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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)

#91

Post by jsherwani »

readthenotes1 wrote: post #77
jsherwani wrote: post #70

For folks that don't know the background on this, here's a layperson summary: - A business is usually taxed on its profits: you deduct your revenue from the cost of producing that revenue, and the delta is what you are taxed on. - In software businesses, this usually means if you spend $1M in software development to develop a web app, and it makes $1.1M in that year, you'd get taxed on the $100K profits. - However, a…

Why do you assume a 50% tax rate in the United States when it is only 21%?

In California, the maximum personal income tax rate is effectively closer to 50%, which is where my mind went, but you're right, it's different for companies.

In my example, the tax rate isn't the point though, it was used just to illustrate the math.

The main point is that it makes no sense to require amortization of software development expenses. The idea that this letter is an attempt to restore rationality in the tax code.

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

#92

Post by demosthanos »

ndriscoll wrote: post #35
vessenes wrote: post #3

Thanks for working on this guys. The current tax code is fairly crazy: you could spend a few million in salaries, sell 200k of software in a year and possibly owe taxes on that. Even if the company would otherwise be shutting down. The traditional capital asset treatment applied to software leaves a lot to be desired. Some software is a capital asset, but much just isn’t. Or at least should be considered to depreciat…

I would be surprised if nearly all software companies wouldn't consider their code to be a valuable capital asset. For example, do you think your company would be okay with releasing commits/snapshots of their source code and design docs into the public domain once they hit 5 years old? Or do they currently depreciate too quickly ?

If you're ripping off a competitor, sure, the salaries of your engineers roughly translates to the value of the resulting capital asset. But the most valuable work that software engineers do is the stuff that has never been done before. The salaries of your developers and designers and your product managers go first towards figuring out what a valuable capital asset would look like. Only after that can you start investing in the actual asset.

The same is true for all true R&D, which is why historically the government has tried to provide protections for R&D work to incentivize people to not just churn out the safe bet over and over again. Patents fall into this category, but software patents are (rightly) hard to come by. Through 2022, the risk of software development was offset by the ability to expense the costs and avoid a tax bill, and this was good policy if your aim is to encourage innovation.

The capital asset theory could still work if there were some way to appraise the value of the actual asset you created. But absent such a way, this thinking is deeply flawed for all but the most shovelware of jobs.

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

#95

Post by cjbgkagh »

hwillis wrote: post #87
jsherwani wrote: post #70

For folks that don't know the background on this, here's a layperson summary: - A business is usually taxed on its profits: you deduct your revenue from the cost of producing that revenue, and the delta is what you are taxed on. - In software businesses, this usually means if you spend $1M in software development to develop a web app, and it makes $1.1M in that year, you'd get taxed on the $100K profits. - However, a…

> a few years ago, the IRS stopped allowing the $1M to be deducted It was Trump's 2017 Tax Cuts and Jobs Act, which amended IRS code.

It wasn't intended to stick, it's a bad idea that was intentionally bad in order to make it easier to reverse.

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

#96

Post by deadbabe »

robomartin wrote: post #26

Signed. That said, here's my perspective on 174 (which should be reverted to full deduction on the year the expense is incurred). You do not have to amortize 100% of your engineering costs. Not even close. Here's the key: Development costs incurred to remove uncertainty are amortized. All other costs are deductible during the tax year where they are incurred. How does this work? You are going to design a new robot ar…

Could you use the vibe coding loophole to eliminate all uncertainty: the AI has the answers you need you just need to develop by continuously prompting and reviewing until the solution is ready for production?

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

#97

Post by adrianmonk »

wodenokoto wrote: post #4

Other than it’s nice not to have your profession taxed, what is the argument that software development shouldn’t be taxed as opposed to all sorts of other white collar work?

That's not the issue. What people are asking for is for software to be treated like every other profession.

That's how it should be, and that's also how it actually was until relatively recently. A new law went into effect that treats software differently. I believe Congress was looking for an easy way to generate extra tax revenue by tapping into the wealth of rich tech giants. Whatever the intent, the workers ended up being the ones who suffer because now hiring people has worse tax consequences than it used to.

So all that people want is to undo that, to take away that special rule that applies only to software, and put it back like it was.

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

#98

Post by rbultje »

londons_explore wrote: post #23
wodenokoto wrote: post #4

Other than it’s nice not to have your profession taxed, what is the argument that software development shouldn’t be taxed as opposed to all sorts of other white collar work?

This isn't changing if it is taxed or not. It is merely about if the tax should be paid in the year the work was done, or spread over the 5 years after the work was done.

> This isn't changing if it is taxed or not.

This is untrue. The rule is not about taxation, but deductions/expenses. If your expenses cover most revenue, you owe little in taxes. With this rule, a particular type of expense (software engineering salaries) is no longer deductible from revenue to calculate taxable income over which taxes are owed. So you might previously owe no taxes, but now you do. The deduction might carry over to the next few years and eventually (after 6 years) you will reach the same point - assuming your salaries don't go up and your business doesn't grow. The remainder in deductions will be returned after the business stops employing software engineers. I'm not sure why anyone would want the tax code to incentivize a business outcome that all of us would consider failure.

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

#99

Post by deadbabe »

lostdog wrote: post #19

Interesting that YC is jumping on this tax code thing, but the shitty tax situation for employees trying to hold onto the equity they've earned is just ignored. The number one problem for startup employees is that the AMT tax makes it impossible to exercise options in a company that is doing well. YC is showing us that they will fight for changes to the tax code when it benefits their bottom line directly, but are si…

Can’t you just exercise early to avoid AMT?

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

#100

Post by jll29 »

jsherwani wrote: post #70

For folks that don't know the background on this, here's a layperson summary: - A business is usually taxed on its profits: you deduct your revenue from the cost of producing that revenue, and the delta is what you are taxed on. - In software businesses, this usually means if you spend $1M in software development to develop a web app, and it makes $1.1M in that year, you'd get taxed on the $100K profits. - However, a…

That's a great explanation, thanks a lot for sharing it.

Some big tech companies affected have laid off teams around the world, perhaps in order to mitigate the numbers looking bad to investors; so in a way, this adversely affected tech employees globally.

Every country should have such a rule for software businesses, which is an industry where all the cost has to be upfronted, so that bootstrapping is facilitated. There are plenty of smaller markets where the VC model is not the most appropriate funding instrument.

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