New tax rule is terrible for software industry
onlycfo.io
onlycfo.io
However, from my perspective, I see this as a clever way to depress developer salaries which have risen in recent years. This tax change makes small companies and startups much less viable, so there will be fewer places for developers to work. As others have noted, it will also alleviate competitive pressure faced by the entrenched players.
Given these lobbyist-friendly “side effects”, I wonder if we will ever see this trash taken out.
So the government is forcing expenses on us.... And then making us wait to deduct.
Sounds like you’re really complaining that you have to deal with regulation in the healthcare industry. Your post has nothing of merit about why it’s not right to treat it as a capital asset. You’re just whining that it’s worse than the status quo you had before.
Not all r&d leads to something viable. So I'm guessing we'll see more of these capital assets being recorded as losses to reduce tax liability.
Software firms across US facing tax bills that threaten survival (cnbc.com)
924 points by mjwhansen 8 months ago | 995 comments
https://news.ycombinator.com/item?id=35614313
Tell HN: Submit comments to IRS re tax treatment of software dev expenses
461 points by mNovak 41 days ago | 229 comments
Article links to a letter that had a deadline back in Oct. Are there any subsequent efforts to rally reform?
Paying employees is a taxable expense.
Buying supplies is a taxable expense.
Paying rent on office space is a taxable expense.
Seriously, what is the R&D cost that is no longer being treated as a taxable expense?
If your employee has a salary of $X, then the taxable expense should only be $X, it does not matter what the employee is doing.
So I don't understand what the benefit of classifying an employee's salary as being R&D was prior to this rule change.
That's the whole point of my question. As far as I can tell, every actual expense is tax deductible, which (from the complaints) implies that either there's an expense I'm not aware of that is no longer deductible (which seems bad), that the R&D classification allowed you to move when you claimed the expenses regardless of when they were actually incurred, or that R&D was used to classify non-expenses as if they were expenses. Only the first option seems reasonable to complain about, the 2nd seems of limited use (based on the complaints being made), and if it's the last option I would think everyone would support the rule change as the last option is imo fraud.
From the way people are complaining I'm assuming that it's not the last option, but I do not understand what the issue is here, because I don't understand what this mysterious "R&D" expense is, if not salaries, consumables, and equipment depreciation. Which are all taxable expenses.
There might be some argument that there’s regular maintenance to be considered but generally speaking you are “building”. And that means it’s a capitalized cost. “It’s bad for me startup” is such a weak argument…
But how frequently does your code live a long an happy life? Some does, but much software has short lifespan.
What is a capitalized cost? What is the logic in taxing this kind of cost more than others, or spreading the tax break over more years?
I have some guesses, but I don't understand the basic philosophy of what should be a tax on the business, what should be a tax on the business owners (when their property becomes more valuable, e.g. capital gains tax), and what should be a tax on the employees' salaries (I guess this part is analogous to a sales tax on products the business buys).
Capitalizing a cost means you’re saying this is a cost that is needed to build an asset that will provide value over time. If you build a factory or an app that is expected to help generate revenue over the next ten years then its dev costs should be allocated over the next ten years.
Companies want to say all of the cost belongs in year 1 so that they can avoid paying any taxes in year 1. It is not taxed “more”. Capital gains tax is a separate thing not relevant to what’s being discussed. The salaries are not being taxed either (payroll tax is a separate idea here too). The question is which years should the salaries applied against revenue.
You would still have to fill out in your time sheet whether you are doing maintenance or R&D. This will lead to developers being burdened with more bureaucratic busy work.
From 12:30 to 13:00 I was working on updating software library X Y Z to the latest version and changing the code to use the new API. From 13:00 to 14:00 I added a new feature using the new API.
Are those first thirty minutes maintenance? Can you deduct them? You as a software developer will have to know the tax rules now.
Technically there’s no carve out for maintenance at all tbh.
I’ve work at senior levels in several companies that have done it and in each case it’s led to under over reporting of profits and reporting of costs
The temptation is capitalise as much as possible because it makes the profits look more, costs look less
Making it harder for new competitors AND depressing tech salaries? Sure
Likewise EU vatmoss didn't add so much crap on small sellers that they all moved on amazon.
Matters are of course more complicated than this because nothing in the IRS code is really simple at least as far as corporate taxes are concerned. It’s an incredibly stupid law.
The counter argument is that lots of software is short lived. Without someone maintaining it, software is often worthless.
But people are kidding themselves if they think the majority of development is not making something that will be useful for longer than the immediate year.
What does your company do? Oh we make X. Well developing X is building an asset.
I would be with you except that Section 174 just says the following: [0[
.03 Activities that are treated as software development. Activities that are treated as
software development for purposes of § 174 generally include but are not limited to:
(1) Planning the development of the computer software (or the upgrades and
enhancements to such software), including identification and documentation of the
software requirements;
(2) Designing the computer software (or the upgrades and enhancements to such software);
(3) Building a model of the computer software (or the upgrades and enhancements to such software);
(4) Writing source code and converting it to machine-readable code;
(5) Testing the computer software (or the upgrades and enhancements to such
software) and making necessary modifications to address defects identified during
testing, but only up until the point in time that:
(a) In the case of computer software developed for use by the taxpayer in its
trade or business, the computer software is placed in service; and
(b) In the case of computer software developed for sale or licensing to others,
technological feasibility has been established, product masters(s) have been produced,
and the computer software is ready for sale or licensing to others; and
(6) In the case of computer software developed for sale or licensing to others (or
the upgrades and enhancements to such software), production of the product master(s).
> Does that actually change anything about the actual issue?
Not in the slightest.
If a b2b startup has some contracts which total $1 million per year in sales, but their dev expenses are also $1 million per year, you're right, the startup is unprofitable. But now they'll still have to pay taxes on the $800K of sales after their 20% immediate-year deduction for dev expenses
Changing R&D expensing rules so software development must be capitalized rather than expensed is disastrous for the SaaS industry.
The rules that 'every business has to play by' are that salaries, pretty much regardless of department and role, are an expense.
Rewriting the rules such that 'programmer salaries can't be treated like salaries' is very very weird - in fact singling out any form of regular salary payment to non-stakeholders/c-suite for special tax treatment is incredibly weird.
Seems very directed.
Amortization/capitalision has always been strictly for purchases of hardware etc.
It's hard to overstate how weird a change this is. This is going to make many many many software development businesses simply non-viable overnight.
Also it creates an odd level of complexity - how do you consider the salary of a programmer who's also a sysadmin? How are DevOps salaries treated? Do all roles have to be strictly defined as 'development' or 'operations'? Can 'new product' developers do bugfixes? If you hire a guy purely to fix bugs do you have to prove that's their role?
It's incredibly strange.
Clearly payments to the outside contractor would not be expenses needed to run the company, but rather a purchase of an asset. But using inhouse employees instead wouldn't really materially change what the money is spent on. I guess the situation is the same when a company uses its employees to build a house, instead of buying one.
So that is the reasoning behind the law I guess but I still don't think it is a good idea. Research and Development is something the government would be wise to promote and support.
It's not a good idea because it's not how things are done in literally any other country that develops software. This makes all US development shops immediately 1/5th as profitable (on the books) as non-US shops. Yes, they catch up after 5 years, if they're still in business.
I'm not sure that I'm overstating it but this law change will, I think, effectively eliminate onshore software development as a profitable activity.
It's very strange that this hasn't been checked back given the size of the sector. I don't normally believe stories about US government dysfunction - which seems mostly like a dog and pony show - but for something like this not to have been rectified is a bit odd.