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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)

#821

Post by kgwgk »

andrewlgood wrote: post #818
kgwgk wrote: post #804

Earlier quoted context omitted.

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

The definition of capitalizable expenses tends to be the same between GAAP and tax. The depreciation schedules are frequently different.

Yes, it tends to.

However: https://www.law.cornell.edu/uscode/text/26/174

any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure [and be capitalized and amortized over five years even if it is disposed of, retired, or abandoned]

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

#822

Post by freeone3000 »

sahila wrote: post #108
freeone3000 wrote: post #65

Earlier quoted context omitted.

Salaries are not generally considered “capital” - HR wording aside, you do not own your employees. It’s an immediate expense that may, or may not, produce something of value. The IRS is using a theory of value where software (1) is a capital asset (okay, sure), (2) has a six-year deprecation schedule (uhhh why not 5 like everything else?), and (3) is valued at the exact cost of all inputs to it, including salaries (u…

> This is unlike how capital assets are valued for any other industry! Is your dismay that it's unfair compared to other industries or that the policy doesn't reflect reality that software is a capital asset that has a lifetime longer than 6 years for many companies?

Shorter is better here — it means you’re able to take the deduction up-front. The issue is that salaries should not be included as part of a capital asset, as this precludes any other deduction for the same salary. You don’t do this for accountants or lawyers, even at a software firm, but you now have to for your developers. It makes a particular role of employee more expensive!

It’s this absurdity I’m upset about. Six year vs five year is weird but meaningless. Internal software not being sold can be a capital asset, or at least I can point to examples of it (MSFT Hyper-V, ex). But the valuation process is both arbitrary in both directions, and discourages companies from hiring software developers as a policy effect.

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

#823

Post by adamc »

I don't favor any tax breaks for big tech until they actually start paying meaningful taxes. There have been far too many giveaways. The country is running a massive deficit, and the current "solution" is to balloon the deficit and throw the poor under a bus.

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

#824

Post by wfh »

echelon wrote: post #752
Plasmoid2000ad wrote: post #725

Earlier quoted context omitted.

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 tha…

Unfortunately by trying to "fix" this, they've caused massive US software developer layoffs. So even less tax revenues. And an even weaker economy.

Has this tax change been mentioned in any earnings calls as a reason for layoffs. Perhaps if that evidence could be found it would bolster the argument being made here. Didn't someone have all earnings call transcripts in a large database - perhaps an AI can find evidence of this?

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

#825

Post by freeone3000 »

rectang wrote: post #74
freeone3000 wrote: post #65

Earlier quoted context omitted.

Salaries are not generally considered “capital” - HR wording aside, you do not own your employees. It’s an immediate expense that may, or may not, produce something of value. The IRS is using a theory of value where software (1) is a capital asset (okay, sure), (2) has a six-year deprecation schedule (uhhh why not 5 like everything else?), and (3) is valued at the exact cost of all inputs to it, including salaries (u…

> (3) is valued at the exact cost of all inputs to it, including salaries (uh oh). Thanks, that really gets at the heart of the issue. Are any other business processes and elements — e.g. accounting mechanisms, print design, sales funnels — valued this way?

Straight no. That’s why they had to put in line 3, “clarifying” the intent, because it’s not done anywhere else.

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

#826

Post by kfajdsl »

rtpg wrote: post #563
yojo wrote: post #220

Earlier quoted context omitted.

The argument I’ve heard is it specifically makes investing in speculative software (new product lines, new features, etc) more expensive. If you’re doing new drug discovery at a bio-lab, treating all your failures as depreciating “assets” seems bonkers. The same seems true of much software development where the work product ends up thrown away.

I don't get this. You speculative spend 1 million dollars on a new thing. It fails. In one universe you get to deduct 1M from your profit in year 1. In another you get to deduct 1M from your profit, but over 5 years. I understand the pain for small companies and it's a strain on cash flow, but for larger companies with "real" revenue streams and profitability is this that much worse? The cynical thing might be that t…

Yes, this hurts smaller companies with less capital/cash flow more than larger companies.

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

#827

Post by busterarm »

rbultje wrote: post #739
Plasmoid2000ad wrote: post #725

Earlier quoted context omitted.

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 tha…

If the issue is with general tax compliance of large multinationals, then congress should have done something about that. This tax rule has hit small software businesses particularly badly, so much so that it'll practically strengthen the quasi-monopoly of established players.

Small business software has largely been offshoring their development teams for years anyway.

For a long while now, every small US-based company I look at hiring engineers have their teams in South America or Eastern Europe.

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

#828

Post by panny »

I think the most impactful thing you can say about Section 174 is that if it continues, I will be starting my startups outside the US. An employee should be taxed like an employee, not a panel truck. There is no guarantee the software developer will produce anything of great value, so this is a tax on unrealized gains.

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

#829

Post by rayiner »

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…

> 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.

The question is: are you getting the value of that work in the same tax year, or is it creating an asset that creates value over time? If you hire a guy to brew a batch of beer, you’re getting the value with that batch of beer. Once you sell that beer, the value is gone.

But if a brewery hires someone to build a fermentation system, then that person’s salary cost must be allocated to capital expenses that must be depreciated over time.

There’s a good argument that most software development is creating an asset that pays off over time. If you hire someone to upgrade the payroll software, you’ll get the value of that in future tax years.

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

#830

Post by the-rc »

jameshart wrote: post #302
the-rc wrote: post #288

Earlier quoted context omitted.

Does it apply to solo companies that provide software consulting to others? I guess it doesn't for S-Corps, because of passthrough, but might for C-Corps?

If you sold the software asset to another company you don’t get an asset on your books.

Right, that's more clear cut with proprietary software, but what about open source code?
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