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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)

#421

Post by shaftway »

naikrovek wrote: post #221
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!

> That gives you a profit, from a tax perspective, of $820k. > But you only have $100k of actual dollars. > Good luck paying your taxes! a lot of people here are conflating "taxable income" and "the amount owed in taxes" for some reason. if I earn $100/year, and I can deduct $50 of that, my tax bill is not $50. It is some percentage of $50, usually a low number for businesses. (Amazon regularly pays $0/year in taxes.…

> Amazon regularly pays $0/year in taxes.

They *were* able to, because they *were* able to offset the cost of developers instead of having to amortize it out over 5 years.

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

#422

Post by cmogni1 »

Does anyone know how AI coding fits in with S174? If a person’s “coding” part of the job is primarily running prompts and checking code outputs (quality control and minor reprompting) with the remainder of the time used for other activities, does this count as software engineering?

It seems like an inevitable outcome of this is elaborate system-gaming to mitigate how much employees fall under S174…

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

#423

Post by PaulDavisThe1st »

addaon wrote: post #190
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. 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…

It's not a question of what its material value is.

It's a question of whether it is a capital expense that is required to be amortized over 5 or 15 years, or a regular expense that can be deducted in the year in which it is incurred.

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

#424

Post by convolvatron »

amanaplanacanal wrote: post #376
narag wrote: post #229

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. 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?

if I pay a bunch of employees to take the cloth I buy and cut and sew into shirts, that's an expense some directly out of my revenue and isn't taxed as profit or forced to be amortized. Why should software be different?

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

#425

Post by PaulDavisThe1st »

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…

> Theoretically it’s the same with any asset you pay someone to make.

No, it's not.

Sec. 174 explicitly and specifically refers only to software development.

Also, this:

> 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.

is also incorrect. For most tax filers, and for most things, under current law, you have a choice whether to deduct the expense in the year in which it incurred or to amortize it.

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

#426

Post by PaulDavisThe1st »

eslaught wrote: post #322
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.

Or any company in its first 5 years of operation. (Or any company, period, within the first 5 years of the law being introduced.) It takes 5 years to fill the pipeline, so even if the steady state would be fine, getting to that state might be impossible.

> Or any company in its first 5 years of operation.

No! Any company (with software development expenses) for the first 5 years after Sec 174 went into effect!

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

#427

Post by schroeding »

hermannj314 wrote: post #388

Is lobbying for our interests how we become the bad guys? I dont want software development to become the oil and gas industry. More specifically, if software devs aren't creating capital assets, then what exactly is being bought during an acquisition? Don't we tell ourselves our work is building an asset that can be reused and sold. The operational aspect of our job still seems to be treated as opex. Our entire indus…

IMO, if you lobby for a thing which does not do harm to other people, you are not the bad guy. If you do, you are. Lobbying itself is not immoral.

The oil and gas industry, and the tobacco industry et al., lobbied (and lobby) for things which they know were (and are) doing harm. This isn't the case here, IMO.

Code is not an asset in all (I would even argue most) cases - proven by companies which open source the vast majority of their code and live from service contracts or certain addons to it, and basically pay developers to commit to open source software.

Often they buy market- or mindshare. There is no way in hell e.g. Akamai wouldn't have been able to bootstrap "Linode 2". I'm unable to see the secret sauce why OpenAI couldn't have created their own VS Code fork instead of buying Windsurf. But why do that if you can acquire their existent customers / market share? Additionally, the term "acquihire" didn't plop into existence with no precedent.

Being able to immediately get a full deductible for salary, which in many (western) countries is the norm for virtually all businesses, does not strike me as particularly immoral. It's a normal office job, developers do not create gold out of thin air.

Big tech isn't even the most affected by this change, they (often) have obscene margins - small software companies do not.

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

#428

Post by pc86 »

Volundr wrote: post #414
Negitivefrags wrote: post #330

Earlier quoted context omitted.

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?

Most of the time you can decide what you want to do. There are exceptions but for most capital expenses (which salary is not despite what proponents of this change would argue), you can choose to either deduct all of it or amortize it. It also depends how you categorize expenses.

A $100 chair is unlikely to get amortized, but a $100 chair as part of $450k office remodel might.

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

#429

Post by PaulDavisThe1st »

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…

> I'm genuinely struggling to understand why the labor of software engineers would be treated differently from other kinds of work

Trump wanted a large tax cut. To make the numbers look better (notably the CBO reporting), Congress looked for ways to increase revenues. For whatever reason, they settled on software development, and devised Sec 174 to generate tax on 80% of s/w developer salaries in the first year it went into effect.

Why s/w development? I have seen no indication of the reasons for this; I suspect it was perceived as a "rich field" and thus suitable for this sort of treatment. Also, somewhat more fairly, s/w developers do tend to produce semi-durable assets that in some ways are like capital goods.

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

#430

Post by PaulDavisThe1st »

hintymad wrote: post #345
jncfhnb wrote: post #335

Earlier quoted context omitted.

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

Thanks. Capitalized expense means the expense can be amortized over years? If so, the short-term profit can be higher than expensed cost? That sounds bad in this context as more profit means more tax. However, the OP seems to argue that capitalized expense is good for tech companies. In the meantime, the parent comment says "Depreciating means that if you pay an engineer $200k in a year, in tax-world you only had $40…

> Capitalized expense means the expense can be amortized over years?

In the case of Sec 174, not can but must.

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