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