The IRS is using a theory of value where software (1) is a capital asset (okay, sure), (2) has a six-year deprecation schedule (uhhh why not 5 like everything else?), and (3) is valued at the exact cost of all inputs to it, including salaries (uh oh).
This is unlike how capital assets are valued for any other industry! And it has the effect that hiring a second lawyer is “cheaper” (for five years anyway) than hiring a second developer.
Thanks, that really gets at the heart of the issue.
Are any other business processes and elements — e.g. accounting mechanisms, print design, sales funnels — valued this way?
An other issue is competitiveness with other jurisdictions that don't have these tax laws, but even if that were normalized there are jurisdictions that are far lower tax in general regardless of the classification.
Well, that framing is just wrong. The companies are paying taxes over what those employees created, not over the employees. Does the company own the software?
> The IRS is using a theory of value where...
Notice that all of your 3 points are exactly like any other kind of capital.
Most countries exclude salaries from the income calculation because it has good practical consequences (both on making accounting cheaper and on incentivizing companies to hire), not because of any theoretical problem.
Is your dismay that it's unfair compared to other industries or that the policy doesn't reflect reality that software is a capital asset that has a lifetime longer than 6 years for many companies?
Using salaries as a proxy for value of the asset encourages only the safest shovelware bets, discouraging risk taking lest your asset be taxed at substantially higher than it's worth.
Avoiding that risk-adverse dynamic is why Section 174 was written the way it was since the 50s to encourage R&D, and it's paid off in spades.
This is neither the current situation nor even a theoretical possibility.
Isn't that the whole point of all sorts of tax strategies, for instance Buy, Borrow, Die?
https://www.forbes.com/sites/davidrae/2022/07/14/how-the-ric...
Especially since even in semantics we call highly successful companies „unicorns”. Because it’s rare. Usually software is worthless, whatever quality.
I failed my own software company twice. If such politic would be in effect I couldn’t even try once.
It’s this absurdity I’m upset about. Six year vs five year is weird but meaningless. Internal software not being sold can be a capital asset, or at least I can point to examples of it (MSFT Hyper-V, ex). But the valuation process is both arbitrary in both directions, and discourages companies from hiring software developers as a policy effect.
The same is true for all true R&D, which is why historically the government has tried to provide protections for R&D work to incentivize people to not just churn out the safe bet over and over again. Patents fall into this category, but software patents are (rightly) hard to come by. Through 2022, the risk of software development was offset by the ability to expense the costs and avoid a tax bill, and this was good policy if your aim is to encourage innovation.
The capital asset theory could still work if there were some way to appraise the value of the actual asset you created. But absent such a way, this thinking is deeply flawed for all but the most shovelware of jobs.
I don't think this comes close to being true. It would make ripping off a competitor pointless.
If the goal is to measure retained value, I'd ask how much a competitor would pay to acquire your 5-year-old code (for direct use, not for hacking you) without feeling cheated afterwards.