Comment by indymike
3 years ago
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.
3 years ago
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.
TBF I hate accounting too, and now that it's past tax season I look forward to pushing as much as possible to the back of my head...
When you say some of your wife's architecture practice's salaries "were classified" as R&D, who/what did that classification?
I'm wondering if a large part of the pain is businesses that were classifying as much as possible as R&D to get the R&D tax credit, and now that classification is a liability and they can't change so quickly. Otherwise it would seem that established companies could call much of their software engineer activity "maintenance" rather than "development" (and the change shouldn't really matter to pre-revenue startups).
?
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.
Sorry, I couldn’t tell which side of the argument you were on, so I was curious if there were good reasons to defend the proposed change.
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