Can someone steelman the positives for me? I don't see how it's anything but pure regulatory capture favoring established tech firms. A small company ramping up revenue simply can't handle this amortization while a large, established company can. That being said, I do think there's a little sloppiness in what is categorized as "R&D" in the software development. Is code maintenance R&D? Bug fixes? Performance improvem…
Generally the US requires valuable assets to be depreciated and amortized over their useful life. This is arguably a fair way to tax businesses with fewer downsides than many alternatives. Consider a different situation, a business pays employees to build a residential home for $275k total, the land is worth zero in this simple example. Currently they can deduct $10k a year for 27.5 years to depreciate the home, even…
Section 174 relates to Research and Development expenses. The idea originally was they firms were spending a lot of money to develop a product that might have long useful life, but the expenses were all hitting the operating expense in the current year. This is great for cash tax purposes, but bad for metrics like operating income and net income which impact many firms valuations. Arguably it also misrepresents the firm’s business model. A fundamental idea is that costs should be reflected consistently with the period that revenue is earned. With R&D, the revenue is expected to be earned over many years but the costs are incurred upfront.
The better example is not a residential home, but an apartment building. The builder spends $300M to build the apartments then leases them for the next 30 years. In that example, the $300M is depreciated over 30 years so the costs track with the expenses.