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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)

#431

Post by PaulDavisThe1st »

organsnyder wrote: post #161
logifail wrote: post #132

Earlier quoted context omitted.

Businesses don't get to say they're claiming "$900k in costs" ... it depends on what kind of costs ... EDIT: and in this instance, it depends on what kind of software engineering.

But why is software engineering treated specially, here? Does Disney have to pay taxes on film animators the same way, given that they're developing a capital asset?

Probably that is a large, rich field, and when you crunch the numbers, collecting corporate income taxes on 80% of essentially all s/w developer salaries in the first year after it goes into effect was a nice push to the CBO numbers related to Trump's 2017 tax cuts.

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

#432

Post by PaulDavisThe1st »

NickHirras wrote: post #169
logifail wrote: post #132

Earlier quoted context omitted.

Businesses don't get to say they're claiming "$900k in costs" ... it depends on what kind of costs ... EDIT: and in this instance, it depends on what kind of software engineering.

This is what's happened at my workplace. We account for time spent working on developing new products differently that development time maintaining legacy applications. Because they are reported for tax purposes differently.

> Because they are reported for tax purposes differently.

For software that used to be an option.

Sec 174 removes the option.

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

#434

Post by cadamsdotcom »

hermannj314 wrote: post #388

Is lobbying for our interests how we become the bad guys? I dont want software development to become the oil and gas industry. More specifically, if software devs aren't creating capital assets, then what exactly is being bought during an acquisition? Don't we tell ourselves our work is building an asset that can be reused and sold. The operational aspect of our job still seems to be treated as opex. Our entire indus…

While your response is valid, the specific circumstances warrant closer consideration and potentially reconsideration.

One problem with the change being appealed is software engineers have become more expensive to carry and that has contributed to layoffs. Unfortunately there appears no logical reason software activities are taxed differently than other things you might hire a skilled worker for. When one goes looking for a logical and direct motivation for the change it’s tough to find. This special tax treatment is a one-off, and engineers earn high salaries - so is it possible this change was to fund some other tax cut? The optics aren’t good, at least.

Finally and more importantly, this change impacts risky ventures & startups most of all since larger tax bills may be incurred even on failed ventures. When you look where economic growth is coming from, the lion’s share is in tech. Higher costs and layoffs discourage experimentation and discourage the development of a broad range of capability in an organization by way of carrying large teams of engineers. It thus jeopardizes the current most promising sector in the US economy. Yes, tech is also having an “are we the baddies” moment - but layoffs and higher costs for startups are a separate issue that dominates here.

If you want even further proof just look at how this is activating the HN community. Comments are through the roof. This issue warrants more than a default response.

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

#435

Post by PaulDavisThe1st »

patmcc wrote: post #390
awkward wrote: post #341

Earlier quoted context omitted.

Software engineers hired for custom, in house work are not building a fixed piece of software with the intention of letting it loose unchanged for the next five years. Software engineers hired to build product are not exclusively building a finished product, and are increasingly necessary as part of the expense of operating that product long term. Industry trends have gone towards combining and blending developement,…

There are businesses that will build a big custom piece of machinery. Think a factory or a mine. That may last for 20 years, but require workers to operate, maintain, etc. This is handled in existing tax law; building or improving a capital asset is amortized, repairing or maintaining it is expensed. It can be a pain in the butt, this is why accounting is not a trivial profession. We could (and I think should ) treat…

> Think a factory or a mine. That may last for 20 years, but require workers to operate, maintain, etc.

Before Sec 174, s/w development costs were subject to a choice: amortization as if they were a capital expense, or regular deduction as a normal operating expense. Companies could decide which category to put costs into depending on the nature of the work (and presumably to suit their own interests).

Sec 174 removes that option. Or rather, it narrows it significantly. You must be absolutely confident that you paid developer X for ONLY maintainance work before deducting their salary.

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

#436

Post by PaulDavisThe1st »

santiagobasulto wrote: post #342
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…

What happens if you outsource all that to an "offshore" company? Is it considered an expense?

Then you have to amortize the costs over 15 years, instead of 5.

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

#438

Post by hn_acc1 »

elictronic wrote: post #181
freedomben wrote: post #127

Earlier quoted context omitted.

Why is it still in place?

The Republican Party is actively antagonistic to any legislation from the Democratic Party basically. You need a 60% vote or you need to take away someone else’s pie. Medicaid/medicare/social security are current contenders based on Republican planning. The bigger issue is Republican voting districts gain less from putting it back in place. Most software devs are on the coasts and Denver.

@cryptonector - but did they have a 60% margin in either house? 50%+1 isn't enough (AFAIK) to undo previously passed legislation.

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

#439

Post by PaulDavisThe1st »

atmavatar wrote: post #306
aaronax wrote: post #239

Earlier quoted context omitted.

So...don't you get value from the newly created software for ~5 years?

That's going to heavily depend on the type of software and whether it's sold as a shrinkwrap product or a subscription. For example: your average AAA game will likely produce the vast majority of its value inside the first year upon its release. At the extreme opposite end you have things like enterprise software using subscriptions, whereby the software continues to produce value year over year, but you're generally…

> At the extreme opposite end you have things like enterprise software using subscriptions, whereby the software continues to produce value year over year, but you're generally also paying developers' salaries to maintain and enhance the softare year over year. That, too, makes little sense in spreading out salaries as a cost over 5 years.

There's also a ship-of-theseus problem here. How much change has to happen to a codebase before it's not the same software anymore?

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

#440

Post by iblacksand »

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…

I also have this question. If this is true, as you note, full deduction is only possible if the wage is constant. So would this also provide an incentive for employers not to give raises, as this 'resets the clock'.

The situation would be that employers want to keep employees for at least 5 years, but providing them with raises as an incentive to stay is also more expensive than it was previously.

Seems like a bit of a mess.

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