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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)

#261

Post by sarchertech »

stonemetal12 wrote: post #222
EFreethought wrote: post #194

Earlier quoted context omitted.

Maybe this is a dumb question, but if you only deduct part of their salary in the first year, what happens if you have a software developer for several years? And then what happens after five years if they are still around?

After five years you are back to the status quo. It is a short term problem, long term there is no difference between the two. It primarily hurts young companies that don't take VC money, and shortens the runway of those who do.

It is much worse for young companies for sure, but it’s not great for any company.

You’re forgoing returns on .1 * salary * tax rate for 5 years, .2 * salary * tax rate for 4 years… for every software dev in the company.

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

#262

Post by garrickvanburen »

What inspired working to reverse this now?

I'm all for it, just curious as the law has existed for 8 years and been in effect for 3. Seemingly little interest from anyone in the tech world to put lobbying behind reversing it until this point.

What changed?

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

#263

Post by Nevermark »

aaronax wrote: post #239
SoftTalker wrote: post #217

Earlier quoted context omitted.

Accounting likes to recognize expenses with revenues. If an asset will be producing revenue for five years, its cost is recognized over that same time span.

So...don't you get value from the newly created software for ~5 years?

The answer to that question can only be reliably answered in 5 years.

Actual honest valuation of software is something that requires actual evidence.

Software returns have extremely high variance. From a lot, to none, to high negative (For projects that don't complete, or worse, deploy to negative effect.)

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

#264

Post by buzer »

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…

Wouldn't "in connection" make this actually extremely broad? For example I doubt C-level executives have 0 connection to software development during the year. They likely make official or unofficial feature requests or give feedback. And if we really push that definition, if the software collected telemetry automatically from the user interactions and this data was then used to improve the software, wouldn't just using the software be connected with the development of the said software?

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

#265

Post by ndriscoll »

yojo wrote: post #220
addaon wrote: post #190

Earlier quoted context omitted.

> 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 compan…

The argument I’ve heard is it specifically makes investing in speculative software (new product lines, new features, etc) more expensive. If you’re doing new drug discovery at a bio-lab, treating all your failures as depreciating “assets” seems bonkers. The same seems true of much software development where the work product ends up thrown away.

The answer to this seems obvious to me: let the company publish all code and documentation pertaining to failed experiments and release it into the public domain to be allowed to fully depreciate it immediately. If it is actually worthless, they should be happy to do so.

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

#266

Post by xyst »

I would appreciate some transparency. I have seen fictional/theoretical scenarios around this simplified to the following:

"You have $1M in engineering expenses annually. So now instead of deducting $1M per year. Now you can only deduct $200K in that tax year. And then amortize it over 5 years"

But we all know this isn’t a vacuum. The US tax code is massive, corporate tax reduced over decades.

You are telling me this single paragraph in the US tax code is directly causing massive layoffs? Or is this single paragraph in the US tax code used as a scapegoat to initiate layoffs and then used to pump P&L and thus still approve C-level executive bonuses?

These big companies have access to massive accounting firms and they can’t work their fucking magic on a single paragraph of text? I call bullshit on big tech.

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

#267

Post by odo1242 »

logifail wrote: post #212
jandrewrogers wrote: post #150

Earlier quoted context omitted.

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

> it classifies all software development as R&D by definition We may need to argue about the word "development", but in any case, do you have a reference for that? https://www.thomsonreuters.com/en-us/posts/tax-and-accountin... "In the United States, to help spawn innovation as part of the Economic Recovery and Tax Act of 1981, the Research & Experimentation Tax Credit was introduced. Although it was initially suppos…

People think R&D expenditure shouldn't be amoritized because it hurts startups.

For example, if you're a first-year startup and you make a software product with $1 million in revenue but pay $900,000 in software dev salaries, and the tax rate is 25%, without amoritization you pay (1,000,000-900,000)*0.25 = $25,000 in tax and make a profit, but with 5-year amoritization you pay (1,000,000-900,000/5)*0.25 = $205,000 in tax and take a loss.

But since established companies aren't affected as much, they are advantaged by the amoritization rule.

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

#268

Post by chermi »

eadmund wrote: post #234
EFreethought wrote: post #194

Earlier quoted context omitted.

Maybe this is a dumb question, but if you only deduct part of their salary in the first year, what happens if you have a software developer for several years? And then what happens after five years if they are still around?

> Maybe this is a dumb question, but if you only deduct part of their salary in the first year, what happens if you have a software developer for several years? Not dumb at all! In the second year, you get to deduct ⅕th of the previous year’s salary and ⅕th of the current year’s salary; likewise, in the third year you get to deduct ⅕th of the first year’s salary, ⅕th of the second year’s salary and ⅕th of the third y…

Thus firmly placing this in the regulatory capture category.

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

#269

Post by NaOH »

kbolino wrote: post #223
Mistletoe wrote: post #174

Earlier quoted context omitted.

Why was the change made to amortize the tax?

To bypass the filibuster. To pass a bill the normal way, you need 60% of the Senate to agree. But certain kinds of bills can be passed through "reconciliation" which only needs a simple majority. Such bills must be "budget neutral" as assessed by the CBO. So legislators throw in hacks like Section 174 in order to game the system and offset other provisions they actually want.

Here's more information on the Reconciliation Process for anyone interested.

PDF: https://www.congress.gov/crs_external_products/R/PDF/R48444/...

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

#270

Post by jandrewrogers »

ethbr1 wrote: post #226
teeray wrote: post #179

Earlier quoted context omitted.

> the current administration… seems pretty ambivalent about collecting taxes that are on the books. I wonder if there will be an inconsistent definition of who is a software engineer, based on how friendly the company is with the administration, whether the company still has someone with a DEI title So basically the same situation that we have with bullshit speed limits everywhere.

If we had specifically defunded highway patrol that was net-revenue-positive, yes. Republican defunding of the IRS is literally insane: reform by cutting enforcement. - It rewards people who cheat on their taxes. - It costs the government more money that it saves, because IRS investment is net revenue positive. But then, the modern Republican party seems more concerned with being the party of 'law(s I agree with) and…

People greatly overestimate the amount of material cheating that happens, especially among large companies and the wealthy. I used to work for a Federal audit organization and almost all of the recoveries had a root cause in sloppy compliance and record-keeping practices rather than intentional malfeasance. It is broadly recognized as optimal that the recovered money should be several-fold the direct costs spent to recover it because this activity incurs a lot of non-obvious indirect costs. It is a variation on the principle that the optimum amount of fraud is non-zero.

Most of the blatant tax fraud is much lower down the economic ladder because below a certain threshold recovery doesn’t justify the cost and people know this. The amount you can get away with is far below the threshold where it would be worth the risk for wealthy parties. The best ROI for auditors in many of these cases is to make regular object lessons at random to discourage it rather than systematically prosecute it.

AFAIK, the increased spending at the IRS did not lead to concomitant offsetting recoveries. This is a predictable outcome, the amount of enforcement activity has been pretty finely tuned for decades to optimize ROI. Most of the recoveries come from changing focuses on compliance to areas that haven’t seen much enforcement activity in many years. Fighting entropy basically.

If you assume that most large recoveries are from sloppiness rather than systematic tax fraud, it changes what is going to be an effective strategy.

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