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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)

#371

Post by fwip »

throwaway7783 wrote: post #309
naikrovek wrote: post #243

Earlier quoted context omitted.

> it massively increases that depends entirely on how much the business is taxed. every $1 deducted from taxable income is NOT $1 saved in that business' tax payment. It's much more like $0.10-$0.30 saved in taxes.

Whether it is $1 or $0.10, it is non existent for young software companies. If I'm penniless (after real expenses), where will I get those 10 cents to pay the taxes? And I'm not making this up. We are about to get cash flow neutral in our company, and this law will literally kill us and make 20 US citizens unemployed.

Well, same as any other expense. You find a way to pay for it, or you go out of business. If the number is 10%; you need either 10% more revenue or 10% less costs.

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

#372

Post by hn_throwaway_99 »

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…

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

This is the part that I think makes this whole jig of treating software development like a purely capitalizable expense so nuts.

I previously worked at a public company that wanted software developers to treat as much work as possible as CapEx - it makes you look more profitable than you actually are, which is bad for taxes but good for your stock price. Developers hated it. The problem with it is that with modern web based software, CI/CD, A/B testing, etc. that the line between "new software" (i.e. CapEx) and "maint" (i.e. OpEx) is so blurred as to be pointless. E.g. many times I'd be fixing a bug (technically OpEx) but that would often lead to some new features ideas, or ways to structure the software to make it easier to add new features (technically CapEx). Software is fundamentally different from capital expenditures in other areas, and assuming a 5 year straightline depreciation schedule for software is laughably absurd.

What other sort of capital expenditure has you do releases every day, or requires 24/7 monitoring? I would argue that the business of software has changed so drastically over the past 20 or so years that it makes much more sense just to categorize it as OpEx by default (for both tax and GAAP purposes), and only have it be capitalized as CapEx for very small and specific reasons.

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

#373

Post by jamessinghal »

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?

The IRS Guidance says this in 5.05(2), which is most relevant to software startups:

  (2) Computer software developed for sale or licensing to others. In the case of
  computer software that is developed for sale or licensing to others (or upgrades 
  and enhancements to such software), activities that occur after such software (or 
  upgrades and enhancements to such software) is ready for sale or licensing to 
  others, such as marketing and promotional activities, maintenance activities that 
  do not give rise to upgrades and enhancements, distribution activities (for 
  example, making the software available via remote access), and customer support 
  activities.
So they are maintenance as long as they "do not give rise to upgrades and enhancements", which would be the responsibility of the taxpayer to track. I'm sure there is more nuance to it in practice.

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

#375

Post by TZubiri »

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…

Mmh

If I paid salary of 100k, and invested 100k. Then I made 0 profit regardless, actually I would have a loss of 100k?

I guess the difference comes in if I made 200k, so I would have a profit of 100k.

Not sure how it affects the pnl, but is it fair to say it doesn't affect total tax, just distributes it more evenly across years?

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

#376

Post by amanaplanacanal »

narag wrote: post #229
ASalazarMX wrote: post #118

Earlier quoted context omitted.

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. I'm not sure if depreciation is the same concept as we call amortización in my country: capital that counts as investment instead of expenses because you're expected to keep extracting value from it over the years, so you can't get a deduction for the whole expense when you f…

If you buy a building, it is a capital expense that depreciates over years, even though you absolutely have to keep paying for maintenance. Why should software be different?

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

#377

Post by TZubiri »

arcbyte wrote: post #73
wagwang wrote: post #44

Earlier quoted context omitted.

Isnt this just false? I thought corporate taxes are levied on net income?

Corporate taxes are indeed levied on net income after expenses . Trading money for capital assets is not considered expense. If you start the year with 0$ in your bank. After the end of the year you have made $200k in revenue. However you "spent" $200k on software salaries. However, because these are software costs, they must be depreciated over 5 years, so only 20% of that $200k software cost can be applied as depre…

This makes sense though.

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

#378

Post by flambojones »

Salaries aren't a one-time expense, so is the amortization rolling? Like, year 1, you pay me $200k and deduct $40k. In year 2, you pay me another $200k, do you get to deduct $40k for year 1's salary and $40k for year 2's salary?

I guess another way to ask is, does this mean that if you keep someone for 5 years and don't change my wages, is their yearly salary effectively fully deductible? If so, does that create incentives to try to keep employees longer-term in order to make them more cost-efficient?

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

#379

Post by paulddraper »

OneDeuxTriSeiGo wrote: post #119
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…

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…

There is a substantially more definition, but the tl;dr is this an R&D expense, or COGS expense?

R&D is amortized, COGS is not.

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

#380

Post by doctorpangloss »

Negitivefrags wrote: post #330
Volundr wrote: post #232

Earlier quoted context omitted.

Forgive the naive question, but is this different than other payrolled employees? So for normal employees you get the deduct the year it's paid, but for some reason for software developers you have to amortize it?

Theoretically it’s the same with any asset you pay someone to make. If you pay someone to make a chair, you don’t deduct the salary. Instead you create an asset valued at what you paid to build it, then depreciate it over time. The arguement for this is that it would be inconsistent to do otherwise. After all, why should buying a chair from someone else be different than paying an employee to do it? It’s worth noting…

> It’s worth noting that this change brings the USA in line with international financial reporting standards, so it’s not like it’s some crazy unique idea or anything.

Can you be more specific?

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