Comment by aarondf

To the extent that the filibuster's beneficial, I'd say it's only so because of our bad electoral system that stabilizes at only two viable parties, and sometimes results in minority rule.

The filibuster is fine, in its original form. Manipulate the parliamentary process to push the date close to the end of session, then have some windbag with sufficient endurance read the phone book for a few days.

The current version, where you declare yourself filibustered, is too cheap. In the old days, they just filibustered stuff like voting rights, not procedures for borrowing money to support the adopted budget.

The filibuster continues to exist each new day because a simple majority of senators continue to want it to exist. Don’t let that majority off the hook for anything by pointing to a rule they could remove at will.

What other bad things does this prevent from happening? I can't think of anything, unless you think double-taxing income is good.

It may have been beneficial on net at some point in the past, but it's just bad at this point.

I read the message you are replying to three times and I still don’t understand who did this and why? Can elaborate more?

When I took tax law, one of the things that blew my mind is that it can be retroactive.

An exemption might expire, but then be retroactively reinstated. This happens all the time.

There is the tax law that applies to your 2022 income now, and then there's the tax law that will apply to your 2022 taxes in five years.

They have been. Large companies have been engaging with Congress since 2019 on this, reminding them that they intended to revert this before it took effect. CFOs wrote a letter to Congress in November. https://investinamericasfuture.org/Communications/letters/

What does any of this have to do with libertarians?

All sw dev is considered R&E. Soo you have no choice

Guys, this entire section is under the ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS section. Taking a deduction is never mandatory (though usually recommended if applicable). Context matters.

> In computing taxable income under section 63, there shall be allowed as deductions the items specified in this part,

Generally, these sections explaining deductions, including 174, are things you adopt. From the beginning of the section

> (a) In general

> In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—

Everything that follows is subject your specified R&E. Which is all part of the itemized deductions framework which is all completely discretionary.

For instance, here’s section 162

> a) In general

> There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—

> (1) a reasonable allowance for salaries or other compensation for personal services actually rendered;

You are simply carrying on business ordinarily. People don’t operate businesses on R&E expenditure. It’s just not a rational interpretation of the tax code and you don't even need to be a lawyer to read this document or form that conclusion.

https://news.bloombergtax.com/tax-insights-and-commentary/ch...

No, you never “catch up” unless you fire every software engineer (so income and trailing five years of amortization cancel out).

Year 5 is just a steady state of no more phantom profit taxes, but you never really get that extra tax you paid back if you want to keep operating at the same level or grow.

No. If you are growing and increasing expenses you’re always behind. The only case where you get ahead is if you stop growing or shrink.

Only if you’re not growing.

What about an architect's salary? Does the firm who designs the building amortize the cost of that labor, while the purchaser of the building also amortizes the entire cost of the building? How about EEs who design the hardware? Are they included?

> If you buy a building, you can’t depreciate the whole thing instantly

The same should hold of course if you buy software.

But if you ask your employee to perform a task like writing a program you are not buying anything. You are paying the employee's salary whether the software they are writing ever gets out of the compiler or not.

So wouldn't there be a way around this by changing the titles of software developers to "software janitors" for instance ?

No.

After 5 years the first years salaries are considered to be a "finished" R&D project, which means there's nothing left to amortize.

The only thing like that is that if, after a few years, you fire all your devs (or at least, all devs working on adding new features and building new products), then you can keep amortizing the last 4 years of salaries for your now-fired workers over the next few years, which reduces your tax base. But I mean, by that point, who cares? Any software business that has fired all its devs is over.

Do you have a source for that claim?

I don’t see any evidence of that. Care to share any?

What part of it is gaming anything? They're not profiting from money they're paying to their employees as salary.

I am personally very happy that my LLC's SBIR grant proposals in 2022 were all turned down, because I wasn't thinking about the disastrous tax consequences.

Which agency is this from? 30% is an insanely low indirect rate. My experience comes dominantly from DoD SBIR, where for Phase I's you propose your own indirect rate.

But yes, this law is awful for SBIR companies, because we're forced to give a giant out of pocket interest-free loan back to the gov

Universities already have their indirect cost rate negotiated (most are like 80-120%). Default for newcomers is around 30%, until you can build up the history and wherewithal to navigate the negotiations for establishing your own rate.

Only those where CFOs are incompetent. And the owner is not responsible for the company’s debt, usually.

Assuming your uncle was single and not able to leverage the double estate tax exemption for married couples, the $1,000,000 farm value is only $11.92 million short of the threshold at which estate tax would start to apply, and only to the amount above the threshold, at an initial marginal rate of 18%. It only reaches a marginal rate of 40% on the amount more than $1 million over the exemption threshold.

If, instead of being $1 million, the farm (assuming it was the whole of the estate) was worth $13.92 million, the actual estate tax would be $345,800. Assuming the same ratio of annual profit to value in your hypothetical, the annual profit would be $278,400; so if you had no other assets to pay the tax, you’d probably need to borrow against the profits, but that shouldn’t be too hard given their magnitude.

> Federal estate tax is due if an estate's value exceeds the estate tax exemption amount, which is $12.92 million for deaths in 2023

The numbers are much, much larger than a simple $1m family farm.

Also, remember, that cap is a exemption from the value. If you have a farm worth $14m, you will have to pay approximately $400,000 in estate tax (NOT 5.6 million like you would naively calculate). At that point, if the farm doesn't generate (effectively) any revenue, and it's not mortgageable or you can't secure a personal loan, it's probably best for everyone that it be sold. You certainly wouldn't be able to e.g. pay property tax on a property that size.

The estate tax is the most widely misrepresented thing in the tax code. It's designed to prevent multimillionaires and billionaires from passing down their entire fortune to the next generation intact. It almost never affects anyone but the top 0.5% wealthiest people in the country, and only then if they do absolutely no estate planning whatsoever.

Thomas Jefferson argued strenuously for the estate tax and for inheritances (without a will) to be divided evenly among the children. In Europe the law of primogeniture put inheritances in the hands of the firstborn male which guaranteed that a dynasty could always be preserved! Ick!

> it prevents a smaller business being able to exist multiple generations.

In addition to what everyone else says, if you have a multi-generational business the owner should be bringing their child(ren) in as executives and part owners of the business. The estate tax would only apply to the part of the business the original owner still owned at their death, not the part of the business owned by the child(ren).

If this is true then the system is clearly made to funnel these lands into the hands of the ruling oligarchs.

Written by whom? What was the original bill?

The amortization change was a deliberate part of the 2017 tax cut. One of the express purposes of the tax changes was to raise taxes on liberals, and I guess they figured that companies that take the R&D credit are run by liberals.

> maintenance (bug fixes) wouldn't.

Link [2] lists activities related to software development and includes maintenance and debugging. As I understand it this is for the older #41?

• Programming

• Tuning and benchmarking of software

• Performing software maintenance and debugging

...

Am I understanding this correctly that there are two different things at play here: the Section 41 tax credit which works in the companies' favor by allowing them to deduce R&D expenses. Then the Section 174 that requires all expenses to be amortized and the big issue for software firms is that the definitions of R&D differes where it's narrow R&D for the credit, but very broad for #174, resulting in a cash flow problem?

Is it? "In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—" is pretty clear. That means what someone wants to claim as research and experimental expenditures. "For the purposes of this section" also seems pretty clear. If you want to claim software development as R&E, it unambiguously qualifies. And now all R&E must be amortized.

I am not a tax expert, but it doesn't seem like there's any reason you have to claim software development as R&E.

I still don’t understand why it has to be RnD? If I made a million dollars and spent a million in salaries, I made no profit. The government shouldn’t be taxing me on no money made. They already get taxes on the salaries I’m giving out.

What would a welder do that isn't research or development? I believe for both jobs certain tasks are journeyman-like, but others are legit R&D. I don't think software ought to be blanket-exempted because its done on a computer.

Here's the IRS' guidance on software: https://www.irs.gov/businesses/audit-guidelines-on-the-appli...

In "research and development", that typically means "research of new ideas and methods, and developing them into commercially viable products". So are there things that software engineers do that fall under R+D? Absolutely! Is adding a sorting feature to a grid in your app one of those things? Probably not!

Maintain services. Why was everyone expecting Twitter to go down after the layoffs if software developers only do research and development of new products?

There are various tax breaks for R&D spending - so companies try and classify lots of things that aren't R&D as R&D.

There's been a bit of stink recently in the UK around R&D tax credits and how companies have been taking the tax man for a bit of a ride.

What jurisdiction doesn't count employee salaries as an expense?

Salaries are already taxed as individual income. Taxing them as corporate profits and individual income is not closing a loophole, its double-taxing.

> I don't know of any jurisdiction (apart from the US, apparently) which allowed 100% non-amortized tax credit for loosely defined R&D salaries.

This is not about tax credits, this is about whether salaries are an expense. If Widget Inc makes and sells a bunch of widgets for $100m, and then they pay $20m in rent, and $30m for materials, and $40m for salaries, with $10m left over, with no other complexities (eg, interest, depreciating factory equipment, etc.), then is their profit this year:

1) $10m (or maybe a bit less, if they got any tax credits)?

2) Some other larger number closer to $50m?

You'd be hard pressed to find many jurisdictionns where the answer isn't option 1. I certainly don't know any offhand.

It is not. If I pay a worker to frame up a house it is an expense. If I pay a swe to frame up a mobile app it is R&D. Again NOT a loophole.

Maybe it was the point? Didn't you notice that the US gained certain lead in software technologies?

The developers, who are paid rather handsomely, also pay rather large amounts of taxes from their salaries. (If fired and jobless, they stop doing that.)

Well, salaries are expenses though. And software development is not necessarily R&D, so if 99% of software development has to be classified as such, that's a problem.

We are not talking about a tax credit here, but a deduction.

This is misinformation. You owe this tax even if you do not claim any R&D tax credit.

https://www.grantthornton.com/insights/articles/tax/2023/sec...

Uhhhhh… every single one up until this change.

100%

There's a very important clause immediately before that though: "For purposes of this section".

Also the parent clause says: "In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—"

So just don't specify the expenditures as research or experimental if you don't want this section to apply.

I guess there might be a distinction between "development" of software and "maintenance" of software (e.g., bug fixing, refactoring, etc.)?

"Any company can theoretically choose to not be profitable, by reinvesting all of its profits, and investors typically don’t care if their value is returned via growth or dividends. " - the Amazon model for its first 20 years :).

Amazon was founded in 1994 and it started to make profits reliably in 2016 : https://www.macrotrends.net/stocks/charts/AMZN/amazon/net-in...

Wow, this is amazing. Do you have any links with more details on this?

It sounds like Canada is trying to make it as easy as possible for companies to set up shop in Canada.

Personally, even incorporating in Canada is so much easier. A federal corporation just costs $100 to make, and even less to maintain annually. (In contrast, in the United States, an LLC set up through Stripe Atlas costs $500, and you have an annual recurring fee $300 owed to Delaware + registered agent fees.)

Yes, but have you heard of SR&ED?

I just figured out the disconnect. This is only for tax reporting and not financials. This is going to be fun.

No reason? Regulatory capture is the reason.

European software companies don't go broke and AFAIK they have 0% tax credit for salaries (in most countries, I know there are some R&D schemes in UK).

You can if you raise debt or equity to pay salaries.

Unsustained growth is just one type of growth though and this affects all growth so I don't see you point as relevant here.

I pay the Estonian accountant (xolo.io) ~100€ a month and that covers just about everything required to keep the company in good standing. Minor amounts of admin to sign off the annual report (all done with my smart card).

I think you may have that backwards but yes. You are effectively always paying for expenses incurred 2.5 years ago.

EDIT: Nevermind, you had it the right way.

When you say "as one of the signers" do you mean you signed the federal bill which modified this tax? i.e. you are a congressperson? Surely I'm misunderstanding you; your post history is utterly incompatible with any sitting congressperson. But I can't figure out what you meant by it.

I think this is flawed in both directions. Sure when you’re primarily building new stuff maybe the cost of that should be amortized. What happens if you’re just maintaining a product though rather than actually developing new stuff? That doesn’t feel like R&D effort.

Yes. You could look at this as an indictment of the tax system, in that the plain language says what it says, but the IRS expects you to hire an account to make an "appropriate determination."

No small business accountant is incentivized to give you creative opinions, they're just going to go with whatever is the most popular practice. They don't give a fuck how much tax you actually pay.

Your CA would certainly prevent that from happening well before your investors look at your accounts.

https://www.claconnect.com/en/resources/articles/2023/a-cost...

> The amortization period is five years for domestic expenses and 15 years for foreign expenses. Additionally, for the first year of the amortization period, the expenses are “placed in service” at the midpoint of the tax year. Thus, the deduction in year one is only half the amount it will be in subsequent years.

Here in Canada we have similar fractional write-offs called CCA (capital cost allowance). That's for assets though, like a company building, car or equipment.

I've written an accounting system before for business activities and successfully used its reports to win a tax dispute.

I'm not so interested in the details of this, particularly because it's in another country, but I do understand the implications of suddenly not being able to entirely write off the likely most important and large business expense.

>> Congress failed to extend a key tax provision last year allowing companies to fully expense research & development costs in the year incurred, a blow to big corporations that had lobbied for it.

OK, so what is it?

But aren't you deriving value from what they developed in the first year? I mean, maybe that's my mistake.

If they spent a million, made a million, and are now back to square one, it would make more sense to not amortize the investment because it's not an investment.

The only way to really plan for it, if you're running a small business with lower margins, is to raise prices, grow users or cut salary expenses. None of those are easy, even if you can see the tax bill coming.

FWIW when I was in business school, one professor strongly argued (based on an Aswath Damodaran blog/video - he is a business school "celebrity") that R&D should generally be considered a capital expense in terms of valuing companies even when it can be considered an operational loss on an income statement. Technically, this (likely catastrophic) accounting change may be kind of correct in a pure sense.

However, the "asset" associated with software development seems pretty uniquely hard to transfer. Almost every other intangible asset has a strong marketable component (eg a patent on a widget, a copyright on a song), whereas software just doesn't have one. Licensing doesn't count here - that's not a transfer of the asset.

As someone who's taken a couple semesters of college-level accounting, and filed my corporate taxes correctly many years without audit (but am not an accountant/CPA), this seems broadly correct.

I'm actually surprised people are freaking out about this. Of course software is R&D. And of course you don't just get to expense it all at once. It's long-lived, like you said.

Maybe we could have some tax breaks like our friends over in real estate, but I very much think the base assumption should be that software dev is capitalized.

I would assume you aren't laying off your whole staff after year 1, so the comparison if costs stay the same seems like this instead?

Old:

Year 1: 0 Profit

Year 2: 0 Profit

Year 3: 0 Profit

Year 4: 0 Profit

Year 5: 0 Profit

New:

Year 1: 800K Profit

Year 2: 600K Profit

Year 3: 400K Profit

Year 4: 200K Profit

Year 5: 0 Profit

E.g. stack another amortized round of annual salary each time.

Even if revenue stays the same but costs increase, your Year 5 total for each is "X Profit" where X is the amount of revenue delta from Year 1 to Year 5?

If rapid hiring growth followed by layoff scenarios, you are worse off here: you pay the tax on the hiring boom for at least the first year or two before your revenue might drop enough to make it not matter?

If you're further away from profitability, it's maybe still a wash.

Hire up to 10 Million in salaries in 1 year, but your revenue after 2 years is just 4M - you're still under the window. You only get hit by the difference in the bill if your revenue accelerates a lot (which is an OK problem to have)?

So on one hand it seems like it could reduce poorly planned impulse hiring by spreading out the costs, but on the other hand the "run big losses until we make it" plan is less affected anyway because of the "big" in "run big losses"... so it seems to hurt the sustainable folks more in that case.

> (since progressive income tax means that 5 years of tax at $800k < 4 years of tax at $1 million)

This is corporate tax, not income tax, so is not progressive.

No, no it doesnt.

> Capital expenses are amortized because you purchase an asset that will give you value over multiple years. So, for example, if you buy an office building, you amortize the capital expense.

Even that seems like a pretty weak argument for what is essentially a tax penalty.

At least for a purchase of a liquid (or somewhat liquid) capital asset, one could, in principle, re-sell it. But most R&D has essentially no direct resale value and is not being done to create a salable asset. It’s done to create knowledge or IP, which, in turn, is used to create something salable.

I assume the purpose of requiring amortization of capital expenses is to prevent abuses like buying an extremely liquid asset, deducting the purchase price, and thus deferring a tax bill.

> The office building equivalent would be the builder having to treat the salary it paid its labor as a capital expense and amortizing it.

If the builder is building the thing for themself, they do in fact have to depreciate over the IRS-provided lifespan of the building.

The software equivalent to a builder is an agency. If the agency is building their own software, they now have to do the same thing. If the agency is building for someone else, they expense the labor immediatley.

>But what this does is says that if the product you created is an asset, the salaries that go into creating that asset should be treated as if it were purchasing that asset.

This is precisely what happens!!

Honestly if a company's business model revolved around getting 100% tax credits for dev salaries, that company should in fact go away. A 100% rebate on taxes on an already high margin and low expense business segment just feels wrong.

Loan example doesn't work because it's not revenue used to buy the lathe. That type of loan situation is exactly what depreciation/amortization/MACRS is for. If the company brings in $500,000 but buys a $1,000,000 lathe with a loan, they have a net cash flow of +$500,000. Their NPV isn't immediately affected by the loan liability because it's offset by the positive value of the lathe asset.

Then they pay taxes on $357,100 of adjusted earnings because under a 7-year MACRS depreciation, it's assumed the lathe lost $142,900 of value in its first year of ownership (under double-declining or straight-line methods).

Your first part is accurate though.

Anyways, this tax law is fucking terrible. W2 Wages should not be capital expenses because you generally won't be using loans to pay them.

I think I'm failing to see your point, as I cannot find one here.

If GM needs a lathe and has a reasonable business strategy, they should be able to get their accounting office and their leadership to align on how to make it make sense over 5 years. If they can't, it's a business run poorly, and according to the basic tenets of free market capitalism (which you seem to be leaning on heavily) that business would and should fail.

More generally, this seems a natural consequence of the impersonal ways that businesses treat employees, aka "human capital stock" to use the term of art. Capital stock / assets used for generating revenue should be taxed the same across the board.

Then the argument would be "let us transition smoothly to the new mode". But all we're seeing in these threads is "bad bad no good very bad" with relatively little nuance.

Makes sense, but why not (genuinely asking)? Is it just that the bank can repossess the building if necessary, but repossessing bespoke software is kind of pointless?

Yes. It also penalizes shrinking firms as you simply lose the benefit of amortization if you can’t use it.

If we are considering a stable company the only problem is that you expensed more since 2017 than you would have normally done, i.e. you effectively paid less taxes over 5 years. Now you need to catch up. I admit it's not fun, especially if everybody expects it won't happen, but overall it's the same tax.

It very much affects bootstrapped companies building a software product. I'm not sure where you got the idea that it only affect Silicon Valley companies?

If you bootstrap your company to the point where you can afford one engineer's salary, you can only deduct 20% of that against your revenue. I.e. you've paid out all the cash and but you still have to pay taxes on the 80% that is not allowed to be expensed this year.

The R&D tax impact will NOT even out. its taxes you pay for 5 years that you don't get back. R&D tax credits is a small right-off and not worth the efforts. Lots of startups don’t even do the R&D tax credits because of the cost and time evolved to do all the necessary records, backups and reports.

This is a pretty ignorant comment.

You hire consultants. You paid them a million, you also made a million on the product they produced that year.

So they were not really 'researchers', working out on unknown with high risk probabilities, instead they were building an asset that made you money the same year.

You would deduct the payment to these consultants as expense. they pay their own taxes on their salaries.

You are left with an asset that you can make money on, year after year.

That's, I think what they are thinking.

But a) you were not prepared to turn your salaried employees into consultants b) the asset requires extensive up-keep, that costs as much as money as it was to 'create it' c) the asset value without the up-keep can become zero in year d) the asset itself is very risky and may not have value later on.

So I overall agree with your sentiment.

The gov does not want to classify software dev as 'research', but yet -- they have not established how to fairly classify it.

This is a clustferfuck.

We aren’t supposed to ask direct questions on here, but you “get” that a company charges 20% of each of the past 5 years, right?

Like, we agree that’s what depreciation/amortization is, right?

So this most affects companies that have a relatively large R&D org relative to the past few years (aka my point about growing R&D ahead of other functions).

Even worse for companies in high tax states like California, overall tax rate is closer to 40%.