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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)

#801

Post by andrewlgood »

flambojones wrote: post #378

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 ince…

Short answer is yes. The finance team has to track each year’s expense as a “tax layer” and amortize it separately. By year 5, ignoring half-year or half-quarter conventions, if have a constant spend, the annual expense will be equal to fully expensing.

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

#802

Post by Dylan16807 »

tossandthrow wrote: post #209
abeppu wrote: post #184

Earlier quoted context omitted.

> The core question is to what extend software constitutes an asset or consumption. Isn't part of the problem with our industry that, even it is an asset, its value can be hard to determine even for a long time after you've written it, and it may be pretty weakly related to how much you paid to build it? - you might have spent a lot on developers last year but next year you find out that you're the new Quibi and no o…

These risks would appear to be the same as a shoe producer wanting to bring shoes to market - regardless they are still taxed on the value of their inventory.

Some of the risks are similar, but your "regardless" is bypassing the point.

We can value a real shoe pretty well. But what if we could duplicate all the shoes we built for less than a penny per pair? What would be the value of our inventory?

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

#803

Post by andrewlgood »

bawana wrote: post #276

Doesnt this new law inhibit rapid turnover tho? Since it takes 5 years to get the full deduction of an employee’s salary, there is an incentive to keep the employee around. OTOH, the souless bean counters who want quarterly (if not shorter) time horizons, will simply decrease starting salaries and use other methods to be net zero. If they do shaft the software engineers, then the converse is true-no employee should s…

No. Not tied to a specific employee. The expense is simply capitalized then amortized over 5 or 15 years.

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

#804

Post by kgwgk »

steine65 wrote: post #657
hermannj314 wrote: post #408

Earlier quoted context omitted.

[flagged]

This does feel a bit like propaganda. I'm a CPA with ex-Big4 audit experience, albeit only 4 years, and specialized in revenue rather than expenses. I just briefly read over the pwc summary of the related FASB standards covering Subtopics ASC 985-20 and ASC 350-40. It pretty much says that you expense everything on software that intended for selling until it's technologically feasible. Upgrades afterwards are capital…

This is about taxes. I imagine you’re aware that GAAP accounting and tax accounting can treat things like depreciation schedules differently.

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

#805

Post by andrewlgood »

nikkwong wrote: post #517
PaulDavisThe1st wrote: post #429

Earlier quoted context omitted.

> 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 we…

Machinists also produce semi-durable assets. Should we depreciate the output of their labor, too? Like others in the thread, I view this as an assault on blue states or maybe to soften my vindictive tone, as an assault on those who are not his core constituents.

IF the machinists are doing R&D, they get the same treatment as software engineers.

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

#806

Post by andrewlgood »

arturocamembert wrote: post #88

What's particularly wild about the choice to tax software development in this way is that it assumes that code is always asset. For companies that are pre product market fit, it's often a liability!

Interesting perspective. Firms actually have to evaluate each year whether it is really an asset. If they determine that product is no longer useful, they would write off the remaining balance immediately.

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

#807

Post by formercoder »

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…

Wouldn’t this make the $200k drop below EBIT and thus increase accrual accounting profitability? Sure it could be less cash efficient but generally capitalizing expenses is net favorable.

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

#808

Post by kgwgk »

andrewlgood wrote: post #801
flambojones wrote: post #378

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 ince…

Short answer is yes. The finance team has to track each year’s expense as a “tax layer” and amortize it separately. By year 5, ignoring half-year or half-quarter conventions, if have a constant spend, the annual expense will be equal to fully expensing.

The short answer to some of those questions is yes.

But clearly not for the final question: “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)

#809

Post by andrewlgood »

jmward01 wrote: post #542

In general, anything that encourages companies to reinvest money into infrastructure, research, etc is a great idea. The trick is to make sure it actually does encourage research, infra, etc etc and doesn't just give a loophole for companies to take more profits and pay less tax.

For clarity, there is another section, Section 41, that addresses tax credits for R&D. This is still active.

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

#810

Post by andrewlgood »

neilv wrote: post #400

What other employee roles pretty directly produce assets that often have value for the company across multiple tax years? What kinds of workers who produce IP? What kinds of workers who build equipment retained by the company (not quickly sold)? And how are taxes for those employee expenses currently handled?

Think of scientists developing drugs at a pharmaceutical company. They were significantly impacted by the change in deductibility.
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