Tell HN: Help restore the tax deduction for software dev in the US (Section 174)

Is H1B a tax issue?

Almost all work is tax deductible. This isn't just for software developers and employees still pay taxes. The issue is software development is being classified as research which is one of the few areas where salaries aren't directly deductible but instead need to be deducted in pieces over five years.

Signed.

That said, here's my perspective on 174 (which should be reverted to full deduction on the year the expense is incurred).

You do not have to amortize 100% of your engineering costs. Not even close.

Here's the key:

  Development costs incurred to remove uncertainty are amortized.  
  All other costs are deductible during the tax year where they are incurred.

How does this work?

You are going to design a new robot arm.

In January, you spend $100K to "remove uncertainty". In rough strokes, this means discovering all the things you don't know and need to know for this robot arm to become a product. This amount will be amortized over five years under 174.

Now, with uncertainty removed, you spend an additional $1.1MM from January until December for engineering implementation. No uncertainty being removed. Just building a product. This is 100% deductible that tax year.

Analogy: You want to build a new brick wall with specific properties. You spend $100K to develop a new type of brick and $1.1MM to build the wall using that brick. The $100K is amortized, the $1.1MM is deductible in one shot.

BTW, at year 6 the amortization schedule reaches steady-state and you are amortizing the full $100K every year. In other words, the impact of 174, if treated intelligently, is the time value of money until steady state is reached for the engineering costs incurred to remove uncertainty.

https://www.law.cornell.edu/cfr/text/26/1.174-2

> provided that employer pays local taxes in those countries for those roles.

This was phrased a bit confusingly, at least to me. Can you explain?

Disclaimer: I’m not an expert, just vaguely interested.

My understanding is that previously, software dev salaries would be counted as a business expense in the year they are paid. Now they are amortized over X years on the tax paperwork. As a result, a lot of software companies suddenly show relatively high income, and have a large increase in their tax burden. This is especially hard for startups that were “on the edge” of making it. If the salaries go back to being an expense in the year the salary is paid, the tax burden will decrease again, because apparent company income will be less.