Comment by dcow
3 years ago
Why is everyone so confused? You only pay taxes on profit. Period. That hasn't changed and probably never will.
If you do “R&D” you can elect to receive a credit. This credit which used to come all in one year, now must be amortized over 5.
If you don’t want that to happen or cant afford it, don’t take the credit. It’s that simple. Not all software development is automatically forced to be R&D. That’s absurd.
IANAA just a poor misinformed internet soul and this is not tax advice.
I agree that you are making logical sense.
I think you should review what I linked or talk to a CPA because this this indeed the change this year, and it is indeed nonsensical.
This is not the same thing as the R&D tax credit.
From TFA
> Generally, section 174 expenditures escape the application of being classified as “start-up costs” under section 195, which generally requires expenditures that qualify as an expenditure under section 162 to be capitalized and recovered over 15 years once the taxpayer begins their business.
Startup costs are things paid to start the business. Once the business is up and running you are “carrying-on” even if you’re not making money. It’s unfortunate that we use the word startup colloquially to mean non-profitable company, because thats not what it means in the IRC.
> You only pay taxes on profit.
That's the question isn't it? What is considered your profit depends on what costs you must amortize vs. expense in year one. I'm not super familiar with this legislation but the concern is that it shifts development costs that were previously expensed to now be amortized.
You appear to be conflating R&E expenses (Section 174) with the R&D credit (Section 41).
Everyone knows taking the R&D credit (Section 41) is optional, that's not what is being discussed here.
The actual question is: if you have incurred software development expenses (e.g. wages paid to software developers), are you required to treat them as R&E expenses under Section 174, or can you instead treat them as ordinary expenses under Section 162?
At first I thought OP was talking about the credit. But I have since updated other comments. In short, use of software to support your business is different from “Software R&E”. Use section 162 not 174. It’s only R&E if you’re frolicking around on the keyboard playing with software for fun, which I doubt any serious business is doing outside of occasional true research. Cost to operate your business is OPEX.
> In short, use of software to support your business is different from “Software R&E”.
Of course the cost of using software to support your business is already deductible as an ordinary business expense. Just to be clear, the discussion in this thread is about the deductibility of the cost of developing software.
> Use section 162 not 174.
The point of the discussion is that it's not actually clear whether this is still possible (for software development costs) after the TCJA changes went into effect in 2022. Please see my sibling comment here for further elaboration: https://news.ycombinator.com/item?id=34634335. (In short, the TCJA rewrites Section 174 to imply that it now supercedes Section 162 for the purpose of software development costs.)
Either way, the situation does not appear to be as cut and dry as you seem to be suggesting.