Comment by crote
3 years ago
The issue here is in the way it is deducted.
Previously, $1.000.000 spent on R&D in 2023 would result in a $1.000.000 deduction on your 2023 taxes. Under the new system the same spending would result in a $200.000 deduction in 2023, $200.000 in 2024, $200.000 in 2025, $200.000 in 2026, and $200.000 in 2027.
You still get the same deduction, but spread out over multiple years. However, it also means that you can now deduct $800.000 less in 2023 than expected, resulting in a far higher tax bill this year! If you are a startup you probably don't have that spare $800.000 just lying around doing nothing.
>The issue here is in the way it is deducted.
The issue is that the rules changed. Businesses that relied on the former rules are now faced with a (possibly insurmountable) challenge to accommodate the new rules.
Washington loves to fiddle with tax rules, and lobbyists spend a lot of time and money encouraging it, but nobody can anticipate the ripple effects. It all looks great on CBO spreadsheets and congressional press releases, but the real-world impacts can be devastating.
I only hope they include some kind of small letter that the same person needs to still be employed to get the amortization - I think that's actually implied by it. The same way you got to keep a machine to keep deducting it. I think the gov't got fed up of the mass layoffs and this is how they are fixing it.
If you can deduct the remaining amortized expense immediately upon termination, could companies just fire everybody and rehire them the next day?
Assuming you had no other expenses the tax bill would be $168k on the $800k right? So what we're saying is a business with $1M each in revenue and salary expense would have an additional $168k in current year tax expense?
its like a weird inverse of paying quarterly taxes...the same goal - more of your money stays with the government longer
That's still taxed off profits, not gross.
Yes, but it's changing the way profits are calculated, which massively impacts cash flows.
If I can only deduct 200k of the 1m I spent that inflates my net profits by 800k that I dont actually have, because I spent it on what I thought was an expense.
It changes what is considered a deductible expense.
Profits = Revenue net Costs
Taxes are a cost. Taxes are defined as some rate t, tax = t * (Revenue net Deductible Expenses)
So Profits = Revenue - t * (Revenue - Deductible Expense) - Non-deductible Expense
Percent of t is small relative to the value of 100% applied to non-deductible expense. What this has done is to take salary, deployment infra, everything, from Deductible to Non-deductible expense, leaving 20% of what was there before. That is very large.
You deduct (eligible) expenses from revenue to get (taxable) profit
If you make $2,000,000 gross, spend $800,000 on operating expenses, and $1,000,000 on R&D, you practically have $200,000 profit; but you have pay $210,000 in federal tax on $1,000,000.
Well no, you have a 1.2M profit, and decided to reinvest 1M into R&D to produce a software asset.
It's bad that the tax treatment changes suddenly because businesses need stability, but the change itself is perfectly rational.