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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)

#141

Post by zacharycohn »

mediaman wrote: post #66

A lot of people don't know what this Section 174 is about, so here's a brief explainer. 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" a…

Just to drive the point home very explicitly:

That means, in the given example above, you are able to deduct $180k that first year instead of $900k.

That gives you a profit, from a tax perspective, of $820k.

But you only have $100k of actual dollars.

Good luck paying your taxes!

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

#142

Post by dang »

gg-plz wrote: post #140

The military is being unleashed against civilians and this is the political issue you’re concerned about on today of all days? Dang, you’re one of the bad ones.

https://hn.algolia.com/?dateRange=all&page=0&prefix=true&que...

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

#143

Post by freedomben »

bdcravens wrote: post #84

Are there any sources for the argument why this should apply to software and not to, say, farm equipment? The cash flow and taxation story seems to be the same.

When you buy farm equipment, you're getting something that (barring manufacturer defects, natural disasters, etc) is (nearly always at least) a long-term asset going to be providing a very predictable level of value over the next many years. Same with computers and things like that. With software development, the predictability is almost entirely non-existent for new and/or smaller software companies. I've personally worked on many projects/codebases that either never shipped or threw away huge parts of the code before shipping.

You're not really taking a financial gamble .

Also I think it's worth mentioning that, software engineers are people who are paid salaries, while farm equipment is not.

A more accurate comparison would be if instead of buying a finished tractor you hired a couple of handymen to come build you one from scratch. It may or may not work at all. It might end up costing you 10x or 20x or more what you would have paid for an off-the-shelf solution (so valuing it at the labor cost is a ridiculous thing to do. Who in the market is going to buy a custom-built tractor at 20x the market rate?)

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

#144

Post by mediaman »

bryanlarsen wrote: post #105
jsherwani wrote: post #70

For folks that don't know the background on this, here's a layperson summary: - 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…

AFAICT, that $450K is refundable and transferable. IOW, if you make $0 in year two and have expenses of $0 in year two, you'd get a tax refund of $100K because $200K of your expenses from year one would be applied to year 2. And it's transferable -- if your company fails, there are companies out there that will buy the rump of your company to realize the unrealized tax refunds. Which is why it's usually fairly straig…

NOLs are generally not transferrable in the US (they used to be, but now the benefit can only be used if the acquirer of the 'rump' continues the existing operating business).

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

#145

Post by deadbabe »

lostdog wrote: post #114
deadbabe wrote: post #99

Earlier quoted context omitted.

Can’t you just exercise early to avoid AMT?

Once a startup hits series A, early exercise is often $X0,000 and a lot of people cannot afford to take a speculative bet with that kind of money.

But for the ones who can, it is a solution.

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

#146

Post by logifail »

OneDeuxTriSeiGo wrote: post #136
jajko wrote: post #121

Earlier quoted context omitted.

Why not claim them as: admins, devops, analysts, testers, technicians, managers? Probably few more. Its really about precisely software development roles? Don't we anyway do some of that other stuff regardless? But if you are correct that is supremely dumb, especially in place like US.

https://www.law.cornell.edu/uscode/text/26/174 > (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. Strictly speaking every single one of those jobs falls under that role. If you "develop" any software, which arguably includes even making or maintaining excel spreadsheets (a…

> Strictly speaking every single one of those jobs falls under that role

Q: Isn't this about whether you're doing "R&D" or not?

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

#147

Post by robomartin »

jonas21 wrote: post #82
robomartin wrote: post #26

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 ar…

If it's software, you do need to amortize 100%. Section 174 (as amended by the TCJA) has specific language to this effect [1]: > 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. i.e. it needs to be amortized. That's the part that people find most objectionable -- software development is special-case…

I firmly believe 174 has to be repealed. Like many bills and regulatory overreach in the US, 174 does not promote and support entrepreneurship, risk-taking, investment, etc.

All I am saying in my prior comment is that clever treatment of your engineering costs can improve tax outcomes. We have done just this --under the guidance of our tax attorneys-- and have had no problems at all.

Of course, a company that is a pure software enterprise and not multi-disciplinary, like us, is, well screwed.

Keep in mind that at year 6 you are effectively deducting your full R&D costs, even for a pure software company. The real cost is the TVM due to the phase shift, at year six you reach steady state (assuming steady costs).

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

#150

Post by jandrewrogers »

logifail wrote: post #146
OneDeuxTriSeiGo wrote: post #136

Earlier quoted context omitted.

https://www.law.cornell.edu/uscode/text/26/174 > (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. Strictly speaking every single one of those jobs falls under that role. If you "develop" any software, which arguably includes even making or maintaining excel spreadsheets (a…

> Strictly speaking every single one of those jobs falls under that role Q: Isn't this about whether you're doing "R&D" or not?

No, it classifies all software development as R&D by definition.
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