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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

#171

Post by ksec »

klipt wrote: post #117
beezle wrote: post #109

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 amorti…

But most employee salaries are deductible right? If you hire a chef at your restaurant, you aren't depreciating their salary. Doesn't that make software engineers one of the few employees with much worse tax treatment?

I think that is the simplest and best analogy I have read so far in the comments.

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

#172

Post by kopecs »

timewizard wrote: post #154
sampton wrote: post #133

Amortization is bad policy when it comes software. Software is inherently high risk. Every piece of software is unique and does not guarantee steady income over 5 years. Most startups won't survive 5 years to fully realize the deductions. This is the end of US software dominance.

Is US software dominance because of our startups? Or because of the giant trillion dollar monopolies we have? Didn't AAPL, GOOG and FB all create products _before_ they had any taxable income? Would this change have had any actual impact on their foundings?

Well, presumably the claim would be that a factor in their not having taxable income was the fact that they didn't have to amortize their development cost.

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

#173

Post by linkjuice4all »

holtkam2 wrote: post #130

Honest question, is there a community / grassroots effort I can participate in so that this this section 174 change can be reverted to its pre-2022 state? I'm wondering, if such a movement doesn't doesn't exist already, do I need to start it myself?

- Gather up about 10 million dollars (more will help)

- Bribe the right people

I hate to provide such a cynical and lazy response but we've got until midterms (maybe) before you really have a shot at 'democratically' influencing the system. For the time being you'll have to work with the mafia that's currently running things and outbid whoever wanted this to happen in the first place.

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

#174

Post by altairprime »

jay_kyburz wrote: post #169
klipt wrote: post #135

Earlier quoted context omitted.

If Joe's plumbing hires an assistant plumber, they get to fully deduct the assistant's salary. Why do I, the hardworking tax payer, have to subsidize Joe Plumber, who already has a big house with a pool?

In some parts of the world we have a sales tax which is a form of minimum tax on business outputs. The consumers of plumbing and software pay 10% regardless on a businesses profitability.

Yeah, VAT would help tremendously in alternative here, but for gestures at United States sociopolitics reasons the existing U.S. taxation methods can’t keep up and won’t be repaired any time soon. I could boil the ocean on this down to bedrock (citizens should be taxed on [redacted] in excess of threshold, services and goods should be VATed) but I stand by “section 174 with a sub-100% cap” as what at minimum would have balanced research and taxation.

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

#175

Post by jay_kyburz »

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.

The software itself has no value, it's the licence to use the software.

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

#176

Post by inChargeOfIT »

demosthanos wrote: post #73
paulcole wrote: post #65

Earlier quoted context omitted.

But nobody’s forcing you to classify software developers as R&D.

No, that's literally the Section 174 change. You now must count them as R&D. The relevant paragraph from Section 174: > (3) Software development > 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. https://www.law.cornell.edu/uscode/text/26/174

So that would include everything? - cloud/hosting expenses - system administrators/devops engineers and their laptops, workstations - project management software, office software, support, etc - project managers, designers, technical writers, qa engineers - software licenses, domain names, certificates, etc - internet bandwidth, data-centers, HVAC, backups

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

#177

Post by mixdup »

MattPalmer1086 wrote: post #136
wdaher wrote: post #56

Earlier quoted context omitted.

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…

Wait - they are saying that employee salaries are not expenses? That is surely wrong? Just because those salaries are for R&D? I could understand if there was some additional tax break for R&D which was being removed. I can't see how basic operating costs cease to be expenses.

What other cost do you think goes into software development? Companies are not spending that much money on IDE licenses. The vast, vast majority of software/R&D costs are labor

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

#178

Post by [deleted] »

demosthanos wrote: post #96

There are some misunderstandings in the comments that seem to stem from not having read the section, so I thought it was worth referencing the actual text [0]. It's quite short and easy to read. The most important bits: * Subsection (a) requires amortizing "Specified research or experimental expenditures" over 5 years (paragraph (2)) instead of deducting them (paragraph (1)) * Paragraph (c)(3) is a Special Rule that…

[deleted]

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

#179

Post by Retric »

HillRat wrote: post #134
Retric wrote: post #94

Earlier quoted context omitted.

> none of us would work for a company that isn't doing R&D So you’d just be unemployed for the rest of your lives? That’s a possible edge case not worth adjusting the tax code for, but it seems unlikely. > wouldn't force you to pay taxes on a loss. R&D is an investment, you only pay taxes if the rest of the company is profitable. If your company is spending 1M / year on R&D and not adding 800k in long term value then…

The problem here is that all software development (excepting that done for hire) is classified as R&D. The software developer working on your Wordpress or Magento site (and arguably the accountant building a spreadsheet, to take the statute at face value) isn't an operational expense, they're now an R&D expense that has to be amortized and can't be taken as an expense against revenue. Previously, this was an optional…

> Early-tags startups into cash bond fires

As a practical measure it’s really not. The transition is difficult for existing companies, but a future startup is going to be minimally impacted.

Year 0 you’re unlikely to have any profits, future years you have multiple years of R&D to offset with.

But let’s assume the worst case. Taxes are 21% of profits and at minimum deduction 20% of R&D so the theoretical maximum distribution is 0.8 * 0.21 = 16.8% increase in R&D expenses if profits = R&D year 0. But that maximum case is only year 0, you’d be able to fund R&D with those same profits and easily be profitable after that.

If profits where say 40% of R&D in year 0 you’d have to pay 16.8% of 40% so an increase is only 6.72% hardly likely to tank the business if it’s already generating that kind of income year 0, and again after that point you’ll deduct for multiple years.

More realistic numbers are going to be really low multiples here, more importantly they represent significant investments not operating expenses.

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

#180

Post by mixdup »

demosthanos wrote: post #42
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…

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…

But the employee time that had a one time use was turned into software. That software is the thing that has value longer than "right now"
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