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Thousands of small businesses are struggling because of R&D amortization

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Re: Thousands of small businesses are struggling because of R&D amortization

#31

Post by ChrisMarshallNY »

alephnerd wrote: post #17
itsoktocry wrote: post #4

> A handful of these small business owners have bravely spoken to journalists from the Wall Street Journal and CNBC[...]But the vast majority are hesitant to speak to journalists as it might give their competitors free intel or make their employees nervous that they might lose their jobs. This seems a tad overblown? "brave", "free intel"? Why would we need to hear the same thing from thousands of small businesses? Th…

> Why would we need to hear the same thing from thousands of small businesses That's how lawmakers prioritize work. It seems some kind of lobbying organization for early stage companies might be needed - maybe some think tank funded by a couple early stage focused VCs

Sounds like this community would be an ideal place to start.

Disclaimer: I'm retired, so I don't have a dog in this race.

Re: Thousands of small businesses are struggling because of R&D amortization

#32

Post by Macha »

anothernewdude wrote: post #25
foooorsyth wrote: post #16

Earlier quoted context omitted.

>software engineers/developers are not in any way engaged in what might be considered genuine scientific research and development Have you forgotten the D in R&D? Software engineers are building the product. That’s development. What do you mean by “genuine scientific research”? I suppose you think ML researchers aren’t doing “genuine science” because they wear hoodies instead of lab coats?

That's a different word that is merely spelt the same. My programmers build software. Should builders building a house amortise their development work?

I think the theory is that you can't keep selling the same house each year so you've just developed inventory and not long term assets.

Though, the country where I work and live, R&D has more profitable tax treatment, your employee costs are a same year expense, but you can get some relief on the rest if your tax bill if you proactively document what's R&D about your work and it doesn't get rejected by the tax department

Re: Thousands of small businesses are struggling because of R&D amortization

#34

Post by p_l »

spacecadet wrote: post #30

Sorry, Im pretty anti-tax, but this is the mature way to run a software business... I remember starting my career and presenting amortization sheets for software R&D and not a single exec giving a shit, whole industry gave up if you ask me.

Salaries being amortized never made sense

Re: Thousands of small businesses are struggling because of R&D amortization

#35

Post by indymike »

welder wrote: post #23
itsoktocry wrote: post #9

Earlier quoted context omitted.

> Precisely. They didn’t think of their work as R&D because it was not R&D. Frankly, they should have seen this coming Don't you have this backwards, or do I? Software development is now going to be treated as R&D, which means that costs have to be amortized. That's not an tax advantage, it's a disadvantage. All the other businesses you list get to expense their labour costs. But we agree, software dev should not be…

MasterYoda900 has it backwards. However, my CPA said software engineer salaries are only categorized as R&D before the product is launched. So this only affects new startups pre-launch... if my CPA is correct.

There will be lots of confusion and litigation on this exact issue.

Re: Thousands of small businesses are struggling because of R&D amortization

#36

Post by tinyhouse »

the_mitsuhiko wrote: post #20

Since this is already hanging around for an entire tax year a lot of companies are 1/5th into that pain. If this does not get changed in the next few months it would not surprise me if this becomes the new norm. Which would also be quite interesting to see how that would play out. Some companies apparently have already been amortizing salaries for a while in anticipation of this (eg: Google). Given that this also gre…

Is it true that they are 1/5th into the pain? What about every new hire? That's the part I don't understand. It seems to discourage companies from increasing their headcount. Also, what happens when an employee leaves after 2 years? The company paid 2 years of salary but expensed only 35% of year 1 and 15% of year 2.

Update: Now thinking about it, it doesn't matter if an employee leaves, since the company will expense their salary portions that they haven't expensed yet in their future tax bills.

Re: Thousands of small businesses are struggling because of R&D amortization

#37

Post by moron4hire »

nerdponx wrote: post #21
kleinsch wrote: post #8

Earlier quoted context omitted.

I don’t think you understand what they’re discussing. If you run a plumbing company, make $100K in revenue, pay a plumber $100K, you have no profits, owe no corporate taxes. If you run a software company, make $100K in revenue, pay a software engineer $100K, section 174, which just went into effect recently, means you now owe taxes on $90K of profit. This is because you must spread dev costs over 5 years, you can’t d…

I assume you meant 80k instead of 90k?

The code defines that you start with the midpoint of the taxable year, so even though it covers a five year period, it will also cover 6 tax years. Because of that, the first tax year (which was 2022), only 10% can be deducted. Tax years 2 through 5 is 20%. You can deduct the last 10% in the 6th tax year.

Re: Thousands of small businesses are struggling because of R&D amortization

#38

Post by jdjskiaka »

the_mitsuhiko wrote: post #20

Since this is already hanging around for an entire tax year a lot of companies are 1/5th into that pain. If this does not get changed in the next few months it would not surprise me if this becomes the new norm. Which would also be quite interesting to see how that would play out. Some companies apparently have already been amortizing salaries for a while in anticipation of this (eg: Google). Given that this also gre…

> Some companies apparently have already been amortizing salaries for a while in anticipation of this (eg: Google)

> Given that this also greatly punishes outsourcing

Anyone help me understand these more? My understanding was that instead of deducting the costs of paying software devs the year it happened, it will be spread over 5 years. Which leads to a bigger tax bill now, and benefits bigger companies with deeper pockets as opposed to smaller businesses which have to raise moneny to pay taxes (or lower costs, potentially lower hiring). This should also push companies towards outsourcing, since not all places have similar laws? Is my understanding wrong?

Re: Thousands of small businesses are struggling because of R&D amortization

#39

Post by telesilla »

Take action and sign up for the Small Software Business Owners Association newsletter and petitions to the government:

https://ssballiance.org/

Michele Hansen is doing an incredible job here and should be recognized for it. Latest news was sent yesterday:

Republicans and Democrats finally struck a tax deal that includes a partial fix for Section 174. It includes expanding the Child Tax Credit, a key Democratic priority, with a handful of business tax issues where were Republican priorities...

Not sure if there is a public copy of that email, but the core info is on the site, it has a list of ways to get your representative's attention and a script to follow. Please call.

Re: Thousands of small businesses are struggling because of R&D amortization

#40

Post by moron4hire »

osigurdson wrote: post #27
kleinsch wrote: post #7

More detail with math here. Lawmakers are discussing delaying these changes for a few years and/or allowing deductions for domestic employees, but all depends on signing a budget, which is never certain. https://blog.pragmaticengineer.com/section-174/

>> let go of 23 engineers employed in India >> lots of devs in Switzerland starts to make a lot more sense, especially now. This seems contradictory.

They're talking about incorporating in Switzerland, which allows 135% deduction for R&D costs. Yes, Switzerland pays you to run a startup.
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