Comment by riku_iki
3 years ago
> 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.
Have you read this article: https://news.bloombergtax.com/tax-insights-and-commentary/ch...?
4 replies →
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.
The question is who gets to decide that a given expenditure is an R&E expenditure. The way the law is written (even with the TCJA amendment) sounds to me as if the taxpayer makes this determination. Why would a taxpayer make such a determination? Presumably for the R&D credit.
I still do not see any clear indication that a taxpayer is required to consider any expenditures as R&E expenditures, though the new clause about software is ... troubling.