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The time bomb in the tax code that's fueling mass tech layoffs

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Re: The time bomb in the tax code that's fueling mass tech layoffs

#231

Post by antognini »

MattPalmer1086 wrote: post #136
wdaher wrote: post #56

Earlier quoted context omitted.

Here's a toy example that hopefully makes this clear: In 2024, your business has $1m in revenue and has $2m in expenses. 100% of these expenses are R&D salaries (engineers you hire.) Your company loses $1m/year. (You brought in $1m and spent $2m.) Under the old rules, you'd owe no tax because you were unprofitable. After Sec 174, what the IRS now says is: You had revenues of $1m. But you only had $400k in expenses (b…

Wait - they are saying that employee salaries are not expenses? That is surely wrong? Just because those salaries are for R&D? I could understand if there was some additional tax break for R&D which was being removed. I can't see how basic operating costs cease to be expenses.

They are expenses, but amortized over 5 years. So if you spent $2m on employee salaries, you would then deduct $400k from your revenue every year for 5 years.

If your employee expenses remained constant, then by year 5 you would be deducting $2m from your revenue since you'd be accumulating the deductions from the previous four years.

So in steady state it wouldn't necessarily be a big problem. But for a startup which is hiring many new employees and whose revenue is growing it's a huge problem.

Re: The time bomb in the tax code that's fueling mass tech layoffs

#232

Post by itsoktocry »

trhway wrote: post #222
youngtaff wrote: post #166

Earlier quoted context omitted.

I worked for a UK company that amortised it’s development costs… it led to the false belief that the company was profitable when it really wasn’t

Yes, that is tremendously important aspect here - the US tech would look better on paper - higher paper profits due lower paper expenses - while getting increased cash flow stress due to decreased deductability of the salaries which are among the main expenses in software dev business.

>Yes, that is tremendously important aspect here - the US tech would look better on paper

It's completely unimportant. Nobody is getting fooled "on paper" by amortized salaries.

Re: The time bomb in the tax code that's fueling mass tech layoffs

#233

Post by 9rx »

timewizard wrote: post #154
sampton wrote: post #133

Amortization is bad policy when it comes software. Software is inherently high risk. Every piece of software is unique and does not guarantee steady income over 5 years. Most startups won't survive 5 years to fully realize the deductions. This is the end of US software dominance.

Is US software dominance because of our startups? Or because of the giant trillion dollar monopolies we have? Didn't AAPL, GOOG and FB all create products _before_ they had any taxable income? Would this change have had any actual impact on their foundings?

> Is US software dominance because of our startups? Or because of the giant trillion dollar monopolies we have?

Most likely neither: It is its massive trade deficit, the one it strangely wants to get rid of now, that has allowed US consumers to consume more than they produce (i.e. you can take something with no real expectation of having to give anything back in return). Which, as it relates to tech, has enabled offering services for what is effectively free to dominate the market. Nobody else in the world can compete with that.

> Didn't AAPL, GOOG and FB all create products _before_ they had any taxable income?

Wouldn't you say they had no taxable income because of it? If Facebook brought in $100,000, and paid $100,000 to developers, then there would be no taxable income under normal regimes. But if the developers were not tax deductible, then that $100,000 in revenue would be taxable, even though the bank account is empty. This isn't nearly so simple, but it has changed the calculus in a similar way. The business models of old no longer work because of it.

Re: The time bomb in the tax code that's fueling mass tech layoffs

#234

Post by SpicyLemonZest »

candiddevmike wrote: post #219
tomrod wrote: post #194

Earlier quoted context omitted.

They tried. They had Senate spoilers.

As a progressive, it seems like the Democrats always have Senate spoilers...

Providing spoilers was the explicitly designed purpose of the US Senate. It's not a one-sided problem - Senate spoilers are also why the Affordable Care Act didn't get repealed in 2017.

Re: The time bomb in the tax code that's fueling mass tech layoffs

#235

Post by demosthanos »

inChargeOfIT wrote: post #176
demosthanos wrote: post #73

Earlier quoted context omitted.

No, that's literally the Section 174 change. You now must count them as R&D. The relevant paragraph from Section 174: > (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. https://www.law.cornell.edu/uscode/text/26/174

So that would include everything? - cloud/hosting expenses - system administrators/devops engineers and their laptops, workstations - project management software, office software, support, etc - project managers, designers, technical writers, qa engineers - software licenses, domain names, certificates, etc - internet bandwidth, data-centers, HVAC, backups

What "in connection with" means is vague. I think a reasonably competent tax attorney could probably argue that the costs of running your production cloud serving existing customers don't count, but IANAL.

Re: The time bomb in the tax code that's fueling mass tech layoffs

#236

Post by demosthanos »

mixdup wrote: post #180
demosthanos wrote: post #42

Earlier quoted context omitted.

The reason that we require you to deduct an expense over years for some things is because they have a resale value that needs to be accounted for. It's not a pure expense because you have an asset with real value that came out of the purchase. Employee time has no resale value. Once used it's gone, so employee salaries are expenses, not investments. The only possible justification for the Section 174 R&D changes is t…

But the employee time that had a one time use was turned into software. That software is the thing that has value longer than "right now"

And the value of that software will be taxed if and when it starts to draw cash.

Re: The time bomb in the tax code that's fueling mass tech layoffs

#237

Post by avsteele »

This is about way more than software. It's all R&D

It's effectively 6 years too. You only get to depreciate 10% in 1st year. This might have killed my company if it was around during first years.

See my comments on the previous discussion (Nov 2023) here: https://news.ycombinator.com/item?id=38145630

Re: The time bomb in the tax code that's fueling mass tech layoffs

#238

Post by dragonwriter »

yardstick wrote: post #229
cjbgkagh wrote: post #206

Earlier quoted context omitted.

It stems from the difference in treatment of capital gains and income. Either way it’s deductible, the difference being when it is deductible and how much tax is saved. Capital deductions are typically done later since they require a taxable event. It’s a fudge to make projections look better to allow congress to pass a budget neutral reconciliation bill with the intent that congress would remove the fudge before the…

> Governments in general are pushing for capital gains tax normalization where instead of requiring a taxation event the capital gains tax would be levied yearly. You’re alluding to wealth taxes, right? Because taxing unrealised gains are wealth taxes. Or maybe I’ve misunderstood?

> Because taxing unrealised gains are wealth taxes.

No, wealth taxes are a tax on retained wealth (a stock). Taxing unrealized gains is a tax on income (a flow), it just changes the point at which taxation attaches from a realization event to the actual gain.

Re: The time bomb in the tax code that's fueling mass tech layoffs

#239

Post by bravesoul2 »

simantel wrote: post #195
layer8 wrote: post #185

As a non-American, it seems strange to me that the cost of regular software development, i.e. that is neither “research” nor “experimental” in a conventional sense, would be deductible in the first place (amortized or not). Isn’t that subsidizing a whole business sector? Maybe I’m misunderstanding something.

Businesses are taxed on profits, not revenue. Paying people to write code is an expense, so you'd normally deduct that expense (plus all your other expenses) from your revenue to arrive at an amount that should be taxed.

That's the rub. Is it an operational expense, like rent or a capital expense, like buying machinery?

It is sort of between the two in my view and is highly dependant on what the software engineer does each day.

Are they fixing a bug, helping a customer, refactoring? I think that is operational.

Are they building out a new feature? That is capital. But it is not quite like buying equipment because it adds no value to the books. So depreciation seems off.

But the same issue applies to other roles. Is a sales persons day trying to land a sale, or trying to develop the business.

It all comes down to "intangible assets" and whether you are making them.

I think it is easier to just say if you are paying someone to work then you can deduct. There must be better ways to claw it back.

The whole reason for most business to exist is to use operations (operational costs) as a lever to increase the growth and intangible value of the business.

Re: The time bomb in the tax code that's fueling mass tech layoffs

#240

Post by cjbgkagh »

yardstick wrote: post #229
cjbgkagh wrote: post #206

Earlier quoted context omitted.

It stems from the difference in treatment of capital gains and income. Either way it’s deductible, the difference being when it is deductible and how much tax is saved. Capital deductions are typically done later since they require a taxable event. It’s a fudge to make projections look better to allow congress to pass a budget neutral reconciliation bill with the intent that congress would remove the fudge before the…

> Governments in general are pushing for capital gains tax normalization where instead of requiring a taxation event the capital gains tax would be levied yearly. You’re alluding to wealth taxes, right? Because taxing unrealised gains are wealth taxes. Or maybe I’ve misunderstood?

If pegged to inflation then they are not, but I think they generally will not be pegged. People who might think this is great should understand that the government makes more money increasing wealth inequality aligning the interest of the government and the ultra rich.
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