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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)

#711

Post by kgwgk »

procaryote wrote: post #696
jncfhnb wrote: post #333

Earlier quoted context omitted.

If you’re building software that is intended to be used for longer than a year then it should be capitalized. The argument on HN is always just complaining that it’s unfavorable to devs; but it’s perfectly reasonable with regards to actual tax principles.

Almost all other payroll is deductible. Why is salary for someone building a house deductible, but salary for someone building a for loop a capital expense Look into when this started and why and you might understand it

> Why is salary for someone building a house deductible, but salary for someone building a for loop a capital expense.

If the “house” (or the for loop) is sold and gone, it’s not an asset and the cost of the goods sold — salaries included - is an expense.

If the “house” (or the for loop) is kept and used, it’s an asset and the cost of producing the asset — salaries included - is capitalized.

(There are differences betweeen the “house” and the for loop but not at the extremes which are clear. I imagine by “house” you mean some building that makes sense in a commercial or industrial context like a warehouse.)

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

#713

Post by mixermachine »

digitaltrees wrote: post #331
hinkley wrote: post #311

Earlier quoted context omitted.

Let's be honest. At a bunch of shops the engineers hired in year 2 will never be properly recouped because the company will be out of business in less than 7 years.

Start ups are hard, most fail. But what rational national policy makes is several orders of magnitude harder to succeed during the riskiest period by adding tax provisions on pretend profits?

Seems like the incentive is to make as little profits as possible at the start to avoid being killed by taxes. I would have expected an exclusion for companies that make below X dollars or are less then Y years old.

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

#714

Post by [deleted] »

andrewl-hn wrote: post #138
cesarb wrote: post #94

Forgive me if this has already been answered in one of the other threads (I haven't been following them), but: How does this work in other countries?

It's not amortized. I.e. the company simply subtracts all salaries for the year from the revenue and pays tax from the difference. Salaries being amortized means on year 1 you can only subtract X% of salaries and the taxable amount becomes much larger. Year 2 you will use the X% for the second year salary and another Y% for the already paid salary of the first year. So, the difference becomes less, and the taxes beco…

[deleted]

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

#715

Post by zoobab »

FirmwareBurner wrote: post #251
hcfman wrote: post #148

Anyone know what the situation in Europe is?

Most European countries don't have deductions for SW devs. Romania had it for a long time and removed it due to gov budget deficits. Some other CEE countries might still have them, but in general most socialist western European countries don't have them, which is why they don't have a tech industry.

"which is why they don't have a tech industry"

We do have a tech industry, just not large behemoths.

Looks like politicians dream about creating behemoths, and they dream about unicorns too.

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

#717

Post by kgwgk »

fuzztester wrote: post #519
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…

>Depreciating means that if you pay an engineer $200k in a year, in tax-world you only had $40k of real expense that year, even though you paid them $200k. what happens if an engineer leaves after the first year, or at any other time? what happens to the calculations then?

Nothing. The calculation has nothing to do with people. It’s about what the company spends - and some kind of spending is capitalized depending on what activity it was related to and what the output was. That doesn’t change if the employee that you paid a salary to leaves, or the company that you bought materials from disappears, etc.

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

#718

Post by pmontra »

michaelt wrote: post #493
hn_throwaway_99 wrote: post #372

Earlier quoted context omitted.

> maintenance activities after the taxpayer places the computer software into service This is the part that I think makes this whole jig of treating software development like a purely capitalizable expense so nuts. I previously worked at a public company that wanted software developers to treat as much work as possible as CapEx - it makes you look more profitable than you actually are, which is bad for taxes but good…

> What other sort of capital expenditure has you do releases every day, or requires 24/7 monitoring? Quite a lot of them actually. If I spend $$$$ setting up a car factory with a big production line, I'm going to have people monitoring it 24/7. If I build an airport, I'm going to have air traffic controllers working 24/7. And so on. Of course, the air traffic controllers didn't build the runway, and the construction…

Your example was quite good actually. Even in sw the people that build the system is not necessarily the people that monitor, maintain and use it, even for systems used only inside a company. I used to work in a telco and we had 3 separate departments, plus a 4th one for testing. And yet all of them seem to be subject to section 174, builders, maintainers, testers.

A country wide power grid or telecommunications network are other examples that come to my mind. They are never complete, they get more features every day (new cables?), they are monitored 24/7. The owner companies also use them.

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

#719

Post by alkonaut »

As I understood it, it makes a difference between R&D on one hand, and "maintenance" on the other hand. This has resulted in that my US corporate overlords are shifting maintenance work to the US (better for taxes) and doing greenfield development where I am in the EU.

This must be excellent for morale in the US office, but I'm not complaining.

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

#720

Post by FirmwareBurner »

zoobab wrote: post #715
FirmwareBurner wrote: post #251

Earlier quoted context omitted.

Most European countries don't have deductions for SW devs. Romania had it for a long time and removed it due to gov budget deficits. Some other CEE countries might still have them, but in general most socialist western European countries don't have them, which is why they don't have a tech industry.

"which is why they don't have a tech industry" We do have a tech industry, just not large behemoths. Looks like politicians dream about creating behemoths, and they dream about unicorns too.

Europe doesn't have any behemoths that are younger than 40+ years but every behemoth that Europe has was once a start-up too in the distant past: Novo Nordisk, ASML, Airbus, Bosch, Siemens, VW, Nestle, etc. How do people forget this?

Behemoths are important because only they have the massive R&D budgets to experiment on new and risky ventures, but also have the economies of scale to built massively expensive and complex things like rockets, hyperscalers, etc.

You can't have a powerful growing and internationally competitive economy just with "Mittelstand" mom & pop shops making niche knick-knacks, you also need behemoths. Why else do you think the German military is contracting Google to build them an on-prem cloud and not a German company?[1] Because Germany, like all of Europe, has no SW behemoths that can do the thigs Google can do at that cost and scale. That's why behemoths are important.

[1] https://www.heise.de/en/news/Bundeswehr-relies-on-Google-Clo...

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