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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

#281

Post by mikeyouse »

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.

That comes off the balance sheet which doesn’t impact taxes. Eg if they raised $100k from friends/family to start the company, that equity investment has no bearing on the P&L or taxes owed.

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

#282

Post by [deleted] »

Steven-Clarke wrote: post #264
wait_a_minute wrote: post #247

Earlier quoted context omitted.

Why on earth would someone give up ownership of their product or platform to an overseas subsidiary? The risks of that are massive, especially in a setting that is more prone to conflict as of late. This would increase the risks of losing your IP entirely. If ownership and development move overseas, then you'd be giving what you have away to someone else to entrust them with the entire thing to avoid paying a bit of…

TL;DR: Engaging with decentralized organizations and open-source communities allows access to global talent and diverse perspectives, fostering innovation and resilience. This approach, focusing on collaboration over ownership, offers potential benefits in R&D and innovation, outweighing traditional models that prioritize geographical and IP constraints. 1. Global Talent and Diverse Perspectives: DAOs and open-source…

[deleted]

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

#283

Post by eropple »

koolba wrote: post #242
pcai wrote: post #225

Earlier quoted context omitted.

imagine in year 1 you grossed 100k, spent 200k on salaries, but the new irs rules say you owe taxes on 60k of profits. To slightly simplify: it forces startups to pay taxes on profits that only exist on paper, with cash that is now much more scarce

> imagine in year 1 you grossed 100k, spent 200k on salaries, but the new irs rules say you owe taxes on 60k of profits. For a clearer picture on this it’s helpful to include the actual tax amount. With a corporate rate of 21%, the tax would be about $12K. Now that’s not zero, but it better shows the actual cost born in year one under this plan. The later years are important as well. As profits continue to flow in, t…

Right, this is exactly why I'm confused about the all-is-lost framing of this. $12K isn't nothing. It's a pretty shitty thing to have drop on you and I think it should revert. But if you're starting a software business that isn't a solo shop--so you have hundreds of thousands of dollars in payroll--I would expect a $12K difference to not be the needle-mover between "start a business" and "don't"; we're not talking a hot dog stand here.

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

#284

Post by dboreham »

WalterBright wrote: post #276

Taxing a startup on non-existent "profit" is a really bad idea.

You have to have income in order to be taxed. So there is no taxing non-existent profit. There has to be actual profit. What people must be complaining about is that they can't take all the income from product X in year Y and say it was spent on developing product X so no profit was made. Instead they'd need to have spent that income on marketing supporting and maintaining that product. Then they'd be making zero profit and no tax owed.

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

#285

Post by wait_a_minute »

Steven-Clarke wrote: post #264
wait_a_minute wrote: post #247

Earlier quoted context omitted.

Why on earth would someone give up ownership of their product or platform to an overseas subsidiary? The risks of that are massive, especially in a setting that is more prone to conflict as of late. This would increase the risks of losing your IP entirely. If ownership and development move overseas, then you'd be giving what you have away to someone else to entrust them with the entire thing to avoid paying a bit of…

TL;DR: Engaging with decentralized organizations and open-source communities allows access to global talent and diverse perspectives, fostering innovation and resilience. This approach, focusing on collaboration over ownership, offers potential benefits in R&D and innovation, outweighing traditional models that prioritize geographical and IP constraints. 1. Global Talent and Diverse Perspectives: DAOs and open-source…

I'm a fan of DAOs for some things, but giving the legal ownership of the IP and the keys to running the entire platform to a subsidiary is not the same conversation as "here's how DAOs work."

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

#286

Post by moron4hire »

adrr wrote: post #273
HWR_14 wrote: post #248

Earlier quoted context omitted.

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.

> 26 US Code Section 174, paragraph D - Treatment upon disposition, retirement, or abandonment

  If any property with respect to which specified research or experimental
  expenditures are paid or incurred is disposed, retired, or abandoned
  during the period during which such expenditures are allowed as an amortization
  deduction under this section, no deduction shall be allowed with respect to
  such expenditures on account of such disposition, retirement, or abandonment
  and such amortization deduction shall continue with respect to such expenditures.

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

#287

Post by pcthrowaway »

ckdarby wrote: post #280
MattRix wrote: post #68

Earlier quoted context omitted.

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.

I was trying to raise that same question here: https://news.ycombinator.com/item?id=39015849#39018565

My feeling is that an EoR (employer of record) like remote.com might be enough for everyone to be able to avoid R&D capitalization. The research happens in Canada, by a Canadian employee of a Canadian company. You pay an American company for outsourcing human resources. The American company pays the Canadian company for human resources services.

Then again, if you're paying another company for outsourced human resouces, but you have an IP assignment clause as part of that, maybe you would need to claim it as your R&D expense

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

#288

Post by WalterBright »

dboreham wrote: post #284
WalterBright wrote: post #276

Taxing a startup on non-existent "profit" is a really bad idea.

You have to have income in order to be taxed. So there is no taxing non-existent profit. There has to be actual profit. What people must be complaining about is that they can't take all the income from product X in year Y and say it was spent on developing product X so no profit was made. Instead they'd need to have spent that income on marketing supporting and maintaining that product. Then they'd be making zero pro…

If you spent $100k on salaries and generated $60k of revenue, you'll owe tax but you lost $40k.

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

#290

Post by pcai »

eropple wrote: post #283
koolba wrote: post #242

Earlier quoted context omitted.

> imagine in year 1 you grossed 100k, spent 200k on salaries, but the new irs rules say you owe taxes on 60k of profits. For a clearer picture on this it’s helpful to include the actual tax amount. With a corporate rate of 21%, the tax would be about $12K. Now that’s not zero, but it better shows the actual cost born in year one under this plan. The later years are important as well. As profits continue to flow in, t…

Right, this is exactly why I'm confused about the all-is-lost framing of this. $12K isn't nothing. It's a pretty shitty thing to have drop on you and I think it should revert. But if you're starting a software business that isn't a solo shop--so you have hundreds of thousands of dollars in payroll--I would expect a $12K difference to not be the needle-mover between "start a business" and "don't"; we're not talking a…

I understand where you’re coming from but the thing to understand is: most startups are incredibly marginal to begin with. If you tilt the field such that the entire distribution is now ~5-6% lower expected value for any given outcome, you can easily wipe out 80%+ of the startups that might’ve been “worth trying” but don’t make any sense now on a risk-adjusted basis. The entire asset class can become unfundable because the same money taking the same level of risk simply generates more returns elsewhere
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