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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)

#201

Post by cjbgkagh »

echelon wrote: post #191
zacharycohn wrote: post #141

Earlier quoted context omitted.

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!

This seems like the biggest reason behind the mass layoffs, not the end of ZIRP.

With ZIRP it would be relatively easy to borrow the float required to make up for the amortization timeline.

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

#202

Post by socalgal2 »

zdragnar wrote: post #51
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…

I signed the petition but I wanted to offer an some background for an alternate POV (that I think I mostly disagree with).

You have $600k in the bank. You hire 4 people to build a house. The materials for the house cost $200k and the 4 people cost $400k. Total expenses $600k and you now have $0 in your bank. You can deduct $600k in expenses, but!, you now have a house worth $$$$. You have to pay taxes on this house as it's an asset and worth $$$$. Your total worth is not $0 (your bank account). It's $0 + the house.

Change house to software. You created something new. The government is claiming that something, software or house, is worth $$$$

I see the point. I have no idea how to value software. I guess the gov might say, to find the value, delete the software, how much would it cost for you to replace it (as one idea)

Similarly with other expenses. You have $200k. You hire office workers at $95k each to do some work and buy two $5k PCs for them to use. At the end of the year you have $0 in the bank. The law sees it as you have $0 in the bank + two $5k computers. You owe taxes on that $10k (the 2 computers). For these, you're allowed to deprecate them 5 years. So you own taxes on $8k.

Note: this issue of equipment being deprecated has killed lots of small businesses, mostly because they are new and unaware (been there (T_T)). If you buy $100k of equipment (furniture deprecates over 7 years), you budgeted $1m for the year with $0 left over (making a product that takes 2-3 years to finish) but you've got to pay taxes on ~80% of the $100k of equipment even though you thought you'd made no money.

Many business opt to lease computers (and furniture?). This way they don't own it so it's not an asset and they can expense 100%. Unfortunately if you're a new startup no one will lease to you as you have no credit history (been there (T_T))

Under the new rules, on the ~3yr software project (like a game) with $1m per year budget, after the first year you'd owe taxes on $1m because you could not deduct any salary expenses. All of your employees are doing software dev by the definitions of the new tax law.

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

#203

Post by commandlinefan »

gnopgnip wrote: post #162
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…

Normally when a business spends money producing a valuable asset, it is required to depreciate the cost to acquire the asset over the useful life. If a business pays people to create a new building, that is depreciated over 20 years. Even if it was paid for as salaries of employees, it isn't a special situation unique to software engineering.

But isn't the reasoning there that you could turn around and sell that building right away?

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

#204

Post by jandrewrogers »

rvba wrote: post #197
freedomben wrote: post #143

Earlier quoted context omitted.

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…

How is farm equipment predictable? Droughts and floods make farming unpredictable.

The value of farm equipment is independent of its use.

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

#205

Post by naikrovek »

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…

say I work for a company for 5 years as a software developer, at $200k/yr the entire time. is this how it works:

year 1: company deducts $40k: 1/5 of the salary for year 1.

year 2: company deducts $80k: 1/5 of the salary for year 2, and 1/5 of the salary of year 1.

year 3: company deducts $120k: 1/5 of the salary for year 3, 1/5 of the salary for year 2, and 1/5 of the salary for year 1.

year 4: company deducts $160k: 1/5 of the salary for year 4, 1/5 of the salary for year 3, 1/5 of the salary for year 2, and 1/5 for year 1.

year 5: company deducts $200k: 1/5 of each of my 5 years of employment. I leave the company after year 5. Year 1 of my employment is fully deducted.

year 6: company deducts $160k: 1/5 of years 5, 4, 3, and 2. Year 2 of my employment is fully deducted.

year 7: company deducts $120k: 1/5 of years 5, 4, and 3. Year 3 of my employment is fully deducted.

year 8: company deducts $80k: 1/5 of years 5 & 4. Year 4 of my employment is fully deducted.

year 9: company deducts $40k: 1/5 of year 5. Year 5 of my employment is fully deducted.

what is the corporate tax rate? It's not 100%, so you're deducting a fraction developer's salary from your income, right, you're not saving that much on your tax bill each year. you're paying tax on the income you used to pay the developer.

I dunno man. In a world where places like Amazon pay $0 in income tax each year, I kinda feel like companies should be paying more taxes. companies get all kinds of deductions that employees don't get themselves, and will never get. businesses have a whole heap of unfair advantages already.

I'm sure the capitalists among you will want me dead for saying this, but: pay your fair share. I don't care what the law says, pay enough that no one can say that you're a lamprey on society, please.

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

#206

Post by thaumasiotes »

jgalt212 wrote: post #54

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…

Question: say you buy the equipment personally and then rent it to your business. What does the tax treatment look like?

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

#207

Post by abeppu »

stego-tech wrote: post #7

I’m all for reverting that part of the tax code, but only on the condition that it’s inapplicable to H-1B visa or foreign worker salaries/payments, provided that employer pays local taxes in those countries for those roles. Keep good paying jobs in the USA. If we need immigrant labor, give them Green Cards instead of precarity.

> Keep good paying jobs in the USA. If we need immigrant labor, give them Green Cards instead of precarity.

I'm all for giving more people a faster path to a green card if they want it.

But should a person really have to get permanent resident status to have a decent job here? If someone wants to work for a few years in the tech industry in the US but expects that they may want to go back to their home country (or another country), and if they and their employer pay the appropriate taxes, what's wrong with that? Similarly, if I as an American citizen wanted to work abroad for some period without having pre-decided to become a permanent resident ... why is that harmful?

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

#208

Post by shoxidizer »

Ajedi32 wrote: post #175
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…

I agree this sounds like bad policy, but what's the logic for doing this with actual capital goods then? Doesn't that have exactly the same problem of limiting corporate investment?

The reasoning is that the deductions for expenses should be applied for the same year as the income they bring in. For expenses that will cover multiple years, they are spread out over those years.

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

#209

Post by tossandthrow »

abeppu wrote: post #184
tossandthrow wrote: post #101

Earlier quoted context omitted.

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 o…

These risks would appear to be the same as a shoe producer wanting to bring shoes to market - regardless they are still taxed on the value of their inventory.

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

#210

Post by OneDeuxTriSeiGo »

EnderWT wrote: post #198
OneDeuxTriSeiGo wrote: post #119

Earlier quoted context omitted.

So it applies to software engineers but under what definition of software engineer? This [1] is the only definition the code actually give. > (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. 1. https://www.law.cornell.edu/uscode/text/26/174 ----- Is a test or QA engineer c…

The IRS released guidance back in 2023: https://www.irs.gov/pub/irs-drop/n-23-63.pdf It starts on page 23. Plenty of analysis online by tax firms but I'll quote from this one: https://insightplus.bakermckenzie.com/bm/attachment_dw.actio... > Generally, activities treated as software development for section 174 purposes include, but are not limited to, the following. • planning the development of the computer software…

> • data conversion activities, except for activities to develop computer software that facilitate access to existing data or data conversion

ex: linking excel spreadsheets or setting up excel to ingest data from a sharepoint or network drive would still fall under the definiton of software developer

> • maintenance activities after the taxpayer places the computer software into service

So a sysadmin or a DB admin writing scripts or a DB admin writing queries and adding new reports would be considered software development

It just seems way too easy for arbitrary employees to get pulled in under this definition because it just fundamentally misunderstands how widespread programming is.

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