Really perceptive comment.
Until 2022, companies had the choice between expensing and amortizing software development under Section 174. (Section 174 specifically calls out all software development as falling under that section.) So they would only time track when they wanted to get the R&D tax credit, which only covers a portion of software development activities. R&D tax credit software development is a much narrower scope than R&E software development. So it didn't matter until now.
Seems pretty obvious to me that the section only applies to what is claimed as R&E. Software development doesn’t have to be claimed as R&E, but if it is, now it unambiguously qualifies.
Nothing forces you to classify engineering salaries or even contract expenses under the provisions of section 174 which describe “research and experimental expenditure”. There are some reasons historically why people elected to do that, but that may be a bad idea moving forward and honestly seems rather dishonest to me. No, your Jira clone is not “research and experimental expenditure”, it’s just a fucking database with a UI… just like 97% of all other startups. It’s more like: if you can use section 174 because you spun up a project to research curing diabetes with nano bots, then your software development allocated towards the project also counts as R&E, cheers.
Repeat after me: “my core business is not a research and experimental expenditure, it’s just a normal mundane boring operating expense”.
" “specified research or experimental expenditures” means, with respect to any taxable year, research or experimental expenditures which are paid or incurred by the taxpayer during such taxable year in connection with the taxpayer’s trade or business."
and
"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."
And yet that's the letter of the law. R&D expenses must be amortized over 5 years. Software development must be counted as R&D.
There is no consideration in the law as written for categorizing software development differently.
That's the reason this whole scenario is a problem in the first place.
It says “For the purposes of this section…”, so it doesn’t apply if you’re not claiming R&E credit.
> 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.
Where "this section" is "§174. Amortization of research and experimental expenditures"
Tax credit is separate from amortization afaict.
Yes, if some of your expenditure falls under R&E, then you use section 174 which says any portion thereof involving software development must be amortized.
What’s described is a cause and effect relationship, not a global mutation of all expenses.
> Where does it say that all your business expenditure must be considered R&E and consequently are subject to the provisions of section 174?
It doesn't, and neither did I. It states that all software development is seen as R&E
> Yes, if some of your expenditure falls under R&E, then you use section 174 which says any portion thereof involving software development must be amortized.
> What’s described is a cause and effect relationship, not a global mutation of all expenses.
That's not how I interpret it. Section 174 states that all sw dev will fall under R&E. By your logic, you could rule out any "Special rules and definitions" of all sections. Again, it's not about "all expenses". It's about "any amount paid or incurred in connection with the development of any software". Basically payroll, contractors, and even outsourced companies.
To prevent massive outsourcing, the amortization rate is 7% (15 years) instead of 20%.
Look at it this way:
A "machine" must be amortized. In its lifespan it wil generate some sort of income (almost by itself). Software can be seen as a "machine". Makes total sense.
Here in NL, if you mine bitcoin. You'll have to pay income tax over it, as it's seen similar as "labor".
> In general
> In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—
Note specified.
Then the special rule says
> 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.
So the section says its purpose is to govern specified R&E expenditure. And the special rule regarding software is caveated to make it clear that it is subject to the general purpose of the section.
To your analogy, if I pay an employee to build a machine rather than buy a machine, that’s opex not capex. I don't amortize the labor cost of the machine out over 5 years and pay taxes on the 80% of the employees salary that now doesn’t count as an expense because they made a machine. I also don't get to add the value of the machine as an asset and record losses as it depreciates over the years, either.
> For purposes of this section, the term "specified research or experimental expenditures" means, with respect to any taxable year, research or experimental expenditures which are paid or incurred by the taxpayer during such taxable year in connection with the taxpayer's trade or business.
So that's R&E expenditures. It's further specified that all swdev is R&E.
My interpretation would be that sw dev = R&E. And R&E = specified R&E, UNLESS it's not in connection to the trade or business. (Not sure when that would happen though).
Afaik, it works like that when activating any piece of IP using an expenses based valuation method.
I'm gonna let it rest now. I'm not affected anyway. At least not directly.
In the UK the relevant document is CIRD81900[0] which sets out what conditions must be satisfied to qualify for R&D tax relief. It's lengthy, but worth the read.
One section that stands out is:
"A process, material, device, product, service or source of knowledge does not become an advance in science or technology simply because science or technology is used in its creation"
[0] https://www.gov.uk/hmrc-internal-manuals/corporate-intangibl...
Disclaimer: Not an accountant, not your accountant, get professional advice.
[0] https://www.att.org.uk/tax-treatment-software-and-website-co...
Indeed. Although:
"If businesses develop their own software, the classification of expenditure relating to this (including salaries of in-house IT staff) should be assessed following the same principles. The fact that expenses such as salaries may be recurring does not on its own prevent them from being capital in nature. However, it should be noted that:
The salaries of IT staff will not normally be capital expenditure unless some major new project can be identified. If staff are making only piecemeal changes or minor improvements to software, their salaries are likely to be revenue costs."
Yet from the [US-based] contibutions in the thread it sounds as though _all_ in-house software developers' salaries may _have_ to be treated as capital expenditure for tax purposes in the US.
This seems, frankly, bonkers. I appreciate that portions of the US tax code might well be exactly that(!)
> 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.
I'm just "parroting" from house.gov
This section describes how to handle expenses you consider to honestly be research and experimental expenditure. It does not supersede all other sections of the tax code and magically cause all software expenses to get sucked under this section. It simply instructs you how to proceed when evaluating your R&E expenditure, of which software development unambiguously qualifies.
Section 174 literally begins with
> In General
> In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—
Why is it so hard to believe? The US has a credit problem. There's a ton of money going to software dev. It gives the government some easy access to capital. It's essentially a loan from tech companies
"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."
PS: if the reply button doesn't show up click the timestamp (X minutes|hours ago) on the comment you’re wanting to reply to and you’ll get a reply option.
Was clarification given? If so, it would be rather strange to see these posts pop up on cnbc and other big sites, as it was already known and discussed some time ago.
I think that's up to the judicial branch to see if the new law/regulations are unconstitutional.
Whil I do agree it's messed up, but they're not really stealing, they're just borrowing from companies. Timing is pretty shitty though; a year or two ago, it would've made less of an impact, as capital was cheaper and easier to get.
That’s what is really fucked up as others are pointing out. If I don’t grow or grow slowly The gov’t is flat out robbing me. If I start a venture that I don’t expect will start generating revenue for 5 years, then the government has taken 5 * 1/5(sw-expenses)(tax-rate). Thats not a loan, it’s larceny.
You certainly have a choice to claim it as such or not.
More importantly, why TF has the government been paying software engineers salary all these years? That's the real question. Also, has it occurred to anyone that this may be why the big tech companies are laying off engineers in droves?
> The salaries of the team responsible for keeping the production instance of the software up and running should also be included in COGS. All other R&D expenses should not be in COGS.
https://www.saas-capital.com/blog-posts/what-should-be-inclu...
> Amortized software development costs (we discourage capitalizing these costs in the first place)
Emphasis mine. They're saying if you amortize your other software dev as R&E (stuff that isn't ops/infra/etc. and thus considered COGS) then it doesn't count towards your COGS. But then what they're pretty clearly saying in the parenthetical is that they don't recommend doing that in the first place, which implies that you have a choice.
My understanding is the problem is the phrase "any amount paid or incurred in connection with". It is unambiguous and provides no leeway. Any costs related to software development are R&D. Period.