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Thousands of small businesses are struggling because of R&D amortization

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Re: Thousands of small businesses are struggling because of R&D amortization

#291

Post by Gormo »

0cf8612b2e1e wrote: post #216
ecocentrik wrote: post #159

Earlier quoted context omitted.

Independent/unaffiliated voters are now 47% of the electorate in the US so that last statement probably doesn't hold water. Are educated voters, regardless of party affiliation, more likely to vote for serious candidates that focus on issue resolution over culture signaling? Sometimes, but that no longer has much to do with party affiliation.

Of those 47% independent, what fraction consistently vote for a particular party?

By definition, none of them, or they'd be identified as supporters of that party, not independents.

Re: Thousands of small businesses are struggling because of R&D amortization

#292

Post by Gormo »

BenFranklin100 wrote: post #169
j16sdiz wrote: post #164

Earlier quoted context omitted.

The idea is: You can hire a R&D team for one year, fire the entire R&D team and still benefits from their works in the next few years. In terms of tax, should we average out these expense over the years? These can have huge difference because how complex our tax and accounting rules are.

Further, R&D is at best a bet, as any of us who has ran a technology business well know. It’s not at all clear one will be able to take the research to market and monetize the R&D investment. Doing that is called founding a successful company.

And if the investment pays off, so that the R&D creates revenue in future years after it's already been paid for, then it will result in actual taxable profit in those future years.

It seems like the IRS is trying to speculatively tax unrealized future profits here, and that's pretty unconscionable.

Re: Thousands of small businesses are struggling because of R&D amortization

#293

Post by Gormo »

moron4hire wrote: post #40
osigurdson wrote: post #27

Earlier quoted context omitted.

>> let go of 23 engineers employed in India >> lots of devs in Switzerland starts to make a lot more sense, especially now. This seems contradictory.

They're talking about incorporating in Switzerland, which allows 135% deduction for R&D costs. Yes, Switzerland pays you to run a startup.

> Yes, Switzerland pays you to run a startup.

It sounds like they're just taxing you less, not paying you anything.

Re: Thousands of small businesses are struggling because of R&D amortization

#294

Post by Gormo »

dboreham wrote: post #284
WalterBright wrote: post #276

Taxing a startup on non-existent "profit" is a really bad idea.

You have to have income in order to be taxed. So there is no taxing non-existent profit. There has to be actual profit. What people must be complaining about is that they can't take all the income from product X in year Y and say it was spent on developing product X so no profit was made. Instead they'd need to have spent that income on marketing supporting and maintaining that product. Then they'd be making zero pro…

If you paid 100k in salaries and earned 100k in revenue, then you broke even, and no actual profit was made. Under the rules being discussed here, however, the 100k you spent in salaries has to be amortized over five years, meaning that even though you actually spent 100k this year, only 20k is deductible from this year's taxes. The IRS then taxes you on the 80k of "profit" you made, which doesn't actually exist, so you don't have the funds to pay the taxes, and your business becomes insolvent.

This is absolutely about taxes being charged against non-existent profit.

Re: Thousands of small businesses are struggling because of R&D amortization

#295

Post by 0cf8612b2e1e »

Gormo wrote: post #291
0cf8612b2e1e wrote: post #216

Earlier quoted context omitted.

Of those 47% independent, what fraction consistently vote for a particular party?

By definition, none of them, or they'd be identified as supporters of that party, not independents.

Party affiliation is self reported. You can be lifelong “independent” and vote straight ticket red/blue.

Re: Thousands of small businesses are struggling because of R&D amortization

#296

Post by Gormo »

nicksergeant wrote: post #274
agwa wrote: post #105

Earlier quoted context omitted.

No, the law defines all software development costs as R&D (technically "R&E") for the purposes of requiring capitalization: https://www.law.cornell.edu/uscode/text/26/174 (c)(3) This is regardless of whether you classify the costs as R&D for the purpose of claiming a tax credit under Section 163.

No, what you linked to there specifically says that "In the case of a taxpayer’s specified research or experimental expenditures for any taxable year", _then_ any software development is classified as R&D for the purpose of requiring capitalization. I don't see anywhere saying that _any and all software development_ is considered "research or experimental". Ie., if some company pays you to build a piece of software a…

> Ie., if some company pays you to build a piece of software and you hand it over when you're done, you were not engaged in research/experimental expenditures if you paid people to build said software.

Then it's your customer's R&D, and they have to amortize their payment to you. If you're doing outsourced software development for SMBs and startups, you might not be directly taxed under this rule, but your customers are, which significantly affects the market for your services.

Re: Thousands of small businesses are struggling because of R&D amortization

#297

Post by bencpeters »

Gormo wrote: post #291
0cf8612b2e1e wrote: post #216

Earlier quoted context omitted.

Of those 47% independent, what fraction consistently vote for a particular party?

By definition, none of them, or they'd be identified as supporters of that party, not independents.

I don't think that's the definition usually used for "independent" when talking about voter affiliation. US politics has a long history of people telling pollsters (and filling out voter affiliation info in actual elections) that they aren't affiliated with a specific party because political parties have generally historically been seen pretty negatively in the US. In reality, many of these self-identified "independent" voters have voting records that are heavily skewed (if not straight-ticket) to one party or another. I don't have actual numbers on what % of independents this is (I too am interested in the parent's question on this matter), but it's definitely not a "definitionally, none" answer.

Re: Thousands of small businesses are struggling because of R&D amortization

#298

Post by gumby »

cj wrote: post #279
csdreamer7 wrote: post #275

Earlier quoted context omitted.

> I don’t understand why businesses can’t just say that their engineering department is a cost center (COGS) instead of classifying engineer salaries as R&D expenditures. They used to be able to. Then Trump and the Republicans came into power and changed it in 2017; the first year to be effective is 2022. https://bipartisanpolicy.org/blog/congress-is-running-out-of... This was to help finance that 20% tax loophole as…

The article you linked to is about R&D. The point I was making is that software engineers don’t need to be classified as R&D. Why can’t a company lump engineers in the same category as technical support? (Which doesn’t need to be amortized)

Before the 2017 change you could and should have if they were not engaged in actual R&D. But people used to lump them into R&D anyway because of the preferential tax treatment (you also used to get special treatment for NOL, which you can't any more).

Software development doesn't generally follow GAAP's model because unless you're IBM or Oracle the same people sometimes fix bugs and sometimes develop new features.

The GAAP rules aren't insane: if your company buys a HQ building it's assumed to last 40 years. And since each year you "get some value" (e.g. you don't pay rent to someone else) you split the value of that purchase over 40 years. If you buy a computer you amortize it over 3 years because you're likely to "use it up" and replace it after that.

And so if you're a car mfr you might have some people developing a new automatic transmission. You expect to then put those things into new cars for some time to come. So GAAP says the R&D that went into the new transmission is amortized while the cost of making one and sticking it into a car you sell is indeed COGS.

If you're an early stage pharma startup almost all you do is R&D for quite a long time. For a software startup you can say the same thing: even if you ship your MVP, every bug you fix is turning it into the "real thing" (unlike Oracle, above, who can split maintenance and development into two buckets).

So I favor accelerated recognition of R&D costs for startups. Not sure about established companies.

Re: Thousands of small businesses are struggling because of R&D amortization

#299

Post by jandrewrogers »

dboreham wrote: post #284
WalterBright wrote: post #276

Taxing a startup on non-existent "profit" is a really bad idea.

You have to have income in order to be taxed. So there is no taxing non-existent profit. There has to be actual profit. What people must be complaining about is that they can't take all the income from product X in year Y and say it was spent on developing product X so no profit was made. Instead they'd need to have spent that income on marketing supporting and maintaining that product. Then they'd be making zero pro…

> You have to have income in order to be taxed.

That “income” is being legislated into existence by disallowing the deduction of customary primary operating costs that are allowed in any other business.

In effect, it becomes a tax on revenue in the early years of a software company. Taxes tied to revenue are notorious for creating unhealthy and perverse market incentives, which is why very few jurisdictions use them. Many small software businesses are now in the position of potentially literally paying more income tax to the IRS than the profit + asset value over the entire life of the business. It is pretty messed up to make small business owners pay “income” taxes out of their own pocket in the absence of offsetting profit.

It is yet another indefensible and unique perversion of reasonable policy under US tax authority.

Re: Thousands of small businesses are struggling because of R&D amortization

#300

Post by baazaa »

paulmendoza wrote: post #263
baazaa wrote: post #257

The best solution is to incentivise investment by setting its tax rate to 0. That's what Trump's cash-flow tax would have done. Higher taxes on the money printing ventures (Google ads etc.), lower taxes on start-ups and companies developing new products. That would be besides all of the other benefits like preventing profit-shifting. Maybe if Silicon Valley wasn't so intensely ideological it would have backed the rig…

Section 174 software changes was designed to punish blue states in order to pay for tax cuts for the wealthy so their budget would balance.

Yes and I'm talking about the original 2016 house-republican DBCFT proposal which would have eliminated tax on investment in general.

Section 174 is a hack to fix a moronic tax that would have been replaced if not for the left. There shouldn't be a section 174 to even amend. And as I said, software development clearly is development, the change makes perfect sense.

If you want R&D to be taxed (even with deductions which get amortized), and you work in R&D, you don't get to whinge when a loophole gets closed so you get taxed like other R&D expenses. The people getting bankrupted by this deserve it insofar as they opposed the tax reform bill that would have elegantly solved this problem forever.

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