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

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

#51

Post by zdragnar »

Mistletoe wrote: post #5

What is a software dev expense and why should it be tax deductible?

In any other company, employee salaries are counted as an operating expense against revenue, much like raw materials, utility bills, etc.

If you sell $100 of goods and you have $100 of expenses, you have $0 net income and owe no taxes as a company- you've made no money!

Because software salaries are counted as research and development, and 174 forces you to amortize the expense over five years, you are now in a much harder position:

You sell $100 worth of software and have $100 of developer salaries. You haven't made any money, and you have $0 in your bank account. The government compels you to not expense more than $20 of those salaries, and taxes the remaining $80 of revenue. You are now bankrupt.

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

#52

Post by dang »

varsketiz wrote: post #38

Somehow I'm not a fan of HN using this community for lobbyism purposes.

pg used to do it semi-regularly, especially on internet freedom isssues (edit: and software patents, IIRC), so arguably this is getting back to HN's roots.

I remember he did an anti-SOPA thing on HN which involved some kind of banner at the top of the frontpage. It's probably saved at archive.org somewhere.

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

#53

Post by rbultje »

wagwang wrote: post #40
TimPC wrote: post #24

Earlier quoted context omitted.

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.

> Almost all work is tax deductible What really? How does this work.

You're confusing corporate vs personal taxes. The salaries businesses pay are meant to be deductible business expenses. The business only pays taxes over the profit after these expenses are deducted from their revenue. The person receiving the salary still owes personal taxes over the income.

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

#54

Post by jgalt212 »

As a business owner, I've been adversely impacted by this. I still can't wrap my head around how this is legal or sustainable. If I buy $1MM of plant and equipment, I may not be able to expense it all in year 1, but I can relatively easily get a loan to finance the purchase of such--and manage my cashflows. The same is not for devs. I cannot easily get a loan for $1MM in dev salaries. In my own case, I don't need the loan to pay the salaries. I need the loan to pay the taxes for the portion of the salaries I cannot deduct as an expense. It's just insane.

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

#55

Post by ok_dad »

wagwang wrote: post #44
vessenes wrote: post #3

Thanks for working on this guys. The current tax code is fairly crazy: you could spend a few million in salaries, sell 200k of software in a year and possibly owe taxes on that. Even if the company would otherwise be shutting down. The traditional capital asset treatment applied to software leaves a lot to be desired. Some software is a capital asset, but much just isn’t. Or at least should be considered to depreciat…

Isnt this just false? I thought corporate taxes are levied on net income?

Have you read section 174? It forces software to be classified as R&D and then use a weird 6 year amortization (10-20-20-20-20-10) for the salary.

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

#58

Post by CamouflagedKiwi »

xnorswap wrote: post #18
wodenokoto wrote: post #4

Other than it’s nice not to have your profession taxed, what is the argument that software development shouldn’t be taxed as opposed to all sorts of other white collar work?

The UK has (had) a tax credit for "Research and Development", intended to be a tax break for genuine R&D, but of course everyone lumped all software development into. The UK eventually put out guidance that business as usual development isn't really "research and development", but afaik there hasn't been a serious crackdown on the practice. It seems kind of absurd to pretend that most work that developers do is pione…

I've dealt with this at a previous employer (where we did try to be reasonably honest and submitted things that had some R&D element, I can imagine a less principled approach). The concept of it seems sensible, in practice you end up justifying why something is R&D to essentially non-technical people, probably at some consultancy who can then repeat a moderately garbled version of your description to HMRC who presumably just approve in most cases because they also don't have the expertise to truly assess the subject matter (and let's face it, we'd all struggle, even if we believe we're expert software engineers, how do you assess whether work on a mortgage issuing product for a bank is truly R&D if you have no familiarity with the domain).

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

#59

Post by [deleted] »

wagwang wrote: post #44
vessenes wrote: post #3

Thanks for working on this guys. The current tax code is fairly crazy: you could spend a few million in salaries, sell 200k of software in a year and possibly owe taxes on that. Even if the company would otherwise be shutting down. The traditional capital asset treatment applied to software leaves a lot to be desired. Some software is a capital asset, but much just isn’t. Or at least should be considered to depreciat…

Isnt this just false? I thought corporate taxes are levied on net income?

[deleted]

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

#60

Post by runako »

wagwang wrote: post #40
TimPC wrote: post #24

Earlier quoted context omitted.

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.

> Almost all work is tax deductible What really? How does this work.

Company earns $X revenue.

Company pays staff $Y in compensation to earn that revenue.

Company pays other expenses of $Z.

Company does not owe tax on $X, but rather on something closer to $X - $Y - $Z.

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