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Comment by dcow

3 years ago

IMHO the solution is really more simple than people are making it out to be and it’s weird politics among CPAs causing all the distress. To people wiling to challenge their CPAs style of doing things: don’t classify your core expenses as “research and development”. I believe this follows the letter and spirit of the law. R&D is extra stuff you do on top of an already profitable business. When you’re building a product you’re implementing. It’s entirely a semantic problem that has happened because we call the job function “software development” and the tax code uses “research and development” (a different function) as the language. The CPA thing is caused by there being a central source of “doing things” that all the CPAs follow because they’re not qualified to be a tax lawyer and think for themselves. So everyone is stuck in whatever rut their guild’s status quo tax setup for #startups has caused.

47 comments

dcow

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nocoiner  3 years ago

You know, this is pretty clearly the right answer. Software developer salaries are ordinary business expenses. There’s some alarming language in the section about deductibility of R&E expenses, but core business functions aren’t R&E.

Really perceptive comment.

  • jbverschoor  3 years ago

    All sw dev is considered R&E. Soo you have no choice

    • imtringued  3 years ago

      That doesn't make sense since there is both greenfield development and maintenance development. By this logic we would have to track our hours and write down when we do maintenance work and when we do R&D.

      8 replies →

    • logifail  3 years ago

      > All sw dev is considered R&E

      In the UK the relevant document is CIRD81900[0] which sets out what conditions must be satisfied to qualify for R&D tax relief. It's lengthy, but worth the read.

      One section that stands out is:

      "A process, material, device, product, service or source of knowledge does not become an advance in science or technology simply because science or technology is used in its creation"

      [0] https://www.gov.uk/hmrc-internal-manuals/corporate-intangibl...

      4 replies →

    • fogzen  3 years ago

      I don’t think the law says all software development has to be part of a mandatory R&E credit.

      It says “For the purposes of this section…”, so it doesn’t apply if you’re not claiming R&E credit.

      5 replies →

    • dcow  3 years ago

      Stop parroting this nonsense. If you really think gluing a React UI onto MongoDB and then jamming it into an Electron app so that you can charge a subscription for your juice-pulp-bag-squeezing-machine is “research and experimental expenditure” you have either drown yourself so far in Kool-Aid that your skin is blue or you’re certifiably committing tax fraud.

      9 replies →

    • phkahler  3 years ago

      >> All sw dev is considered R&E. Soo you have no choice

      You certainly have a choice to claim it as such or not.

      More importantly, why TF has the government been paying software engineers salary all these years? That's the real question. Also, has it occurred to anyone that this may be why the big tech companies are laying off engineers in droves?

      3 replies →

spiffytech  3 years ago

From the Section 174 text:

    26 U.S. Code § 174 - Amortization of research and experimental expenditures 
    (c) Special rules
    (3) Software development

    For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.

https://www.law.cornell.edu/uscode/text/26/174

To me it doesn't sound like classification is discretionary to me, or that splitting semantic hairs will prove effective (IANAL).

(Additionally, the R&E classification is different from R&D)

  • dcow  3 years ago

    Guys, this entire section is under the ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS section. Taking a deduction is never mandatory (though usually recommended if applicable). Context matters.

    > In computing taxable income under section 63, there shall be allowed as deductions the items specified in this part,

    Generally, these sections explaining deductions, including 174, are things you adopt. From the beginning of the section

    > (a) In general

    > In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—

    Everything that follows is subject your specified R&E. Which is all part of the itemized deductions framework which is all completely discretionary.

    For instance, here’s section 162

    > a) In general

    > There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—

    > (1) a reasonable allowance for salaries or other compensation for personal services actually rendered;

    You are simply carrying on business ordinarily. People don’t operate businesses on R&E expenditure. It’s just not a rational interpretation of the tax code and you don't even need to be a lawyer to read this document or form that conclusion.

    https://news.bloombergtax.com/tax-insights-and-commentary/ch...