Ask HN: How to write off software development cost on taxes

Business owners generally cannot count their own time spent on their business as a business expense. Software here is no different than a restaurant owner trying to write off the time it takes him/her to develop a menu, negotiate with suppliers, or manage employees: not allowed. It's assumed that as a business owner, spending your time on the business is what you do, much like as an employee, spending your time on your job is what you do; an employee cannot write off "time spent on my job" from their taxes, and you can't write off "time spent on my business".

One possibility, however, is to pay yourself a salary. Then from the business side, you could write off the salary as a business expense. But now you will pay personal income taxes on the salary. Also, you cannot do this if you're a sole proprietor, and even if you're incorporated, should probably consult with an accountant and/or lawyer to make sure it's legit in your case.

Talk to an accountant. There is an R&D tax credit in the US which substantially every software business is eligible for. However, the amount of paperwork required to qualify for it and rigorously document how you arrived at the number you quote the IRS doesn't make sense until you're closer to a Fog Creek or 37Signals than to a sole proprietor.

A different option is to use the time you've spent on the project as part of the basis for the IP you're developing, and claim a non-zero basis when you sell, thus reducing the amount of capital gains taxes you have to pay versus having a cost basis of $0. Again, this gets heady quickly: talk to an accountant.

Personally, at my scales, I find it easier to bill clients $10 than to decrease my tax burden by $1.