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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

#271

Post by EdwardDiego »

Steven-Clarke wrote: post #146

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…

I think the crypto industry is going to face tax and securities regulation in any jurisdiction that isn't corrupt or operating as a tax haven.

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

#272

Post by cj »

gumby wrote: post #261

To be fair, accelerated R&D amortization (immediate full expensing in the year the expense was incurred) is a tax loophole . Essentially, the default tax treatment of expenses is basically to take the expense same as you would treat it under GAAP, but some people (I am one of them BTW) think that we should put a finger on the scales for the case of legitimate R&D. Now though I happen to think accelerating it is a goo…

I don’t understand why businesses can’t just say that their engineering department is a cost center (COGS) instead of classifying engineer salaries as R&D expenditures.

I guess one downside would be not qualifying for the R&D tax credit.

The majority of software engineering is the equivalent of janitorial work… keeping servers online, fixing bugs, maintaining services, upgrading and refactoring code, etc.

It’s difficult for me to tell how much of this issue is just people making a fuss about the literal interpretation of the tax code compared to how it will, in practice, impact their business.

Nearly all accountants try to operate in the gray, in that accountants know how to tweak the numbers just enough to not get in big trouble with the IRS but enough that the business can slide through various loopholes. I have a feeling most accountants would just say “reclassify your engineers as maintenance workers, COGS” as a solution.

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

#273

Post by adrr »

HWR_14 wrote: post #248
eropple wrote: post #209

Earlier quoted context omitted.

> It's not enough. I was geared up to start a business this year; this, specifically, has put the brakes on it. I've read a little about this, but not a lot. How has this put sufficient drag on starting a business that it's impractical to go from zero to one? Is there an aspect of the business model that's particularly impacted?

Your salary costs for all programming and other development can only be written off over a five year period instead of the year you incur them. That means if you are breaking even normally with 1MM of developer costs, the government will tax you as though you made 800k. Because it says 80% of the code they write is a long term investment and therefore needs to be written off over time like a company car or a drill pr…

It’s not five years. It’s whatever the useful lifespan of the software. Web dev we usually did 2 years since that was the average lifespan of a web page.

For public companies, they are incentivized to amortize over longer period because it hides expenses and can boost earnings that boosts stock price.

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

#274

Post by nicksergeant »

agwa wrote: post #105
minton wrote: post #96

I’m confused why this is so impactful. If you have software devs, even if you don’t classify as R&D, you can deduct their full salaries, right?

No, the law defines all software development costs as R&D (technically "R&E") for the purposes of requiring capitalization: https://www.law.cornell.edu/uscode/text/26/174 (c)(3) This is regardless of whether you classify the costs as R&D for the purpose of claiming a tax credit under Section 163.

No, what you linked to there specifically says that "In the case of a taxpayer’s specified research or experimental expenditures for any taxable year", _then_ any software development is classified as R&D for the purpose of requiring capitalization.

I don't see anywhere saying that _any and all software development_ is considered "research or experimental". Ie., if some company pays you to build a piece of software and you hand it over when you're done, you were not engaged in research/experimental expenditures if you paid people to build said software.

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

#275

Post by csdreamer7 »

cj wrote: post #272
gumby wrote: post #261

To be fair, accelerated R&D amortization (immediate full expensing in the year the expense was incurred) is a tax loophole . Essentially, the default tax treatment of expenses is basically to take the expense same as you would treat it under GAAP, but some people (I am one of them BTW) think that we should put a finger on the scales for the case of legitimate R&D. Now though I happen to think accelerating it is a goo…

I don’t understand why businesses can’t just say that their engineering department is a cost center (COGS) instead of classifying engineer salaries as R&D expenditures. I guess one downside would be not qualifying for the R&D tax credit. The majority of software engineering is the equivalent of janitorial work… keeping servers online, fixing bugs, maintaining services, upgrading and refactoring code, etc. It’s diffic…

> I don’t understand why businesses can’t just say that their engineering department is a cost center (COGS) instead of classifying engineer salaries as R&D expenditures.

They used to be able to. Then Trump and the Republicans came into power and changed it in 2017; the first year to be effective is 2022.

https://bipartisanpolicy.org/blog/congress-is-running-out-of...

This was to help finance that 20% tax loophole as far as I understand it.

https://www.nytimes.com/2018/08/08/us/politics/tax-deduction...

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

#277

Post by jkelleyrtp »

wmf wrote: post #237
jkelleyrtp wrote: post #232

Can someone help me understand? Let's just say I started a company last year. I sell software and made $100k revenue this year. I hired someone for $100k to help build that software. I have zero dollars left in the bank at the end of the year. According to 174 I can only amortize that $100k over 5 years, not all at once. So now I have to pay taxes on $80k profit. I have no money in my bank account, how can I pay any…

You're understanding it correctly. The "answer" is that you either take VC investment, borrow money to pay the taxes (in this economy??), or go out of business.

Going into business is now a liability for me.

What? Why is all software work counted this way? Why software? Shouldn't I be paying taxes later once I've made money? This is like paying taxes on unrealized gains - I can't pay those taxes - I haven't made any gains!

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

#278

Post by jkelleyrtp »

codingclaws wrote: post #255
jkelleyrtp wrote: post #232

Can someone help me understand? Let's just say I started a company last year. I sell software and made $100k revenue this year. I hired someone for $100k to help build that software. I have zero dollars left in the bank at the end of the year. According to 174 I can only amortize that $100k over 5 years, not all at once. So now I have to pay taxes on $80k profit. I have no money in my bank account, how can I pay any…

Wait, isn't it an incomplete example? How much money did you start with? In other words, you had to pay the developer some salary before any revenue came in.

I built a prototype for a potential customer and they agreed to pay me 100k to develop it. Let's say they're my only customer - we're a boutique shop. I didn't need any startup capital - just needed to promise to solve one person's problem.

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

#279

Post by cj »

csdreamer7 wrote: post #275
cj wrote: post #272

Earlier quoted context omitted.

I don’t understand why businesses can’t just say that their engineering department is a cost center (COGS) instead of classifying engineer salaries as R&D expenditures. I guess one downside would be not qualifying for the R&D tax credit. The majority of software engineering is the equivalent of janitorial work… keeping servers online, fixing bugs, maintaining services, upgrading and refactoring code, etc. It’s diffic…

> I don’t understand why businesses can’t just say that their engineering department is a cost center (COGS) instead of classifying engineer salaries as R&D expenditures. They used to be able to. Then Trump and the Republicans came into power and changed it in 2017; the first year to be effective is 2022. https://bipartisanpolicy.org/blog/congress-is-running-out-of... This was to help finance that 20% tax loophole as…

The article you linked to is about R&D.

The point I was making is that software engineers don’t need to be classified as R&D.

Why can’t a company lump engineers in the same category as technical support? (Which doesn’t need to be amortized)

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

#280

Post by ckdarby »

MattRix wrote: post #68
edgyquant wrote: post #43

Earlier quoted context omitted.

Especially since it seems like you can spread it out over 15 years, 3 times as long, if you have overseas devs. >These costs have to be capitalized and amortized over 5 years – or 15 if labor is done outside of the US. I’m not an accountant so maybe I’m reading that wrong, but if so that’s insane.

You MUST spread it over 15 years, which is brutal for most companies and will mean no longer hiring any foreign R&D or software development contractors.

Can't the work be done in a Canadian entity instead of labour being hired via the US entity?

This way, all the R&D expenses are happening in Canada.

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