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> So if I get $1mln in income now, and spend $1mln on say software R&D, i'd end up owing a bunch of taxes on the $1mln of income using cash I just don't have anymore.

Then go get a loan which should be easy because you’ve demonstrated $1M revenue with 100% gross profit margin. A complete non issue and painfully unrealistic because how are you paying for the $1M capitalized expenses before you have the revenues? Yes, you have to raise funds to start a business. Shocking.

Have you ever bootstrapped a business? If no, maybe you wouldn't be so flippant here if you had. Loans are not easy to get as a small business, particularly ones with favorable interest rates.

Loans are exceptionally easy to get when you have $1M in REVENUE with NO OPERATIONAL EXPENSES. It’s the premise that’s contrived here.

If you are a software company, that $1 million you spent on software devs is your operating expense. Actual profit that year is $0.

On a cash accounting basis it’s actually worse, because that company is seriously in the red after paying taxes with the new rules. Previously it would have netted out at $0.

Of course someone is going to be hesitant to loan money in that situation, unless you can cut those expenses. Which if you’re in a highly competitive market could mean death to your company.

Is it overly simplistic? No shit, it’s an example to illustrate why startups are getting worked up right now because they have sudden cashflow issues. And why larger companies are also doing layoffs and trying very hard to reduce their software dev spend. Including outsourcing, where they can.

Because the actual way most companies will solve this once they figure it out is to not spend all their cash on software dev, and instead reduce it significantly.

Because this new treatment means instead of being able to write income off as a straight business expense in the year they spent it, they have to pay taxes on money they’ve already spent in that year, and then can only make it up fractionally after that.

So in the example I gave? Companies taxes that year are zero with the prior R&D rules. They had zero taxable income.

With the updates to section 174, now they owe taxes on $800k of taxable income the first year.

Huge difference.

They can still eventually write off the whole $1mln they spent in year one, but that is a hell of a big difference in cash flow. Even if dev spend is flat for 5 years, it will take that long for it to look the same cash flow wise. And it’s rarely ever actually flat.

And that is not even taking into account the increased cost of money going on, tightening access to credit. If you pulled off this situation while being in a safe industry that a bank will write a loan for you easily, then cool.

But they’re surprisingly weird sometimes, and if you’re in year one it can be hard to get anyone to return your calls at all if there is anything ‘non-traditional’ about you. Which is most startups.And the ‘startup banks’ where it was easy (SVB and first republic) all got nuked.

So you could easily end up paying 25% APR on short term financing to close this gap, if anyone is talking to you at all.

> If you are a software company, that $1 million you spent on software devs is your operating expense. Actual profit that year is $0.

No, it’s not. Net income here is $800k (20% amortization). Gross income is $1M. Because accounting recognizes that the value of your investments today are useful next year. If you sold a million dollars of your software this year, it’s extremely likely that you will be able to sell the same software next year. You’re not starting from scratch in 2025.

> On a cash accounting basis it’s actually worse, because that company is seriously in the red after paying taxes with the new rules. Previously it would have netted out at $0.

And that’s an example of why cash based accounting is not they way businesses track their financials. It’s misleading.

Your understanding of finance here is completely backwards. Think about it. Would you rather loan money to a company that paid $1M contractors to do work for $1M in revenue? Or to a company that spent $1M building a product that sold $1M in services that year?

Obviously, OBVIOUSLY, the second one is more enticing. The contractor company is extracting zero profit and is poised to do the same next year. The software company built a product and they can continue selling. Whether the market is really competitive and whether they might need to continue investing in the product to stay competitive is a tangential concern and a secondary consideration about the business environment that does not factor into our basic understanding of assets here.

Whining about funding being hard to get or that business is hard does not define what an asset is. Imagine a factory owner saying “well the Chinese just built an automated factory so I’ll need to double my investment next year to make sure my products can compete in the market, so I’m going to say that my building of factory doesn’t count as an investment because that just works out nicer for me. It’s only fair. The business environment is competitive!”

And this right here is the difference between theory and practice.

Because in theory sure.

Though previously there was the far more profitable and easy to deal with theory of building an actual asset of large value (monetized via stock/equity) while treating the expenses to do it as straightforward business expenses with no amortization to be a PITA, and the IRS was willing to go along on that.

In practice, this is exactly how you run your startup into a wall at 100 mph while you bounce payroll checks and end up in a morass of legal trouble. Because cashflow absolutely matters, and startups and small businesses rarely can just get ‘free’ debt at a moments notice to smooth it all out. Even large ones are having more difficulty than ever.

Call it whining all you want - it’s a significant concern partially driving market behavior. Remote work also meaning outsourcing is back on the table being another.

The “theory vs practice” split here is about whether your business made any sense in the current environment, not the definition of an asset.

“Business is hard” is not an argument to redefine what an asset is

This is really hilarious actually.

Because this was all due to a change of the rules on existing behaviors, and created a new capital asset which previously didn’t need to be recognized.

And because you seem to be saying ‘suck it up’, which of course sure whatever. Business is what it is, and folks get what they get.

But of course what is going to happen is the related companies are just going to fire some people/lay them off, or go bankrupt and then do that to everyone.

I don’t actually care - I pivoted in a way it benefits me several years back - but what else does anyone expect to happen?

Then the whining and finger pointing happens of course on the state of the labor market, and no one ever points one back to themselves. shrug

So your proposed solution to someone having a cash crunch (with no easy liquidatable assets) is to take on debt?

Which most banks or investors are going to be pretty hesitant to do, because cash crunch with low assets?

Some business environments, sure. Others? Not so much.

Is it impossible? Hopefully not. But is is a major change from how it used to work.

You have insanely good financials in this contrived scenario. Raising debt or equity should not be a problem.

Only if you can cut opex - aka software dev costs. And aren’t killed by having to pay taxes on 800k of money you already spent on what otherwise would be a business expense.

Which is why there is such a huge push for offshoring.

As stated, without some significant changes that company is doomed in short order with the new rules.

Literally not software dev costs. It’s in the prompt. You literally cannot simultaneously describe software dev as opex and still talk about the 800k. Those are mutually exclusive framings of the context.

Uh yeah, that's the point.

Software dev as 'opex' (actually R&D, which had the same treatment as opex) == the old way. 800k in 'income' you've already spent to do what your company exists to do, but have to pay taxes on this year == the new way.

The vast majority of tools you can expense the year you buy them

That is not true in the U.S. All capital assets must be depreciated. This includes all tools and equipment except for very short life consumables (< 1 year).

No one sane is depreciating hand tools or anything smaller/less valuable than a bobcat. At least for businesses that aren’t doing millions of dollars worth of them.

Why do you think they should? Care to quote a section of the tax code?

No one, including the IRS, wants to deal with mountains of BS paperwork over small stuff like this.

For a description [https://www.trustbgw.com/blog/2016/07/08/capitalize-fixed-as....],

“To determine when to expense and when to capitalize, consider both the de minimus rule and the useful economic life.

The de minimis rule allows you to expense any item that may potentially be capitalized so long as said expense (or the sum of related expenses) does not significantly distort your bottom line. In other words, these expenses cannot make up a large percentage of your total expenses, subsequently providing you with an extraordinarily low income. A strong metric to follow is that the sum of the expenses should be less than 0.1% of your gross receipts for the year, and/or 2% of your total depreciation and amortization expense for the year.

Any item that will retain no value after 12 months may be expensed. Do note that the IRS may frown upon deductions that appear to take advantage of end-of-year timing. If you incur an expense in December and then consume the item in January, you may need to argue that the deduction did not distort your bottom line in order to take it.“

There is no paperwork involved in depreciating a piece of furniture over a standard schedule. You seem to be of the belief that you are required to show documentation tracking individual assets. That’s not true any more than proving the payment actually occurre as for expenses.

The de minimus rule is, as your own quote indicates, for a tiny, tiny subset of your assets.

You need to track and document assets in your books to depreciate them, and in the event of an audit you need to substantiate it.

That is paperwork. Unless your tax folks are just yolo’ing amounts into the appropriate fields in your taxes anyway, in which case you’ve got bigger problems.

You are correct that it doesn’t necessarily require going out and tracking say every individual desk.

But to depreciate it, you would need to be able to show you bought x desks for y $$ (and those were reasonable business expenses), including receipts, and if the IRS got worked up, they might demand to see said desks. Which if you had no idea where they were, is going to be hard eh?

And then you need to track them over the period of time you’re depreciating them (and how much was depreciated).

Which for a small business is not worth the hassle at all.

And it is highly unlikely the amount they spent on said desks is not de minimus.

If you are IBM or sprint or whatever? Then sure. That is why they have massive accounting departments, asset tag everything, etc.

Even they don’t bother with hand tools and the like for tax purposes though.

they can’t do things the easy (and legal) way.

> The vast majority of tools you can expense the year you buy them.

Not ones that you build.

Materials and labor to build them, yes you can. Same for if they're not overly expensive or valuable.

For it to be a capital expense they'd need to be large, sellable assets. For example, formwork? Jigs (except for something really exceptionally expensive perhaps)? Hand tools? Less-expensive-than-a-truck custom machinery? Not a problem to write off as a normal expense.

'Gigapress'? Yeah, thats a capital investment/expense.

The difference here is 'is this something you built/bought to get a job done' (aka an expense), or 'is this a large valuable asset (with a market value)'. It's a sliding scale with many exceptions.

Someones $100k snap-on set for example MIGHT be considered a Capital expense, not a normal business expense, depending on the circumstances and scale.

There is a pretty sizable cap too where you can do whatever and not worry about it too much, a bit over $1mln if I remember correctly.

Yeah, this is all made up buddy. The dollar value is not a consideration. There’s no such thing as $1M cap. Or any cap.

The salient thing here is how long they are expected to last. Super cheap items are generally not going to last very long so yes they do trend towards expensing.

There is ABSOLUTELY no requirement that a capital asset be sellable or have any market value.

You get an F-

You need a much better accountant. Tax code section 179. With the 1 million cap. It gets adjusted, and was recently 1.222 million I believe.

[https://www.law.cornell.edu/uscode/text/26/179]

“ (a) Treatment as expenses A taxpayer may elect to treat the cost of any section 179 property as an expense which is not chargeable to capital account. Any cost so treated shall be allowed as a deduction for the taxable year in which the section 179 property is placed in service.

(b) Limitations (1) Dollar limitation The aggregate cost which may be taken into account under subsection (a) for any taxable year shall not exceed $1,000,000.”

[https://www.executech.com/insights/1-million-deduction-for-n...]

For something to be considered an asset, it has to generally be “property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.”

While there are certainly edge cases where something would be impossible to sell or value on a market but still considered an asset; that gets pretty murky for a number of reasons no?

An asset which no one would ever buy is also going to be hard to consider something which someone would take as payment for a debt, meet a commitment, or leave as a legacy. Even a pile of beany babies has some articulable value.

If it isn’t an asset, it is likely an expense.

Most businesses do not account for or attempt to track the things I’ve been calling out (hand tools, etc.) at the level they consider them assets. Any more than they track a desk or whatever. It’s de minimus.

Would they get worked up if someone walked off with them? Sure. But they aren’t depreciating their stocks of beaten up wrenches or counting their hammers each year, anymore than they are doing that for desks.

Unless they have a really bored group of bean counters or are so large they have no choice, because they literally bought like 10k desks and now that is real money.

Excavators, bobcats, etc? Yeah. Everyone is tracking those unless they’re really screwing up their taxes.

A specific election you can take is not at all the same as “you can do whatever”. Your writing heavily implied that they won’t penalize you for getting things wrong up to $1M. That’s flagrantly wrong.

Assets do not need to be sellable. Goodwill is an asset. It’s a not “real” thing. The book value is also completely unrelated to the market value.

You have quoted a dictionary definition of the word “asset” from Oxford languages off of Google. You do realize we are not talking about about generic language but specific technical accounting definitions right?

Desks are 100% capital assets. Office furniture has a specific useful life defined by the IRS. Feel free to Google this basic information.

Nope.

That exemption means you can either track them as capital assets and depreciate them, or take them as straight up business expenses in the year you qualify.

It’s right in that first paragraph I quoted. Bullet a.

Aka ‘whatever’. You would need to decide though.

If you have a different definition of asset that includes ‘something of no market value’, then feel free to provide a reference.

If you buy something you can’t sell later for money, it isn’t an asset anymore. Its economic value has been consumed, and it was an expense.

There are some exceptions to 179, and even then it’s an election. You have specifically invoke it, It’s not a catch all for oopsies on your taxes.

I already gave you an example. Goodwill.

I’m really not sure what you’re trying to say. I never said it was an ‘oopsies’? In fact, I said you needed to decide which option to take. But it’s up to you.

And Goodwill is definitely sellable/marketable in most cases, as it includes a number of valuable things like IP, brand value, etc. and typically occurs to track those things when an acquisition happens and someone pays money for them.

And it gets concrete dollar amounts.

You’re just flailing around, F-. And you definitely need a better accountant.

The computer you develop on gets amortized, typically over 3 years. It's much more complicated than you realize. It's tied to the useful life of the thing.

What changed is that almost all software development was classified as capital improvements and a forced 5y (15y if international salary). There is not way to classify different software projects by their useful lifespan.

Section 179 provides a sizable exemption. Roughly $1 million/yr (1.223 in 2023 apparently) [https://www.law.cornell.edu/uscode/text/26/179].

Section 174 was updated this way yes - which is why we’re talking about it yes?

Previously it was classifiable as an R&D expense, and could be written off the same year it was taken. Which is much friendlier, cashflow wise.

Anyone manually depreciating computers over 3 years either already has a lot of capital expenses (> 1 million/yr), or should probably get a better accountant.

There are situations it needs to be more complicated - but for the vast majority of the situations anyone reading this is going to be in, it isn’t. And if they are in that situation, they should hire a professional to help them untangle it.