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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)

#721

Post by ivankelly »

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…

From the wording, it sounds like it applies to contracting non-US resident software development as well.

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

#722

Post by rajeshpatel15 »

By forcing software wages to be amortized over 5 years (15 for foreign devs), Section 174 has sapped cash flow, prompting layoffs and project cancellations totaling $3–4 M for some firms. Reinstating immediate expensing could unlock roughly $240 B in stuck deductions and supercharge R&D credits, materially bolstering hiring and keeping IP onshore. Has anyone modeled the macroeconomic gains of full expensing versus the budgetary trade-offs in the current $4.5 T tax proposal?

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

#723

Post by jbs789 »

blindriver wrote: post #655
andrewlgood wrote: post #593

I think people are missing the actual process used by Finance teams relating to this issue. I am a former CFO and spent a fair amount of time with this issue in my last role. The firm had a significant amount of software engineering expense related to its core operating system that was the backbone of the company. The FASB accounting rules drive the capitalization of software expenses, not the tax rules. The FASB def…

This is wrong. It's an IRS code change, not FASB. FASB doesn't oversee taxation at all. Section 174 is strictly a tax issue.

I think he stopped short of a more controversial observation (for this audience), that capitalising these expenses for tax purposes is actually closer to GAAP/what's happening in the financial statements, and the prior treatment could be viewed as a tax stimulant to encourage development.

When viewed through this lens, are growing companies trying to have their cake and eat it too - get the boost to GAAP net income for stock comp purposes etc, but defer the cash tax to future years. This perspective ties everything together for me, in terms of understanding the incentives of the players here.

I think the other piece mentioned elsewhere is the very real cash flow implications for fast growing companies, in particular those that might be smaller and with more limited access to financing (which also isn't free...). And the idea that it's a pretty blunt tool... 5 yrs for all development... every product is different and as others point out lifecycles are often much shorter.

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

#724

Post by kgwgk »

pmontra wrote: post #718
michaelt wrote: post #493

Earlier quoted context omitted.

> 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…

Your example was quite good actually. Even in sw the people that build the system is not necessarily the people that monitor, maintain and use it, even for systems used only inside a company. I used to work in a telco and we had 3 separate departments, plus a 4th one for testing. And yet all of them seem to be subject to section 174, builders, maintainers, testers. A country wide power grid or telecommunications netw…

> And yet all of them seem to be subject to section 174, builders, maintainers, testers.

Do they?

Upthread one can read: > Activities that are not treated as software development vis-à-vis software developed by a taxpayer for use in its trade or business are as follows: […] • maintenance activities after the taxpayer places the computer software into service

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

#725

Post by Plasmoid2000ad »

bunnie wrote: post #637
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…

I keep seeing an objection in this thread along the lines of "what make software so special that it deserves a tax deduction". Correct me if I'm wrong, but if a company hires someone to say, mine coal or brew beer, the expense of those employees is an expense any company can claim a full tax deduction on. If you're a line chef or wait tables, your salary is tax deductible to the restaurant. So it's not that we are as…

This wasn't my first impression of this, but the more I heard this dicussed the more I'm forming an opinion that there might be some intentional parts of this that while maybe not being good, make sense from a certain narrow perspective.

My assumption is, if tax folks in the US were looking Jealously at US companies with large Multinational presence declaring a lot of their profits abroad. They might have noticed that some of them have large dev presence in US, but through complex accounting, IP transfers, licensing and other actions are able to claim that majority of the value is generated outside of the US.

If a company had, say, 100k software devs, 50k in the US, and 50k scattered across other countries, but claimed the value of it's software was primarily in Puerto Rico and Ireland... In that case, I'd expect questions around the 50k devs in the US.

Is software dev the only activity where this is possible - no, but is currently by the far the largest and the largest growth industry.

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

#726

Post by jfernandezr »

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…

Wow, initially I thought this was the typical libertarian thing to pay less taxes. But thanks to your explanation, I see that the scheme is absolutely crazy. Software devs salaries, as any other employee, should be considered an expense.

But, in a second thought, if you sell a software that you hand crafted to a single customer, in Spain, the software enterprise currently deducts all salaries, while the customer has to depreciate the cost. Think about that in the likes of building an expensive machine: the manufacturer deducts all costs while the customer has to depreciate the machine cost over 20 years.

So the question is, how should a software development piece be considered when it's used internally? Why if you sell that software to others have a tax implication different than if you yourself use it?

That's a very difficult question to answer with too many edges.

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

#728

Post by bunnie »

kgwgk wrote: post #666
bunnie wrote: post #637

Earlier quoted context omitted.

I keep seeing an objection in this thread along the lines of "what make software so special that it deserves a tax deduction". Correct me if I'm wrong, but if a company hires someone to say, mine coal or brew beer, the expense of those employees is an expense any company can claim a full tax deduction on. If you're a line chef or wait tables, your salary is tax deductible to the restaurant. So it's not that we are as…

> One could argue in the future, for example, that those who operate machines to produce tooling dies, should not have their labor treated as regular expenses, but instead as capital assets because their labor output is captured in assets, In the future? That's how it works! > just as Sec 174 treats the labor of software developers as assets. [I was wrong about the following. I misread the text - and the submission t…

Fair enough, that was not the best example.

But I'd also observe that since business owners have to capitalize the wages of the machine operators producing injection molds, then there is an advantage to outsource the whole operation.

Comparing a procurement manager and a CNC operator [the person running the milling machine making a mold] paid the same amount, the CNC operator has a bigger negative impact on the businesses' bottom line, because the business can't expense most of the CNC operator's wages in the current tax year, whereas the procurement manager is generally accepted as fully deductible expense.

Of course, the labor that went into making the mold is effectively built into the acquisition price of the mold, so you haven't gotten rid of it by outsourcing it.

But, by building it into the price of an outsourced mold, one can delay the purchase of the mold to next year to improve the P&L this year, but you can't similarly delay the wages of the tooling operator to a later date.

So, when a CFO is looking for a way to improve the P&L in a given calendar year, there's an incentive to cut operators who build factories, tools, and other assets that have to be amortized, and replace them with more flexible outsource options.

Of course, part of the reason mold making left the US is wages are lower outside the US. But I'd say the current situation with software engineers is a datapoint that demonstrates the impact of expensable versus amortizeable labor on employee retention. It could be that if the tax code is not fixed, the same "CFO logic" would lead to more and more software being outsourced over time, as management is an immediate expense, but software engineers are not.

I suppose one can then argue, why should software engineers get special treatment compared to tooling operators; but then I would counter-argue that perhaps tooling operators should have gotten better treatment so we could have retained more of them in the US.

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

#729

Post by pmontra »

kgwgk wrote: post #724
pmontra wrote: post #718

Earlier quoted context omitted.

Your example was quite good actually. Even in sw the people that build the system is not necessarily the people that monitor, maintain and use it, even for systems used only inside a company. I used to work in a telco and we had 3 separate departments, plus a 4th one for testing. And yet all of them seem to be subject to section 174, builders, maintainers, testers. A country wide power grid or telecommunications netw…

> And yet all of them seem to be subject to section 174, builders, maintainers, testers. Do they? Upthread one can read: > Activities that are not treated as software development vis-à-vis software developed by a taxpayer for use in its trade or business are as follows: […] • maintenance activities after the taxpayer places the computer software into service

You are right. I also read other comments pointing at that. Nevertheless it's often debatable what's maintenance and what's a new feature. Hopefully nobody is looking at it in too much detail.

Example: a one line change to ignore non Unicode codepoints in PDF files loaded in a web app (I did it yesterday.) Is that a new feature? Is that a bug fix? And if it's a bug fix, is that part of a feature that we should have developed before putting the sw into service? Is that maintenance? And what if that particular code point that triggered the issue did not even exist when we released the sw years ago (the code around it is from 2021)?

I believe that nobody has the time to dig the (tens of?) thousands of issues that a company opens and completes every year but there are a lot of gray areas to exploit if somebody has any reason to be pedantic.

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

#730

Post by bambax »

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 true, that's a very convincing explanation of why this new rule is wrong.

I'm not a US taxpayer so my opinion really is irrelevant, but I was so far in the camp of "there's no reason to make a special case for big tech".

But if what happened is actually the reverse, ie, the rule makes a special case of tech/developers and pretends their salary is not a cost but an investment, that's clearly absurd and indefensible.

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