Comment by ricardobayes
3 years ago
Honestly this whole thing looks like a huge tax loophole, now being closed. 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. No wonder everyone and their dog started software companies in the US.
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.
> If I pay a worker to frame up a house it is an expense
If you are getting paid to build the house because you're in the business of building houses, then yes it is an expense. If you're building a house to keep ownership of and rent out, then no, that cost has to be capitalized and depreciated over the expected lifetime of the improvement.
The general question addressed by this law is "should it be allowed to reinvest profits tax-free and delay paying taxes indefinitely?". There are many places in the tax code where this answer is "no" (eg you pay taxes on bank interest yearly, even on a long term CD), and there are many places where this answer is "yes" (retirement accounts, US savings bonds, stock buybacks, 1031 exchange).
It's ridiculous that software development is getting singled out, given that for most business activity the answer is default yes, with only specific list of things that have to be capitalized. I'm just saying the right answer isn't set in stone, apart from of what the tech industry has gotten used to and how effectively abrupt this change was.
Came here to say this. The level of general ignorance of how accounting and tax works on this thread (not you, others) is astounding.
Of course, if anyone had owned real estate, they'd understand things like depreciation, and the fact that you can spend money without it being an 'expense', or that no, just because you 'made $1,000,000 and spent $1,000,000' doing something like building a house, or a piece of code, you could of course show an accounting profit. You created something of value--that's the point. There's something of value left over. Maybe there won't be in five years, but you can't expense the entire thing immediately.
I actually think this treatment (capitalization of software R&D) is more "correct" from a theoretical accounting perspective. Clearly, software companies are creating something that has residual value with all those developer salaries. As for the politics, I'm not sure. I do know that RE has the same problem (accounting profit can run far ahead of cashflow), but has so much crazy advantaged tax treatment (arguably "loopholes")--1031 exchanges, bonus depreciation--and that's on top of stuff like 179 expensing (not specific to RE I know, but still), that maybe software just needs to work more like RE, where the baseline is "many things capitalized", but all sorts of crazy loopholes driven by the whims of short-term politics.
It certainly makes the accountants rich...
FWIW, my wife's architecture practice is dealing with this 174 amortization (on their salaries, some of which were classified as R&D) and it's killing them, too.
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Are you just framing up a mobile app for funzies?
Wouldn't it be a professional service, therefore an expense, therefore fully tax deductible?
No, this is completely wrong.
It's not "just an expense". Think about an architect designing a house. The tax treatment depends on how the person spending the money "uses" the labor. It might be an ordinary operating expense (fully deductible), but could also be inventory, or a depreciated "capital asset" (closely related to the idea of "capital gains" taxes) whose value is spread over a long period of time, generally related to the asset's usable life.
There is a large body of work around the correct treatment of this stuff, which sits at the core of accounting in the same way data structures sit at the core of CS. It's not the most straightforward thing to explain. The tax code contains a ton of exceptions, but in general, a thing that is long-lived, expensive, not routinely bought or sold, and provide some kind of long-lived economic benefit (e.g. shelter, the ability to produce something, or facilitate some kind of industrial process), is a capital asset. (Sounds a lot like software, doesn't it?) Inventory is something routinely bought and sold, generally for profit. A server is inventory for Dell. For a typical software startup, it's a capital asset.
The whole point of accounting is trying to accurately measure economic activity. It's more complicated than it looks. If you agree to a five-year contract and get paid upfront, not all that money is "earned" (hence taxable) in the first year. If you're in debt and the debt is forgiven, no money changes hands, but that's very much beneficial (and taxable) to you. And if you own a long-lived asset, you don't just get to say, oh, I spent all this money upfront, that's an expense I can use to reduce my taxes. Not how it works.
Just trying to shed some light on this. It is indeed rather complex.
No, that's what's changing and it's why everyone is freaking out - software development is no longer a fully-deductible expense.
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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.)
The Trump voters will be happy with the software developers all fired and jobless, because it brings them down to their level.
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%