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

pg used to do this kind of thing on HN from time to time, especially on internet freedom issues, so this is a bit of return-to-roots for the site. SOPA is the one I remember but there were others.

Normally, when you have expenses, you deduct them off your revenue to find your taxable profit. If you have $1 million in sales, and $900k in costs, you have $100k in profit, and the government taxes you on that profit.

Section 174 says you can't do this for software engineers. If you pay a software engineer, that's not "really" an "expense", regardless of the fact that you paid them.

What you've actually done, Congress said, is bought a capital good, like a machine. And for calculating tax owed, you have to depreciate that over several years (5 in this case).

Depreciating means that if you pay an engineer $200k in a year, in tax-world you only had $40k of real expense that year, even though you paid them $200k.

So the effect is that it makes engineers much more expensive, because normally when a company hires an engineer, like they spend on any other expense, they can at least think "well, they will reduce our profit, which reduces our tax obligation," but in this case software engineers are special and aren't deductible in the same way.

In the case of the $200k engineer, you deduct the first $40k in the first year, then you can expense another $40k from that first year in the second year, the third $40k in the third year, and so on through the fifth year. So eventually you get to expense the entire first year of the engineer's pay, but only after five years.

The effect is that companies wind up using their scarce capital to loan the federal government money for five years, and so engineers become a heavy financial burden. If a company hires too many engineers, they will owe the federal government income tax even in years in which they were unprofitable.

These rules, by the way, don't apply to other personnel costs. If you hire an HR person or a corporate executive, you expense them in the year you paid them. It's a special rule for software engineers.

It was passed by Congress during the first Trump administration in order to offset the costs of other corporate tax rate cuts, due to budgeting rules.

- A business is usually taxed on its profits: you deduct your revenue from the cost of producing that revenue, and the delta is what you are taxed on.

- In software businesses, this usually means if you spend $1M in software development to develop a web app, and it makes $1.1M in that year, you'd get taxed on the $100K profits.

- However, a few years ago, the IRS stopped allowing the $1M to be deducted in the year it was incurred. Instead, the $1M was to be amortized over 5 years, so now the business can only count $200K as the deductible expense for that year. So now it's going to be taxed on "profits" of $900K. Assuming the tax rate is 20%, that means the business owes $180K in taxes, even though it has a total of $100K in the bank after the actual expenses were paid. So it would have to either borrow to pay taxes or raise venture capital, meaning that VC-funded companies would be advantaged over bootstrapped ones!

- The letter's goal is to bring things back to how they were (and how they are for all other businesses): let businesses deduct their actual expenses from their actual revenue, and tax that actual profit.

I am neither a lawyer nor an accountant, this is just my understanding of this issue.

Edit: Switched the tax rate to 20%. The logic is still the same.