Comment by x0x0
3 years ago
Previously: fully deduct R&D salaries from income to calculate taxable profit.
Now: deduct 20% of R&D salaries from income to calculate taxable profit, with the remaining 80% spread 1/5 per year over the next 4 years.
For software companies, where costs are basically eng salaries, this is a huge tax increase. It will kind of even out over time, but it wacks new companies very hard.
"It will kind of even out over time, but it wacks new companies very hard."
Amortizing salaries seems really weird since they are recurring every year. After 5 years you can deduct your full salary expenses for that year. And after you have laid off everybody you can deduct for a few more years. Definitely makes it hard to hire a lot of people quickly if you don't have a ton of profit.
> R&D salaries
> For software companies, where costs are basically eng salaries,
... it smells like this might be fallout from mis-classifying workers and/or fudging categorization of labor for some benefit. Am I on to something?
Even companies that don't take R&D credits (which is a benefit which can be fudged) are still forced to treat software development expenses as R&E subject to 5 year amortization. Companies have no choice in that matter (see https://www.law.cornell.edu/uscode/text/26/174 (c)(3))
Is there a legal definition of "development" that needs to be used? In the dictionary, the definition that most fits "software development" is "The application of techniques or technology to the production of new goods or services."
Which means that at the very least, companies should be able to classify at least some portion of salary costs as "not software development". Maintenance, bug fixing, useless meetings, etc?
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Thank you for the first comment I’ve come across that points to the specific problem. Yes, this seems quite bad.
One could probably apportion some blame to the businesses who assumed a fix from Congress would be forthcoming, but on the whole it seems to me like a spectacularly il-conceived bit of the tax code that never should have been passed in the first place.
What's the reason for that? I can find a lot of coverage of the effects, and of efforts to change it, but why was it made that way to begin with?
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The IRS forces the miscategorization, leading to tax bills that can exceed actual net income.