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Tell HN: Help restore the tax deduction for software dev in the US (Section 174)
781–790 of 957 posts
Re: Tell HN: Help restore the tax deduction for software dev in the US (Section 174)
#782Luther et al, would you be willing to share some high level statistics about the submissions, such as how many signatures it gets?
20 hours in, there are over 1,800 signatories. It appears the signatories are from nearly all states as well (minus Wyoming and North Dakota): https://www.google.com/maps/d/edit?mid=1jxiSSfj4uG7UBOHPjCbH...
Re: Tell HN: Help restore the tax deduction for software dev in the US (Section 174)
#783Earlier quoted context omitted.
> Almost all work is tax deductible What really? How does this work.
Proft = income - expense. When you pay people to get work done for a business, that paid work is an expense. You can deduct expenses from your income to calculate your profits. IIRC the problem is that software development is not being classified as an operating expense, now, but rather a "research" capital expense, and the deductions then have to be amortized over a number of years.
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Re: Tell HN: Help restore the tax deduction for software dev in the US (Section 174)
#784What inspired working to reverse this now? I'm all for it, just curious as the law has existed for 8 years and been in effect for 3. Seemingly little interest from anyone in the tech world to put lobbying behind reversing it until this point. What changed?
In 2017, in order to pay for the tax legislation in Trump's first term, a provision was added that would prevent companies from deducting Research and Development costs immediately (includes but not limited to payroll costs). It required domestic R&D costs to be expensed over 5 years (really 6 years since you only get to deduct one half of your first year expenses in the first year) and foreign expenses over 15 years (really 16 years). This provision was put in place to start January 1, 2022 because they were looking for additional revenue to pay for 2017 individual and corporate tax cuts. At the time, the thinking was it would be eventually fixed (allow for R&D deductions) as they had almost 5 years to fix the provision. Due to the politics at the time, it was not fixed. Bottom line, the political stars haven't aligned until now to actually get this fixed.
Re: Tell HN: Help restore the tax deduction for software dev in the US (Section 174)
#785Earlier quoted context omitted.
> That's trying to put a material value on software, and doing it based on the salaries of developers is as crazy as valuing it in lines of code. We all do this at the conclusion of every successful job interview. And performance review. And budget review. IMO it's a reasonable floor on the value engineers produce: if you produced an asset worth less than your salary you should be concerned for your career.
Why is software special? Why is all other payroll not treated like this? In reality, this is something made up to balance a budget while pushing the consequences beyond the next election. It isn't a well intentioned accounting principle
It’s not just software. Software developers are just the most vocal people talking about it. I worked a company that owned nuclear power plants. We did R&D on how to make the power plants work more efficiently and safely. Some of the work we did qualified as R&D and could be capitalized. This mattered as the US government gave tax credits for eligible R&D. The tax credits directly reduced your tax bill.
Re: Tell HN: Help restore the tax deduction for software dev in the US (Section 174)
#786Earlier quoted context omitted.
Taxes on income or capital inherently reduce income and capital. Ditto for sale taxes, which reduces transaction volume. This is bad for the economy and ultimately reduce our tax base. About the only thing that doesn't happen is for non-reproducible privileges such as land, intellectual properties, the electromagnetic spectrum, etc.
Taxes reduces taxes? So are you saying that 0% rate taxes would capture the most tax?
Not all taxes are in income or capital. Some are e.g. on consumption (gas, cigarettes, carbon, etc). There’s an argument that in place of corporate income taxes, we should let companies reinvest freely (or pay dividends), and then recoup the taxes elsewhere. The Planet Money podcast has a classic episode about this and other aspects of a presidential platform most economists could agree on.
Re: Tell HN: Help restore the tax deduction for software dev in the US (Section 174)
#787Earlier quoted context omitted.
Taxes reduces taxes? So are you saying that 0% rate taxes would capture the most tax?
> Taxes reduces taxes? Yes. It’s a second-order effect. Imagine if there were a 100% tax: the government would probably get no taxes, because there would be no economy. > So are you saying that 0% rate taxes would capture the most tax? No. There’s a sweet spot. Everyone argues about where it is, but obviously 0% and 100% tax rates would both be problems.
There are taxes on things which generally don't have this kind of effect on supply such as land, because land is an inelastic supply because it cannot be destroyed.
However if the tax is too high then it would cause land abandonment.
Re: Tell HN: Help restore the tax deduction for software dev in the US (Section 174)
#788Earlier quoted context omitted.
This description is misleading (as many of them seem to be), because you're only describing the first year. After 5 years of constant expenses, the deductions match the costs. If expenses diminish, deductions exceed costs. -> this is bad (in the short term) for companies that are growing.
Most startups won’t make it five years especially if they have to raise or borrow money to pay taxes on phantom profit. There is no rational basis for this tax change it was a vindictive attack on blue states in the first Trump admin and an attack on California and SV in particular along with the SALT tax changes.
For startups that don’t make it five years the issue is moot. Expensing the software developers compensation in year 1 rather than over years 1-5 simply creates a larger taxable loss which creates a Net Operating Loss on the balance sheet which could be used in a future, profitable year. As NOLs can expire and have rules regarding how quickly they can be used and whether they can be sold, capitalizing the R&D could be a better answer for some firms.
Re: Tell HN: Help restore the tax deduction for software dev in the US (Section 174)
#789Earlier 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.
Exactly
Re: Tell HN: Help restore the tax deduction for software dev in the US (Section 174)
#790A 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…
> It was passed by Congress during the first Trump administration in order to offset the costs of other corporate tax rate cuts, due to budgeting rules. Wow, so there isn’t really a good faith steel man for this? They were just like, hey, we need to offset other cuts so let’s arbitrarily pick a high paying profession that, not so coincidentally doesn’t have a lot of influence in government, and let them take the hit?
I think it was more along the line that R&D had been formally encouraged with special expensing rules and in 2017 they removed the special treatment.