Comment by pclmulqdq
3 years ago
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).
Revenue Ruling 55-706 provides that IP created by employees of a corporation does not fall within the scope of 1221(a)(3).
And generally, corporate-created IP is treated as a capital asset on the books. This is in line with how capital assets are generally treated; as other commenters have noted, the expense of building a factory (including the salaries of the construction workers, if employed directly by the taxpayer) is also subject to capitalization.
Considering that this entire discussion revolves around how the law is misaligned from the economic impacts of business activities, it is a circular argument to use law to explain and justify your argument.
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