Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

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

news.ycombinator.com

Post reply on HN
Print view View original

411–420 of 957 posts

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

#411

Post by bobmcnamara »

JumpCrisscross wrote: post #397
bradleyishungry wrote: post #396

Earlier quoted context omitted.

this is not entirely true and i’ve seen the exact same comment regurgitated with the same exact numbers for the past two years. I am not in really in favor of section 174 but i’m tired of seeing misinfo. I have discussed this with a CPA multiple times and its simplified and blown out of proportion in a way that you can’t actually have a conversation about it

…could you expand on what part is inaccurate?

One example:

"What they've actually done, congress said, is bought a capital good, like a machine."

Replace "like a machine" with "like software"

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

#412

Post by hn_acc1 »

digitaltrees wrote: post #327
davidgay wrote: post #313

Earlier quoted context omitted.

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.

Most startups won’t make it five years especially if they have to raise or borrow money to pay taxes on phantom profit. There is no rational basis for this tax change it was a vindictive attack on blue states in the first Trump admin and an attack on California and SV in particular along with the SALT tax changes.

This. They hate CA and will do anything to try to make them look bad because we call out their BS. See Los Angeles right now as an example.

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

#413

Post by pc86 »

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…

If you pay an employee to make a chair, you 100% deduct their salary, immediately. The chair is only a capital expense if you buy it from a company that sells chairs. The company selling the chairs isn't forced to amortize the salaries of their carpenters, so implying that it's normal for companies to be forced to amortize the salaries of their software engineers is, in the most generous possible interpretation, a gross misunderstanding of the law.

> this change brings the USA in line with international financial reporting standards

Which ones?

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

#414

Post by Volundr »

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…

> 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?

Probably exposing how little I know of accounting... If you buy a chair you have to track it and deduct it over the course of X years?! It's not just an expense the year you bought it?

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

#415

Post by PaulDavisThe1st »

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…

The point is that if your revenue covers their salaries/contract costs, you will owe tax on 80% of their salary in the first year.

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

#416

Post by hshdhdhj4444 »

hn_throwaway_99 wrote: post #372
EnderWT wrote: post #198

Earlier quoted context omitted.

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…

The entire thing is nuts.

And no one thinks it was sensible.

The only reason it exists is for political games by Trump 1.

Now imagine all the nonsense that’s gonna go into the much bigger Trump 2 tax cut bill.

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

#418

Post by jfengel »

enceladus06 wrote: post #383

We should not have carve out for software R&D or anything else. Business taxes as a whole are stupid and a convoluted mess, just let businesses make as much money as possible and roll with it. It would be much more efficient to tax consumption at a flat rate, and give a variable rebate for elderly/children/whatever.

Are you suggesting that we eliminate all tax deductions for businesses? Or that we eliminate corporate taxes entirely?

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

#419

Post by zdragnar »

socalgal2 wrote: post #202
zdragnar wrote: post #51

Earlier quoted context omitted.

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 a…

I don't think it is reasonable to use employee salaries as the measure of market value. Companies buy and sell other companies based on performance, not cost to build.

Employees are an operating expense.

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

#420

Post by shakna »

jandrese wrote: post #365
dgfitz wrote: post #338

Earlier quoted context omitted.

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.

That seems too exploitable to pass muster in the court. If you release Beta 0.0.1 of your software after 2 months of development then spend the next 5 years getting it up to version 1.0 that's clearly a development effort not a maintenance effort.

> such as marketing and promotional activities, maintenance activities that do not give rise to upgrades and enhancements, distribution activities

If it leads to a new release, then its software dev. Meaning anything more than a minor patch is going to count.

Post reply on HN