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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.

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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

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