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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)

#831

Post by hattmall »

OneDeuxTriSeiGo wrote: post #318
raverbashing wrote: post #296

Earlier quoted context omitted.

You missed the paragraph saying that maintenance activities are not considered development activities

But that's the rub right? What is the definition of maintenance activities? And for what software? If you are writing a new script to automate something or updating an existing script, is that not software development? If that's considered maintenance activities then would maintaining a software codebase not be considered maintenance activities then?

The concept and determining factor is how it relates to revenue. Is it an activity that supports or contributed to current revenue generation, or is it something that is expected to only contribute to future revenue generation.

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

#832

Post by airstrike »

adamc wrote: post #823

I don't favor any tax breaks for big tech until they actually start paying meaningful taxes. There have been far too many giveaways. The country is running a massive deficit, and the current "solution" is to balloon the deficit and throw the poor under a bus.

Nobody is arguing for a tax break for big tech. We're explaining how it hurts small tech. If anything, allowing the status quo to continue is helping big tech, so you should also be arguing for undoing this travesty.

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

#833

Post by matthewowen »

rtpg wrote: post #560
throwaway7783 wrote: post #275

Earlier quoted context omitted.

1M eng salaries, 5m revenue, 4M other costs. Today I am cash flow neutral at 5m revenue, but with this I'm paying taxes on 800k "profits", which don't exist anywhere but on paper. But I have to pay the taxes in real dollars.

This is going to sound silly but you paid 800k in profits, but now have 4 years of banked costs you can use to _reduce_ your profit margin. So you pay taxes on 800k profits, but then each subsequent year you reduce you profit by 200k, even though you don't have 200k leaving the door. If 1M eng salaries was your stable state, then after several years you're... going to have 1M in costs to subtract from your profit! Th…

This is why it's bad. Large incumbents can manage this and then in steady state it's the same.

But for any new entrants that need to rapidly grow their engineering teams, it's a huge disadvantage.

We don't need more things in the tax code that protect large incumbents at the expense of new entrants.

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

#835

Post by MichaelZuo »

rayiner wrote: post #829
bunnie wrote: post #637

Earlier quoted context omitted.

I keep seeing an objection in this thread along the lines of "what make software so special that it deserves a tax deduction". Correct me if I'm wrong, but if a company hires someone to say, mine coal or brew beer, the expense of those employees is an expense any company can claim a full tax deduction on. If you're a line chef or wait tables, your salary is tax deductible to the restaurant. So it's not that we are as…

> Correct me if I'm wrong, but if a company hires someone to say, mine coal or brew beer, the expense of those employees is an expense any company can claim a full tax deduction on. If you're a line chef or wait tables, your salary is tax deductible to the restaurant. The question is: are you getting the value of that work in the same tax year, or is it creating an asset that creates value over time? If you hire a gu…

Yeah this is the most plausible interpretation.

Software engineers being taxed similar to brewery design engineers seems reasonable, not the person literally brewing each batch of beer.

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

#836

Post by gnopgnip »

andrewlgood wrote: post #601
gnopgnip wrote: post #231

Earlier quoted context omitted.

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…

I think you are confusing the use case. If a business pays employees to build a residential home for $275k and the land cost $0, they don’t deduct anything. Assume they sell the home for $350k. They then have a cost of sale of $275k so they make a profit of $35k0 - 275k = $75k. They then pay tax on the $75 in the year the home was sold. Section 174 relates to Research and Development expenses. The idea originally was…

Yes this is the same type of example. A builder that spends $300m to build apartments doesn't deduct $300m in the first year. The same way a real estate investor that builds a single family home to rent out doesn't deduct $275k the first year

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

#837

Post by ninetyninenine »

phendrenad2 wrote: post #692
ninetyninenine wrote: post #686

Software is one of the few things that the US still dominates at. Looks like this will change soon.

I think that was the whole point of this change. "Too much tech, not enough coal mines" seems to be Trump's whole thing.

It actually makes sense. Most of our brain power is being drained into tech when it could’ve went to other places.

It’s a zero sum game. We have limited population and thus limited total IQ points that can be diverted into different technological fields.

We definitely have an over allocation of points towards software at the detriment of other fields.

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

#838

Post by ojbyrne »

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…

Slight amendment. It's actually a little worse than you describe. Like a machine, if this is amortized over 5 years, it's subject to the "half-year convention" - the assumption is made (to keep things simple) that the engineer is hired at the exact midpoint of the year.

So for your example of a $200k salary amortized over 5 years, you can only deduct $20k the first year, then $40k, $40k, $40k, $40k, and then the final $20k in the sixth year.

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

#839

Post by owlstuffing »

echelon wrote: post #752
Plasmoid2000ad wrote: post #725

Earlier quoted context omitted.

This wasn't my first impression of this, but the more I heard this dicussed the more I'm forming an opinion that there might be some intentional parts of this that while maybe not being good, make sense from a certain narrow perspective. My assumption is, if tax folks in the US were looking Jealously at US companies with large Multinational presence declaring a lot of their profits abroad. They might have noticed tha…

Unfortunately by trying to "fix" this, they've caused massive US software developer layoffs. So even less tax revenues. And an even weaker economy.

While this modification may contribute to layoffs, the general declining economy is the real culprit — the layoffs started long before the tax code change.

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

#840

Post by garrickvanburen »

itsluther wrote: post #784
garrickvanburen wrote: post #262

What 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…

That’s my question: what are the political stars now aligned?
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