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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

#301

Post by gumby »

a-dub wrote: post #267
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 know enough about tax codes and how business works to comment on the actual policy, but it sure does seem to me that changes that result in immediate and massive new liabilities are unfair.

> changes that result in immediate and massive new liabilities are unfair.

Congress knows this: the law was passed in 2017 but only took effect for tax year 2022. This very issue was widely discussed at the time.

That was five years to figure out what to do and your CFO (or at the very least your tax accountant) should have been warning you. I mean, if your tax accountant doesn't know the tax law that's a bad thing.

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

#302

Post by cj »

gumby wrote: post #298
cj wrote: post #279

Earlier quoted context omitted.

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)

Before the 2017 change you could and should have if they were not engaged in actual R&D. But people used to lump them into R&D anyway because of the preferential tax treatment (you also used to get special treatment for NOL, which you can't any more). Software development doesn't generally follow GAAP's model because unless you're IBM or Oracle the same people sometimes fix bugs and sometimes develop new features. Th…

I own a company with millions in payroll expense.

All of payroll is lumped into 1 line item when submitted to the IRS. (I’m only somewhat simplifying for sake of argument)

We would have to go out of our way to split out R&D.

When you win $500 at a casino, do you go out of your way to claim the gain on your taxes? Absolutely not. Are you supposed to? Absolutely, but you don’t. And the IRS doesn’t much care.

I feel like we’re talking past each other. The vast majority of companies won’t be paying more taxes because of this rule change.

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

#303

Post by adrr »

moron4hire wrote: post #286
adrr wrote: post #273

Earlier quoted context omitted.

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 accoun…

I don’t get. It doesn’t say five years.

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

#305

Post by rgbrenner »

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.

TCJA actually says 5 years for domestic research and 15 for foreign.

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

#306

Post by mindslight »

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?

That's a fantastic point!

Also it made me think about the converse, which might be interesting - libre software. Assuming a company has no plans of dual-licensing, ownership of the actual copyright of libre software is independent of how that software gets used to generate income. Anyone else could come along and use a copy of the software to create a business without any license payments to the owner. Or alternatively the original company could donate said software to a nonprofit steward (eg FSF or Apache) and be in a similar position. So accounting wise, it would seem that amounts spent on developing libre software could be more appropriately classified along with things like recruiting, advertising expenses, or even charitable donations, rather than the creation of an income-producing asset.

Setting up that software to work on the company's production infrastructure would still be a development expense requiring amortization. But the work to keep it running would still be maintenance.

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

#307

Post by [deleted] »

geraldwhen wrote: post #90
MattRix wrote: post #71

Earlier quoted context omitted.

Well the “good” thing about this law is that it also classifies ALL software development (and any supporting activities!) as R&D. And yes that’s as absurd as it sounds, but it’s true.

This is a good thing. Prior to this, I had to make up a paper explaining why my team was R&D with help from an outside consulting group annually. It was always a sham. We were building product.

[deleted]

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

#308

Post by rgbrenner »

moron4hire wrote: post #286
adrr wrote: post #273

Earlier quoted context omitted.

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 accoun…

This means something different than adrr is asking about. The IRS has depreciation schedules for different asset classes. For example, trucks are 5 years; real estate is 39 years; but you can under some circumstances use an Alternative Depreciation Schedule (ADS).. the depreciation schedule should match the usable lifetime of the asset.

But if the typical lifetime is 5 years, but you use an ADS of 2 years... you are not disposing or abandoning the asset if you keep it for 2 years. 2 years is the expected life time of the asset, and at the end of year 2, the asset has a value of $0.

If you depreciate over 5 years, but then on year 2 decide you don't need the asset anymore, then you'll dispose of it. The asset is valued at 3/5ths of the original price. The paragraph you're quoting applies to this scenario.

ADS doesn't apply here though, because TCJA requires 5 years for domestic and 15 years for foreign research.

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

#309

Post by BenFranklin100 »

Gormo wrote: post #292
BenFranklin100 wrote: post #169

Earlier quoted context omitted.

Further, R&D is at best a bet, as any of us who has ran a technology business well know. It’s not at all clear one will be able to take the research to market and monetize the R&D investment. Doing that is called founding a successful company.

And if the investment pays off, so that the R&D creates revenue in future years after it's already been paid for, then it will result in actual taxable profit in those future years . It seems like the IRS is trying to speculatively tax unrealized future profits here, and that's pretty unconscionable.

Excellent point.

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

#310

Post by elicksaur »

nicksergeant wrote: post #274
agwa wrote: post #105

Earlier quoted context omitted.

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 a…

The link literally says that:

> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.

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