Comment by majormajor | Hacker News Reader

Comment by majormajor | Hacker News Reader

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I would assume you aren't laying off your whole staff after year 1, so the comparison if costs stay the same seems like this instead?

Old:

Year 1: 0 Profit

Year 2: 0 Profit

Year 3: 0 Profit

Year 4: 0 Profit

Year 5: 0 Profit

New:

Year 1: 800K Profit

Year 2: 600K Profit

Year 3: 400K Profit

Year 4: 200K Profit

Year 5: 0 Profit

E.g. stack another amortized round of annual salary each time.

Even if revenue stays the same but costs increase, your Year 5 total for each is "X Profit" where X is the amount of revenue delta from Year 1 to Year 5?

If rapid hiring growth followed by layoff scenarios, you are worse off here: you pay the tax on the hiring boom for at least the first year or two before your revenue might drop enough to make it not matter?

If you're further away from profitability, it's maybe still a wash.

Hire up to 10 Million in salaries in 1 year, but your revenue after 2 years is just 4M - you're still under the window. You only get hit by the difference in the bill if your revenue accelerates a lot (which is an OK problem to have)?

So on one hand it seems like it could reduce poorly planned impulse hiring by spreading out the costs, but on the other hand the "run big losses until we make it" plan is less affected anyway because of the "big" in "run big losses"... so it seems to hurt the sustainable folks more in that case.

The flipside is that that 5-year amortization continues even if you did fire everyone, right? Because the costs already happened. So if we consider forward from year 5 of your example, with everyone being fired at year 5:

Old:

Year 6: 1000K profit

Year 7: 1000K profit

Year 8: 1000K profit

Year 9: 1000K profit

Year 10: 1000K profit

New:

Year 6: 200K profit (End of year 1 amortization)

Year 7: 400K profit (End of year 2 amortization)

Year 8: 600K profit (End of year 3 amortization)

Year 9: 800K profit (End of year 4 amortization)

Year 10: 1000K profit (End of year 5 amortization)

Of course this "wind-down" period is unhelpful if you're actually shuttering the business...

You didn't generate an additional $1m in revenue in years 2-5. So in a situation where you get paid a $1m contract once, and pay $1m in salaries every year, here's what happens.

Year 2022: $1m revenue, -$1m expenses amortized to $200k: $800k profit, approximately 20% ($160k) is paid to tax.

Year 2023: -$1m expenses amortized to $200k, previous year's $200k: -$400k loss, carryforward. You cannot carryback 2023 losses to 2022 taxes.

The carryback is how Congress will resolve the issue for people who paid the tax.

The dispute is that you paid $160k in tax in year 1. Is that inefficient? In my opinion, it is. You paid $1m in salaries!

Is a business that generates 1M revenue off of 1M salary for one year, and then nothing for 4 years, worth discussing here?

In markets like game development it's not uncommon to have one big release that generates a lot of revenue in one year, and then not release anything for a couple years and have minimal revenue as a result while you keep paying salaries. Carryforward won't help you in that case. Without this stupid amortization you could at least write off a full year's salaries against your launch income.

In a reasonable world where you can depreciate your assets over their expected lifespans rather than a fixed 5 or 15 years, video game dev would probably actually be fine with capitalization. A SaaS startup that fails fast still gets really screwed in that more reasonable world.

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