Comment by phphphphp
3 years ago
I am not a tax expert but my understanding is that a business would claim expenditure as R&D because of the beneficial tax treatment: it's a choice you make to categorise expenditure as R&D, you're under no obligation to do so. If the tax treatment of R&D spend has changed to be less favourable in your circumstance (i.e: you can't afford the short term cost of amortisation) then you would not claim the spend to be R&D related. After all, a small technology company working on their revenue-generating product is not doing anything experimental: it's only experimental if you massage it as such.
I could be far off the mark -- so please correct me if I am wrong -- but your framing suggests that if a business spends money on software development then they must amortise the cost which does not seem to be correct.
This is how it worked in previous years. Previously, you could elect to take the R&E expenses either entirely in a single year or amortized over the longer period. This year the change is:
1) You can no longer take it all in the single year, and 2) All software development is now R&E automatically, no exceptions.
Note that this is separate from the R&E tax credit that you can also claim, that's a different deal in addition to this.
Reply from our CPA:
“There's pretty widespread bipartisan distaste for that change and there have been multiple attempts to extend the deadline or amend the change, but they haven't picked up steam yet. Still possible it will be changed retroactively. The saving grace is that a lot of the expenses they are talking about you needing to amortize would qualify for the R&D credits you'll be getting. So there's often a substantial offset between the two.”
It really says a lot about the system when the people who pass laws bipartisanly are not happy about what they just passed. It's almost like they could have, I dunno, read and thought about what they were passing. Just imagine all the other BS slipping through.
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This is what I've also heard from our CPA (that no one likes this and it shouldn't be happening), but since it's here and taxes are due in April, here we are.
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There may be widespread bipartisan distaste, yet:
1. It passed in the 2017 tax changes
2. The Congress ending on Jan 3, 2023, did nothing about it, even though they totally could have
3. I think R&D credits will usually be significantly smaller compared to the salary paid
I’m an attorney who works with companies doing software dev everyday, and this is not only a really bad tax policy, but will be detrimental to US innovation. There are a few things you can do, as many others pointed out, like claiming the R&D credit (section 41), extending your tax return, and making sure you have sources of financing if you a owe a big tax bill.
My team also wrote an article on this subject a few weeks back with takeaways and graphs to show the potential math: https://capstantax.com/rev-proc-2023-11/
If anyone wants to reach out to me, feel free to do so as my contact info is at the bottom of the above article.
> it's a choice you make to categorise expenditure as R&D, you're under no obligation to do so
Link provided by author says there is no choice:
(3) Software development. For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
My understanding is that only applies if you're claiming that your expenditure is R&D, that is, it's saying that all software development costs are permitted as part of R&D not that if you spend money on software development you must declare it to be R&D.
There are other requirements to meet for expenditure to qualify as R&D, like experimentation and consideration of alternatives: if all software development is R&D and R&D must have alternatives considered and justified, are companies even permitted to engage in software development if suitable alternatives exist?
This is not what my accountant is telling me or what the articles I am finding from large accounting firms are saying...
It is not a choice anymore, if it is software dev, it's R&E now. They added a specific callout for software development only right to the tax code.
Example: if you are a restaurant and you buy an off the shelf point of sale software, this doesn't apply. If you are in the business of making a point of sale software to sell to restaurants, or your restaurant chain develops its own point of sale software internally, it applies to all costs related to the development of that software now.
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Spot on. This actually applies to most consultants like myself. Though I pay expenses in order to develop software, since I don't own the resulting IP I can't take advantage of the R&D credit.
I think the key words there are "For purposes of this section", which means if you're choosing to designate it as R&E for the purpose of taking the deduction, you can do that with all software related expenses. The core premise of this post seems nonsensical, you're not going to be taxed on revenue as though it was profit.
Not in any way qualified to provide tax advice, don't take the above as anything but idle chat.
Key verbiage here is "for purposes of this section". Section 174 can define software development expenses however it wants--that doesn't make amortization required.
> (a)(2)(B) be allowed an amortization deduction of such expenditures ratably over the 5-year period
I’m not familiar with this tax law, why would the “be allowed” verbiage here not mean it’s an election the taxpayer could choose to apply to their situation rather than a mandate as the OP is presenting it?
i.e. software development is always an R&E expenditure but you are only “allowed” (not “required”) to amortize it.
The problem is the one above that at the start of the section:
(1) except as provided in paragraph (2), no deduction shall be allowed for such expenditures, and
What that means is, you can't take it as a normal business expense deduction, except by following (2) which is to amortize it.
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So how would someone categorize those expenses differently?
On a launched product, cost of sales. On an unlaunched product, cost of inventory, etc.
One of the key questions that defines "R&D" is technical risk: are you answering a question of "Can it be done?" or "How can we do it?" If you know how and you are just slapping it together, it's an opex.
"Software Use" rather than "Software Development"