The problem with taxing software development like this is it is impossible to know the value of the asset up front. A $1M investment might be worth $1B or $0.
Thousands of small businesses are struggling because of R&D amortization
351–360 of 369 posts
Re: Thousands of small businesses are struggling because of R&D amortization
#352Re: Thousands of small businesses are struggling because of R&D amortization
#353Earlier quoted context omitted.
TCJA actually says 5 years for domestic research and 15 for foreign.
Talking about software development which can be classified r&d for tax credits but it can also be capitalized like any other assets. This pdf has handy chart to determine how to determine software development should be treat for accounting purposes. Grant Thornton is the external auditor for many large companies. ttps://www.grantthornton.com/content/dam/grantthornton/website/assets/content-page-files/audit/pdfs/2020/…
No. TCJA requires all software development costs to be treated as r&d, and capitalized over 5 years (or 15 years). Guidance from pre-2022 no longer applies.
https://www.grantthornton.com/insights/alerts/tax/2023/flash...
Re: Thousands of small businesses are struggling because of R&D amortization
#354Earlier quoted context omitted.
I understand where you’re coming from but the thing to understand is: most startups are incredibly marginal to begin with. If you tilt the field such that the entire distribution is now ~5-6% lower expected value for any given outcome, you can easily wipe out 80%+ of the startups that might’ve been “worth trying” but don’t make any sense now on a risk-adjusted basis. The entire asset class can become unfundable becau…
Are we talking "startups" or "small businesses" here? I could see this blowing up startups for sure, but the conversation was about small businesses and I'm not sure I see the connection there. In my conception of the universe, you're not rolling out multiple hundreds of thousands of salary when you're hanging out your small-business shingle. You might grow to it, but that'll be over a long period of time.
Not quite. Plenty of startups pull 6-7 figures. We did 6 figure revenue on year 1 of our dev agency startup in past.
Re: Thousands of small businesses are struggling because of R&D amortization
#355Earlier quoted context omitted.
I amortize a server because you buy it now, it does work, then is eventually obsolete and you toss it. Does a developer keep doing work for me after he quits/dies?
The code you hired the developer to write/maintain should keep working for you after he quits/dies. Or you made a real bad investment.
Maybe? What if it was a one time manual test harness? What if it was a migration for a new client that has since quit? There is a pretty wide range of tasks a developer can do.
Re: Thousands of small businesses are struggling because of R&D amortization
#356Earlier quoted context omitted.
This isn’t like a loan where the longer the term the smaller the payments. It’s the reverse. You essentially pay taxes now on income, and can’t deduct costs for 5 or 15 years. So it’s kind of like pre-paying taxes and not getting the money back for 5/15 years. Say that you need to go borrow cash to cover the shortfall. Is it cheaper to borrow money for 5 or 15 years?
Hah I'm still trying to understand how software developer pay should be a deduction at all.
So if you run a McDonalds. Your cash flows is money coming in for finished burgers. Your expenses are workers salaries and to buy meat. Let's say your very simple business summary is:
* Total Revenue: $1,000,000
* Cost of food: -$200,000
* Employee Salary: -$600,000
* (potential profit): $200,000
Assuming you can deduct the cost of food and employee salary to sling your burgers.. you make a 200k profit, and pay taxes on 200k.
But now let's say you can't deduct employee salary. You now pay taxes on $800,000 of income despite only having $200,000 of income. Depending on tax rates etc. you might end up with $0 in your pocket, despite having a successful business.
Now replace McDonalds with bootstrapped startup, food cost with AWS bill, and keep employee cost. This is the real situation many small SaaS or other software companies are currently in.
Re: Thousands of small businesses are struggling because of R&D amortization
#357Earlier quoted context omitted.
> Yes, Switzerland pays you to run a startup. It sounds like they're just taxing you less, not paying you anything.
A tax credit gets paid out if you end in green doesn’t it?
A credit does, but a deduction does not. I'm not sure where the previous commenter is getting this information from, since I can't find any documentation of a 135% tax deduction for R&D in Switzerland anywhere online, but if it is a deduction and not a credit, it means that it just offsets taxes on other income.
Re: Thousands of small businesses are struggling because of R&D amortization
#358Earlier quoted context omitted.
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.
This is exactly what they are doing. If this scheme sticks, it will reduce R&D investment. It certainly disincentivizes me from investing in such efforts. We once started a revolution over unfair taxation. I sadly think the same will be necessary to fix the status quo, as system has rotted past the point of meaningful reform.
Allowing the federal government to implement an income tax was one of the most destructive changes to the constitution we've ever made, and it's only gotten worse and worse over the decades. What was originally just supposed to be another tool to generate revenue has become an end in itself at best, an a lever to manipulate society at worst.
On top of that, the necessity of shoehorning everyone's economic activity into prescriptive taxonomies in order to implement this taxation has drastically diminished innovation on the margin, and has created unintended consequences that significantly distort market incentives and diminish our ability to adapt to change, with the situation we're discussing here being a prime example.
I'm worried that you're right; that it's beyond repair, and that we may have to live through a systemic collapse before things can get better.
Re: Thousands of small businesses are struggling because of R&D amortization
#359Who does this benefit in a zero-sum competition scenario, assuming that everybody is affected. For instance, imagine a competition over the AI toaster market. You have Philburn, the broke PhD student with a great idea, Burnright LLC, the toaster algorithm and electronics designer, BurnCo, the manufacture, and B2N, the toast technology venture capitalist. A few scenarios: 1) BurnCo hires Philburn for internal R&D. 2)…
> Who does this benefit in a zero-sum competition scenario, assuming that everybody is affected.
Foreign-run software companies not affected by this law, big companies with deep pockets that don't need to fear upstart competition, and other industries that are not R&E but can enjoy the lower tax rates from TCJA that were paid for with this revenue.
Re: Thousands of small businesses are struggling because of R&D amortization
#360Earlier quoted context omitted.
Talking about software development which can be classified r&d for tax credits but it can also be capitalized like any other assets. This pdf has handy chart to determine how to determine software development should be treat for accounting purposes. Grant Thornton is the external auditor for many large companies. ttps://www.grantthornton.com/content/dam/grantthornton/website/assets/content-page-files/audit/pdfs/2020/…
No. TCJA requires all software development costs to be treated as r&d, and capitalized over 5 years (or 15 years). Guidance from pre-2022 no longer applies. https://www.grantthornton.com/insights/alerts/tax/2023/flash...
My reading of this document is that certain software development activity (e.g., “corrective maintenance to debug, diagnose, and fix programming errors”) is not SRE.
This seems to contradict your statement that “all software development costs [are] to be treated as r&d,” but my experience is that you know what you’re talking about. What am I missing here?