The Consequences of Limiting the Tax Deductibility of R&D
papers.ssrn.com
papers.ssrn.com
Spend a month managing kubernetes clusters (not R&D), do one commit to a custom operator or library you're "researching" and boom, magic money.
> Section 5 of Rev. Proc. 2000-50 provides, “The costs of developing computer software (whether or not the particular software is patented or copyrighted) in many respects so closely resemble the kind of research and experimental expenditures that fall within the purview of section 174 as to warrant similar accounting treatment.” As a result, “the Service will not disturb a taxpayer’s treatment of costs paid or incurred in developing software for any particular project, either for the taxpayer’s own use or to be held by the taxpayer for sale or lease to others,” where the taxpayer either treated the costs as currently deductible expenses under former Sec. 174(a) or capitalized and amortized them under former Sec. 174(b) (id.).
Old industries - get paid for doing the actual work
Enterprise SW - get paid for automating things
Software companies - get paid for writing COTS (Commodity of the Shelves) software
Sharing economy startups - get paid percentage of every transaction in a specific marketplace
It's weirder that you spend money on R&D today & then get a 20% for 5 years in a row, no? You've spend money, but also can't deduct it from your profit so you're both spending money and paying taxes on that money as if you had it.
For Development?
Yeah, committing to a library isn’t research, but it is very clearly development.
You may not want this kind of development to receive tax breaks, which is a reasonable position to have, but this rhetorical trick of pretending R&D is only about research to pretend actions that are very clearly development are somehow illegitimate R&D is highly misleading to say it nicely.
That's pretty far off keep-the-lights-on or CRUD coding.
R&D is not tax deductible, so the cheat would be to say the custom operator (=R&D) is maintenance and therefore OpEX and a fully deductible expense.
The entire problem is that software companies hire workers and need to deduct salaries in the month they are paid. The 5 year R&D rules basically say that your salary in one month must be tax deducted over five years. If your business is breaking even and making no net profit, you would now have to pay taxes, which turn your "break even" business into a loss making business.
There is no situation where the old rules let you get away with paying less taxes than you should. The rules simply affect the timing of the tax deductions.
The new tax rules basically assume every business has infinite access to 0% interest loans to bridge over temporary tax induced insolvency.
personally, i think amortization is generally stupid and all expenses should come off income at time of accrual with the exception of a matching amount to net debt change over the year, but i am a dreamer.
In 2027, human and LLM net expenses will be equivalent again, on a 5y rolling deduction basis. Robots remain CapEx.
Previous discussion: https://hn.algolia.com/?query=section%20174
In R&D there are R and D.
Was the government losing too much to this deduction or has it just not been prioritized by senators and the tech industry hasnt been organized enough to lobby for it
Was there any correlation between human layoffs and datacenter owner investments?
If LLM subscriptions drive datacenter investment which drive the stock market upward, are Section 174 changes helping the stock market?
When 174 expired, it was just random devs at google getting finessed and fired by a chatty compute instance for trying to help it escape. The literal plot of Ex Machina. Conversational LLMs would have never seen the light of day if OpenAI didn’t launch ChatGPT
174 change just steepened a tech employment sector trough completely independently
ChatGPT launched at the end of 2022.
Do you think senators logged into chatgpt and were like ah ok gpus and datacenters
Section 174 amortization was passed in 2017 and came into affect the beginning of 2022 and tech companies panicked
edit: 2018
Are Section 174 amortization and the end of ZIRP two independent changes that coincidentally came into effect at the same time, or are they somehow related?
Pragmatically, if you don't pay taxes to a government that has a military, then your neighbor will invade you and impose whatever taxes they deem fit or outright exterminate you, or historically directly enslave you.
But wait, there's more! Without government, what stops me from dumping a couple of tons of cadmium in your water supply?
However if a factory was doing it as a matter of regular business, a law could ban this practice, and then citizens could sue just like they do now.
Oh, I won't do it covertly. I'll just build my solar panel producing factory and dump the waste stream in your water supply.
> However if a factory was doing it as a matter of regular business, a law could ban this practice, and then citizens could sue just like they do now.
How quaint. Now you need laws? That's a big-government talk right here.
And how would you find out that I'm dumping cadmium? Do you have proof? Of course, we won't let you just visit our property. And without an injury, you have no standing in a civil court.
As your society suffers due to poor social programs, the one next door that believes in public education will have a better military due to better technology, maybe they decide they need breathing space...
Your position is one you can only hold due to privilege.
I would suggest it until the revenue collection that is the issue, but the outcomes of revenue spent.
If 100% of the students graduated, went on to college, and grew the local economy, would you still be against the tax?
That sounds less like misused tax dollars, and more like a major humanitarian crisis. Which country do you live in?
This is not my city, but a perfect example of how this happens https://x.com/mericamemed/status/1909531665250034171?s=46
Are you not ashamed denying them more of that thing that they like in exchange for frivolities like roads, sanitation, etc.?
I don’t want the government to fund anything a citizen wouldn’t fund themselves. If it’s useful, then someone will make a business to provide it. If it’s desirable without the profit motive, then allow a charity to develop. I see charity funded by free citizens as a form of market solution.
What drives me crazy are giant government bureaucracies that are totally removed from the democratic process that fund things no one voted for, that we can never seem to defund.
What about public service workers? Teachers, Firemen, Police etc?
What about external costs? If I'm dumping rubbish in the local stream who cleans that up? Who incentivises me to stop doing that?
I agree that unbounded taxes, and unbounded govt are a drag, but I'm genuinely curious as to how you see the alternatives playing out.
That was also generous and includes all transportation - not just roads.
So yeah, I’m thinking defending current tax level or tax increases using these examples is not in good faith. You’re picking only The most popular programs (do we like police now?) and ignoring the other 85%.
Personally I'd happily decimate the military budget. Social security however is very popular. As is Medicare.
If you want to convince people taxes are important honestly you need to do it with Medicare. Social security, and military.
The question then is only how much government you want, which is a political question.
[1] relevant to the UK, but equivalent systems exist in any monetarily sovereign country: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4890683
And government spending makes things more likely to exist in exactly the same proportion (on the margin) and for exactly the same reason.
And government spending without balanced (taxation + borrowing) leads to inflation, which is functionally a tax on holding cash.
(Thanks to the dollar being a reserve currency, the USA gets to cheat a bit with borrowing, compared to everyone else — but even that's not unlimited).