Comment by rhaway84773
3 years ago
This is backwards. 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.
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. The office building equivalent would be the builder having to treat the salary it paid its labor as a capital expense and amortizing it.
That sounds beyond insane.
That being said, it’s not a material change, if phased in properly, so companies have time to spread their expenses over a period of time.
But it looks like neither was this planned for (not surprising because it’s ridiculous on its face), nor does the legislation phase it in a manner that can be properly absorbed.
In practice companies will get hit hard the first year, but save the equivalent amount over the next 3-4 years. So after 5 years it will be a wash (ignoring the time value of money…factoring in that makes it a loss, but not as much of a loss). The problem is that it will create tremendous cash flow problems as 5 years of tax is paid in 1 year.
> 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.
It's not a rebate, it's salary. For a company bringing in 1 million in revenue and paying 1 million in salary, they literally don't have any money in the bank to pay taxes because they haven't profited yet. If they profit the next year because of their new "asset" giving them long term benefits, they would pay then.
Isn't the simple solution to just not give away all of your revenue before you pay your taxes?
The two constants are death and taxes, if you don't have the revenue to pay them at your current burn rate, you either find a way to burn less or your company just isn't viable.
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If the company has high margins and low expenses, then their profits are already taxed. Its not like hiring one SWE makes your tax bill go to zero.