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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)

#811

Post by dwg »

franciscop wrote: post #651
dwg wrote: post #630

Japan has required amortization of capitalized software over five years for qualifying internal-use software since at least 2000. Correct me if I’m wrong, but I believe most other countries have similar rules. Until 2022, U.S. companies had a real competitive advantage. Software developer salaries in Japan are depressed—other roles too, but especially engineers. Without digging too deep, perhaps the previously unfavo…

Dev here working in Japan for few years, I don't think the main reason software salaries are low in Japan is financial, but social/cultural. Software has traditionally not seen as valued as hardware, it was just an "extra" added on top of the hardware part. Basically never went through the startup revolution of the 2000s in US. Also Japan is still very hierarchical, so old ideas change much slower. I would say the co…

Essentially agree.

Nonetheless, if reports are to be believed the post-rule change decline is significant, and I can’t help but wonder how big of a positive feedback loop—in other words a bubble—was being created. The gap was, after all, built up over several decades.

The usual culprit you mentioned, perhaps aren’t as much of a factor as we usually ascribe to them.

Just speculating.

Thanks for sharing the report.

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

#812

Post by rbultje »

phkahler wrote: post #350
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…

How are software engineers different than other people on payroll? Can't they be deducted the same way as accountants or other functions?

> Can't they be deducted the same way as accountants or other functions?

No.

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

#813

Post by andrewlgood »

8note wrote: post #603

ive got a different thought in response to this: is all this ammortization stuff bumpkiss? not just for sorftware developmeent, but everything else that's required to be ammortized? software has been the growth area of actually making stuff for the past 20 years in the US. is it ammortization rules that have held back other investment?

Amortization/depreciation is actually pretty important for understanding the performance of a company. Imagine a firm buys a piece of software to run its business. In year 1 it pays $10M for the software then $1M per year in maintenance thereafter. The software enables the firm to make $2.5M Revenue in year 1 and ramp up to $3.5M thereafter. Assume no other expenses. Without amortization of the software expense, it would look like the business lost $7.5M in year 1, then made $2.5M per year for next 4 years. With amortization, the business makes $0.5M per year consistently which better reflects the stable nature of the business.

Note: ($10M / 5 years =2 m·$/year ). Year 1: $2.5M Revenue - $2.0M amort = $0.5M profit. Years 2-5 have $3.5M revenue - ($2.0M amort + $1M maintenance)= $0.5M profit.

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

#814

Post by andrewlgood »

blindriver wrote: post #655
andrewlgood wrote: post #593

I think people are missing the actual process used by Finance teams relating to this issue. I am a former CFO and spent a fair amount of time with this issue in my last role. The firm had a significant amount of software engineering expense related to its core operating system that was the backbone of the company. The FASB accounting rules drive the capitalization of software expenses, not the tax rules. The FASB def…

This is wrong. It's an IRS code change, not FASB. FASB doesn't oversee taxation at all. Section 174 is strictly a tax issue.

For most items, there is harmony between GAAP and tax. Even though Section 174 is a tax code item, the implications of it must be properly presented on your GAAP financials. Therefore the auditors opine on it

While one of the biggest differences between GAAP and tax is the depreciation schedules for various assets, the definition of the items is generally the same.

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

#815

Post by mjwhansen »

gortok wrote: post #347

The SSBA (Small Software Business Alliance) was set up by Michele Hansen -- co-founder of Geocodio, http://geocod.io (and the SSBA is now run by another person) for this reason -- to raise awareness in Washington DC of the issue with the Section 174 Capitalization changes and the efforts to repeal it. https://ssballiance.org/ She has also spoken about it on podcasts: https://www.youtube.com/watch?app=desktop&v=oF-xsD…

Thanks for being part of SSBA and continuing to raise awareness!

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

#816

Post by andrewlgood »

mgkimsal wrote: post #778
andrewlgood wrote: post #593

I think people are missing the actual process used by Finance teams relating to this issue. I am a former CFO and spent a fair amount of time with this issue in my last role. The firm had a significant amount of software engineering expense related to its core operating system that was the backbone of the company. The FASB accounting rules drive the capitalization of software expenses, not the tax rules. The FASB def…

"... then applied to software development in an effort to juice hiring." How does it 'juice hiring' by removing the ability to deduct 100% of an employee's cost in one year? Who would be incentivized to hire more people when less is deductible?

Apologies, I was speaking to the more general idea of allowing firms to depreciate/amortize assets faster to juice hiring. In this case, the government ended the accelerated amortization for R&D which had been juicing the hiring for many years. This happens on the “regular” capital expenditures side rather frequently with windows of accelerated depreciation to increase the purchase of machinery. It’s always for a window of time, then it expires.

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

#817

Post by andrewlgood »

jbs789 wrote: post #723
blindriver wrote: post #655

Earlier quoted context omitted.

This is wrong. It's an IRS code change, not FASB. FASB doesn't oversee taxation at all. Section 174 is strictly a tax issue.

I think he stopped short of a more controversial observation (for this audience), that capitalising these expenses for tax purposes is actually closer to GAAP/what's happening in the financial statements, and the prior treatment could be viewed as a tax stimulant to encourage development. When viewed through this lens, are growing companies trying to have their cake and eat it too - get the boost to GAAP net income f…

Thank you for the clearer restatement.

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

#818

Post by andrewlgood »

kgwgk wrote: post #804
steine65 wrote: post #657

Earlier quoted context omitted.

This does feel a bit like propaganda. I'm a CPA with ex-Big4 audit experience, albeit only 4 years, and specialized in revenue rather than expenses. I just briefly read over the pwc summary of the related FASB standards covering Subtopics ASC 985-20 and ASC 350-40. It pretty much says that you expense everything on software that intended for selling until it's technologically feasible. Upgrades afterwards are capital…

This is about taxes. I imagine you’re aware that GAAP accounting and tax accounting can treat things like depreciation schedules differently.

The definition of capitalizable expenses tends to be the same between GAAP and tax. The depreciation schedules are frequently different.

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

#819

Post by freeone3000 »

sethherr wrote: post #500
thaumasiotes wrote: post #187

Earlier quoted context omitted.

Well, a larger issue seems to be that this whole idea is premised on taxing an unrealized gain. If I create a painting, I don't owe any taxes on it until I sell it. If the world decides that I'm Picasso and my sneezing on a canvas means it's worth $50 million, it still won't be true that, after I sneeze without covering my mouth and some spittle lands on one of my blank canvases, a government official shows up to my…

While I understand the drawbacks, the current situation - where the ultra-wealthy don’t pay taxes because all their wealth is in unrealized gain - is even worse

This valuation of software for business taxes. If a business never sells its software, the software may very well have no value.

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

#820

Post by glitchc »

graycat wrote: post #626
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…

Your Honor, here printed on paper is what the Prosection calls "software". Actually as anyone can see on the paper, what is there is just ordinary typing A-Z and 0-9 with a lot of the typing in English. Businesses have been doing typing for many decades. E.g., this typing is much like instructions to a delivery truck driver to deliver goods to customers. And it's the same if a drone reads those instructions and makes…

It runs on a computer. It tells a computer how to do things. You can type once and have the same instructions run again and again on the same computer or on different computers. It can run on many computers simultaneously. No human intervention is required for all of the above.
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