Comment by pclmulqdq
3 years ago
I am not a tax expert at all, but I pay some tax experts a lot of money, because I do a lot of bootstrapped R&D and the tax laws around it are nuts. My accountant has suggested that I am totally fine, but my lawyer told me he wanted to do more research (not that this was an outright bad rule), but didn't think I would be stuck on this. I declined on the research (legal research is very expensive). My lawyer is very conservative, and my accountant is very liberal on this sort of thing, so that's the range of opinions I'm looking at.
In general, I'm not so sure this is particularly apocalyptic unless you are bootstrapping with high expenses, and you are doing hard tech without a launched product. If you have a launched product, software development can be an operating expense. If you don't, it's harder to justify. If what you are doing has low technical risk, you can also put the number in a different spot on your income/loss statement and operationalize it. If what you are doing has low expenses, it probably doesn't matter much either way because it's not worth anyone's time to figure out if you can actually claim the credit.
If you are bootstrapping a hard tech product and have not launched anything yet, I hope you can afford the amoritzation, because you might not be able to afford your technical risk either.
As a general reminder as long as you have a reasonable interpretation of the tax code; even if it is NOT the IRS's (and the judge eventually rules for the IRS), you will likely be clear of penalties.
If you try to avoid ever getting entangled with the IRS you will way overpay.
E.g,: https://johntreed.com/products/aggressive-tax-avoidance-for-...
Would you recommend that book or any others on real estate / real estate taxes? I'm thinking about getting into the market soon.
Anything by John is highly recommended, but he's honest about the whole thing, and small rentals aren't necessarily the greatest.
1 reply →
So you're saying that the advice you got was that if it's a launched product, you can treat software development as an operating expense and just ignore the fact that 174 says software development is an R&E expense?
I mean that sounds great to me...I just also feel like it's probably a very "liberal" interpretation indeed.
The part I'm getting hung up on is essentially, previously R&E expenses (as you note) were a lot more fungible, it depended on a number of factors including how risky the endeavor was. Things that you just do day-to-day in the service of keeping your company afloat (which for a launched SaaS for example would include fixing bugs or even developing basic features) were likely not R&E. Maybe if you embarked on a journey to develop a totally new product, it would have been.
It seems like the most basic reading of this is pretty straightforward: they've taken that decision making away and said "if it's software dev, it's R&E." Not "if it's software dev for a new feature, but hey existing bug fixes and maintenance don't count," just, "software is R&E now always."
Obviously everyone has their own risk tolerance for how they interpret things and what definition they use.
The key is that as long as your interpretation is reasonable, you won't be penalized, and as long as the numbers are fine, you probably won't even be audited. If you have a good representative, you may even be able to convince an auditor that your interpretation is correct.
And yes, I would say that software that isn't continually developed rots, so if you have a launched product, you aren't really working out your technical risks, you're keeping your revenue stream alive. That sounds like a cost of goods sold to me.
Previously, all of our accountants wanted our work to be R&D, which is why we include things like "all software development" in R&D. Now, we may not want it. There are a lot of other places you can put it.
EDIT: CRUD apps have always been on the line between R&D and not R&D, so let's just put our toes on the other side for 2022 and beyond. In comparison, biotech and hard tech endeavors are screwed because that's not even arguable.
This sounds right to me, if the government started coming after software companies and penalizing them for this they will have an absolute storm on their hands