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The time bomb in the tax code that's fueling mass tech layoffs

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Re: The time bomb in the tax code that's fueling mass tech layoffs

#51

Post by Retric »

demosthanos wrote: post #47
Retric wrote: post #45

Earlier quoted context omitted.

> I've seen no justification for the government deciding that from 2022 on we should actively discourage R&D, it just seems to be a mistake. Removing a specific tax exemption to create a level playing field isn’t discouraging R&D. That’s the thing, every year such exemptions exist the US taxpayers are handing out money. Just because we subsidize say EV’s or Corn doesn’t mean that’s the baseline forever more.

Level playing field for whom? Who does incentivizing R&D disadvantage? Restaurants weren't competing with R&D-heavy corporations in any way. R&D-heavy corporations competed with each other, on a level playing field where all of them can build new stuff without having to pay taxes on negative income in their early years. The only change this has made is un-level the playing field in favor of old, established corporati…

> Who does incentivizing R&D disadvantage?

Taxpayers who end up with the bill and every company is competing for workers, office space, etc. Incentives across decades shift what people study, what business get created, etc. R&D sounds great abstractly, but it’s not some panacea where unlimited funding results in pure gains.

The economy is generally more efficient without central planning, and dumping money into anything that can be classified as R&D is simply inefficient.

Re: The time bomb in the tax code that's fueling mass tech layoffs

#52

Post by deanputney »

svara wrote: post #46

> For cash-strapped companies, especially those not yet profitable, the result was a painful tax bill just as venture funding dried up and interest rates soared Can someone explain this? What taxes do unprofitable US businesses owe that this would be deducted against?

That is kind of strangely worded, but I think I see what they're getting at.

Say you would have been exactly not-profitable ($0) if you could expense all of your R&D as in the old system, therefore avoiding tax. Now with the new rules you may be on-paper profitable because you can only deduct 20% of the R&D as an expense this year. The remaining 80% of that expense tips you over, becomes profit, and that's taxable.

Re: The time bomb in the tax code that's fueling mass tech layoffs

#54

Post by demosthanos »

twoodfin wrote: post #50
demosthanos wrote: post #42

Earlier quoted context omitted.

The reason that we require you to deduct an expense over years for some things is because they have a resale value that needs to be accounted for. It's not a pure expense because you have an asset with real value that came out of the purchase. Employee time has no resale value. Once used it's gone, so employee salaries are expenses, not investments. The only possible justification for the Section 174 R&D changes is t…

What about construction worker and other labor time to build a factory? That’s the analogy being made here by the tax code: Software whose development is a capital expense with value returned over time.

From a quick search it appears to me like construction labor is deductible as an expense in the year it is incurred. Do you have evidence that says otherwise?

Re: The time bomb in the tax code that's fueling mass tech layoffs

#56

Post by wdaher »

svara wrote: post #46

> For cash-strapped companies, especially those not yet profitable, the result was a painful tax bill just as venture funding dried up and interest rates soared Can someone explain this? What taxes do unprofitable US businesses owe that this would be deducted against?

Here's a toy example that hopefully makes this clear:

In 2024, your business has $1m in revenue and has $2m in expenses. 100% of these expenses are R&D salaries (engineers you hire.)

Your company loses $1m/year. (You brought in $1m and spent $2m.)

Under the old rules, you'd owe no tax because you were unprofitable.

After Sec 174, what the IRS now says is:

You had revenues of $1m. But you only had $400k in expenses (because you now have to spread that $2m in R&D expense over 5 years).

So actually you had a profit of $600k! And you owe tax on that $600k profit (~$120k)

So you now have an additional $120k tax expense, making your business even more cash-flow negative.

.

Amusingly, if you're pre-revenue, none of this matters (you have no income at all, so it doesn't matter what your expenses are.) You get hardest hit by this change when you have some revenue and when you do a fair bit of R&D.

Re: The time bomb in the tax code that's fueling mass tech layoffs

#58

Post by ak217 »

potato3732842 wrote: post #4

>The delayed change to Section 174 — from immediate expensing of R&D to mandatory amortization, meaning that companies must spread the deduction out in smaller chunks over five or even 15-year periods. Doesn't this just amortize out to be roughly the same amount of deduction over the long term? All the big companies mentioned should be relatively unaffected over an N>5 year time period. Also this was something that's…

Yes, if you are a profitable company operating at a steady state and your investors have a time horizon of (in other words, are locked in for) a decade or more.

Most companies in question don't fit these criteria. They are either large public companies subject to the reactions of the market to quarterly earnings, or small private startups that have limited cash (a runway of far less than 5 years) and are facing a perfect storm of a historic rise in the cost of capital coinciding with this change.

In either case, their cost of labor just went up by a lot and will continue to cause layoffs, labor market shrinkage, and diminished ability to develop new products.

Re: The time bomb in the tax code that's fueling mass tech layoffs

#59

Post by orangecat »

deanputney wrote: post #52
svara wrote: post #46

> For cash-strapped companies, especially those not yet profitable, the result was a painful tax bill just as venture funding dried up and interest rates soared Can someone explain this? What taxes do unprofitable US businesses owe that this would be deducted against?

That is kind of strangely worded, but I think I see what they're getting at. Say you would have been exactly not-profitable ($0) if you could expense all of your R&D as in the old system, therefore avoiding tax. Now with the new rules you may be on-paper profitable because you can only deduct 20% of the R&D as an expense this year. The remaining 80% of that expense tips you over, becomes profit, and that's taxable.

Right. With concrete numbers, say your main expense is $1 million in developer salaries and you have $500k in revenue. Going by the previous rules, you have a loss of $500k and don't owe income tax. With the new rules, you can only deduct $200k of expenses which gives you a "profit" of $300k, on which you'll owe $62k in taxes.

Re: The time bomb in the tax code that's fueling mass tech layoffs

#60

Post by thayne »

altairprime wrote: post #40
potamic wrote: post #22

This is insane, how does it make sense? Employee salary expenses are no different from other expenses to run your business. Imagine they did this for raw material instead, a restaurant could only expense 20% of the food that they sell. If they purchased $100 worth of food, but could only sell $50 worth of it, they have to pay tax on that even when making a net loss overall. It just does not make any sense. There woul…

It makes sense when you consider that there is no minimum tax rate on businesses. Given the choice, Amazon would rather spend 100% of its profits on itself than allow any of its profits to be paid out in taxes. Section 174 was implemented without a minimum tax on corporate profits before voluntary deductions such as research. Therefore, it’s exploitable and all companies ought to hire and fire staff to ensure their p…

The company already pays payroll taxes on those salaries, and the employees pay income taxes. And the people hurt by this aren't the shareholders or top executives, it's the rank and file workers getting laid off, losing benefits, and being asked to work more for the same pay.

What this change effectively did was make software developers significantly more expensive, without increasing the amount those developers get paid.

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