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Comment by hermannj314 | Hacker News Reader

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You know not what you speak of. I am small developer without funding.

For every developer I hire I pay tax on 90% of their wages in year 1.

So, if I hire a 200k a year developer, I have an increased tax liability of 180k. That works out to paying about $75k ~ $85k. So my 200k developer becomes an 285k developer.

Now, eventually I could regain that cost, or I could do like I know of a few companies and commit tax fraud by not correctly reporting my expenses.

BTW even as a partner I am hit by this - to correctly file my taxes I have to report my retirement savings as development revenue and pay tax on what is supposed to be tax free.

Pretty cool.

You are completely wrong. I run a small software company and this is really bad for us.

All this does for large companies is that it might cause them to layoff developers.

For a small software company it can threaten our existence.

In the first year, you only get to deduct 20%. But in your second year, you get to deduct 40% (20% from the first year and 20% from the second year). In the 3rd and 4th year it's 60% and 80%. And so on until you get to steady state of 100%.

So, no, it is not "really bad" for you. You as the owner might not make as much money for the first year, but you will be at steady state in a few years, and you get to deduct the salary for years after they leave.

I think an implicit assumption here is that the company is able to survive the five years. This rule affects cash flow in the initial years pretty hard and a lot of small companies cannot survive that.

In the initial years most startups have massive losses that they carry forward and don’t need to pay taxes anyway. During that bridge period the affect of section 174 is zero since they aren’t paying taxes anyway.

This really only affects software companies that are profitable in their first year, which is a very small minority.

I think you're missing something - the only way these startups have those massive losses is if they can deduct them. This rule change stops them feom being able to deduct 80% of most of their expenses in the year where the expense occurs.

Amen.

10% first year

This does feel a bit like propaganda. I'm a CPA with ex-Big4 audit experience, albeit only 4 years, and specialized in revenue rather than expenses. I just briefly read over the pwc summary of the related FASB standards covering Subtopics ASC 985-20 and ASC 350-40. It pretty much says that you expense everything on software that intended for selling until it's technologically feasible. Upgrades afterwards are capitalized, then amortized. Internal software development is capitalized. Like, if you build internal infrastructure, it likely has value, similar to PP&E. Differences is, Equipment is physical. The value of the software is the minds and time that went into it. I'm also certain that if you could prove to your auditors that your software is not worth much, you could probably expense more of the costs. This whole thread screams big tech company propaganda.

This is about taxes. I imagine you’re aware that GAAP accounting and tax accounting can treat things like depreciation schedules differently.

The definition of capitalizable expenses tends to be the same between GAAP and tax. The depreciation schedules are frequently different.

Yes, it tends to.

However: https://www.law.cornell.edu/uscode/text/26/174

any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure [and be capitalized and amortized over five years even if it is disposed of, retired, or abandoned]

I stand corrected. I've not seen GAAP vs IRS differ so much in my experience. Thanks for referencing IRS section 174 which clears things up. It appears to be quite strict on the 5/15 year amortization of software development expenses, and I now agree with OP that the change to section 174 as part of the TCJA is some bullshit.

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