Comment by uoaei
3 years ago
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.
In a world where you venture-fund software development, this is fine, since the venture funding isn't revenue. In a world where you fund software development with revenue, this hurts a lot, particularly for young companies (and especially for companies that get research grants, which are revenue).
Established companies can probably debt-finance development the way GM would debt-finance a lathe (yes, large enterprises often use debt to buy everything possible). Small companies likely won't have that benefit. Particularly because that software isn't necessarily a capital asset that can back a secured loan, the way a lathe is.
Software definitely is a capital asset: if it weren't, it wouldn't be IP and all code would be open-source.
VC has spoiled software folks for the past decade. This is just how small businesses become bigger businesses. The dogma of "bootstrapping" in software circles has been distorted into what is now clearly, retrospectively, an unsustainable means of developing industries. There doesn't seem to be any reason to treat software differently from others.
The arguments here given scream of panicked, defensive rationalizations how actually we're super special and saving the world through technology, and how dare they claw back the rewards we're given for enabling humanity's progress.
I point you to IRC 1221(a)(3): https://www.law.cornell.edu/uscode/text/26/1221
Arguably, software fits this definition, and under 1221(a)(3)(C) it would not be a capital asset for most closely-held companies (eg a lot of bootstrapped firms).
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I'd prefer to get away from the lathe example because it's not actually a great example of whats going on. I solely used it because the person I was responding to used it.
So back to software. If I have an idea for some company (lets say Twitter2.0) and I bring in ~10M in revenue from selling ad slots but I also paid a bunch of programmers ~8M over the course of the year and somehow the rest of overhead/expense was 1M. I think we can both agree 10M > 9M and so my business venture is profitable.
However, come end of year I have book 10M - (1M + 1.6M) = 7.4M of profit. You may wonder how I can book 7+M of profit when I spent 9M on 10M of revenue and this is exactly what this whole thread is about, programming salaries must be amortized.
This leads to the problem I have to pay taxes on 7.4M of profit using the 1M that I actually have left over so as long as the tax rate is below 13% there's no problem but if its any higher than I need to take out a loan to pay taxes.