation
| (e.g., routine maintenance) are expensed as incurred.
| sokoloff wrote:
| Though your answer is correct for the tax code as well as
| GAAP, Generally Accepted Accounting Principles are not
| necessarily followed by the tax code.
| twoodfin wrote:
| Unfortunately my understanding of the R&D expensing rule
| is that it is lifted directly from GAAP, which means
| private companies have to adhere to those (heavyweight)
| rules to comply.
| kgwgk wrote:
| Fair point. I changed the question to "according to the
| tax code" and it told me that
|
| Construction labor is generally not deductible as an
| expense in the year incurred if it is related to the
| construction or improvement of a capital asset (like a
| building). Instead, under the U.S. tax code (IRC SS263A),
| these costs must usually be capitalized and recovered
| through depreciation over time. Exceptions may apply for
| certain small taxpayers or repairs.
| sokoloff wrote:
| My reading of SS 1.263A-1 is that construction labor must
| be capitalized.
|
| SS 1.263A-1.a.3.A indicates that it's in scope: Real
| property and tangible personal property produced by the
| taxpayer
|
| SS 1.263A-1.e.2 specifies that Direct Costs are subject
| to capitalization: Producers. Producers must capitalize
| direct material costs and direct labor costs.
|
| (I'm just a taxpayer, not a tax lawyer or even an EA or
| CPA.)
|
| What tax code references or treasury regulations did you
| find to support your belief that construction labor can
| be expensed in the year performed?
| sitkack wrote:
| Software is like Art, it doesn't have value until sold or
| can be used. If they sell services based on the software,
| they are generating revenue and then taxation on that
| revenue can occur.
|
| Same as if they sell the software, either as a copy or
| ownership.
|
| But not being able to take salary as a business expense
| seems like as thing that would happen if software in and of
| itself has value, which is largely does not.
| thaumasiotes wrote:
| > But not being able to take salary as a business expense
| seems like as thing that would happen if software in and
| of itself has value, which is largely does not.
|
| To me it seems like a thing that just wouldn't happen.
| Forget software.
|
| Say you own a McDonald's, and as part of your operations
| you have some people on staff to take orders, prepare
| food, and clean the bathrooms. Why are their wages not a
| deductible business expense?
|
| If the answer is "they are, don't be stupid", then...
| what exactly was the R&D tax break?
| jay_kyburz wrote:
| The software itself has no value, it's the licence to use
| the software.
| mixdup wrote:
| But the employee time that had a one time use was turned
| into software. That software is the thing that has value
| longer than "right now"
| demosthanos wrote:
| And the value of that software will be taxed if and when
| it starts to draw cash.
| polotics wrote:
| I have seen a lot of software development where what's been
| done has been changed beyond recognition over the course of
| less than a year.
| bravesoul2 wrote:
| Ironically I think they would want to claim that over
| multiple years unless they have other profitable operations
| under the same company. E.g. other restaurants.
| altairprime wrote:
| It makes sense when you consider that there is no minimum tax
| rate on businesses.
|
| Given the choice, Amazon would rather spend 100% of its profits
| on itself than allow any of its profits to be paid out in
| taxes. Section 174 was implemented without a minimum tax on
| corporate profits _before_ voluntary deductions such as
| research. Therefore, it's exploitable and all companies ought
| to hire and fire staff to ensure their profits show as 0%.
|
| This tax code defect is now closed by accident, but could have
| been done much more intelligently than it was. Oh well.
|
| (EDIT: My first sentence is potentially confusing when I reread
| it later. To restate: section 174 was defective as implemented
| due to the uncapped 100% deduction, but the _concept_ of a
| significant research exemption is still excellent. Just need to
| close the effective 0% corporate tax rate loophole.)
| thayne wrote:
| The company already pays payroll taxes on those salaries, and
| the employees pay income taxes. And the people hurt by this
| aren't the shareholders or top executives, it's the rank and
| file workers getting laid off, losing benefits, and being
| asked to work more for the same pay.
|
| What this change effectively did was make software developers
| significantly more expensive, without increasing the amount
| those developers get paid.
| warkdarrior wrote:
| Software developers are already too expensive in US, so
| this applies some downward pressure on those salaries.
| Frankly the economy will be much better off when tech
| salaries equalize across geos, thus avoiding the deep whole
| US manufacturing is in (for example, manufacturing wages in
| Vietname are one tenth of US manufacturing wages, and thus
| it is better to open new plants there).
| bboygravity wrote:
| Yeah, make everybody equally poor. That'll solve things.
| altairprime wrote:
| If you look at happiness and indexes versus taxation
| rates - yes, making everybody poorer _does_ tend to solve
| things. Not too soon in the growth curve - but certainly
| not _never_.
| bloomingeek wrote:
| MAGA much?
| californical wrote:
| Don't forget the other stakeholder - the general public.
|
| Yes it sucks for developers, but does it make any
| difference for any other employee? Why does Joe's plumbing
| have to pay those taxes, but Jane's AdTech company doesn't?
|
| Sure, there are benefits to investing in R&D in general,
| and tech has fueled a lot of growth, so incentivizing it
| has likely paid off for the whole economy. But will that
| forever be true? Maybe?
| klipt wrote:
| If Joe's plumbing hires an assistant plumber, they get to
| fully deduct the assistant's salary.
|
| Why do I, the hardworking tax payer, have to subsidize
| Joe Plumber, who already has a big house with a pool?
| jay_kyburz wrote:
| In some parts of the world we have a sales tax which is a
| form of minimum tax on business outputs. The consumers of
| plumbing and software pay 10% regardless on a businesses
| profitability.
| altairprime wrote:
| Yeah, VAT would help tremendously in alternative here,
| but for _gestures at United States sociopolitics_ reasons
| the existing U.S. taxation methods can't keep up and
| won't be repaired any time soon. I could boil the ocean
| on this down to bedrock (citizens should be taxed on
| [redacted] in excess of threshold, services and goods
| should be VATed) but I stand by "section 174 with a
| sub-100% cap" as what _at minimum_ would have balanced
| research and taxation.
| cyberax wrote:
| > Given the choice, Amazon would rather spend 100% of its
| profits on itself
|
| And why is this bad, exactly? Money will be spent and will go
| back into the economy. Amazon will have to use the funds to
| build new offices, datacenters, do research, whatever.
|
| And even if execs give themselves $10^11 USD in bonuses, they
| will be taxed as personal income, at even higher rates than
| corporate income.
| californical wrote:
| It is complex - is it better for the money to go back into
| the economy by _paying high salaries to a specific group of
| highly-educated people_? Or is it better for the money to
| go back into the economy through _taxes, then disbursing
| the benefits to lower-income benefit programs_?
|
| I'm not sure what the answer is. The former is likely to
| drive _some_ innovation, which I'm sure varies by company.
| Where the latter could also unlock innovation by giving the
| bottom-quartile of earners a chance to improve their
| situation.
| cyberax wrote:
| > It is complex - is it better for the money to go back
| into the economy by paying high salaries to a specific
| group of highly-educated people?
|
| Yes. Also, the salary will not go _only_ to highly-
| educated people. For example, if Amazon decides to build
| a new distribution center, it will employ blue-collar
| workers to build it, not software engineers.
|
| > Or is it better for the money to go back into the
| economy through taxes, then disbursing the benefits to
| lower-income benefit programs?
|
| No.
|
| > I'm not sure what the answer is.
|
| The answer is pretty clear: invest money into the private
| sector, rather than divert it into the Federal budget.
| Private actors are more efficient at allocating funds
| than the government.
|
| I'm not against social spending, it's a necessary evil
| for any real state. Pure libertarianism leads to
| dystopian outcomes. But it should be understood that it's
| a very real artificial inefficiency that is imposed on
| the economy.
|
| There are also situations where additional social
| spending is necessary, but they are VERY easy to detect:
| when your interest rate is near zero.
| shafyy wrote:
| Jesus man, how can you look at the economic history of
| the past 30 years and still think neoliberalism is the
| way to go?
| cyberax wrote:
| I used to think like you, until I saw what the lack of
| neoliberalism does to countries. And before I witnessed
| the magic of market economy that adapts to changes far,
| far, far better than anything else.
|
| If you want a static economy that supports gradual
| decline (preferably with a mineral-based income stream),
| then a lot of state spending is fine.
| klipt wrote:
| Real neoliberalism (with land value tax and pigouvian
| tax) has never been tried.
| GuinansEyebrows wrote:
| because a high percentage people on HN fall into the
| group that benefits more from neoliberal economics than
| the larger group of people within those economies who
| don't benefit.
| duped wrote:
| It can do both, by eliminating corporate taxes.
| zdragnar wrote:
| Those salaries are also taxed, and at the highest tax
| brackets. The government may end up getting more revenue
| that way.
| xiphias2 wrote:
| The answer is simple: it's the biggest growth generator
| in USA.
|
| Growth has its own problems of course (I don't want to
| estimate the health impact of Coca Cola), but it's a
| prerequisite of a country not falling behind others.
| orwin wrote:
| Mostly, Amazon will do stock buybacks, so that its investor
| can invest into other top stocks.
| cyberax wrote:
| Funds for the stock buybacks are not R&D, they'll be
| taxed.
| mountainriver wrote:
| It was literally just a shot at California and New York, that's
| all it was. "Own the libs" ya know
|
| "if we aren't rich then no one else will be"
| dang wrote:
| Related. Others?
|
| _Big Beautiful Bill R &D Tax: Will tech go on a hiring spree
| again?_ - https://news.ycombinator.com/item?id=44028106 - May
| 2025 (19 comments)
|
| _The Consequences of Limiting the Tax Deductibility of R &D_ -
| https://news.ycombinator.com/item?id=43639202 - April 2025 (64
| comments)
|
| _House restores immediate R &D deduction in new tax bill_ -
| https://news.ycombinator.com/item?id=39212650 - Feb 2024 (8
| comments)
|
| _Ask HN: Best country to run a boostrapped startup from? (After
| Section 174)_ - https://news.ycombinator.com/item?id=39098371 -
| Jan 2024 (31 comments)
|
| _US tech innovation dreams soured by changed R &D tax laws_ -
| https://news.ycombinator.com/item?id=38988129 - 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 (37
| comments)
|
| _Will US companies hire fewer engineers due to Section 174?_ -
| https://news.ycombinator.com/item?id=38870429 - Jan 2024 (20
| comments)
|
| _IRS tax code change in Section 174: R &D is an expense_ -
| https://news.ycombinator.com/item?id=38642461 - Dec 2023 (23
| comments)
|
| _New tax rules on R &D expenses may lead to layoffs for devs_ -
| https://news.ycombinator.com/item?id=38636866 - Dec 2023 (7
| comments)
|
| _Tell HN: Submit comments to IRS re tax treatment of software
| dev expenses_ - https://news.ycombinator.com/item?id=38120388 -
| Nov 2023 (225 comments)
|
| _Software firms across US facing tax bills that threaten
| survival_ - https://news.ycombinator.com/item?id=35614313 - April
| 2023 (981 comments)
|
| _Ask HN: How are you handling Section 174 changes for
| bootstrapped companies?_ -
| https://news.ycombinator.com/item?id=34627712 - Feb 2023 (187
| comments)
|
| https://hn.algolia.com/?dateRange=all&page=0&prefix=true&que...
| dmoy wrote:
| Not a big thread, but a layoff one from a year ago:
| https://news.ycombinator.com/item?id=38633668
| timhigins wrote:
| Note that Trump's Big Beautiful Bill as it passed the House of
| Reps would bring back 100% expensing of R&D expenses including
| software development costs/salaries.
| margalabargala wrote:
| "I'll give you a candy bar if you let me stab you multiple
| times"
| kelnos wrote:
| If the article is to be believed, though, the damage is already
| done. Companies have already laid off large portions of their
| R&D staff, and have canceled lots of forward-looking technical
| work. Re-hiring those people and restarting those projects can
| take years, and that's if companies feel confident enough that
| the exemption will stick around, and not get removed again in a
| few years.
| jmyeet wrote:
| I reject this framing.
|
| What really changed things was the end of ZIRP [1] and even then
| it was opportunistic. Labor costs are a massive cost for tech
| companies. They have continually tried to suppress wages. In the
| 2000s, it was the anti-poaching agreement between Steve Jobs,
| Eric Schmidt and others. In the 2010s, high growth ahnd zero
| interest meant labor costs continued to balloon.
|
| But then Covid came along and was a massive opportunity. A few
| companies may have needed to do layoffs but that created the
| opportunity for everyone else. Big Tech just went full Corporate
| America with a page straight out of Jack Welch: fire the bottom
| 5-10% every year. Call it "layoffs". It's a direct pay decrease
| for those who remain (who get assigned the work). Those are still
| there won't be asking for raises because they're now afraid of
| their jobs.
|
| Very little of this was ever necessary. None of the big tech
| companies ever came close to making a loss. They've remaining
| insanely profitable, in total and on a per-worker basis. At
| different times Google's per-worker profit has approached or
| exceeded $1 million.
|
| The other factor is these companies eventually reached their size
| limits where antitrust stopped them making any more significant
| acquisitions.
|
| Consider the timing: this change came in 2017. Where were the
| mass layoffs in 2018? 2019?
|
| Also, the 2017 tax cuts contained a massive tax holiday for the
| repatriation of foreign profits.
|
| Mass layoffs are simply wage suppression. It's the end state for
| any company that can't keep growing the way the market demands:
| eventually it comes down to cutting costs to make those quarterly
| profit targets. And in that, they sow the seeds of their own
| demise.
|
| [1]: https://en.wikipedia.org/wiki/Zero_interest-rate_policy
| Seattle3503 wrote:
| > Consider the timing: this change came in 2017. Where were the
| mass layoffs in 2018? 2019?
|
| The bill passed in 2017, but the changes to R&D didn't kick in
| until 2022.
| khuey wrote:
| Things can have more than one cause. Even the article only
| claims this change "has contributed to the loss".
| jmyeet wrote:
| Yes. And I reject that claim.
|
| Big tech companies are both doing mass layoffs AND hiring.
| How does this fit the narrative that the tax change is at
| least in part responsible? The new hires still have the same
| deduction issue, right? So what impact does this really have?
|
| Think of it this way: if this passes, will the layoffs end?
| Or reduce? Absolutely not. All this does is give line the
| pockets of shareholders. That's it.
|
| I'm a big fan of tying certain benefits to NOT doing layoffs.
| This can include:
|
| 1. You get this deduction only if you've fired fewer than 1%
| of your workforce in the last calendar year;
|
| 2. You don't get to sponsor for an H1B if you've conducted
| ANY layoffs in the last calendar year; and
|
| 3. The tax deduction only applies to unionized workers.
|
| And while we're at it, let's roll back this ridiculous tax
| structure where IP can be "sold" to a subsidiary in Ireland
| and then royalties paid.
| jen20 wrote:
| > Big Tech just went full Corporate America with a page
| straight out of Jack Welch: fire the bottom 5-10% every year
|
| Plenty of "big tech" already did it. Microsoft could not be
| more famous for stack ranking dating back to the 90s. Amazon
| have long had that kind of culture too.
| svara wrote:
| > For cash-strapped companies, especially those not yet
| profitable, the result was a painful tax bill just as venture
| funding dried up and interest rates soared
|
| Can someone explain this? What taxes do unprofitable US
| businesses owe that this would be deducted against?
| dadoprso wrote:
| I thought you could carry forward losses or something. i.e.
| Once profitable you can use your previous losses as 'tax
| credits'.
| satya71 wrote:
| Yes, but businesses operate on cash, not tax credits.
| edoceo wrote:
| If you make it that far.
| mNovak wrote:
| So you're essentially giving the government a 0% interest 5
| year loan, in the amount of the pre-paid taxes
| mppm wrote:
| If the business has some revenue, but is not yet profitable
| after deducting development costs, it can become profitable on
| paper (and owe tax) if R&D is capitalized instead.
| deanputney wrote:
| That is kind of strangely worded, but I think I see what
| they're getting at.
|
| Say you would have been exactly not-profitable ($0) if you
| could expense all of your R&D as in the old system, therefore
| avoiding tax. Now with the new rules you may be on-paper
| profitable because you can only deduct 20% of the R&D as an
| expense this year. The remaining 80% of that expense tips you
| over, becomes profit, and that's taxable.
| orangecat wrote:
| Right. With concrete numbers, say your main expense is $1
| million in developer salaries and you have $500k in revenue.
| Going by the previous rules, you have a loss of $500k and
| don't owe income tax. With the new rules, you can only deduct
| $200k of expenses which gives you a "profit" of $300k, on
| which you'll owe $62k in taxes.
| wdaher wrote:
| Here's a toy example that hopefully makes this clear:
|
| In 2024, your business has $1m in revenue and has $2m in
| expenses. 100% of these expenses are R&D salaries (engineers
| you hire.)
|
| Your company loses $1m/year. (You brought in $1m and spent
| $2m.)
|
| Under the old rules, you'd owe no tax because you were
| unprofitable.
|
| After Sec 174, what the IRS now says is:
|
| You had revenues of $1m. But you only had $400k in expenses
| (because you now have to spread that $2m in R&D expense over 5
| years).
|
| So actually you had a profit of $600k! And you owe tax on that
| $600k profit (~$120k)
|
| So you now have an additional $120k tax expense, making your
| business even more cash-flow negative.
|
| .
|
| Amusingly, if you're pre-revenue, none of this matters (you
| have no income at all, so it doesn't matter what your expenses
| are.) You get hardest hit by this change when you have _some_
| revenue and when you do a fair bit of R &D.
| svara wrote:
| Is this true even if you don't capitalize the immaterial IP
| asset generated by the R&D salaries on the balance sheet? Is
| that required in the US?
|
| Otherwise I'm quite amazed that salaries can be carried
| forward as future expenses.
| wdaher wrote:
| This is what the Sec 174 change said: it says that you _do_
| have to capitalize it.
| mppm wrote:
| Elsewhere in the world (under IFRS accounting rules)
| capitalization of R&D costs has been a firm requirement for
| a while. The US has been somewhat unique in allowing them
| to be expensed instead, until recently.
| svara wrote:
| Taxes are calculated according to tax accounting rules,
| not IFRS, though?
|
| I know of at least two Western European countries where
| you don't have to do that. Don't worry, we pay enough
| taxes either way ;)
| mppm wrote:
| Yeah, seems I was wrong about that. Apparently most IFRS
| countries allow expensing R&D for tax purposes,
| regardless of accounting. Many even have an R&D
| superdeduction nowadays.
|
| Sorry for the noise :(
| bravesoul2 wrote:
| I was confused and has to double check. In Australia you
| can deduct them https://www.ato.gov.au/businesses-and-
| organisations/income-d...
| 0xWTF wrote:
| Came here to ask about the Aussie RDTI. So, if I spend
| $10M on R&D and make $5M, what's the difference between
| US and Aussie net?
| paulcole wrote:
| But nobody's forcing you to classify software developers as
| R&D.
| demosthanos wrote:
| No, that's literally the Section 174 change. You now must
| count them as R&D.
|
| The relevant paragraph from Section 174:
|
| > (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
| mring33621 wrote:
| what if you don't call it "software development"?
|
| how about "business process mechanization"?
| nsxwolf wrote:
| Then you risk going to jail.
| brookst wrote:
| At that point you're so into tax fraud that you light as
| well call them "postage and shipping"
| acedTrex wrote:
| I mean sometimes fraud works, sometimes it doesnt.
| xhkkffbf wrote:
| What if some executive tweaks a "no code" tool?
| Technically, the name says that there's no coding
| involved.
| zdragnar wrote:
| Presumably that still counts as "developing software"-
| the regulation doesn't mention "coding" at all.
| inChargeOfIT wrote:
| So that would include everything? - cloud/hosting
| expenses - system administrators/devops engineers and
| their laptops, workstations - project management
| software, office software, support, etc - project
| managers, designers, technical writers, qa engineers -
| software licenses, domain names, certificates, etc -
| internet bandwidth, data-centers, HVAC, backups
| demosthanos wrote:
| What "in connection with" means is vague. I think a
| reasonably competent tax attorney could probably argue
| that the costs of running your production cloud serving
| existing customers don't count, but IANAL.
| croes wrote:
| How would that help? R&D developers helped saving taxes,
| now they don't.
|
| Classifying them as non R&D doesn't help saving taxes
| again.
| jorvi wrote:
| > Amusingly, if you're pre-revenue, none of this matters (you
| have no income at all, so it doesn't matter what your
| expenses are.)
|
| https://youtu.be/BzAdXyPYKQo
| throwawaymaths wrote:
| so you are okay, if you start getting revenue when you're
| five years in?
| singron wrote:
| You can deduct 100% of salaries paid 5 years ago, but only
| 20% of salaries last year (etc.), and since companies tend
| to hire more people over time, most of your expenses will
| have been in the last few years that are still amortizing.
| You might have enough losses to carry forward in your first
| year of revenue, but 6 years in that could run out. It
| depends on the exact circumstances.
| MattPalmer1086 wrote:
| Wait - they are saying that employee salaries are not
| expenses?
|
| That is surely wrong? Just because those salaries are for
| R&D?
|
| I could understand if there was some additional tax break for
| R&D which was being removed. I can't see how basic operating
| costs cease to be expenses.
| gruez wrote:
| >Wait - they are saying that employee salaries are not
| expenses?
|
| >That is surely wrong? Just because those salaries are for
| R&D?
|
| The same would be true if you hired a bunch of
| scientists/engineers and got them to do R&D.
| mixdup wrote:
| What other cost do you think goes into software
| development? Companies are not spending that much money on
| IDE licenses. The vast, vast majority of software/R&D costs
| are labor
| tomrod wrote:
| This was my first reaction when I heard about it before it
| passed. I was horrified.
| antognini wrote:
| They are expenses, but amortized over 5 years. So if you
| spent $2m on employee salaries, you would then deduct $400k
| from your revenue every year for 5 years.
|
| If your employee expenses remained constant, then by year 5
| you would be deducting $2m from your revenue since you'd be
| accumulating the deductions from the previous four years.
|
| So in steady state it wouldn't necessarily be a big
| problem. But for a startup which is hiring many new
| employees and whose revenue is growing it's a huge problem.
| svara wrote:
| Based on my exchange with wdaher, who seems to understand
| this well, it's a bit more subtle than that:
|
| The salaries are of course expenses, but they are exactly
| offset by the value of the IP created by the R&D
| activities.
|
| It's a bit as if you spent money on buying some materials.
| As long as the material doesn't degrade, the cash is gone
| but the value is the same and therefore won't reduce your
| taxes.
|
| If that IP is amortized over a single year, it does not
| contribute to taxation, but it does if it is amortized over
| a longer period.
| sitkack wrote:
| Is there a flaw in saying, "salaries should always be considered
| a business expense and cannot be amortized over many years." ?
| warkdarrior wrote:
| That's not what the law says. You'll have to take it up with
| Congress.
| fluidcruft wrote:
| I think they're asking whether there would be a flaw with
| making that change.
| eximius wrote:
| Considering they are probably the largest component of R&D
| expenses... yes, _if_ you think R&D should be tax-subsidized in
| some way.
| sitkack wrote:
| I don't understand how that is a subsidy, are the people
| paying the employer?
|
| The employer makes less profit due to salaries, but they
| won't "lose less" or make more money due to salaries.
|
| Under that argument, the government would have a direct
| incentive to dictate how businesses do business to maximize
| taxable revenue.
| eximius wrote:
| Tax subsidies are when the government taxes you less,
| thereby reducing your tax burden. You don't receive funds,
| you just owe less.
| holtkam2 wrote:
| I would say, yes there is a flaw there, because salaries are
| often a huge chunk of R&D expenses, and for the sake of long
| term growth, we want to disproportionately incentivize R&D
| spending
| creer wrote:
| How about the salaries of employees being paid to create a new
| line of business? Say, the business runs restaurants and you
| decide to break into the tax software business. Can you avoid
| taxes on restaurant profits right now in order to build your
| new unrelated venture. ISFICR, tax law allowed outright
| deducting of costs of the current business, but not costs for
| starting a new one. Not deducting the new costs against the old
| profits.
|
| After that, we can nitpick: should the development costs of new
| software be encouraged the same as maintenance costs of
| existing software. If you want to encourage startups, then yes
| they should. If you want to discourage startups or very
| temporarily increase tax collection, then no.
| encoderer wrote:
| How this impacted our business is that when you are doing next
| year planning, and the goal is to grow the business, it made ads
| and other marketing investments more appealing versus tech hiring
| to expand product capabilities.
| wdaher wrote:
| Worth noting: the version of the Big Beautiful Bill passed by the
| House ends this particular change, starting in tax year 2025.
| We'll have to see if this provision makes it through the Senate,
| and in what form.
| NewJazz wrote:
| That's crazy. We're 3 years into a 5 year depreciation cycle,
| and now they "change their minds". Sure convenient when you
| know you are in power to supercharge growth and leave a time
| bomb for the next admin.
| xbar wrote:
| The destructive power of the Section 174 change cannot be
| overstated. It has been reported on a lot, but its harms are
| generally poorly articulated.
|
| I do not like many things in BBB, but I am glad to know there
| is at least something in there that I can be glad for.
| naijaboiler wrote:
| Why sent tech companies and tech workers kick up a fuss when
| this bill passed in 2017. I remember being mad about it
| walterbell wrote:
| _> ends this particular change_
|
| Temporarily, for 5 years.
| badloginagain wrote:
| If remember correctly, this was put in by Trump first round,
| set to activate when Biden was in office.
|
| Now Trump second round fixes it, but expires in next
| (presumably) Democrat administration.
| heymijo wrote:
| That is correct. Some historical context is much
| appreciated in this thread.
|
| > _tl;dr on Section 174, Research & Experimentation costs
| went from being fully deductible in the year incurred to
| being deductible over a 5 year period.
|
| Larger tax bills and a tightening on what roles/activities
| are deductible as R&E are likely what OP is pointing at
| with his comment.
|
| To the best of my non-inside baseball research, Section 174
| changes were simply one part of a package of revenue
| generating measures to offset the large tax cuts from the
| broader tax act they were a part of.
|
| The changes came from The Tax Cuts & Jobs Act of 2017 that
| was introduced to the House of Representatives by
| Congressman Kevin Brady (R) Texas. The bill passed both
| houses of Congress along party lines. Then President Trump
| signed the bill into law. Section 174 changes did not take
| effect until 2021._
|
| https://news.ycombinator.com/threads?id=heymijo&next=433209
| 8...
| lifeisstillgood wrote:
| I'm not sure I fully understand the problem here
|
| 1. I start "Facebook for dogs" It's gonna be massive. For the
| first year me and five guys code away in the garage and I use my
| savings / credit card / family trust fund to pay them 100k each.
| Expenses are 500k, revenue is, amazingly, 1.5M and taxes owed is
| 500k.
|
| At this point turning round and saying the development was R&D,
| and claiming 500k of tax breaks is just (to me) ripping off the
| American Taxpayer.
|
| And I'm not even an American Taxpayer.
|
| If the revenue was zero would anyone suggest that the taxpayer
| give me 500k to help ? (Ok _I_ would because I like free money
| but most people won't)
|
| Or am I missing something?
| wdaher wrote:
| See my example here for where it ends up biting you:
| https://news.ycombinator.com/item?id=44180533#44204246
| lowkey_ wrote:
| Everything you just said but imagine revenue is $500K, and you
| spent $500K on salaries for the team.
|
| You can only expense $100K of the salary costs this year, so
| even though you're break-even, you pay taxes on $400K in
| income.
|
| Or, even worse, imagine revenue is $250K, and you spent $500K
| on salaries for the team.
|
| You can only expense $100K of the salary costs this year,
| you're already -$250K on the year, and now you're paying taxes
| on $400K in income. You're destroyed.
|
| VC-backed startups aren't designed to get profitable quickly,
| and I don't see that as a problem for the American taxpayer,
| and nobody is saying the taxpayer is giving money or helping. A
| business losing money should not have to pay taxes on income,
| as if it's not losing money.
| xivzgrev wrote:
| the idea is that normal business expense are deductible.
|
| in this case, your taxable income is $1.0M, and cash flow is
| $500k ($1.5M - $500k salaries - $500k taxes).
|
| now you have to amoritize it over 5 years. so your taxable
| income is $1.4M ($1.5-500k*20%), taxes are 700k, and cash flow
| is $300k.
|
| Uncle Sam just reduced your cash flows by 40% by a simple tax
| change. You eventually make up the difference, but for fast
| growing tech companies, that's a large shift in current flows
| and significantly changes their investment strategy.
| padjo wrote:
| "Some spoke on condition of anonymity to discuss sensitive
| political matters." - yep this is fine.
| demosthanos wrote:
| There are some misunderstandings in the comments that seem to
| stem from not having read the section, so I thought it was worth
| referencing the actual text [0]. It's quite short and easy to
| read.
|
| The most important bits:
|
| * Subsection (a) requires amortizing "Specified research or
| experimental expenditures" over 5 years (paragraph (2)) instead
| of deducting them (paragraph (1))
|
| * Paragraph (c)(3) is a Special Rule that requires that all
| software development expenses be counted as a "research or
| experimental expenditure".
|
| That's it. All software expenses must be treated as research and
| experimental expenses, and no research and experimental expense
| can be deducted instead of amortized. Ergo, all software expenses
| must be amortized over 5 years.
|
| I strongly recommend reading the section before forming an
| opinion. It really is quite unambiguous and is unambiguously
| _bad_ for anyone who builds software and _especially_ for
| companies that aren 't yet thoroughly established in their space
| (i.e. startups).
|
| Also note that this makes Software a _special_ case of R &D. It's
| the only form of R&D that Section 174 _requires_ you to
| categorize as such and therefore amortize.
|
| [0] https://www.law.cornell.edu/uscode/text/26/174
| radley wrote:
| It's not really targeted at tech, insomuch as at Democrats.
|
| Everyone assumed it was a traditional accounting hack. But
| given the timing and the reinitialization, it's clearly
| political, not economic.
|
| The code is a strategic time-bomb designed to cause a high-
| profile economic downturn during a presidential election cycle,
| specifically when the following president is a Democrat and
| Republicans have a house majority.
|
| It was used to harm Biden's economy, and it will happen again
| in 2030 if the next president is a Democrat. While deferred, it
| will be spun as a major Trump "economic achievement" for the
| midterms, because companies will be able to afford to hire
| again.
|
| The tech industry is merely high-profile fodder for extreme
| politics. It really is that petty.
| victoro wrote:
| The Democrats had control of the presidency and the house in
| 2022 when this provision first went into effect but had 2
| fewer senators (1 fewer if you count the tie-breaking VP).
| Why didn't they try to change it? Is there some reason a
| change in the tax code like this can't be modified or
| repealed once its in place?
| tomrod wrote:
| They tried. They had Senate spoilers.
| candiddevmike wrote:
| As a progressive, it seems like the Democrats always have
| Senate spoilers...
| SpicyLemonZest wrote:
| Providing spoilers was the explicitly designed purpose of
| the US Senate. It's not a one-sided problem - Senate
| spoilers are also why the Affordable Care Act didn't get
| repealed in 2017.
| dragonwriter wrote:
| > As a progressive, it seems like the Democrats always
| have Senate spoilers...
|
| With Republicans usually being dominant in a number of
| states, _if_ Democrats have a Senate majority, it is
| usually both narrow and dependent on a very small number
| of Democratic and /or Dem-leading moderate independent
| Senators from Republican-majority states who vote with
| the party on leadership, but are soft (or firmly opposed
| to the progressive preference) on a number of issues
| important to progressives.
|
| If the US were approximately an equal democracy, this
| might be less of an issue.
| naijaboiler wrote:
| Why should they? Why did we allow a president to put in tax
| raise for the future. Replicants were playing politics from
| the start. Pass a bad bill, and then hope to get about it
| when the bad parts kick in when the other side woo be in
| power
| sampton wrote:
| Amortization is bad policy when it comes software. Software is
| inherently high risk. Every piece of software is unique and
| does not guarantee steady income over 5 years. Most startups
| won't survive 5 years to fully realize the deductions. This is
| the end of US software dominance.
| timewizard wrote:
| Is US software dominance because of our startups? Or because
| of the giant trillion dollar monopolies we have?
|
| Didn't AAPL, GOOG and FB all create products _before_ they
| had any taxable income? Would this change have had any actual
| impact on their foundings?
| typeofhuman wrote:
| HN has taken a sad turn over the last few years where we
| see genuine curiosity - such as your reply - met with
| downvotes instead of replies.
|
| I don't have an answer for you. But I support your
| intrigue.
| kopecs wrote:
| Well, presumably the claim would be that a factor in their
| not having taxable income was the fact that they didn't
| have to amortize their development cost.
| joshuanapoli wrote:
| Yeah; start-ups will start paying tax much sooner since
| salaries are the main expense in software development,
| and only a fraction can be deducted per year. The tax
| change must make things marginally more difficult for
| young companies that have some revenue, aren't cash-flow
| positive, and have a short horizon.
| tomrod wrote:
| It's not marginal. It significantly impacts sub-$10MM
| companies.
| anonym29 wrote:
| It's worth noting that FB was quite possibly being secretly
| funded with taxpayer money by national intelligence
| interests at inception, which would have substantially
| reduced or eliminated commercial pressure early on.
|
| DARPA was working on Project LifeLog starting in 2003, was
| to be "an ontology-based (sub)system that captures, stores,
| and makes accessible the flow of one person's experience in
| and interactions with the world in order to support a broad
| spectrum of associates/assistants and other system
| capabilities". The objective of the LifeLog concept was "to
| be able to trace the 'threads' of an individual's life in
| terms of events, states, and relationships", and it has the
| ability to "take in all of a subject's experience, from
| phone numbers dialed and e-mail messages viewed to every
| breath taken, step made and place gone".
|
| The program, at least officially and publicly, was
| cancelled on February 4th, 2004, the exact same day that
| Facebook was founded.
|
| https://en.m.wikipedia.org/wiki/DARPA_LifeLog
|
| https://en.m.wikipedia.org/wiki/Facebook
|
| You can call it a coincidence if you want, I just tend to
| be very skeptical of "coincidences" where massive,
| powerful, unaccountable, immoral, unethical institutions
| like the US intelligence community get exactly what they
| want at the expense of our civil liberties.
| trinsic2 wrote:
| I often wonder if national intelligence interests are
| behind or have taken control of major corporate players
| like Microsoft, Google and Apple. There was an article
| [0] back in 2015 that brought forth the proposition that
| google was created by the CIA. It would explain the
| current enshitification of these companies and the
| lengths they are going to take away choice.
|
| [0]: https://medium.com/insurge-intelligence/how-the-cia-
| made-goo...
| cjbgkagh wrote:
| Ever wonder why Microsoft bought Skype?
| tomrod wrote:
| This impacts deductable expenses, not profits directly. The
| labor you pay for internally owned IP related to software
| must be amortorized. This screwed up an enormous number of
| business plans because software has more risk than many
| other endeavors. For small businesses, you basically can't
| do your own software.
|
| It applies to things like configuring your internal tools
| too. Good luck at audit time.
| madaxe_again wrote:
| I don't know how it works in the U.S., but we had HMRC in
| the U.K. write us a cheque every year, as if you have a
| greater R&D claim than your tax bill, you get a rebate.
| 9rx wrote:
| _> Is US software dominance because of our startups? Or
| because of the giant trillion dollar monopolies we have?_
|
| Most likely neither: It is its massive trade deficit, the
| one it strangely wants to get rid of now, that has allowed
| US consumers to consume more than they produce (i.e. you
| can take something with no real expectation of having to
| give anything back in return). Which, as it relates to
| tech, has enabled offering services for what is effectively
| free to dominate the market. Nobody else in the world can
| compete with that.
|
| _> Didn 't AAPL, GOOG and FB all create products _before_
| they had any taxable income?_
|
| Wouldn't you say they had no taxable income _because of
| it_? If Facebook brought in $100,000, and paid $100,000 to
| developers, then there would be no taxable income under
| normal regimes. But if the developers were not tax
| deductible, then that $100,000 in revenue _would_ be
| taxable, even though the bank account is empty. This isn 't
| nearly so simple, but it has changed the calculus in a
| similar way. The business models of old no longer work
| because of it.
| jweir wrote:
| We are small and so have been on a hiring freeze since 2022.
| I'd like to hire but the upfront cost is high.
|
| For those around when this went into effect many business
| owners were surprised. Our accountants told us they seriously
| thought congress would fix this before it went into effect.
| youngtaff wrote:
| I worked for a UK company that amortised it's development
| costs... it led to the false belief that the company was
| profitable when it really wasn't
| Reason077 wrote:
| Exactly. And if you're more profitable on paper, you have to
| pay more tax, making you even less profitable in reality.
| trhway wrote:
| Yes, that is tremendously important aspect here - the US tech
| would look better on paper - higher paper profits due lower
| paper expenses - while getting increased cash flow stress due
| to decreased deductability of the salaries which are among
| the main expenses in software dev business.
| itsoktocry wrote:
| > _Yes, that is tremendously important aspect here - the US
| tech would look better on paper_
|
| It's completely unimportant. Nobody is getting fooled "on
| paper" by amortized salaries.
| trhway wrote:
| Except for example the millions of stock market casual
| participants.
| kgwgk wrote:
| People is getting fooled by "adjusted" earnings that
| reduce salaries "on paper" by hiding the "non cash"
| component.
| layer8 wrote:
| As a non-American, it seems strange to me that the cost of
| regular software development, i.e. that is neither "research"
| nor "experimental" in a conventional sense, would be deductible
| in the first place (amortized or not). Isn't that subsidizing a
| whole business sector? Maybe I'm misunderstanding something.
| pjc50 wrote:
| Most businesses let you deduct inputs and capital expenses
| from your revenue so that tax only applies to profit.
|
| Since this is done on annual buckets it's very common to try
| to move items in both columns between years to minimize tax.
| layer8 wrote:
| So if company A pays company B to develop some software,
| that revenue for company B (or rather, its profit) is still
| taxable? Then it makes sense I guess.
| monkeyelite wrote:
| The revenue minus expenses is taxable, yes. And if the
| business itself makes no money, that means all of it was
| taxed through payroll.
| simantel wrote:
| Businesses are taxed on profits, not revenue. Paying people
| to write code is an expense, so you'd normally deduct that
| expense (plus all your other expenses) from your revenue to
| arrive at an amount that should be taxed.
| bravesoul2 wrote:
| That's the rub. Is it an operational expense, like rent or
| a capital expense, like buying machinery?
|
| It is sort of between the two in my view and is highly
| dependant on what the software engineer does each day.
|
| Are they fixing a bug, helping a customer, refactoring? I
| think that is operational.
|
| Are they building out a new feature? That is capital. But
| it is not quite like buying equipment because it adds no
| value to the books. So depreciation seems off.
|
| But the same issue applies to other roles. Is a sales
| persons day trying to land a sale, or trying to develop the
| business.
|
| It all comes down to "intangible assets" and whether you
| are making them.
|
| I think it is easier to just say if you are paying someone
| to work then you can deduct. There must be better ways to
| claw it back.
|
| The whole reason for most business to exist is to use
| operations (operational costs) as a lever to increase the
| growth and intangible value of the business.
| offnominal wrote:
| Salaries in general (not just of software developers) are tax
| deductible in many countries. This is desirable because we do
| not want companies to be paying taxes on revenue.
| cjbgkagh wrote:
| It stems from the difference in treatment of capital gains
| and income. Either way it's deductible, the difference being
| when it is deductible and how much tax is saved. Capital
| deductions are typically done later since they require a
| taxable event.
|
| It's a fudge to make projections look better to allow
| congress to pass a budget neutral reconciliation bill with
| the intent that congress would remove the fudge before the
| consequences triggered.
|
| Governments in general are pushing for capital gains tax
| normalization where instead of requiring a taxation event the
| capital gains tax would be levied yearly. In such a scenario
| the only difference remaining would stem from the difference
| taxation rates.
| yardstick wrote:
| > Governments in general are pushing for capital gains tax
| normalization where instead of requiring a taxation event
| the capital gains tax would be levied yearly.
|
| You're alluding to wealth taxes, right?
|
| Because taxing unrealised gains are wealth taxes.
|
| Or maybe I've misunderstood?
| dragonwriter wrote:
| > Because taxing unrealised gains are wealth taxes.
|
| No, wealth taxes are a tax on retained wealth (a stock).
| Taxing unrealized gains is a tax on income (a flow), it
| just changes the point at which taxation attaches from a
| realization event to the actual gain.
| aeonik wrote:
| But you haven't gained... you could be taxed over and
| over again, and if the stick drops or hits zero then
| what? It's all on paper and not "real".
| lesuorac wrote:
| imo, it's in the best interest of the market for people
| to have to realize their gains otherwise the price of an
| item is pretty imaginary if it's never realized.
| dragonwriter wrote:
| > But you haven't gained...
|
| Yes, you have. You have an asset of greater value which
| you can leverage in a number of ways without liquidating
| it and "realizing" the gains. That's a real gain, with
| real value.
|
| > you could be taxed over and over again
|
| Only if you make new unrealized gains.
|
| > and if the stick drops or hits zero then what?
|
| Then you have a negative unrealized gain, or,
| equivalently, an unrealized loss. If you are taxing
| unrealized gains instead of taxing gains when realized,
| then the natural assumption would be, _just as is done
| with taxing gains at realization_ , that negative
| unrealized gains are either offset against current income
| or against future unrealized gains, and so effectively
| create (considered on their own) negative (current or
| future) taxes. The simplest form of this is to offset
| only against future gains, by the simple mechanism that
| when gains are recognized for tax purposes, they adjust
| the basis value of the asset, and when unrealized losses
| occur, they don't effect the basis value at all, so you
| don't have a taxable unrealized gain again until the
| market value exceeds the basis value established at the
| prior peak.
|
| More complex versions would allow you to offset some or
| all of the unrealized loss from the prior basis value
| against current income of other forms, but the amount of
| that offset would reduce the basis value of the asset.
| cjbgkagh wrote:
| If pegged to inflation then they are not, but I think
| they likely will be. People who might think this is great
| should understand that the government makes more money
| increasing wealth inequality aligning the interest of the
| government and the ultra rich.
| demosthanos wrote:
| We're not talking about a tax deduction in the sense of a
| special privilege, we're talking about simple calculations of
| profit.
|
| Before this change, tax for software development was
| calculated against:
|
| * Profit = Revenue - Expenses
|
| And software developer salaries fell neatly into Expenses
| unless you were looking for an R&D tax credit.
|
| After this change, tax for software development is calculated
| against this new equation:
|
| * Profit = Revenue - (1/5 * YearlyExpenses[-1]) - (1/5 *
| YearlyExpenses[-2]) - (1/5 * YearlyExpenses[-3]) - (1/5 *
| YearlyExpenses[-4]) - (1/5 * YearlyExpenses[-5])
|
| Which means that if you are in Year 1 of operation, your
| values for YearlyExpenses[-2:-5] are all 0 and you only get
| to deduct 1/5 of your actual operating costs for the year
| from your "profit". So you can be _in the hole_ but still owe
| taxes on your "profit" for the year because what you spent
| money on was classified as R&D.
| lesuorac wrote:
| It is a subsidy!
|
| Why should money spent on software _development_ not have
| to be deprecated over time like other money spent on
| _development_?
|
| I get that it sucks from a cash flow standpoint but the
| same is going to be true of other R&D expenses. It's just
| that we're more exposed to this specific R&D expenditure
| and not others.
| anp wrote:
| The root of this subthread makes it clear why the current
| provisions to force software expenses to be amortized are
| different than other kinds of R&D.
| mountainriver wrote:
| Yes and part of the reason America is so rich
| Reason077 wrote:
| The OBBBA ("Big Beautiful Bill") suspends amortization
| requirements for domestic R&D expenditure, and explicitly
| allows domestic software development as an R&D expenditure
| eligible for immediate expensing.
|
| The new rules would apply from 2025 to Dec 31, 2029:
|
| https://www.crowell.com/en/insights/client-alerts/house-comm...
| tomrod wrote:
| That would be the one positive I have heard regarding OBBB.
| This should be put into its own bill.
| madaxe_again wrote:
| That isn't how legislation is passed. If anything, it needs
| a section about acceptable tar shingle application
| standards for roofs within 6 nautical miles of any heliport
| operated in a subarctic area on the west cost. Then it's
| looking like a bill.
| teeray wrote:
| You forgot renewing the Patriot Act :)
| aetherson wrote:
| There's a little of this, but more so, you only get one
| reconciliation bill per year. And anything that's not a
| reconciliation bill has to be bipartisan.
| AnonymousPlanet wrote:
| And it gets so bizzare that even legislators have to
| laugh when they read it out loud, like in this case here
| in Switzerland:
|
| https://www.youtube.com/watch?v=S9hztUCq15o
| Terr_ wrote:
| That "suspends" should be understood as "continues to hold-
| hostage" / "renews as a time-bomb to screw over some other
| party".
| sherburt3 wrote:
| Removing it would make Congress less powerful, and we can't
| have that now can we.
| rurp wrote:
| If anything it has been the opposite problem, with modern
| congresses having been more than happy to delegate away
| their powers. You might have heard the recent tariff news
| for example.
| avsteele wrote:
| That isn't the reason. They sunset in the bill so it has a
| lower CBO score (which calculates costs out to 10 years).
| If you sunset in the bill after 5 years, even if you know
| it will get renewed, the apparent cost goes down. Get it?
| gigatexal wrote:
| This is a highlight in an otherwise shitty bill.
|
| I saw let Trump's ugly bill die and then a small fix up to
| the tax code could be this. Should be able to pass.
| yieldcrv wrote:
| This bill is goated for upper middle class and tech and
| defense sector
|
| And I'm tired of pretending like we aren't going to be
| beneficiaries
|
| Every Congress increases the debt, we can acknowledge that
| the cuts they picked are going to wreck the lower class
| especially with the medicaid, we can acknowledge that it
| won't meet its goals of cuts
|
| but are you guys just scared to acknowledge its going to
| super charge things that you are a beneficiary of too? so
| busy saying it just benefits billionaires as if we're
| trying to avoid guillotines. not gonna happen and many
| people here are going to try to take advantage of new
| programs
| slipnslider wrote:
| Repealing SB174 has bipartisan support. The house already
| passed its repeal but it died in Senate because a separate
| took (that also repealed it) took its place but that separate
| bill stalled out.
|
| 174 is so small it can't go through both chambers on its own
| so it needs to get attached a larger bill like OBBA.
|
| It's unfortunate because it appears both sides want this
| repealed to allow immediate amortization of domestic R&D
| expenses.
|
| https://abgi-usa.com/section174/latest-and-greatest
| trhway wrote:
| What i like about US is that compare to other countries (like
| for example Russia where i'm originally from) there is almost
| no lying and cheating here. Instead there is a respect of the
| law and an army of talented creative accountants and lawyers.
| Remember that stale "multi-used" sandwich served with the drink
| which by virtue of its existence converted drinking
| establishment into a food serving restaurant? Not being an
| accountant, i'd just speculate, out of sheer fantasy, that some
| hardware chip/gadget added to your software may similarly
| convert your software development into hardware/gadget one.
| e40 wrote:
| And if the R&D uses foreign workers, because you can't afford
| to pay US wages, then the 5 years goes to 15 years!
|
| This hurts small companies (like mine) that were priced out of
| the US developer market.
| mountainriver wrote:
| This is one of the worst things MAGA has done. Tech startups
| are the source of so much of our wealth, and this makes it very
| challenging to ever build one.
|
| I can't believe this still exists, and no one has changed it.
| We truly are governed by morons
| beezle wrote:
| Bloomstink has a short article on R&D expenses/tax credits as
| does Reuters on some of the back and current history.
|
| But just as an accounting note: R&D expense has nothing to do
| with the company having revenues for an existing product, which
| already is allowed to deduct cost of goods sold, selling and
| admin expense. It is a cost related to future business and in
| that regard, it is not crazy to say it should be amortized. That
| in the past this did not happen, or that accelerated depreciation
| for other assets is in the IRS code is a function of the
| government wanting to effectively subsidize business investment.
|
| https://pro.bloombergtax.com/insights/federal-tax/rd-tax-cre...
|
| https://tax.thomsonreuters.com/news/the-future-of-rd-expensi...
| klipt wrote:
| But most employee salaries are deductible right? If you hire a
| chef at your restaurant, you aren't depreciating their salary.
|
| Doesn't that make software engineers one of the few employees
| with much worse tax treatment?
| ksec wrote:
| I think that is the simplest and best analogy I have read so
| far in the comments.
| luckylion wrote:
| The chef doesn't create a meal once that you can sell for
| the next 10 years though. You pay him for time X, he makes
| a meal, you sell that meal.
|
| That's fundamentally different from regular software
| development outside of agencies where there is no direct
| relationship. Software development is closer to an
| investment than an expense.
|
| Amortization sucks in general, yes, because the money is
| gone and it doesn't affect your taxes to the same amount,
| but that's not different for any company doing
| manufacturing or anyone needing specialized tools or
| vehicles that cost significant amounts.
| cake_robot wrote:
| When someone pays for labor to build an apartment
| building they profit off for decades, do they amortize
| that labor?
| DyslexicAtheist wrote:
| bit of a self-own it seems. Start-ups and early stage companies
| might simply decide to start in a more friendly tax jurisdiction.
| E.g.: Switzerland offers a 135% deduction on R&D-related salaries
| in the year they are incurred, making it an attractive location
| for tech development
|
| EU provides a large pool of experienced developers seeking new
| opportunities on salaries well below SV. Why pay 500K for a burnt
| out "rockstar" who spends more time on twitter than doing actual
| work when you can hire highly skilled people in Eastern-EU (or
| even in Berlin).
|
| Section 174 seems unlikely to progress unless attached to broader
| legislation.
|
| > _" More promising is the Tax Relief for American Families and
| Workers Act of 2024 (H.R. 7024), which proposes restoring
| immediate expensing for U.S.-based R&D investments through the
| end of 2025. "_ --
| https://www.pwc.com/us/en/services/tax/library/tax-committee...
| renewiltord wrote:
| That's a good policy but Switzerland is awful for startups:
| expensive, strict labour laws, few funding opportunities, risk-
| averse customers, fragmented European market.
|
| If I could start anywhere in the World, Switzerland would be
| above all the war-torn and crime-ridden places, but business-
| wise it's no good for a tech startup.
| holtkam2 wrote:
| Honest question, is there a community / grassroots effort I can
| participate in so that this this section 174 change can be
| reverted to its pre-2022 state?
|
| I'm wondering, if such a movement doesn't doesn't exist already,
| do I need to start it myself?
| linkjuice4all wrote:
| - Gather up about 10 million dollars (more will help)
|
| - Bribe the right people
|
| I hate to provide such a cynical and lazy response but we've
| got until midterms (maybe) before you really have a shot at
| 'democratically' influencing the system. For the time being
| you'll have to work with the mafia that's currently running
| things and outbid whoever wanted this to happen in the first
| place.
| entangledqubit wrote:
| From what I understand, this does not actually affect Google.
| They were already amortizing their R and D expenses.
|
| Over long time scales (and big company revenue streams), this is
| sort of a wash. I think this hurts startups a bit more due to the
| long timescales involved which eats up much needed cash in the
| short term.
| wk_end wrote:
| Why is this the first we're hearing about this, three years in?
| The article says these companies blamed other factors for the
| layoffs - why?
| tomrod wrote:
| It's not the first time many have heard about it.
| madaxe_again wrote:
| "We are heavily subsidised by taxpayers" is not great optics.
| anp wrote:
| To head off the likely questions, I downvoted this comment
| because it is a gross misrepresentation of section 174 and
| the changes made to it.
| candiddevmike wrote:
| There were a ton of stories around this in 2022 as a bunch of
| startups scrambled to make ends meet due to this bill taking
| effect.
| wenbin wrote:
| Let me guess - the keyword here is "Section 174", just from the
| title alone :)
|
| Dealing with Section 174 amortization in those first one to three
| years is a real headache (and your tax bill ends up higher than
| if it didn't apply). Once your startup survives that the first
| few years of doing Section 174, things do get easier... but,
| sadly, most don't make it that far.
| silverlight wrote:
| I made one of the original posts on HN about this years ago after
| hearing about it from my CPA. Both then and now these changes
| make zero sense to me as a matter of good policy. I am also still
| surprised at the number of people in tech who either haven't
| heard about this or are willfully ignoring it and likely filing
| their taxes incorrectly.
| e40 wrote:
| It's not only that, ZIRP[1] contributed.
|
| Also, the 10+ years before the layoffs started tech companies
| were on a hiring binge. Much of big tech was hiring to keep
| people off the market and off their competitors payrolls (this is
| from friends of friends in FANG HR departments). These were high
| paying jobs, too.
|
| [1] https://news.ycombinator.com/item?id=44141650
| mountainriver wrote:
| We are at a bad inflection point of Zirp, tax changes, and AI.
|
| All of which make hiring engineers unattractive
| avsteele wrote:
| This is about way more than software. It's all R&D
|
| It's effectively 6 years too. You only get to depreciate 10% in
| 1st year. This might have killed my company if it was around
| during first years.
|
| See my comments on the previous discussion (Nov 2023) here:
| https://news.ycombinator.com/item?id=38145630
| GypsyKing716 wrote:
| Love articles that are 39 pages long with one paragraph and 3 ads
| per page. mmmm.. good journalism.
| bravesoul2 wrote:
| Could this lead to a new financial product that lends money to
| companies to pay this tax secured on the future deductions?
|
| This would be a no go for startups though.
| TrevorFSmith wrote:
| So, we want incredibly profitable companies like Google,
| Microsoft, and Apple to take their software development costs and
| subtract that from their tax bill? These are the same companies
| that file patents so nobody else can use the ideas that they
| developed at the expense of public services. How about making it
| a tax break only for small and medium sized companies?
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