>A handful of these small business owners have bravely spoken to journalists from the Wall Street Journal and CNBC[...]But the vast majority are hesitant to speak to journalists as it might give their competitors free intel or make their employees nervous that they might lose their jobs.
This seems a tad overblown? "brave", "free intel"? Why would we need to hear the same thing from thousands of small businesses? This stuff is all over the industry, but employees are oblivious unless their company is explicitly interviewed?
It's a bad law, but I'm not sure what is interesting about this Tweet.
> Why would we need to hear the same thing from thousands of small businesses
That's how lawmakers prioritize work.
It seems some kind of lobbying organization for early stage companies might be needed - maybe some think tank funded by a couple early stage focused VCs
As an employee, if I hear my CEO/CFO saying how this law makes it hard to employ SWEs, I will be likely to worry about my job.
I pay attention to news coverage and interviews of my company execs, whatever they’re talking about. I don’t pay attention to all other company execs talking about tax law.
I don’t see why software should receive special treatment when 99.99% of software engineers/developers are not in any way engaged in what might be considered genuine scientific research and development, which R&D tax advantages should be reserved for.
> Changes to R&D amortization were a rude surprise to them, as they'd never had to amortize software development before, and didn't think of the work they do as R&D.
Precisely. They didn’t think of their work as R&D because it was not R&D. Frankly, they should have seen this coming.
> These are small businesses we're talking about. Almost all of them make under $10M in annual revenue, and the vast majority are under $2M in revenue.
What about the millions of other small businesses that don’t get special tax treatment? Restaurants, bars, plumbing companies, landscaping companies, accounting firms, etc.? Software engineers are not scientists. At the end of the day, a company is supposed to be able to stand on its own two feet, not rely on government handouts. Allowing otherwise unprofitable businesses to stay in business disincentivizes innovation and efficiency, which harms productivity growth and makes us all poorer in the long run.
I don’t think you understand what they’re discussing.
If you run a plumbing company, make $100K in revenue, pay a plumber $100K, you have no profits, owe no corporate taxes.
If you run a software company, make $100K in revenue, pay a software engineer $100K, section 174, which just went into effect recently, means you now owe taxes on $90K of profit. This is because you must spread dev costs over 5 years, you can’t deduct them in the year they happened.
The code defines that you start with the midpoint of the taxable year, so even though it covers a five year period, it will also cover 6 tax years. Because of that, the first tax year (which was 2022), only 10% can be deducted. Tax years 2 through 5 is 20%. You can deduct the last 10% in the 6th tax year.
>Precisely. They didn’t think of their work as R&D because it was not R&D. Frankly, they should have seen this coming
Don't you have this backwards, or do I?
Software development is now going to be treated as R&D, which means that costs have to be amortized. That's not an tax advantage, it's a disadvantage. All the other businesses you list get to expense their labour costs. But we agree, software dev should not be treated differently.
MasterYoda900 has it backwards. However, my CPA said software engineer salaries are only categorized as R&D before the product is launched. So this only affects new startups pre-launch... if my CPA is correct.
> However, my CPA said software engineer salaries are only categorized as R&D before the product is launched
I wonder how this one will pan out.
Let's say you build out a landing page with a way for folks to input their email address which demonstrates interest in your product. You've released it and people can sign up.
Did it launch? You could make case it did and now you're iterating on the product from here on out. You've launched phase 1 of the product which is probing for demand.
Your CPA might be referring to rules for R&D tax credits, which covers a much, much more narrow scope of business activities. R&D credits cannot offset the impact of the amortization rules.
Any software development costs related to improving the product by providing new features must be amortized. Only clear bug fixes can have costs that are expensable.
This is made extremely clear in the IRS guidance document.
They have it backwards in two ways. Software isn’t Research, but Software Developers are generally doing Development ie improving existing products or developing new ones.
I used to have similar mindset about this like you, but let's read what's an actual definition of R&D:
>Research and development is the set of innovative activities undertaken by corporations or governments in developing new services or products, and improving existing ones.
>R&D activities differ from institution to institution, with two primary models of an R&D department either staffed by engineers and tasked with directly developing new products, or staffed with industrial scientists and tasked with applied research in scientific or technological fields, which may facilitate future product development. R&D differs from the vast majority of corporate activities in that it is not intended to yield immediate profit, and generally carries greater risk and an uncertain return on investment.
and as you see "R&D department either staffed by engineers and tasked with directly developing new products, or staffed with industrial scientists and tasked with applied research in scientific or technological fields, which may facilitate future product development"
> I don’t see why software should receive special treatment when 99.99% of software engineers/developers are not in any way engaged in what might be considered genuine scientific research and development, which R&D tax advantages should be reserved for.
Why? There's a clear relationship between R&D spend and economic growth. This is including R&D spend on non-scientific endeavours like commercial products + processes, which the majority of non-maintenance software work falls into.
Estimates vary, but I've never seen a cost/benefit analysis of unrestricted R&D that finds anything lower than a $2 return for every $1 spent in unrestricted R&D.
>software engineers/developers are not in any way engaged in what might be considered genuine scientific research and development
Have you forgotten the D in R&D? Software engineers are building the product. That’s development.
What do you mean by “genuine scientific research”? I suppose you think ML researchers aren’t doing “genuine science” because they wear hoodies instead of lab coats?
I think the theory is that you can't keep selling the same house each year so you've just developed inventory and not long term assets.
Though, the country where I work and live, R&D has more profitable tax treatment, your employee costs are a same year expense, but you can get some relief on the rest if your tax bill if you proactively document what's R&D about your work and it doesn't get rejected by the tax department
Do your builder developers build the same thing over and over again like builders who build identical houses over?
I get the point but software really is different. Rarely ever are you building the same thing over, both from a “structural” or “architectural” perspective and from a functional perspective.
If your builders are creating a brand new blueprint for every house /structure and designing everything from scratch then I think it’s more similar, probably closer to commercial property builders with large structures.
Now under that perspective, I still don’t exactly understand why you’d treat labor cost deductions differently. Maybe the fact that these more complex products and services being built have higher return potential? I don’t know, I’m searching for a rational reason.
But, I do disagree treating software like something as commodified as many forms of labor. Someday we may get to that point with simple principles and procedures to follow, albeit technically, but we’re not there yet. At higher levels that may not be much “research” that’s needed but where the rubber meets the road, your engineers are checking to see what exists and doesn’t, designing new solutions to fill gaps in between, testing things, digging into previous things that don’t work and trying to fix them… it’s research.
As we continue to move more professions to an intellectual economy, many roles are becoming more and more like this, not just software. I’d say loading more roles and expectations on labor is also creating this situation where we’re asking more people to do more things they don’t know or can’t possibly know everything at a proficient level and the things we’re asking them to do don’t have solutions that can be written down and quickly referenced when needed as a simple recipe to follow. If you make the recipe general enough (e.g if a problem arises, find a solution and fix it at a low cost) then one might point to such highly generalized solutions and pretend it’s a solved problem but it’s not, it lacks any useful concretization. “You're not doing research, I told you ‘if a problem arises fix it’! There’s nothing to research you just do that!” doesn’t cut the muster.
Yes, if your company has builders that build you an asset (like a warehouse or a factory or office building) then you always had to amortise those salaries together with all the other expenses for building that capital asset.
That's not the case if you contract your builders out to build a house for someone else and they pay you for the hours, but IMHO it's also not the case (even with the new changes) for software developers being 'rented' as contractors to build stuff for others and the company getting paid for their hours.
Note that the current tax code implies that all software development requires amoritzation of salaries. This is as far as I can tell internationally quite unique. Usually you can write off all salaries as expenses.
I don't have a fully formed opinion on this aspect of the taxation, but it's pretty evident that this is out of the norm.
You only get taxed on the revenue. So no, if you don't have revenue, you're not paying taxes. But all those businesses CAN deduct their expenses, and only pay taxes on profit.
Software is now in the unique position of being required to pay taxes on revenue instead of profit. If you spent $5M on development and raked in $100k, you'll be taxed on $100k (minus expenses, where the $5M must now be spread over 5 years). Of course, with those numbers, the company might want to spread costs over 5 years anyway (which they could already do).
So really, it's as if the tax code is specifically targeting bootstrapped companies that are reinvesting their profits back into the company. IMHO, the worst possible option of any that could have been chosen to milk software companies. Large established companies can afford it, VC companies were going to amortize anyway.
Yeah, you "eventually" can expense your costs. But that just means that it's a tax grab on the smaller companies that will be put out of business by this move. They pay all the tax this year, go out of business, and never get to reap the profit of the development work.
This is a much better article: basically these companies are paying for the tax cut Republicans gave the to the top bracket in 2017:
> In 2017, then-President, Donald Trump, signed the 2017 Tax Cuts & Jobs act, which overhauled tax codes and reduced tax – for example, it reduced the top tax bracket from 39.6% to 37%. To make the bill pass strict budgetary rules, the Senate used a process called reconciliation: adding in tax code changes that delayed tax increases. These delayed increases “balanced out” the tax reduction.
You're getting down voted for sounding partisan I suspect, but regardless of the politics, you're absolutely right. That bill was a huge change across the US tax system.
Yeah, it’s an election year so even a literal statement of fact is going to be downvoted by some people. Hopefully at some point they’ll have an epiphany about whether they should self-identify with a party so strongly when an accurate descriptions of its actions feels like an attack, but I’m not as optimistic about that as I used to be.
It’s a partisan statement since you only mention the upper tax bracket and not that it also slashed taxes for the lowest one completely and reduced them for basically everyone while making changes to a ton of other things (like child tax credits) as well.
You’re over simplifying and singling out your pet political issue in an effort to sway opinion to your political leaning. If you had just said it was due to those tax cuts you likely wouldn’t have been downvoted.
The reason the author I quoted said that is that most of the cost comes from the top. If we were taking on a couple trillion in extra debt, that seems like a rather minimal benefit to give ⅔ of it to the richest people.
Most of the need for the reconciliation was the cut to the top tax bracket, where most of the the tax revenue comes from (e.g., the top 1% of earners pay 42% of the taxes [0]). So focusing on that bracket seems valid in this context.
This is correct. Since it was basically accounting sleight-of-hand to get a better score from the Congressional Budget Office, they knew this would be disastrous if it took effect, and were widely expected to repeal it before it did. That deal, which also paired fixing it with the child tax credit, fell apart in December 2022.
I think of that every time someone proclaims that some time bomb like that will force the Congress to make a deal. That’s the instinct of a bygone era and I no longer feel safe counting on it.
Yeah… that’s why this is still far from a guarantee, even though it’s a very positive development. This could very well still fall apart like last time.
Everyone, call your Reps and ask them to tell leadership to support the tax deal!
More detail with math here. Lawmakers are discussing delaying these changes for a few years and/or allowing deductions for domestic employees, but all depends on signing a budget, which is never certain.
I hear this a lot and it's difficult to reconcile with my experience. Every US company I've worked at (and that's always been in at-will states) has not made it easy to get rid of people. Even people with woefully bad records of losing money every year and having multiple harassment complaints filed against them were kept for nearly a decade. With one exception (I personally got fired from a tiny startup because I refused to commit timesheet fraud for the CEO), the stories I've heard of the lengths that European companies have to go through to fire someone sound exactly the same to the processes I've seen at all of my employers.
You describe a scenario where management didn't want to fire someone - that's why it was harder. In the U.S. only two things get in the way: A) venial corruption B) worrying about unemployment insurance (that's why HR makes you do paperwork documenting an issue).
In many European countries you have to file a ton of paperwork and justify it: ex. at Google, they're still working through _January 2023_ layoffs because you have to work with the government itself and there isn't a good* financial reason for it
* by European standards. "we need stonk to go up" doesn't fly if you're massively profitable
Ive worked at a lot of different earlier stage software companies in the US and we've always fired very quickly, especially if there was harassment, but also just for low performance. Were you working at bigger companies? (aside from the tiny startup where the ceo wanted you to commit fraud) This hasn't been my experience at all.
> Every US company I've worked at (and that's always been in at-will states) has not made it easy to get rid of people.
That's an internal choice they do, to avoid having a reputation of a company that fires people any second (but then you have companies like netflix which take pride in having that reputation, but make up for it by paying more).
However, it's very different from European companies where these processes are (often) driven by laws. In the US there are no employee protection laws (aside from protected classes) so even if the company has a rigorous internal process, they could at any second override it if someone high up says so and you'll be fired in the blink of an eye.
You are mixing up EU and Switzerland, employment laws are very different (and each EU state has its own, but generally much more protective of employees than Swiss ones).
One of the reasons Google has long term big center in Zurich, if grass would be greener (since cheaper it is) in say Germany or Austria they would build there
> One of the reasons Google has long term big center in Zurich, if grass would be greener (since cheaper it is) in say Germany or Austria they would build there
I don't think Google has an office in Zurich because it's cheap. It's mostly due to a lot of talent available (ETHZ, EFPL, etc).
It's very easy to fire in Switzerland. The notice periods are usually longer than in North America, but everyone having unemployment insurance where they are paid ~80% of their salary for up to 2 years makes is not such a big deal.
Can you say more about unemployment insurance? I haven't heard of this [a us worker] and honestly I also wouldn't mind being more aggressive with my career if I can guarantee ~80% of my income for 2 years should I lose a job.
You have a mandatory deduction on your salary (2.2%, a bit less effectively if you make over 150k). You need to have contributed for at least a year in the past 2 years before you're eligible.
You get 70% of your salary (or 80% if you have children under 25) for two years, capped at 70% (or 80%) of 150k.
There are a lot more exceptions, special cases and so on, but that's the gist of it.
It's state by state and different states have vastly different rules.
Here in Virginia, the max, regardless of how much you made, is $378/wk, for a max of 12 weeks.
You can't claim it if you're also receiving a severance, and you also have to record at least 4 job applications each week, but the documentation required needs to include information like the hiring manager's full contact information, which usually means the company needs to have replied to your application within that week.
I got laid off back at the end of April last year. I got a month of severance, so I couldn't claim UC in May. In June, I was able to do some online sleuthing to figure it out for a few applications out of the dozens I was making in a week, but there were some weeks I wasn't able to scrounge together even 4. I ended up with 2 UC checks for a total of $756 gross (yes, had to pay taxes on it). I don't remember exactly how much, but I do remember I calculated it was less than 20% my original take home pay for a month.
Luckily, by the end of June I had a good line on a job and started in July. I got lucky that we could bridge a month of basically "no" income from me. I can't imagine what it would be like for a single-income family living here in one of the most expensive areas of the country.
It's a kind of a tax - computed from your income. Similar to health insurance (in Europe). There are caveats like "you must be actively looking for a job" and "you weren't fired for an offense".
Not how deductions work. Say 20% corporate tax, a 100% deduction (which is the normal business expense) means you don't pay any tax. A 135% deduction means you'd get to expense 35% more, avoiding those 20% for a "total saving" of 7% compared to a normal expense.
A credit does, but a deduction does not. I'm not sure where the previous commenter is getting this information from, since I can't find any documentation of a 135% tax deduction for R&D in Switzerland anywhere online, but if it is a deduction and not a credit, it means that it just offsets taxes on other income.
You MUST spread it over 15 years, which is brutal for most companies and will mean no longer hiring any foreign R&D or software development contractors.
This isn’t like a loan where the longer the term the smaller the payments. It’s the reverse.
You essentially pay taxes now on income, and can’t deduct costs for 5 or 15 years. So it’s kind of like pre-paying taxes and not getting the money back for 5/15 years. Say that you need to go borrow cash to cover the shortfall. Is it cheaper to borrow money for 5 or 15 years?
As far as I understand it, it’s normal to deduct most all kinds of payroll as an operating expense, and historically that’s included software developers too. The way it was explained to me, the tax man gets his bite when the people receiving the paychecks pay their own income taxes.
The recent changes mean you can still do that for most staff EXCEPT developers, even if the devs are doing operational work instead of work that feels more conventionally like R&D. So you have to come up with a bundle of cash now to pay tax on most of the developers’ salaries, even though they’ll give it back to you over 5-15 years.
Essentially you making a free loan to the government for a decade or whatever, except the money’s probably not free to you.
Of course I can think of situations where the development effort really was more R&D than operational, and the revenue stream matched: the first few years operated at a loss already, and the deductions might have more been useful in 5 years when the revenues were flowing in from a mature product. But I think they might have ways to carry forward losses to future tax years or something to deal with situations like that?
So if you run a McDonalds. Your cash flows is money coming in for finished burgers. Your expenses are workers salaries and to buy meat. Let's say your very simple business summary is:
* Total Revenue: $1,000,000
* Cost of food: -$200,000
* Employee Salary: -$600,000
* (potential profit): $200,000
Assuming you can deduct the cost of food and employee salary to sling your burgers.. you make a 200k profit, and pay taxes on 200k.
But now let's say you can't deduct employee salary. You now pay taxes on $800,000 of income despite only having $200,000 of income. Depending on tax rates etc. you might end up with $0 in your pocket, despite having a successful business.
Now replace McDonalds with bootstrapped startup, food cost with AWS bill, and keep employee cost. This is the real situation many small SaaS or other software companies are currently in.
So this year if I spend $150k on foreign research (which includes ANY software development), and then I also earn $150k in revenue: despite me having $0 in the bank, I will only be able to deduct 1/15 of that, or $10k. In other words, I’ll be taxed as if I made $140k of profit, despite me not having any actual money left over.
You can see how if this was 5 years, then I could deduct 1/5 and I would be taxed on $120k profit, which is still bad, but not nearly as bad.
Just as an aside - as a general accounting principle, no, wages are not always deducted.
The easy example is a car company, like Ford. If they buy a car factory, that is a capital asset, and the cost needs to be amortized over x years. If they decide to instead BUILD a car factory...they still end up with a capital asset, and the costs (including wages) need to be amortized over x years.
In most cases this is what companies want - they'll have revenues over x years and matching costs over x years is generally better for everyone.
I don't think it will stop foreign hiring for R&D, since the cost differential is often greater than the tax obligation would be.
E.g. if you pay $150K for local research, you expense $15K (10%) the first year (and 30K the subsequent year). You pay taxes on $135K of 'profit'. Let's say that's $45K (I have no idea what's realistic here.
Alternately you pay $130K for a dev from Canada, expense $4,333 (1/30) the first year, and pay tax on the remaining 'profit' of $125,666. Even after admin costs you're coming out ahead
My feeling is that an EoR (employer of record) like remote.com might be enough for everyone to be able to avoid R&D capitalization. The research happens in Canada, by a Canadian employee of a Canadian company. You pay an American company for outsourcing human resources. The American company pays the Canadian company for human resources services.
Then again, if you're paying another company for outsourced human resouces, but you have an IP assignment clause as part of that, maybe you would need to claim it as your R&D expense
So far as I can find the last time Congress bothered to pass a budget was 2016 with the prior one in 2010.
The government has been funding itself instead with “continuing resolutions” which pretty much just continue spending as the prior year modulo marginal changes. Incidentally this is why federal deficits have exploded since 2010: the financial crisis “one time” trillion dollar stimulus has been continued every year since.
It was about three months late, but they passed it. This year's is currently at least about four months late, and the federal government is currently operating under a continuing resolution that will expire in March. However, full-year continuing resolutions are rare: the budget bills are usually passed, but passed late.
This change was actually part of the Trump tax cuts in 2017. It was delayed by five years as an accounting trick to make the bill look better at the time: the tax cuts’ projected long-term impact on the deficit didn’t look quite so bad when they tacked on a bunch of tax increases that would take effect in the distant future of 2022 (and with the assumption that this could of course be repealed if Republicans stayed in power).
Why target software companies? I guess because their owners look more like Democratic voters than, say, real estate investors who benefit from massive tax breaks that remain untouchable.
Yeah, the "Coastal liberal elite" is a popular boogeyman. I mean, look at the actual "elites", don't see too many Bernie-bros alongside Musk, Thiel, and the Zuck.
Since this is already hanging around for an entire tax year a lot of companies are 1/5th into that pain. If this does not get changed in the next few months it would not surprise me if this becomes the new norm. Which would also be quite interesting to see how that would play out. Some companies apparently have already been amortizing salaries for a while in anticipation of this (eg: Google). Given that this also greatly punishes outsourcing I would not be surprised if at least that aspect will remain even if some of the rest will be rolled back.
Is it true that they are 1/5th into the pain? What about every new hire? That's the part I don't understand. It seems to discourage companies from increasing their headcount. Also, what happens when an employee leaves after 2 years? The company paid 2 years of salary but expensed only 35% of year 1 and 15% of year 2.
Update: Now thinking about it, it doesn't matter if an employee leaves, since the company will expense their salary portions that they haven't expensed yet in their future tax bills.
You already have such amortizations for a lot of things. In some cases this even gives you possibilities to improve your tax burden. It just means that you cannot deduct it all in one year. If you downsize a company to zero employees you still get to subtract salaries for a few more years against your profits.
It will set different incentives wiring wise and I’m not convinced they are good ones, but from this rule some people will benefit so they might fight the rollback.
Would this cause more intentional hiring? In other words, since everyone's already 1/5th into it this means that anyone who was hired in the last year since all those layoffs was hired intentionally with more of an expectation of betting on them for the longer term.
> Some companies apparently have already been amortizing salaries for a while in anticipation of this (eg: Google)
> Given that this also greatly punishes outsourcing
Anyone help me understand these more? My understanding was that instead of deducting the costs of paying software devs the year it happened, it will be spread over 5 years. Which leads to a bigger tax bill now, and benefits bigger companies with deeper pockets as opposed to smaller businesses which have to raise moneny to pay taxes (or lower costs, potentially lower hiring). This should also push companies towards outsourcing, since not all places have similar laws? Is my understanding wrong?
This applies to all foreign R&D, not just where it is much cheaper… and unless it is many times less expensive, it will not be worth it. Only being able to deduct 1/15th per year is absurd.
If you're not yet profitable it doesn't matter, so you can do this accounting and once you are profitable (in five years) you'll be caught up
What the (possibly temporary) temporary law probably actually does is decrease the incentive to become profitable for the next couple of years (assuming your business is strong and you can raise another round)
Sorry, Im pretty anti-tax, but this is the mature way to run a software business... I remember starting my career and presenting amortization sheets for software R&D and not a single exec giving a shit, whole industry gave up if you ask me.
Please explain then. Because if you spend $2m on an idea, layoff half the company, pivot to a new idea, rehire. You think it's fair on the rest of us you get to write that risk off? This. Is. Why. People. Hate. Tech.
With a startup you're running a search function. The code you hired the developer to write often does stop working because you've been forced to pivot as you search for product-market fit.
If we spend $1M in year one to build a platform, we will surely spend more than $1M in year two maintaining and extending it, and keep doing that until almost the day we finally abandon it. Depreciation might make sense when the actual investment was heavily front-loaded (compared to the revenue) but in our industry it almost never is.
Maybe? What if it was a one time manual test harness? What if it was a migration for a new client that has since quit? There is a pretty wide range of tasks a developer can do.
Pretty much everyone else works on the idea that salaries are operational expenses and not subject to amortization.
I have yet to see any other case of salaries being turned into Capital Expenses (aka something that requires amortization/depreciation). I'd understand if outsourcing (or otherwise contract work) would be treated as something to be amortized, but we're talking SALARIES.
Michele Hansen is doing an incredible job here and should be recognized for it. Latest news was sent yesterday:
Republicans and Democrats finally struck a tax deal that includes a partial fix for Section 174. It includes expanding the Child Tax Credit, a key Democratic priority, with a handful of business tax issues where were Republican priorities...
Not sure if there is a public copy of that email, but the core info is on the site, it has a list of ways to get your representative's attention and a script to follow. Please call.
You should note that these sorts of tax law changes are largely a revenue game: Someone wants to cut some other tax, so they find a place to raise taxes elsewhere without thinking about the consequences. But also, the vast majority of people employed by R&D-heavy companies are Democrats, so it's hard to impute motive one way or the other.
Independent/unaffiliated voters are now 47% of the electorate in the US so that last statement probably doesn't hold water. Are educated voters, regardless of party affiliation, more likely to vote for serious candidates that focus on issue resolution over culture signaling? Sometimes, but that no longer has much to do with party affiliation.
I'd argue that voting predominantly for one party or another doesn't identify the unaffiliated individual as a member of the party who's candidates they vote for. It absolutely doesn't identify the whole unaffiliated voting block as having any secret party affiliation. Telling the whole party system to take a hike is an active choice and it happens in counties that only allow a single political party as often as it happens in countries like the US where there are only really two choices.
I don't think that's the definition usually used for "independent" when talking about voter affiliation. US politics has a long history of people telling pollsters (and filling out voter affiliation info in actual elections) that they aren't affiliated with a specific party because political parties have generally historically been seen pretty negatively in the US. In reality, many of these self-identified "independent" voters have voting records that are heavily skewed (if not straight-ticket) to one party or another. I don't have actual numbers on what % of independents this is (I too am interested in the parent's question on this matter), but it's definitely not a "definitionally, none" answer.
It's was part of the very same tax package and implemented for the same reason: It made the trump tax cuts look economically more reasonable by sticking in time delayed increases on tax burdens that would land on disproportionately on democrats. Yet democrats were unable to undo it because dem platform programs need the funding.
On what basis will it be different here? Dems are almost completely disengaged on the bill intended to fix this, almost all the activity for and against appears to be republicans.
Addicted's confident statement "Even when this fix is passed, it will be voted for unanimously by Democrats" seems misplaced and unlikely. If that were likely we would have seen broad dems support on fixing the SALT tax limits and we just didn't.
A lot of politics consists of quietly creating problems and then loudly coming in with tons of press coverage to solve it later so you look good and get reelected.
I wish there was a good way to prevent such behavior.
The strong bipartisan showing in the House Ways and Means Committee adds more momentum to the proposed changes, which include allowing the immediate expensing of research and development costs.
The challenge at the moment is to get Speaker Johnson to put it on the floor and give him confidence that he has the votes. Critical that everyone contacts their Representative next week to ask them to ask leadership to do so, especially if their Representative is a Republican.
Going on a tangent here, but I always hated this idea of reading off a script to try and lobby politicians. If I were the politician, I would ignore all such communiques as indoctrinated spam.
Totally fair! I provided a script because many people have never contacted Congress before and might not know what to say, so it’s a way to make them more comfortable with the idea. They don’t necessarily have to use it.
Now for tweets, it’s important that each tweet is unique. Otherwise it’s clearly coordinated/automated. But as a casual scroll of Twitter shows, many people hate comfortable expressing themselves through that medium.
Also, I kinda wrote a whole book with scripts (for customer interviewing)… if I didn’t provide scripts, it just wouldn’t be true to my work!
Typically staff answer the phone. They’re making tally marks. If the script tells the staffer what the issue is and the caller’s position so an appropriate tally can be counted, it does the job.
Your comment is completely backwards. Chevron has nothing to do with this.
This was a specific law passed by Congress and the Trump administration to make their massive tax cut for billionaires revenue neutral.
The IRS is implementing the law as passed and has nothing to do with Chevron. It would be the exact same with or without Chevron because this has nothing to do with it.
It’s quite telling that the anti Chevron people have to rely on blatant falsehoods to push their agenda.
Well the “good” thing about this law is that it also classifies ALL software development (and any supporting activities!) as R&D. And yes that’s as absurd as it sounds, but it’s true.
My understanding[0] is that building product was always categorizable as R&D (though it was up to the company to choose to categorize it that way). What was not R&D was operational expenses (production support, etc).
[0] This is based on working at a company that went through a brief period where we had to do extra tracking to be able to capitalize our time if it was possible, and then reading up on the matter to try and understand what the hell the purpose was. Possible I'm wrong about the matter--I've never been the one doing the finances.
Your consultants were helping you get a tax credit for R&D under section 163. That has not changed - not all software development is R&D for section 163 purposes, and you still need to justify why you're classifying software development as R&D for section 163.
What has changed is section 174 - previously all software development could be expensed (without any justification needed) and now it must be capitalized.
This is actually great if true! Maybe companies will finally be incentivized to start fixing their bugs rather than cramming unwanted features and UI re-designs into their software products!
However I doubt they'd leave such an obvious loophole. Surely the IRS's definition of R&D includes all types of software development activity.
It's not an "obvious loophole". They are quite specific about this. New features, new capabilities: R&D, must be amortized. Bug fixes for existing features: expensable.
The gray zone comes when a bug fix actually provides a new feature (e.g. something that wasn't actually usable before).
Am I correct that if this does not get fixed, it's a huge boon for dev agencies as paying them is an immediate expense for the startup, while paying in-house devs is not?
From my reading, that would be an expense directly related to the development of the software, which also must be amortized.
What I haven't figured out is what the Dev agency has to do. They don't own the software being developed. Unless they have in-house libraries they develop...
And how does this work for open source projects that have corporate support to be developed on during company time? If you amortized the "R&D excited" of the developer's salary on the premise that the software will make long-term, recurring income, what does that mean for software that isn't being sold?
My previous job, I was the only software developer, making a tool that employees and customers in the company used together. We didn't sell the software, we sold a service completely unrelated to the software, the software was just a supplement to the service.
> Any accidental policy that disincentivizes R&D is stupid
The problem with section 174 is not that it disincentivizes R&D. These rules were already in place for R&D spending, and were generally welcomed by companies with actual R&D expenditures.
The problem with section 174 is that it essentially forces ALL expenditure on software development to be treated like R&D.
Being formerly in the materials industry at an individual contributor level, I think Asia’s preponderance of materials development firms is less about what the U.S. incentivizes and more about how poor the quality of life is for the engineers compared to what they could be doing. Asian engineers will put up with a lot more B.S. than Americans, and they have low birth rates to show for it.
No, what you linked to there specifically says that "In the case of a taxpayer’s specified research or experimental expenditures for any taxable year", _then_ any software development is classified as R&D for the purpose of requiring capitalization.
I don't see anywhere saying that _any and all software development_ is considered "research or experimental". Ie., if some company pays you to build a piece of software and you hand it over when you're done, you were not engaged in research/experimental expenditures if you paid people to build said software.
> Ie., if some company pays you to build a piece of software and you hand it over when you're done, you were not engaged in research/experimental expenditures if you paid people to build said software.
Then it's your customer's R&D, and they have to amortize their payment to you. If you're doing outsourced software development for SMBs and startups, you might not be directly taxed under this rule, but your customers are, which significantly affects the market for your services.
Absolutely true! It's a burden on our clients for sure, and something I'll be sure to make them aware of before signing on (presuming this section doesn't get unturned in the near future...)
> 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.
The IRS provided incrementally helpful guidance on the types of costs that must be capitalized in September. The capitalization requirements are generally more restrictive than GAAP where only ~30% of costs are capitalized for book purposes at many companies. There are some types of software development that are outside the scope of 174 though such as UI changes that don't add new capabilities.
If this persists, it seems like it’d make sense for many software companies to shift the development and ownership of their software outside of the US, and then pay licensing fees to those overseas subsidiaries for the use of the software, which isn’t taxed as R&D.
Why on earth would someone give up ownership of their product or platform to an overseas subsidiary? The risks of that are massive, especially in a setting that is more prone to conflict as of late. This would increase the risks of losing your IP entirely. If ownership and development move overseas, then you'd be giving what you have away to someone else to entrust them with the entire thing to avoid paying a bit of tax. Software has its own supply chain too, and if you lose your product or platform due to doing this then that's going to be too bad...USA protections means USA presence and USA taxes.
TL;DR: Engaging with decentralized organizations and open-source communities allows access to global talent and diverse perspectives, fostering innovation and resilience. This approach, focusing on collaboration over ownership, offers potential benefits in R&D and innovation, outweighing traditional models that prioritize geographical and IP constraints.
1. Global Talent and Diverse Perspectives: DAOs and open-source projects, by their nature, often operate without geographical boundaries. This allows them to hire and collaborate with talent from all over the world, bringing in diverse perspectives and expertise that can be crucial for R&D and innovation. The traditional model of keeping all operations within a single country might limit access to this global talent pool.
2. Decentralization as a Strength: Decentralized structures can offer resilience and flexibility. In a world where geopolitical tensions and conflicts can disrupt traditional business operations, a decentralized model, with no single point of failure or control, might actually reduce certain risks. Intellectual property, in this case, isn't concentrated in one jurisdiction but is part of a global network, which could mitigate the risk of loss due to regional conflicts or regulatory changes.
3. Innovation and Experimentation: The open-source and DAO model is fundamentally about experimentation and pushing the boundaries of what's possible in technology and organizational structures. By embracing these models, companies can participate in cutting-edge developments and explore new ways of working that might not be possible within the confines of traditional corporate structures.
4. Intellectual Property Considerations: While there are legitimate concerns about IP protection, decentralized and open-source models often operate on a different paradigm regarding IP. The focus is less on ownership and more on collaboration, community, and building upon shared knowledge. In many cases, the value generated isn't from the IP itself but from the community and ecosystem that develops around it.
5. Regulatory and Tax Implications: It's important to acknowledge that regulatory and tax environments are significant considerations. However, for some organizations, the benefits of global collaboration and access to decentralized structures might outweigh the simplicity of operating within a single jurisdiction.
I'm a fan of DAOs for some things, but giving the legal ownership of the IP and the keys to running the entire platform to a subsidiary is not the same conversation as "here's how DAOs work."
We need temporary relief, immediately. But long term, how about we shrink the size of the federal government? Then we don’t have to flog small businesses to death to feed the massively inefficient and wasteful machine!?
These changes came about as part of the Trump administration & Republican efforts to reduce taxation. Because you can't trivially just cut taxes (as was done in 2017) without showing how you will either make up the missing revenue or reduce spending, they threw in a time-deferred measure - the new Section 174 that "demonstrated" how the tax cuts in 2017 would be paid for in the future. It was all sleight of hand, but what's new?
Republicans have been talking about shrinking the size of the federal government for decades. They routinely fail to come up with substantive cuts in spending that would not set off a disaster for them at the polls, or for the country economically, or both.
There is this perception that the federal is full of wasteful spending, but this perception is false (there is waste, it's not a large percentage of the huge overall federal budget). This means that to actually cut the revenue needed will require truly substantive cuts to the services provided and performed by the federal government.
Maybe you could be more successful at proposing what those cuts would be than any Republican has for 50 years, but it seems unlikely.
US voters have consistently rejected such policies for nearly a century, if not longer.
While there are certainly people who believe as you do, you are not in a majority. There are also a lot of people in Argentina (possibly a majority) who don't agree with those policies either.
This is exactly why I decided to not make my single-member, zero employee LLC an S Corp; if I'm paying no salaries, I don't have the Section 174 craziness.
With an S Corp, you have to pay yourself a salary, and if your work is primarily software development, Section 174 might hit you. (IANAL or accountant. Talk to one of them.)
Unfortunately, this doesn’t erase the impact. This applies beyond salaries to all resources used for what 174 considers R&D. Servers, software, the desk chair you sit on to do development —- all have to be amortized under 174.
It also applies to e.g. saas used for software development, which never would be depreciated over time previously. So your paid GitHub account? Amortize it over 5 years.
is extremely clear on this. New features, improvements? All costs must be amortized. You can only expense bug fixes and GUI changes that don't add features.
I've been researching this for another issue. Anyhow, expensing R&D is a perennial political issue. Logically, if you're creating an income-producing asset, then you have to depreciate it over its useful life. The theory is sound, but of course politicians can mess with it, as they do.
But I thought the "useful life" of software was 3 years. No?
You usually want to incentivize R&D, messing with that simple theory is the standard.
Anyway, even that 3 years common knowledge number is biased into long-lived code. Do you spend work time putting out fires? Do you write code that is immediately discovered to be wrong so you have to take more time and fix it? Those 3 years are only for software that already passed through all of that.
(Anyway, I don't have any interest on that fight, I'm just watching from a safe distance.)
> Does "maintenance" on an amortized asset have to be amortized as well?
Usually not. Also, from other comments here, it looks like bug-fixing doesn't count as R&D (anyway, in a development focused company, you'll probably spend more deciding what is or isn't bug-fixing than you'd get from the difference).
Still, there are many more things that make software disappear just after being written. It's actually similar to most of R&D, so it makes little sense to count it the same way as capital investment.
I have said this before and attracted downvotes for it, but here goes.
There are two possible arguments here to try, and I have only ever seen people lobbying against this change use the one, less persuasive argument. That argument is what I will call the "incentives" argument: that change in the rule provides bad incentives against doing R&D. This argument goes along the lines of "this will cost jobs for R&D workers" or "this will reduce the competitiveness of the US." The other possible argument (that I have not seen cited) is that "R&D" work can be operational, and that forcing capitalization of R&D expenses is a bad accounting practice. This Twitter thread only argues the former.
The glaring problem with the incentives argument is that it gives up the point that the ability to operationalize R&D work is a subsidy for technology and software companies. This is equivalent to asking for a subsidy at a time when startups can pull $100 million with no product and other technology companies are reaping record profits. That is not a particularly persuasive argument, and it triggers bad emotional reactions from people. If not for the SBIR companies getting absolutely shafted, the responses to this argument I have seen from non-tech people range from "fuck you" to "deal with it."
The accounting argument is boring and sort of technical, but also a lot harder to argue against and doesn't trigger a negative emotional reaction. All of the people making the rules will understand it, and the IRS could even make the clarification on what is and isn't "R&D" on an accounting basis without an act of congress. They have kind of done this, but have not been pushed nearly far enough.
I (shamefully) have an MBA, and I learned a lot about accounting during that process. Whether basic research ought to be operationalized or capitalized when looking at company valuation was actually a bit of a point of debate, but both sides have strong arguments. What definitely shouldn't be capitalized is "new feature for my existing software" which pretty clearly is capitalized under the current rules.
>the responses to this argument I have seen from non-tech people range from "fuck you" to "deal with it."
Two factors also don't help matters either:
* Most people, which perhaps surprisingly includes most commenters here, don't understand what taxes are levied against or what losses and amortization even are. You can't effectively argue against something you don't understand.
* Of the people who do understand taxes and income/loss sheets, it's only the business owners and accountants who like putting as big a number as possible under losses to reduce net profit and thus taxes owed. The commons rightfully see it as tax avoidance, which unsurprisingly is met with "fuck you".
"tax avoidance" Otherwise known as what every sensible and smart person does because that's not the "governments money".
AKA: "How dare people want to keep their own money and not freely give up larger and larger percentages to ever larger government programs that are inefficient cesspools of mismanagement and corruption".
I'll match people saying "fuck you for wanting to keep your own money" with a fuck you for supporting the destruction of businesses on the notion that it's the governments money in the first place.
Can't you only deduct the mortgage interest? Or are you referring to something else? The mortgage interest deduction turns out to not be very much in practice, in my experience, anyway.
It used to be a bigger deal. Yes, housing prices (in some US geos) have gone up a lot but so have standard deductions and interest rates are still relatively low historically. Absent relatively large charitable donations, big mortgage interest payments, etc., itemizing doesn't make a lot of sense for many people.
Front loading taxes on a new business makes little sense no matter the industry. Long term view is that more taxes are generated from a surviving, healthy business.
For one, companies will be encouraged to classify R&D as operational expenses where they can. This distorts the overall picture of the business’s fundamentals.
It's probably more than that. You have external GAAP, non-GGAP, constant currency vs. non-constant currency metrics, all sorts of internal accounting measures. With larger companies it's complicated. (Smaller companies it's more about cash flow even if they consider taxes as well.)
This is going to wipe out a lot of small businesses, including innovative software dev startups.
Here’s a simplified example of this works: Let’s say you’re a four person software dev startup. Everybody is making, say, $125K to get by. That’s $500K in salary expense which normally you can write off as expenses against revenue/funding. For this example, let’s say somehow you also generated $500K in revenue/funding, i.e. you just broke even.
Currently, you would (of course) owe zero taxes. Under the new tax rules, you couldn’t write off those R&D salaries as expenses, only amortize them over 5 years. That is, your salary expenses for this year is only ~ $100K, and this you made a $400K ‘profit’ (!!) on which you owe taxes ($100K).
Further, R&D is at best a bet, as any of us who has ran a technology business well know. It’s not at all clear one will be able to take the research to market and monetize the R&D investment. Doing that is called founding a successful company.
And if the investment pays off, so that the R&D creates revenue in future years after it's already been paid for, then it will result in actual taxable profit in those future years.
It seems like the IRS is trying to speculatively tax unrealized future profits here, and that's pretty unconscionable.
This is exactly what they are doing. If this scheme sticks, it will reduce R&D investment. It certainly disincentivizes me from investing in such efforts.
We once started a revolution over unfair taxation. I sadly think the same will be necessary to fix the status quo, as system has rotted past the point of meaningful reform.
Allowing the federal government to implement an income tax was one of the most destructive changes to the constitution we've ever made, and it's only gotten worse and worse over the decades. What was originally just supposed to be another tool to generate revenue has become an end in itself at best, an a lever to manipulate society at worst.
On top of that, the necessity of shoehorning everyone's economic activity into prescriptive taxonomies in order to implement this taxation has drastically diminished innovation on the margin, and has created unintended consequences that significantly distort market incentives and diminish our ability to adapt to change, with the situation we're discussing here being a prime example.
I'm worried that you're right; that it's beyond repair, and that we may have to live through a systemic collapse before things can get better.
It is salary, but it goes not into operational expense (that applies directly creating the things you sell right away) but into building a capital asset that helps you generate future revenue and can depreciate over a number of years.
It's just as if you pay the salaries of some construction workers to build you a new factory - those salaries are part of the capital investment for creating that factory (and depreciated as that asset), not your operating expenses.
As a SMB, if your salary expense is $500k and your revenue is $500k, you are absolutely struggling, no matter the tax situation. In this case you "just" need another $100k in revenue. After all, you are throwing out theoretical revenue numbers anyway. So it just moves the needle somewhat for you to still break even. You could game it just a little if there's revenue at end of year that you can book in the following quarter instead -- companies do the reverse of this all the time. Perhaps you can shift some of the expenses as well.
Note that in year 2, you get 20% of the year 2 salary expense, plus 20% from year 1. So the impact is less. By year 5 you are "caught up".
Companies don’t do “this all the time”. In your hypothetical example, you”d have to essentially forge the quarterly 941 reports to shift the salary R&D expenses. Also ‘gaming’ which quarter revenue occurred is technically tax fraud, certainly if one is on an accrual basis. And it doesn’t mean one is ‘caught up’ by year five. Any time a company increases R&D expenditures, it will have an impact.
Have you never bought anything? There is always a push at end of quarter and end of fiscal year, to sign the agreement NOW. so that it can be booked in that quarter. even though delivery won't happen until next ...
incentivized by quota but the incentive is there to get it on the books.
there is no forgery involved.
Yes, of course as you increase spend you increase the impact (in the year that you actually spent), but the context here is specifically very early SMBs, and more so, ones that would only be running break even under previous rules.
This is wrong because you are speaking on an accrual basis but you have to consider cash. The cash (salaries and taxes) is paid out in year 1 regardless of what year you try to book it in your p&l statements
i'm suggesting that as an early startup, in year 1 where this has the most impact (you aren't now bringing in previous years expense), your employees may be flexible enough that you pay out the cash 31 days delayed (example) instead of paying anything in December.
obviously if you pay salary in December, you paid in December and you have to book it that way.
I think I am being fair. The numbers $500k/$500k were picked arbitrarily to demonstrate how it would kill a business. If you were at $500k/$400k you would be similarly dead. "back then", $500k/$500k was enough to stay afloat. Now you "just" need to be at $500k/$600k, that's all. ie, your revenue needs to be somewhat higher (20% I guess? too lazy to math it) to pay the taxes. Assuming the business stays afloat, you'll eventually break even on the taxes, it's not forever lost like paying AMT for stock options that never become liquid, or RSUs that go well underwater before a lockup expires.
It does suck that a quirk in accounting means you were profitable on the books, no question there. But it "just" means you can't run so close to the bone. I don't think it's the world ender everyone is making it out to be. It means you need more operating capital up front.
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[ 0.28 ms ] story [ 329 ms ] threadThis seems a tad overblown? "brave", "free intel"? Why would we need to hear the same thing from thousands of small businesses? This stuff is all over the industry, but employees are oblivious unless their company is explicitly interviewed?
It's a bad law, but I'm not sure what is interesting about this Tweet.
That's how lawmakers prioritize work.
It seems some kind of lobbying organization for early stage companies might be needed - maybe some think tank funded by a couple early stage focused VCs
Disclaimer: I'm retired, so I don't have a dog in this race.
I pay attention to news coverage and interviews of my company execs, whatever they’re talking about. I don’t pay attention to all other company execs talking about tax law.
> Changes to R&D amortization were a rude surprise to them, as they'd never had to amortize software development before, and didn't think of the work they do as R&D.
Precisely. They didn’t think of their work as R&D because it was not R&D. Frankly, they should have seen this coming.
> These are small businesses we're talking about. Almost all of them make under $10M in annual revenue, and the vast majority are under $2M in revenue.
What about the millions of other small businesses that don’t get special tax treatment? Restaurants, bars, plumbing companies, landscaping companies, accounting firms, etc.? Software engineers are not scientists. At the end of the day, a company is supposed to be able to stand on its own two feet, not rely on government handouts. Allowing otherwise unprofitable businesses to stay in business disincentivizes innovation and efficiency, which harms productivity growth and makes us all poorer in the long run.
If you run a plumbing company, make $100K in revenue, pay a plumber $100K, you have no profits, owe no corporate taxes.
If you run a software company, make $100K in revenue, pay a software engineer $100K, section 174, which just went into effect recently, means you now owe taxes on $90K of profit. This is because you must spread dev costs over 5 years, you can’t deduct them in the year they happened.
https://blog.pragmaticengineer.com/section-174/
Don't you have this backwards, or do I?
Software development is now going to be treated as R&D, which means that costs have to be amortized. That's not an tax advantage, it's a disadvantage. All the other businesses you list get to expense their labour costs. But we agree, software dev should not be treated differently.
I wonder how this one will pan out.
Let's say you build out a landing page with a way for folks to input their email address which demonstrates interest in your product. You've released it and people can sign up.
Did it launch? You could make case it did and now you're iterating on the product from here on out. You've launched phase 1 of the product which is probing for demand.
Any software development costs related to improving the product by providing new features must be amortized. Only clear bug fixes can have costs that are expensable.
This is made extremely clear in the IRS guidance document.
>Research and development is the set of innovative activities undertaken by corporations or governments in developing new services or products, and improving existing ones.
>R&D activities differ from institution to institution, with two primary models of an R&D department either staffed by engineers and tasked with directly developing new products, or staffed with industrial scientists and tasked with applied research in scientific or technological fields, which may facilitate future product development. R&D differs from the vast majority of corporate activities in that it is not intended to yield immediate profit, and generally carries greater risk and an uncertain return on investment.
and as you see "R&D department either staffed by engineers and tasked with directly developing new products, or staffed with industrial scientists and tasked with applied research in scientific or technological fields, which may facilitate future product development"
developing new products falls under R&D
Why? There's a clear relationship between R&D spend and economic growth. This is including R&D spend on non-scientific endeavours like commercial products + processes, which the majority of non-maintenance software work falls into.
Estimates vary, but I've never seen a cost/benefit analysis of unrestricted R&D that finds anything lower than a $2 return for every $1 spent in unrestricted R&D.
> The whole thing backwards, he gets.
Not too surprising, I guess.
Have you forgotten the D in R&D? Software engineers are building the product. That’s development.
What do you mean by “genuine scientific research”? I suppose you think ML researchers aren’t doing “genuine science” because they wear hoodies instead of lab coats?
My programmers build software.
Should builders building a house amortise their development work?
Though, the country where I work and live, R&D has more profitable tax treatment, your employee costs are a same year expense, but you can get some relief on the rest if your tax bill if you proactively document what's R&D about your work and it doesn't get rejected by the tax department
I get the point but software really is different. Rarely ever are you building the same thing over, both from a “structural” or “architectural” perspective and from a functional perspective.
If your builders are creating a brand new blueprint for every house /structure and designing everything from scratch then I think it’s more similar, probably closer to commercial property builders with large structures.
Now under that perspective, I still don’t exactly understand why you’d treat labor cost deductions differently. Maybe the fact that these more complex products and services being built have higher return potential? I don’t know, I’m searching for a rational reason.
But, I do disagree treating software like something as commodified as many forms of labor. Someday we may get to that point with simple principles and procedures to follow, albeit technically, but we’re not there yet. At higher levels that may not be much “research” that’s needed but where the rubber meets the road, your engineers are checking to see what exists and doesn’t, designing new solutions to fill gaps in between, testing things, digging into previous things that don’t work and trying to fix them… it’s research.
As we continue to move more professions to an intellectual economy, many roles are becoming more and more like this, not just software. I’d say loading more roles and expectations on labor is also creating this situation where we’re asking more people to do more things they don’t know or can’t possibly know everything at a proficient level and the things we’re asking them to do don’t have solutions that can be written down and quickly referenced when needed as a simple recipe to follow. If you make the recipe general enough (e.g if a problem arises, find a solution and fix it at a low cost) then one might point to such highly generalized solutions and pretend it’s a solved problem but it’s not, it lacks any useful concretization. “You're not doing research, I told you ‘if a problem arises fix it’! There’s nothing to research you just do that!” doesn’t cut the muster.
That's not the case if you contract your builders out to build a house for someone else and they pay you for the hours, but IMHO it's also not the case (even with the new changes) for software developers being 'rented' as contractors to build stuff for others and the company getting paid for their hours.
I don't have a fully formed opinion on this aspect of the taxation, but it's pretty evident that this is out of the norm.
Do any of those businesses owe taxes before they've collected their first cent of revenue? That is the situation a software startup is now looking at.
Software is now in the unique position of being required to pay taxes on revenue instead of profit. If you spent $5M on development and raked in $100k, you'll be taxed on $100k (minus expenses, where the $5M must now be spread over 5 years). Of course, with those numbers, the company might want to spread costs over 5 years anyway (which they could already do).
So really, it's as if the tax code is specifically targeting bootstrapped companies that are reinvesting their profits back into the company. IMHO, the worst possible option of any that could have been chosen to milk software companies. Large established companies can afford it, VC companies were going to amortize anyway.
Yeah, you "eventually" can expense your costs. But that just means that it's a tax grab on the smaller companies that will be put out of business by this move. They pay all the tax this year, go out of business, and never get to reap the profit of the development work.
Then why not provide some links, it isn't secret then?
Why wouldn't people be able to talk about it.
What is brave about discussing a tax policy? There was not context given about what it is, what is is causing.
> In 2017, then-President, Donald Trump, signed the 2017 Tax Cuts & Jobs act, which overhauled tax codes and reduced tax – for example, it reduced the top tax bracket from 39.6% to 37%. To make the bill pass strict budgetary rules, the Senate used a process called reconciliation: adding in tax code changes that delayed tax increases. These delayed increases “balanced out” the tax reduction.
https://newsletter.pragmaticengineer.com/p/the-pulse-75
You’re over simplifying and singling out your pet political issue in an effort to sway opinion to your political leaning. If you had just said it was due to those tax cuts you likely wouldn’t have been downvoted.
https://www.taxpolicycenter.org/publications/distributional-...
[0] https://taxfoundation.org/data/all/federal/summary-latest-fe...
Everyone, call your Reps and ask them to tell leadership to support the tax deal!
https://blog.pragmaticengineer.com/section-174/
>> lots of devs in Switzerland starts to make a lot more sense, especially now.
This seems contradictory.
In many European countries you have to file a ton of paperwork and justify it: ex. at Google, they're still working through _January 2023_ layoffs because you have to work with the government itself and there isn't a good* financial reason for it
* by European standards. "we need stonk to go up" doesn't fly if you're massively profitable
That's an internal choice they do, to avoid having a reputation of a company that fires people any second (but then you have companies like netflix which take pride in having that reputation, but make up for it by paying more).
However, it's very different from European companies where these processes are (often) driven by laws. In the US there are no employee protection laws (aside from protected classes) so even if the company has a rigorous internal process, they could at any second override it if someone high up says so and you'll be fired in the blink of an eye.
One of the reasons Google has long term big center in Zurich, if grass would be greener (since cheaper it is) in say Germany or Austria they would build there
I don't think Google has an office in Zurich because it's cheap. It's mostly due to a lot of talent available (ETHZ, EFPL, etc).
You get 70% of your salary (or 80% if you have children under 25) for two years, capped at 70% (or 80%) of 150k.
There are a lot more exceptions, special cases and so on, but that's the gist of it.
Here in Virginia, the max, regardless of how much you made, is $378/wk, for a max of 12 weeks.
You can't claim it if you're also receiving a severance, and you also have to record at least 4 job applications each week, but the documentation required needs to include information like the hiring manager's full contact information, which usually means the company needs to have replied to your application within that week.
I got laid off back at the end of April last year. I got a month of severance, so I couldn't claim UC in May. In June, I was able to do some online sleuthing to figure it out for a few applications out of the dozens I was making in a week, but there were some weeks I wasn't able to scrounge together even 4. I ended up with 2 UC checks for a total of $756 gross (yes, had to pay taxes on it). I don't remember exactly how much, but I do remember I calculated it was less than 20% my original take home pay for a month.
Luckily, by the end of June I had a good line on a job and started in July. I got lucky that we could bridge a month of basically "no" income from me. I can't imagine what it would be like for a single-income family living here in one of the most expensive areas of the country.
That's a big problem for US based tech companies
It sounds like they're just taxing you less, not paying you anything.
>These costs have to be capitalized and amortized over 5 years – or 15 if labor is done outside of the US.
I’m not an accountant so maybe I’m reading that wrong, but if so that’s insane.
You essentially pay taxes now on income, and can’t deduct costs for 5 or 15 years. So it’s kind of like pre-paying taxes and not getting the money back for 5/15 years. Say that you need to go borrow cash to cover the shortfall. Is it cheaper to borrow money for 5 or 15 years?
If my business makes 400k/year, but I pay a contractor 100k during that year, my effective income is reduced by 100k.
The recent changes mean you can still do that for most staff EXCEPT developers, even if the devs are doing operational work instead of work that feels more conventionally like R&D. So you have to come up with a bundle of cash now to pay tax on most of the developers’ salaries, even though they’ll give it back to you over 5-15 years.
Essentially you making a free loan to the government for a decade or whatever, except the money’s probably not free to you.
Of course I can think of situations where the development effort really was more R&D than operational, and the revenue stream matched: the first few years operated at a loss already, and the deductions might have more been useful in 5 years when the revenues were flowing in from a mature product. But I think they might have ways to carry forward losses to future tax years or something to deal with situations like that?
Because it is an expense maybe?
* Total Revenue: $1,000,000
* Cost of food: -$200,000
* Employee Salary: -$600,000
* (potential profit): $200,000
Assuming you can deduct the cost of food and employee salary to sling your burgers.. you make a 200k profit, and pay taxes on 200k.
But now let's say you can't deduct employee salary. You now pay taxes on $800,000 of income despite only having $200,000 of income. Depending on tax rates etc. you might end up with $0 in your pocket, despite having a successful business.
Now replace McDonalds with bootstrapped startup, food cost with AWS bill, and keep employee cost. This is the real situation many small SaaS or other software companies are currently in.
You can see how if this was 5 years, then I could deduct 1/5 and I would be taxed on $120k profit, which is still bad, but not nearly as bad.
The easy example is a car company, like Ford. If they buy a car factory, that is a capital asset, and the cost needs to be amortized over x years. If they decide to instead BUILD a car factory...they still end up with a capital asset, and the costs (including wages) need to be amortized over x years.
In most cases this is what companies want - they'll have revenues over x years and matching costs over x years is generally better for everyone.
E.g. if you pay $150K for local research, you expense $15K (10%) the first year (and 30K the subsequent year). You pay taxes on $135K of 'profit'. Let's say that's $45K (I have no idea what's realistic here.
Alternately you pay $130K for a dev from Canada, expense $4,333 (1/30) the first year, and pay tax on the remaining 'profit' of $125,666. Even after admin costs you're coming out ahead
This way, all the R&D expenses are happening in Canada.
My feeling is that an EoR (employer of record) like remote.com might be enough for everyone to be able to avoid R&D capitalization. The research happens in Canada, by a Canadian employee of a Canadian company. You pay an American company for outsourcing human resources. The American company pays the Canadian company for human resources services.
Then again, if you're paying another company for outsourced human resouces, but you have an IP assignment clause as part of that, maybe you would need to claim it as your R&D expense
The government has been funding itself instead with “continuing resolutions” which pretty much just continue spending as the prior year modulo marginal changes. Incidentally this is why federal deficits have exploded since 2010: the financial crisis “one time” trillion dollar stimulus has been continued every year since.
The last time Congress passed a budget was for last fiscal year (FY 2023):
https://www.congress.gov/bill/117th-congress/house-bill/2617
It was about three months late, but they passed it. This year's is currently at least about four months late, and the federal government is currently operating under a continuing resolution that will expire in March. However, full-year continuing resolutions are rare: the budget bills are usually passed, but passed late.
https://twitter.com/GergelyOrosz/status/1735030983173230944
https://newsletter.pragmaticengineer.com/p/the-pulse-75
https://www.theregister.com/2024/01/12/us_tax_research/
This change was actually part of the Trump tax cuts in 2017. It was delayed by five years as an accounting trick to make the bill look better at the time: the tax cuts’ projected long-term impact on the deficit didn’t look quite so bad when they tacked on a bunch of tax increases that would take effect in the distant future of 2022 (and with the assumption that this could of course be repealed if Republicans stayed in power).
Why target software companies? I guess because their owners look more like Democratic voters than, say, real estate investors who benefit from massive tax breaks that remain untouchable.
Update: Now thinking about it, it doesn't matter if an employee leaves, since the company will expense their salary portions that they haven't expensed yet in their future tax bills.
It will set different incentives wiring wise and I’m not convinced they are good ones, but from this rule some people will benefit so they might fight the rollback.
> Given that this also greatly punishes outsourcing
Anyone help me understand these more? My understanding was that instead of deducting the costs of paying software devs the year it happened, it will be spread over 5 years. Which leads to a bigger tax bill now, and benefits bigger companies with deeper pockets as opposed to smaller businesses which have to raise moneny to pay taxes (or lower costs, potentially lower hiring). This should also push companies towards outsourcing, since not all places have similar laws? Is my understanding wrong?
What the (possibly temporary) temporary law probably actually does is decrease the incentive to become profitable for the next couple of years (assuming your business is strong and you can raise another round)
Does a developer keep doing work for me after he quits/dies?
I think that might have a lot of unintended side-effects.
I have yet to see any other case of salaries being turned into Capital Expenses (aka something that requires amortization/depreciation). I'd understand if outsourcing (or otherwise contract work) would be treated as something to be amortized, but we're talking SALARIES.
https://ssballiance.org/
Michele Hansen is doing an incredible job here and should be recognized for it. Latest news was sent yesterday:
Republicans and Democrats finally struck a tax deal that includes a partial fix for Section 174. It includes expanding the Child Tax Credit, a key Democratic priority, with a handful of business tax issues where were Republican priorities...
Not sure if there is a public copy of that email, but the core info is on the site, it has a list of ways to get your representative's attention and a script to follow. Please call.
That’s a bit too “must make it seem bipartisan” when there is a clear partisan direction.
Even when this fix is passed, it will be voted for unanimously by Democrats and only a small fraction of Republicans will vote for it.
Explain again to me how that makes it a Republican priority as opposed to a priority of the endangered species that is the Pro Business Republicans?
Like the unanimous democrat vote to repeal the SALT limits that overwhelming impacts people in California and NY?
On what basis will it be different here? Dems are almost completely disengaged on the bill intended to fix this, almost all the activity for and against appears to be republicans.
Addicted's confident statement "Even when this fix is passed, it will be voted for unanimously by Democrats" seems misplaced and unlikely. If that were likely we would have seen broad dems support on fixing the SALT tax limits and we just didn't.
I wish there was a good way to prevent such behavior.
https://www.cnbc.com/2024/01/19/bipartisan-tax-bill-clears-k...
The strong bipartisan showing in the House Ways and Means Committee adds more momentum to the proposed changes, which include allowing the immediate expensing of research and development costs.
Going on a tangent here, but I always hated this idea of reading off a script to try and lobby politicians. If I were the politician, I would ignore all such communiques as indoctrinated spam.
Now for tweets, it’s important that each tweet is unique. Otherwise it’s clearly coordinated/automated. But as a casual scroll of Twitter shows, many people hate comfortable expressing themselves through that medium.
Also, I kinda wrote a whole book with scripts (for customer interviewing)… if I didn’t provide scripts, it just wouldn’t be true to my work!
It moves the calculus of measuring sentiment from a fuzzy game of figuring out how to classify opinion to one with very clear quanta.
This was a specific law passed by Congress and the Trump administration to make their massive tax cut for billionaires revenue neutral.
The IRS is implementing the law as passed and has nothing to do with Chevron. It would be the exact same with or without Chevron because this has nothing to do with it.
It’s quite telling that the anti Chevron people have to rely on blatant falsehoods to push their agenda.
If a programmer is building an app that isn't yet offered as a product, is that R&D?
If a programmer is maintaining an app that is offered as a product, is that NOT R&D?
It was always a sham. We were building product.
[0] This is based on working at a company that went through a brief period where we had to do extra tracking to be able to capitalize our time if it was possible, and then reading up on the matter to try and understand what the hell the purpose was. Possible I'm wrong about the matter--I've never been the one doing the finances.
What has changed is section 174 - previously all software development could be expensed (without any justification needed) and now it must be capitalized.
Bug fixing, for example, is not covered by Section 174.
tldr: if they're developing new features, it has to be capitalized; if they're doing maintenance then it can be immediately expensed
However I doubt they'd leave such an obvious loophole. Surely the IRS's definition of R&D includes all types of software development activity.
I literally just linked to the IRS' definition that says not all software development activity is included.
The gray zone comes when a bug fix actually provides a new feature (e.g. something that wasn't actually usable before).
What I haven't figured out is what the Dev agency has to do. They don't own the software being developed. Unless they have in-house libraries they develop...
And how does this work for open source projects that have corporate support to be developed on during company time? If you amortized the "R&D excited" of the developer's salary on the premise that the software will make long-term, recurring income, what does that mean for software that isn't being sold?
My previous job, I was the only software developer, making a tool that employees and customers in the company used together. We didn't sell the software, we sold a service completely unrelated to the software, the software was just a supplement to the service.
Major materials innovations are discovered here, but the only nations that want to actually invest and build upon them are currently in Asia.
The argument was that the US wants to transition away from building things towards building software which is more profitable, and then this...
This is what happens when a monoculture of business/law/finance-thinking takes over political leadership.
The problem with section 174 is not that it disincentivizes R&D. These rules were already in place for R&D spending, and were generally welcomed by companies with actual R&D expenditures.
The problem with section 174 is that it essentially forces ALL expenditure on software development to be treated like R&D.
This is regardless of whether you classify the costs as R&D for the purpose of claiming a tax credit under Section 163.
I don't see anywhere saying that _any and all software development_ is considered "research or experimental". Ie., if some company pays you to build a piece of software and you hand it over when you're done, you were not engaged in research/experimental expenditures if you paid people to build said software.
Then it's your customer's R&D, and they have to amortize their payment to you. If you're doing outsourced software development for SMBs and startups, you might not be directly taxed under this rule, but your customers are, which significantly affects the market for your services.
> 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.
> (a)In general > In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—
So if you are not doing "research or experimental expenditures", all of the specifications in this section do not apply to you.
https://www.irs.gov/pub/irs-drop/n-23-63.pdf
1. Global Talent and Diverse Perspectives: DAOs and open-source projects, by their nature, often operate without geographical boundaries. This allows them to hire and collaborate with talent from all over the world, bringing in diverse perspectives and expertise that can be crucial for R&D and innovation. The traditional model of keeping all operations within a single country might limit access to this global talent pool.
2. Decentralization as a Strength: Decentralized structures can offer resilience and flexibility. In a world where geopolitical tensions and conflicts can disrupt traditional business operations, a decentralized model, with no single point of failure or control, might actually reduce certain risks. Intellectual property, in this case, isn't concentrated in one jurisdiction but is part of a global network, which could mitigate the risk of loss due to regional conflicts or regulatory changes.
3. Innovation and Experimentation: The open-source and DAO model is fundamentally about experimentation and pushing the boundaries of what's possible in technology and organizational structures. By embracing these models, companies can participate in cutting-edge developments and explore new ways of working that might not be possible within the confines of traditional corporate structures.
4. Intellectual Property Considerations: While there are legitimate concerns about IP protection, decentralized and open-source models often operate on a different paradigm regarding IP. The focus is less on ownership and more on collaboration, community, and building upon shared knowledge. In many cases, the value generated isn't from the IP itself but from the community and ecosystem that develops around it.
5. Regulatory and Tax Implications: It's important to acknowledge that regulatory and tax environments are significant considerations. However, for some organizations, the benefits of global collaboration and access to decentralized structures might outweigh the simplicity of operating within a single jurisdiction.
example/ Optimism $100 Million for Developers - Announcing RetroPGF Round 3 Recipients https://optimism.mirror.xyz/37Bgum6MfTJWDuE41CH9RXSH5KBm_RCL...
Republicans have been talking about shrinking the size of the federal government for decades. They routinely fail to come up with substantive cuts in spending that would not set off a disaster for them at the polls, or for the country economically, or both.
There is this perception that the federal is full of wasteful spending, but this perception is false (there is waste, it's not a large percentage of the huge overall federal budget). This means that to actually cut the revenue needed will require truly substantive cuts to the services provided and performed by the federal government.
Maybe you could be more successful at proposing what those cuts would be than any Republican has for 50 years, but it seems unlikely.
While there are certainly people who believe as you do, you are not in a majority. There are also a lot of people in Argentina (possibly a majority) who don't agree with those policies either.
With an S Corp, you have to pay yourself a salary, and if your work is primarily software development, Section 174 might hit you. (IANAL or accountant. Talk to one of them.)
It also applies to e.g. saas used for software development, which never would be depreciated over time previously. So your paid GitHub account? Amortize it over 5 years.
Or- sure we launched the platform and that was R&D but now we're just doing data entry.
https://www.irs.gov/pub/irs-drop/n-23-63.pdf
is extremely clear on this. New features, improvements? All costs must be amortized. You can only expense bug fixes and GUI changes that don't add features.
But I thought the "useful life" of software was 3 years. No?
Anyway, even that 3 years common knowledge number is biased into long-lived code. Do you spend work time putting out fires? Do you write code that is immediately discovered to be wrong so you have to take more time and fix it? Those 3 years are only for software that already passed through all of that.
(Anyway, I don't have any interest on that fight, I'm just watching from a safe distance.)
I don't have a dog in this fight either. Does "maintenance" on an amortized asset have to be amortized as well? Don't know.
Usually not. Also, from other comments here, it looks like bug-fixing doesn't count as R&D (anyway, in a development focused company, you'll probably spend more deciding what is or isn't bug-fixing than you'd get from the difference).
Still, there are many more things that make software disappear just after being written. It's actually similar to most of R&D, so it makes little sense to count it the same way as capital investment.
There are two possible arguments here to try, and I have only ever seen people lobbying against this change use the one, less persuasive argument. That argument is what I will call the "incentives" argument: that change in the rule provides bad incentives against doing R&D. This argument goes along the lines of "this will cost jobs for R&D workers" or "this will reduce the competitiveness of the US." The other possible argument (that I have not seen cited) is that "R&D" work can be operational, and that forcing capitalization of R&D expenses is a bad accounting practice. This Twitter thread only argues the former.
The glaring problem with the incentives argument is that it gives up the point that the ability to operationalize R&D work is a subsidy for technology and software companies. This is equivalent to asking for a subsidy at a time when startups can pull $100 million with no product and other technology companies are reaping record profits. That is not a particularly persuasive argument, and it triggers bad emotional reactions from people. If not for the SBIR companies getting absolutely shafted, the responses to this argument I have seen from non-tech people range from "fuck you" to "deal with it."
The accounting argument is boring and sort of technical, but also a lot harder to argue against and doesn't trigger a negative emotional reaction. All of the people making the rules will understand it, and the IRS could even make the clarification on what is and isn't "R&D" on an accounting basis without an act of congress. They have kind of done this, but have not been pushed nearly far enough.
Two factors also don't help matters either:
* Most people, which perhaps surprisingly includes most commenters here, don't understand what taxes are levied against or what losses and amortization even are. You can't effectively argue against something you don't understand.
* Of the people who do understand taxes and income/loss sheets, it's only the business owners and accountants who like putting as big a number as possible under losses to reduce net profit and thus taxes owed. The commons rightfully see it as tax avoidance, which unsurprisingly is met with "fuck you".
AKA: "How dare people want to keep their own money and not freely give up larger and larger percentages to ever larger government programs that are inefficient cesspools of mismanagement and corruption".
I'll match people saying "fuck you for wanting to keep your own money" with a fuck you for supporting the destruction of businesses on the notion that it's the governments money in the first place.
I don't know enough accounting to figure it out for myself.
After all, the IRS doesn't use GAAP.
Here’s a simplified example of this works: Let’s say you’re a four person software dev startup. Everybody is making, say, $125K to get by. That’s $500K in salary expense which normally you can write off as expenses against revenue/funding. For this example, let’s say somehow you also generated $500K in revenue/funding, i.e. you just broke even.
Currently, you would (of course) owe zero taxes. Under the new tax rules, you couldn’t write off those R&D salaries as expenses, only amortize them over 5 years. That is, your salary expenses for this year is only ~ $100K, and this you made a $400K ‘profit’ (!!) on which you owe taxes ($100K).
In terms of tax, should we average out these expense over the years?
These can have huge difference because how complex our tax and accounting rules are.
It seems like the IRS is trying to speculatively tax unrealized future profits here, and that's pretty unconscionable.
We once started a revolution over unfair taxation. I sadly think the same will be necessary to fix the status quo, as system has rotted past the point of meaningful reform.
On top of that, the necessity of shoehorning everyone's economic activity into prescriptive taxonomies in order to implement this taxation has drastically diminished innovation on the margin, and has created unintended consequences that significantly distort market incentives and diminish our ability to adapt to change, with the situation we're discussing here being a prime example.
I'm worried that you're right; that it's beyond repair, and that we may have to live through a systemic collapse before things can get better.
It's just as if you pay the salaries of some construction workers to build you a new factory - those salaries are part of the capital investment for creating that factory (and depreciated as that asset), not your operating expenses.
Note that in year 2, you get 20% of the year 2 salary expense, plus 20% from year 1. So the impact is less. By year 5 you are "caught up".
Indeed the first years are harder.
incentivized by quota but the incentive is there to get it on the books.
there is no forgery involved.
Yes, of course as you increase spend you increase the impact (in the year that you actually spent), but the context here is specifically very early SMBs, and more so, ones that would only be running break even under previous rules.
obviously if you pay salary in December, you paid in December and you have to book it that way.
It doesn't matter if $500k/$500k is good or bad. They're only numbers that simplify the point without misrepresenting the situation.
It does suck that a quirk in accounting means you were profitable on the books, no question there. But it "just" means you can't run so close to the bone. I don't think it's the world ender everyone is making it out to be. It means you need more operating capital up front.