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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)

#181

Post by elictronic »

freedomben wrote: post #127
cjbgkagh wrote: post #113

Earlier quoted context omitted.

The worse it was the better it worked as a budget fudge and it could be included in projections and allow a budget neutral bill to be passed. And by being so bad it would be easier to reverse as fewer people would defend it. There was an attempt to eat their cake and have it too.

Why is it still in place?

The Republican Party is actively antagonistic to any legislation from the Democratic Party basically.

You need a 60% vote or you need to take away someone else’s pie. Medicaid/medicare/social security are current contenders based on Republican planning.

The bigger issue is Republican voting districts gain less from putting it back in place. Most software devs are on the coasts and Denver.

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

#182

Post by varsketiz »

niam wrote: post #71
varsketiz wrote: post #38

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

May I ask why? It's expressly the intention of democracies to hear from constituents (and conversely: groups of constituents). That we happen to call that feedback loop "lobbying", and that the term carries some societal baggage from corporations using/abusing it is unfortunate, but shouldn't be an indictment of what is otherwise a democratic function. Some group FOO with a shared ill should be able to convene about…

Good question. I'm not certain myself why. I am not from the USA, so I don't see how it affects me. Also, probably unfounded, but I am somehow suspicious if this is for the benefit of software developers, or billionaires.

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

#183

Post by actinium226 »

zacharycohn wrote: post #141
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!

Only if you assume that the 900k in costs is exclusively the salary of 5 engineers. Realistically you will employ other people and have overhead costs like rent, etc., and I assume that other non-salary costs (health insurance, etc.) aren't included (b/c I assume health insurance, like rent, is a company-wide overhead cost and that companies aren't expected to carve out what portion of that is going to the software folks but what do I know?).

But if we more realistically assume it's 3 software folks at 200k, then the taxable profit is 580k (100 profit + 3*(200k salary - 40k ammortized))

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

#184

Post by abeppu »

tossandthrow wrote: post #101
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…

While this does convey the idea, the premise is also biased. > even though it has a total of $100K in the bank after the actual expenses were paid. People running a business can perfectly understand the concept of liquidity. And yes, just because you transform money to something else, then it doesn't mean that you should not be taxed on it. The extreme example is a company that buys gold on the last trading day of th…

> The core question is to what extend software constitutes an asset or consumption.

Isn't part of the problem with our industry that, even it is an asset, its value can be hard to determine even for a long time after you've written it, and it may be pretty weakly related to how much you paid to build it?

- you might have spent a lot on developers last year but next year you find out that you're the new Quibi and no one wants to use your product

- you might have had a small, tight team and what you built turns out to be hugely valuable (like instagram or whatsapp)

- ... and to the degree that the software is part of a valuable business, how do you really assign value to the software as versus the go-to-market plan, the partnership/distribution agreements, etc that helped make the business succeed?

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

#185

Post by floxy »

chermi wrote: post #110

Can someone steelman the positives for me? I don't see how it's anything but pure regulatory capture favoring established tech firms. A small company ramping up revenue simply can't handle this amortization while a large, established company can. That being said, I do think there's a little sloppiness in what is categorized as "R&D" in the software development. Is code maintenance R&D? Bug fixes? Performance improvem…

Doesn't this kind of make sense if software is an asset? If your company purchases a seat of Oracle or Solidworks or Windows 11 or whatever. I don't think you can expense that all at one time, you have to amortize over the useful life of the software, just like if it was a physical printing press or a backhoe. Similar if you were making a software program for sale or for use internally, there is the upfront costs associated with making the software, and then it gets used/sold for the next X number of years. And software never wears out, unlike a tractor; that's at least why physical goods are amortized over a finite life. Probably the biggest problem is that this conceptualization of software might be 20 years out of date.

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

#187

Post by thaumasiotes »

demosthanos wrote: post #130
sahila wrote: post #108

Earlier quoted context omitted.

> This is unlike how capital assets are valued for any other industry! Is your dismay that it's unfair compared to other industries or that the policy doesn't reflect reality that software is a capital asset that has a lifetime longer than 6 years for many companies?

It's that it doesn't reflect the reality that the value of software is not remotely correlated with the salaries that were spent building it. It could be valued much higher or much lower, spanning a huge range. Using salaries as a proxy for value of the asset encourages only the safest shovelware bets, discouraging risk taking lest your asset be taxed at substantially higher than it's worth. Avoiding that risk-advers…

Well, a larger issue seems to be that this whole idea is premised on taxing an unrealized gain. If I create a painting, I don't owe any taxes on it until I sell it. If the world decides that I'm Picasso and my sneezing on a canvas means it's worth $50 million, it still won't be true that, after I sneeze without covering my mouth and some spittle lands on one of my blank canvases, a government official shows up to my house to force me to sell it so that I can pay the taxes I owe for creating it.

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

#188

Post by zajio1am »

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…

> Assuming the tax rate is 50%

Which is not(?). According to https://en.wikipedia.org/wiki/Corporate_tax_in_the_United_St... , federal corporate income tax rate is 21%, + additional <10% for state level, not sure about local level.

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

#189

Post by Terr_ »

acdha wrote: post #135
freedomben wrote: post #127

Earlier quoted context omitted.

Why is it still in place?

Republicans really want to cut taxes for rich people but they don’t want to just straight-up acknowledge a huge debt increase for that goal, so they come up with different ways to say that something is budget neutral. That’s why a lot of the 2017 bill cuts were time-limited so regular people got the tax cut immediately and would hopefully remember it, but the time limit meant that CBO wouldn’t count it as a long-term…

There's a risk they'll try to break the Senate rules outright [0], by pretending that certain promised-to-be-temporary tax cuts now cost $0 to extend.

To put it in domestic terms:

* [January 1st] "Honey, I want to rent a Ferrari, I did the math and it fits if it's just one month! Pleeeeeease?"

* [February 1st] "Oh, that? It's the Ferrari rental-fee for the next month, don't worry, it's an existing expense, it's already part of our regular budget, so clearly we've proven we can afford it. We'll just have to cut back on insulin for the kids."

[0] https://www.americanprogress.org/article/senate-republicans-...

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

#190

Post by addaon »

ASalazarMX wrote: post #118
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…

That's nuts, since a payroll should never be considered an asset. That's trying to put a material value on software, and doing it based on the salaries of developers is as crazy as valuing it in lines of code. The value of software could be based on something more realistic, like a percentage of actual revenue, but I suppose tech giants would be against that.

> That's trying to put a material value on software, and doing it based on the salaries of developers is as crazy as valuing it in lines of code.

Software clearly has material value. For software that is built, not bought, the company building it clearly values it exactly enough to pay the salaries of the software developers building it. What other estimate of its material value is better than the one that the company purchasing it is demonstrably willing to pay?

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