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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)

#491

Post by ethbr1 »

AnthonyMouse wrote: post #481
LamaOfRuin wrote: post #389

Earlier quoted context omitted.

>AFAIK, the increased spending at the IRS did not lead to concomitant offsetting recoveries. This is a predictable outcome, the amount of enforcement activity has been pretty finely tuned for decades to optimize ROI. Most of the recoveries come from changing focuses on compliance to areas that haven’t seen much enforcement activity in many years. Fighting entropy basically. AFAIK, all the data shows exactly the oppos…

These are studies designed to show positive results, and are susceptible to the criticism the parent identified. IRS enforcement has diminishing returns because the IRS starts with the small minority of people who are very obviously cheating on their taxes. Those people get audited and the IRS very easily recovers money from them. If you want to audit more people than that, you have to audit people who are less likel…

If you want to account for the social cost: moral hazard.

Who pays taxes when it's well known that the IRS doesn't audit and follow up on tax cheats?

Especially, if all it takes to further dissuade them is engineering complex wealth structures and keeping tax lawyers on retainer.

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

#492

Post by bravesoul2 »

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…

ELI5: why is this blowing up on HN this particular week in 2025. Is there a trigger? As it has been known about for a while.

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

#493

Post by michaelt »

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…

> What other sort of capital expenditure has you do releases every day, or requires 24/7 monitoring?

Quite a lot of them actually. If I spend $$$$ setting up a car factory with a big production line, I'm going to have people monitoring it 24/7. If I build an airport, I'm going to have air traffic controllers working 24/7. And so on.

Of course, the air traffic controllers didn't build the runway, and the construction crew don't direct air traffic, so the whole situation is much less ambiguous.

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

#495

Post by floxy »

IG_Semmelweiss wrote: post #480
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?

"Other payroll employees" is doing a lot of lifting. The question is really, payroll is made up of builders, vs nonbuilders. Are devs different from other builders? The dirty secret is that they are not. Ford engineers, P&G food researchers, and architect salaries are capitalized just like Software development costs. But, in the case of software development, only those builders are getting a nice subsidy. A world whe…

>Ford engineers, P&G food researchers, and architect salaries are capitalized just like Software development costs.

I'd say the majority of the posters on this thread who are answering questions (as opposed to asking questions) believe this is not the case. What is a good source for learning more about which categories of employee salaries are amortized? Besides becoming a CPA.

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

#496

Post by echelon »

bravesoul2 wrote: post #492
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…

ELI5: why is this blowing up on HN this particular week in 2025. Is there a trigger? As it has been known about for a while.

It's actively being discussed in Congress and is a part of OBBBA.

" H.R.1990 - American Innovation and R&D Competitiveness Act of 2025 "

https://www.congress.gov/bill/119th-congress/house-bill/1990...

> A bipartisan bill reintroduced in Congress last month could offer long-awaited relief to small tech companies hit hardest by an obscure federal tax change — one that many founders say is threatening their survival.

> Industry groups from the Small Software Business Alliance to the National Venture Capital Association and TECNA are backing the bill, which sits in committee. Over 100 House members have signed on. The bill would reverse the changes not just going forward, but also retroactively.

https://technical.ly/startups/r-d-tax-change-reversal-startu...

> On May 13, the House Ways and Means Committee passed “The One, Big Beautiful Bill.” This bill includes several provisions that, if enacted, will be important to businesses claiming research and development incentives:

> The bill would suspend the current amortization requirement for domestic R&D expenses and allow companies to fully deduct domestic research costs in the year incurred for tax years beginning January 1, 2025 and ending December 31, 2029.

https://www.crowell.com/en/insights/client-alerts/house-comm...

> The OBBBA suspends required capitalization of domestic research and experimental expenditures for amounts paid or incurred in taxable years beginning after December 31, 2024, and before January 1, 2030. Under the OBBBA, at the taxpayer’s election, such expenditures can be: deducted as paid or incurred under new Section 174A(a),

https://www.skadden.com/insights/publications/2025/05/the-on...

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

#497

Post by waynesonfire »

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, after 5 years, they can deduct the entire salary.. this just seems like an incentive to promote long-term employment. Doesn't seem like a bad incentive.

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

#498

Post by soneca »

hollerith wrote: post #468
soneca wrote: post #457

Earlier quoted context omitted.

My understanding is that the salary of other types of workers do not follow this rule. If that’s correct, then the section means software developers are actually special snowflakes treated differently by the tax code

Untrue: for example, if you are a lawyer employed to help a company acquire real-estate or another company (i.e., a merger) then your salary is treated the same way by the US tax code (i.e., your employer must amortize your salary). If you want to argue against the current tax code, point out that currently companies do not have to amortize the pay of executives even though arguably their work fortifies the company's…

A recruiter, or an HR person in general, do work that “fortifies the company’s ability to make a profit in future years” as you say, by hiring people that will hopefully work there for years.

Same as a financial analyst implementing new processes and spreadsheets to better control money spending.

One can argue that most white collar worker is investing in future profit. Sales people nurturing long sales cycles, lobbyists, content marketing, SEO.

Why are software developers (and merge lawyers) snowflakes among all those types?

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

#499

Post by throwanem »

rbultje wrote: post #489
Atreiden wrote: post #455

So this is a huge problem, and one worth tackling, but I worry very much about the timing of this post in the context of the bill being brought before the Senate now. We should not implement horrific legislation just because we agree with a single provision. Calling your representatives is the right path, but you MUST be explicit that you do not support the current bill being brought forth that addresses this. Here a…

> We'll correct the ills of the 2017 administration in time How? We have - at times - had democrats in charge since 2017 and they did nothing to resolve this either. We appear to be waiting for flying pigs.

So because this is something we can do now and we want to do something now, we do this?

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

#500

Post by sethherr »

thaumasiotes wrote: post #187
demosthanos wrote: post #130

Earlier quoted context omitted.

It's that it doesn't reflect the reality that the value of software is not remotely correlated with the salaries that were spent building it. It could be valued much higher or much lower, spanning a huge range. Using salaries as a proxy for value of the asset encourages only the safest shovelware bets, discouraging risk taking lest your asset be taxed at substantially higher than it's worth. Avoiding that risk-advers…

Well, a larger issue seems to be that this whole idea is premised on taxing an unrealized gain. If I create a painting, I don't owe any taxes on it until I sell it. If the world decides that I'm Picasso and my sneezing on a canvas means it's worth $50 million, it still won't be true that, after I sneeze without covering my mouth and some spittle lands on one of my blank canvases, a government official shows up to my…

While I understand the drawbacks, the current situation - where the ultra-wealthy don’t pay taxes because all their wealth is in unrealized gain - is even worse
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