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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)

#331

Post by digitaltrees »

hinkley wrote: post #311
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…

Let's be honest. At a bunch of shops the engineers hired in year 2 will never be properly recouped because the company will be out of business in less than 7 years.

Start ups are hard, most fail. But what rational national policy makes is several orders of magnitude harder to succeed during the riskiest period by adding tax provisions on pretend profits?

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

#332

Post by hintymad »

Does Section 175 apply to other professions? For example, if I hire a full-time handyman for my office, does their salary count as a deductible cost?

Sorry if this sounds naive—I'm genuinely struggling to understand why the labor of software engineers would be treated differently from other kinds of work. It seems logical that either all labor costs should count as costs, or none should. If different types of jobs are treated differently, what's the reasoning behind that?

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

#333

Post by jncfhnb »

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…

If you’re building software that is intended to be used for longer than a year then it should be capitalized.

The argument on HN is always just complaining that it’s unfavorable to devs; but it’s perfectly reasonable with regards to actual tax principles.

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

#334

Post by beAbU »

alistairSH wrote: post #248

Possibly dumb question... For a medium/large company, is this really a big deal? Their payroll is relatively stable year-over-year, so after a few years, it all evens out (very roughly). Or am I missing something? IE, is this really an anti-competition law, designed to protect entrenched tech industry players and prevent up-starts from, well, starting?

Based on everything I've read on it in this thread so far, it seems like it's pretty much hurting the little guys the most.

Whether this is malicious or intentional or just incompetent or something I honestly don't know.

Donald Trump's deeds and behaviour is just about the only place where I find myself unable to apply Hanlon's Razor.

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

#335

Post by jncfhnb »

hintymad wrote: post #332

Does Section 175 apply to other professions? For example, if I hire a full-time handyman for my office, does their salary count as a deductible cost? Sorry if this sounds naive—I'm genuinely struggling to understand why the labor of software engineers would be treated differently from other kinds of work. It seems logical that either all labor costs should count as costs, or none should. If different types of jobs ar…

If you hire someone to build you an office or office furniture, you are creating a long lived asset so it is capitalized

If you hire someone to clean your office, you are not creating an asset so it is expensed

Building software is generally creating a long lived asset

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

#336

Post by dsizzle »

davidgay wrote: post #313
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…

This description is misleading (as many of them seem to be), because you're only describing the first year. After 5 years of constant expenses, the deductions match the costs. If expenses diminish, deductions exceed costs. -> this is bad (in the short term) for companies that are growing.

It's also bad because of the time value of money (deductions in the future are worth less than deductions now).

But I agree that much of the outrage seems due to a confusion that 80% of the deduction is lost completely (vs deferred).

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

#337

Post by ashwinsundar »

tossandthrow wrote: post #252
ashwinsundar wrote: post #219

Earlier quoted context omitted.

I think you are conflating "software engineers" with "software". A business that pays a software engineer doesn't automatically receive working software in return, especially not in the first year. It doesn't seem fair to assume that paying a dev $200k means that the business received an asset (some code) worth $200k in return, and thus can be taxed on it as if it were an asset producing $200k in profits a year.

I am not conflating, but the law is. Obviously it would be better to have an appraisal of the software - I reckon law makers see the cost of producing ad an ok proxy. Btw,this is how it is done in many construction projects also. Like bridges, budings, etc.

I don't know how you're supposed to value software. I just reread your original post - picking 10% out of thin air doesn't make much sense either.

Software is more like a blueprint for a building, it's not the building itself. How much is a blueprint worth? If 100 architects spent a year on it, does that mean the blueprint is worth 100 x salaries? It might actually be worth nothing, if the blueprint asks the construction team to do something impossible.

Software is even worse though, because at least with construction, there are known physical models and real-world constraints (like physics) that decide whether a design can or cannot be implemented. A piece of software written today might be entirely unimplementable and worth nothing, but a breakthrough elsewhere in 5 years might make it extremely valuable at that time

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

#338

Post by dgfitz »

OneDeuxTriSeiGo wrote: post #318
raverbashing wrote: post #296

Earlier quoted context omitted.

You missed the paragraph saying that maintenance activities are not considered development activities

But that's the rub right? What is the definition of maintenance activities? And for what software? If you are writing a new script to automate something or updating an existing script, is that not software development? If that's considered maintenance activities then would maintaining a software codebase not be considered maintenance activities then?

In my simple mind, if software has been "released" it is no longer R&D, and "bug fixes" (which should include continuous improvements such as your example) are not research.

I may be way, way wrong though.

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

#339

Post by stego-tech »

abeppu wrote: post #324
stego-tech wrote: post #241

Earlier quoted context omitted.

That’s the neat part of the Permanent Residency (Green) card: you don’t have to stay forever. What that change does is destroy outsourcing and H1B visa mills by forcing employers to hire domestically first, and actually go through the process of sponsoring an immigrant’s Green Card if they want to hire cheaper foreign labor. It does not deter expats, it protects them from exploitation and abuse by employers.

Sure, and a hunting license doesn't require you to shoot anything but it would be weird to oblige you to get one if you don't have an intention of hunting? If green cards are easier to get, then the people that want them, and who you seem interested in protecting from abuse and exploitation can choose to apply for them -- great! It would have this effect even if you don't require every employee to have a permanent re…

The entire point of a work visa is enforced precarity for the benefit of the employer at the expense of the worker. I do not know how to make that concept any clearer.

If an employer wants someone to work in Country A, then they should be hiring domestically first; if they cannot find someone in Country A and want to hire someone from Country B, then that job is necessary enough that a Permanent Residency permit should be a non-issue for the employer and employee alike.

It really is that simple. If a job cannot be done on domestic wages then it’s not a job that needs doing in the first place.

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

#340

Post by jncfhnb »

digitaltrees wrote: post #329
spockz wrote: post #250

Earlier quoted context omitted.

The logic outlined in other posts is that this is because software is seen as an asset that nets dividend. As such, like with houses you can’t deduct all the costs at once because you keep extracting value out of it. I’m not sure whether I understand why that now applies only to software and not other things.

Those arguments fall short when considering the fact that that the construction company deducted the wages of the workers that built the house. The software development firm is the builder not the home owner.

If you’re building software to use or sell to other people you are definitely the owner.

If you’re a body shop lending out devs to build software for other people, that would be different

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