Other than it’s nice not to have your profession taxed, what is the argument that software development shouldn’t be taxed as opposed to all sorts of other white collar work?
The Section 174 changes altered the accounting method that software development companies must use for calculating their profit for tax purposes. Starting in 2022 software dev must be treated not as an expense but as an investment in an asset, such that you're now required to amortize the expense over 5 years instead of deducting it from your revenue the year you spent the money.
The gigantic problem with this change is that without the ability to expense software development expenses as expenses, a new software startup can very easily be considered profitable in their first year because only 10% of their software development-related expenses get to be counted as expenses.
And note that, contrary to what you say, most white-collar work is not treated this way, and software is further singled out from other R&D-type work in that it is the only type of work that is explicitly called out in the section as being required to be marked as R&D. So we're not asking for software to be treated specially, we're asking why it suddenly changed in 2022 to be treated specially in an extremely negative way.
Lately (since 1971?), the balance has tilted over to the other side, so I welcomed any move to restore it :)
Some examples of white collar work that builds long-lived assets but where the work isn't required to be amortized over long periods of time:
- marketing collateral development, unless it is done by engineers
- development of standard legal documents like contracts
- development of HR policy
- development of financial processes & associated reporting, unless done by engineers
- art development (e.g. for packaging and other collateral)
- building customer lists, unless it is done through software by engineers
- developing service offerings (e.g. Costco membership)
Software is not fundamentally different than any of these other white-collar assets that are used to build companies, except that it typically requires more ongoing maintenance.
What really? How does this work.
When you pay people to get work done for a business, that paid work is an expense.
You can deduct expenses from your income to calculate your profits.
IIRC the problem is that software development is not being classified as an operating expense, now, but rather a "research" capital expense, and the deductions then have to be amortized over a number of years.
Company pays staff $Y in compensation to earn that revenue.
Company pays other expenses of $Z.
Company does not owe tax on $X, but rather on something closer to $X - $Y - $Z.
That's how it should be, and that's also how it actually was until relatively recently. A new law went into effect that treats software differently. I believe Congress was looking for an easy way to generate extra tax revenue by tapping into the wealth of rich tech giants. Whatever the intent, the workers ended up being the ones who suffer because now hiring people has worse tax consequences than it used to.
So all that people want is to undo that, to take away that special rule that applies only to software, and put it back like it was.
The UK eventually put out guidance that business as usual development isn't really "research and development", but afaik there hasn't been a serious crackdown on the practice.
It seems kind of absurd to pretend that most work that developers do is pioneering the profession.
R&D tax breaks make sense, both to encourage genuine research but also to prevent brain-drain.
Not taxing (or tax credits / refunds ) for line-of-business software isn't really excusable.
It's bad that the law in the US has been changed in a cliff-edge way though.
This is untrue. The rule is not about taxation, but deductions/expenses. If your expenses cover most revenue, you owe little in taxes. With this rule, a particular type of expense (software engineering salaries) is no longer deductible from revenue to calculate taxable income over which taxes are owed. So you might previously owe no taxes, but now you do. The deduction might carry over to the next few years and eventually (after 6 years) you will reach the same point - assuming your salaries don't go up and your business doesn't grow. The remainder in deductions will be returned after the business stops employing software engineers. I'm not sure why anyone would want the tax code to incentivize a business outcome that all of us would consider failure.
Software is being singled out