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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

#101

Post by kelnos »

dtagames wrote: post #2

This doesn't explain the mass tech layoffs. According to the article, the rule applies to R&D. The vast majority of tech workers laid off in the last two years didn't work in research and development. They wrote regular software for sale, like games, for example. The games industry, while hugely profitable and bigger than TV, movies, and music combined, laid off tens of thousands of people. It's unmitigated greed is…

> They wrote regular software for sale, like games, for example.

Even though it sounds unintuitive, that activity is considered R&D for tax purposes.

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

#102

Post by thaumasiotes »

sitkack wrote: post #68
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…

Software is like Art, it doesn't have value until sold or can be used. If they sell services based on the software, they are generating revenue and then taxation on that revenue can occur. Same as if they sell the software, either as a copy or ownership. But not being able to take salary as a business expense seems like as thing that would happen if software in and of itself has value, which is largely does not.

> But not being able to take salary as a business expense seems like as thing that would happen if software in and of itself has value, which is largely does not.

To me it seems like a thing that just wouldn't happen. Forget software.

Say you own a McDonald's, and as part of your operations you have some people on staff to take orders, prepare food, and clean the bathrooms. Why are their wages not a deductible business expense?

If the answer is "they are, don't be stupid", then... what exactly was the R&D tax break?

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

#103

Post by californical »

thayne wrote: post #60
altairprime wrote: post #40

Earlier quoted context omitted.

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…

Don’t forget the other stakeholder - the general public.

Yes it sucks for developers, but does it make any difference for any other employee? Why does Joe’s plumbing have to pay those taxes, but Jane’s AdTech company doesn’t?

Sure, there are benefits to investing in R&D in general, and tech has fueled a lot of growth, so incentivizing it has likely paid off for the whole economy. But will that forever be true? Maybe?

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

#104

Post by polotics »

sokoloff wrote: post #32
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…

Now imagine that a restaurant buys 100 tables, 500 chairs, kitchen equipment, cutlery for 800 people, signage, a security system, and does a remodeling before opening. (Or an airline buys an airplane. Or a hotel chain builds a hotel.) Should they be able to expense all of those items that provide value for multiple years in a single year? Does software development provide value exclusively in the year it's done? Or o…

I have seen a lot of software development where what's been done has been changed beyond recognition over the course of less than a year.

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

#105

Post by svara »

mppm wrote: post #71
svara wrote: post #63

Earlier quoted context omitted.

Is this true even if you don't capitalize the immaterial IP asset generated by the R&D salaries on the balance sheet? Is that required in the US? Otherwise I'm quite amazed that salaries can be carried forward as future expenses.

Elsewhere in the world (under IFRS accounting rules) capitalization of R&D costs has been a firm requirement for a while. The US has been somewhat unique in allowing them to be expensed instead, until recently.

Taxes are calculated according to tax accounting rules, not IFRS, though?

I know of at least two Western European countries where you don't have to do that. Don't worry, we pay enough taxes either way ;)

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

#106

Post by sitkack »

eximius wrote: post #99
sitkack wrote: post #62

Is there a flaw in saying, "salaries should always be considered a business expense and cannot be amortized over many years." ?

Considering they are probably the largest component of R&D expenses... yes, _if_ you think R&D should be tax-subsidized in some way.

I don't understand how that is a subsidy, are the people paying the employer?

The employer makes less profit due to salaries, but they won't "lose less" or make more money due to salaries.

Under that argument, the government would have a direct incentive to dictate how businesses do business to maximize taxable revenue.

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

#107

Post by warkdarrior »

londons_explore wrote: post #36
sokoloff wrote: post #32

Earlier quoted context omitted.

Now imagine that a restaurant buys 100 tables, 500 chairs, kitchen equipment, cutlery for 800 people, signage, a security system, and does a remodeling before opening. (Or an airline buys an airplane. Or a hotel chain builds a hotel.) Should they be able to expense all of those items that provide value for multiple years in a single year? Does software development provide value exclusively in the year it's done? Or o…

It's only shifting what year the government gets its revenue. The government should simply let the company choose how to do it, but if they choose anything other than year 1 interest will be payable at government bond rates.

It's also massively shifting the companies' cash flows. The company paid $X for R&D this year, but for tax purposes 80% of that $X expense is moved to next four years. So for this year's tax purposes, the company R&D expenses are much lower than what the company paid.

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

#108

Post by satya71 »

dadoprso wrote: post #48
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?

I thought you could carry forward losses or something. i.e. Once profitable you can use your previous losses as 'tax credits'.

Yes, but businesses operate on cash, not tax credits.

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

#109

Post by beezle »

Bloomstink has a short article on R&D expenses/tax credits as does Reuters on some of the back and current history.

But just as an accounting note: R&D expense has nothing to do with the company having revenues for an existing product, which already is allowed to deduct cost of goods sold, selling and admin expense. It is a cost related to future business and in that regard, it is not crazy to say it should be amortized. That in the past this did not happen, or that accelerated depreciation for other assets is in the IRS code is a function of the government wanting to effectively subsidize business investment.

https://pro.bloombergtax.com/insights/federal-tax/rd-tax-cre...

https://tax.thomsonreuters.com/news/the-future-of-rd-expensi...

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

#110

Post by jorvi »

wdaher wrote: post #56
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 (b…

> 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.)

https://youtu.be/BzAdXyPYKQo

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