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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)

#271

Post by api »

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…

Doesn’t this also unfairly penalize bootstrapped companies? VC track companies seldom have taxable profits.

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

#272

Post by SteveNuts »

kogus wrote: post #164

I'm going to be that guy and just say that one of the many many harmful side effects of income taxes is the kind of social engineering power it gives politicians, who are neither qualified nor properly motivated to make good decisions with such tools. Income taxes are an unethical pollution to our society and government.

What do you propose instead?

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

#273

Post by siliconc0w »

tzs wrote: post #249
siliconc0w wrote: post #90

This is where it's really important to use a bug tracker that can distinguish between bugs/maintenance and feature development. The former can be deducted but the latter has to be amortized.

The law says: > 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 don't see why that would not apply to software developed for bug fixes or maintenance.

Read the latest notice https://www.irs.gov/pub/irs-drop/n-23-63.pdf

You can deduct internal tools, training, maintenance, data conversion activities, installation, distribution, marketing, promotion, etc.

So it's definitely worth it to use an issue tracker to tie your engineer's commits to bugs and categorize their bugs as either feature development or one of these activities.

Depending how aggressive you want to get, if a LLM builds a feature that you beta launch and the engineer fixes the LLM's mistakes to get it working you can probably argue that is correcting errors or defects in software that isn't adding new functionality and thus deductible.

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

#274

Post by GuinansEyebrows »

i'm torn. on one hand, i simply do not care if business do not want to pay more in taxes. in fact, i gladly accept the premise that business should pay more in taxes.

in practice, the slippery slope argument is that this will entrench big-money players, which i don't support, because they'll be the only ones who can afford this. i also fear that it'll lead to an irresponsible adoption of "virtual coders" because it's cheaper than paying juniors.

kind of a rock and a hard place for me.

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

#275

Post by throwaway7783 »

actinium226 wrote: post #183
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!

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 f…

1M eng salaries, 5m revenue, 4M other costs.

Today I am cash flow neutral at 5m revenue, but with this I'm paying taxes on 800k "profits", which don't exist anywhere but on paper. But I have to pay the taxes in real dollars.

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

#276

Post by bawana »

Doesnt this new law inhibit rapid turnover tho? Since it takes 5 years to get the full deduction of an employee’s salary, there is an incentive to keep the employee around. OTOH, the souless bean counters who want quarterly (if not shorter) time horizons, will simply decrease starting salaries and use other methods to be net zero. If they do shaft the software engineers, then the converse is true-no employee should stay at a job more than a year because only the corp will benefit as the deduction grows

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

#279

Post by walterbell »

murdockq wrote: post #254

I've heard that many of the big tech layoffs where actually just moved / converting them to contracting groups, so they lose the direct head count but kept the developer via the intermediary. Have others heard this too and could this have been a way to label contractors differently so they don't fall under this tax code?

Which entity typically owns a software asset created by contracted developers?

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

#280

Post by eximius »

bawana wrote: post #276

Doesnt this new law inhibit rapid turnover tho? Since it takes 5 years to get the full deduction of an employee’s salary, there is an incentive to keep the employee around. OTOH, the souless bean counters who want quarterly (if not shorter) time horizons, will simply decrease starting salaries and use other methods to be net zero. If they do shaft the software engineers, then the converse is true-no employee should s…

Not clear to me that this is true. The expense was incurred, they just claim it over 5 years. It's not clear that the same employee is required to be there in subsequent years to claim the expense from year 1 in year 2.
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