Thousands of small businesses are struggling because of R&D amortization • Hacker News Board

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

#141

Post by jagged-chisel » Sat, Jan 20, 2024, 5:51 PM UTC

PaulDavisThe1st wrote: post #133

siliconc0w wrote: post #118

You got it all wrong, sure that first commit was R&D but the rest of the year? Maintenance. Or- sure we launched the platform and that was R&D but now we're just doing data entry.

The IRS document https://www.irs.gov/pub/irs-drop/n-23-63.pdf is extremely clear on this. New features, improvements? All costs must be amortized. You can only expense bug fixes and GUI changes that don't add features.

Aha! I can now put all this stuff into the backend now, and the UX people can futz with how to present it to the users over time. Brilliant!

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

#142

Post by pclmulqdq » Sat, Jan 20, 2024, 5:55 PM UTC

tracerbulletx wrote: post #128

pclmulqdq wrote: post #121

I have said this before and attracted downvotes for it, but here goes. There are two possible arguments here to try, and I have only ever seen people lobbying against this change use the one, less persuasive argument. That argument is what I will call the "incentives" argument: that change in the rule provides bad incentives against doing R&D. This argument goes along the lines of "this will cost jobs for R&D workers…

Having been an accountant early in my career before becoming a software developer, I'm amazed that this isn't the primary argument.

I (shamefully) have an MBA, and I learned a lot about accounting during that process. Whether basic research ought to be operationalized or capitalized when looking at company valuation was actually a bit of a point of debate, but both sides have strong arguments. What definitely shouldn't be capitalized is "new feature for my existing software" which pretty clearly is capitalized under the current rules.

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

#143

Post by ryandrake » Sat, Jan 20, 2024, 6:00 PM UTC

agwa wrote: post #124

ryandrake wrote: post #116

Earlier quoted context omitted.

This is actually great if true! Maybe companies will finally be incentivized to start fixing their bugs rather than cramming unwanted features and UI re-designs into their software products! However I doubt they'd leave such an obvious loophole. Surely the IRS's definition of R&D includes all types of software development activity.

> However I doubt they'd leave such an obvious loophole. Surely the IRS's definition of R&D includes all types of software development activity. I literally just linked to the IRS' definition that says not all software development activity is included.

No, it's really cool, totally glad to see!

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

#144

Post by gavinhoward » Sat, Jan 20, 2024, 6:07 PM UTC

mjwhansen wrote: post #138

gavinhoward wrote: post #108

This is exactly why I decided to not make my single-member, zero employee LLC an S Corp; if I'm paying no salaries, I don't have the Section 174 craziness. With an S Corp, you have to pay yourself a salary, and if your work is primarily software development, Section 174 might hit you. (IANAL or accountant. Talk to one of them.)

Unfortunately, this doesn’t erase the impact. This applies beyond salaries to all resources used for what 174 considers R&D. Servers, software, the desk chair you sit on to do development —- all have to be amortized under 174.

Those are physical things that had to be amortized anyway, and I had planned for that.

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

#145

Post by iancmceachern » Sat, Jan 20, 2024, 6:28 PM UTC

IndoCanada wrote: post #42

moron4hire wrote: post #40

Earlier quoted context omitted.

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

But it is difficult to fire them which is a big problem for tech companies where hiring and firing are common

And it's hard and time consuming to hire in the EU also

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

#146

Post by Steven-Clarke » Sat, Jan 20, 2024, 6:30 PM UTC

Yes Section 174 is a huge issue for US companies of all sizes. We are seeing a shift in companies and other decentralized projects explore places like Panamá. The blockchain industry is dealing with IRS, SEC and other regulatory challenges. Some companies are choosing to leave the US.

There are options and advantages to operating outside the US. US timezone, a USD economy and a territorial tax system makes it easy to operate from my home country.

interview on this topic: https://www.youtube.com/watch?v=BzUAJzKb8bA

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

#147

Post by [deleted] » Sat, Jan 20, 2024, 6:33 PM UTC

pclmulqdq wrote: post #91

addicted wrote: post #55

Earlier quoted context omitted.

They’re calling this a business priority for the Republicans when it was a Republican House, Senate and President that passed this measure. That’s a bit too “must make it seem bipartisan” when there is a clear partisan direction. Even when this fix is passed, it will be voted for unanimously by Democrats and only a small fraction of Republicans will vote for it. Explain again to me how that makes it a Republican prio…

You should note that these sorts of tax law changes are largely a revenue game: Someone wants to cut some other tax, so they find a place to raise taxes elsewhere without thinking about the consequences. But also, the vast majority of people employed by R&D-heavy companies are Democrats, so it's hard to impute motive one way or the other.

[deleted]

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

#148

Post by marcosdumay » Sat, Jan 20, 2024, 6:41 PM UTC

AlbertCory wrote: post #120

I've been researching this for another issue. Anyhow, expensing R&D is a perennial political issue. Logically, if you're creating an income-producing asset, then you have to depreciate it over its useful life. The theory is sound, but of course politicians can mess with it, as they do. But I thought the "useful life" of software was 3 years. No?

You usually want to incentivize R&D, messing with that simple theory is the standard.

Anyway, even that 3 years common knowledge number is biased into long-lived code. Do you spend work time putting out fires? Do you write code that is immediately discovered to be wrong so you have to take more time and fix it? Those 3 years are only for software that already passed through all of that.

(Anyway, I don't have any interest on that fight, I'm just watching from a safe distance.)

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

#149

Post by andoaazzz662 » Sat, Jan 20, 2024, 6:44 PM UTC

Playing devil's advocate here. There are a large number of jobs that fall under this R&D classification in the software space that I do not feel carry the weight that a term like R&D ought to imply. This carve out was clearly intended to be for fundamental research in hard technical disciplines. Much of where it is being claimed however is really more accurately described as product development and market research at best. Not the kind of hard technical R&D that this is pitched as.

It seems that the number of software engineers involved in actual R&D (according to my admittedly made up and subjective definition) is vanishingly small, much less than 1% in all likelihood if we do some quick napkin guestimates.

So to what extent do we want to provide tax incentives to (an already profitable in some cases but also commonly accused of setting big piles of money on fire) industry for normal run of the mill product development? That's what's really going on here imo, and it's not obvious to me that there is any way to justify that. There has to be some line drawn somewhere between applications development / product development, and true R&D ala some systems research group working on scheduling algorithms or whatever.

I admit that the line here is blurry and not well defined. That needs to change if there are tax incentives involved.

At the very least, anything that you know for sure is going to end up in an end product is NOT R&D. The definition ought to depend on what a reasonable and informed observer would classify the risk of total failure to be. True R&D tends to have a very high risk of complete failure in either a technical sense or a product integration sense (as in, you find a solution to your question but it cannot be made into a commercially viable product, often for technical reasons or the specifics of your solution). That is what laws like this are intended to incentive, because we have collectively decided that we want this research to take place even if the risk calculus is such that it is entirely unprofitable for a lot of companies.

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

#150

Post by erichocean » Sat, Jan 20, 2024, 6:55 PM UTC

nullc wrote: post #131

The same continuing income occurs for journalists and other fields that produce copyrighted output, in fact it's more true there since there isn't a substantial bug fixing load. So why just software and not all fields that produce durable intellectual property?

It's even more clear with copyright what the amortization period should be.