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.
You do, if you want to claim the tax credit. But the R&D tax credit and R&E under Section 174 are two completely different things.
Until 2022, companies had the choice between expensing and amortizing software development under Section 174. (Section 174 specifically calls out all software development as falling under that section.) So they would only time track when they wanted to get the R&D tax credit, which only covers a portion of software development activities. R&D tax credit software development is a much narrower scope than R&E software development. So it didn't matter until now.
“In the case of a taxpayer’s specified research or experimental expenditures for any taxable year” …
Seems pretty obvious to me that the section only applies to what is claimed as R&E. Software development doesn’t have to be claimed as R&E, but if it is, now it unambiguously qualifies.
Honestly people like you posting these articles claiming that “weird legislative inaction is fucking over startups and small business” and further pushing the “all work that involves scripting a computer 110% must be classified as software R&E” narrative in comments, in spite of so many people telling you that such a conclusion is batshit stupid, makes me question whether there’s some ulterior motive in play. Like what, are all the accounting firms realizing their CPAs don’t outperform TurboTax if they can’t use their secret software R&E magic loophole and have thus deployed the shills, who show founders ridiculous mega tax bills..obviously perturbing them into posting their re-shills? Anecdotally, I know exactly zero founders who are getting “fucked over” by this because they aren’t stupid enough to structure their taxes in a way that causes their employees’ salaries to magically become capitalized voodoo money. Like, man, cut the histrionics… and find a better tax person.
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"
Unsure if you were getting at this too, but software development in the UK can absolutely be ineligible for R&D tax credits yet still require treatment as capital expenditure for tax purposes (and thus not simply fully deductible in year 1 like revenue expenditure) - see [0] from the AAT on this.
Disclaimer: Not an accountant, not your accountant, get professional advice.
Yeah we've helped hundreds of start-ups do their R&D claims, and you have to have specific projects that fall within the definition of "novel" and even then you need to explicitly specify exactly which people worked on it and for how long. It's not a blank cheque at all, and they've tightened the requirements this year on top of that.
> software development in the UK can absolutely be ineligible for R&D tax credits yet still require treatment as capital expenditure for tax purposes
Indeed. Although:
"If businesses develop their own software, the classification of expenditure relating to this (including salaries of in-house IT staff) should be assessed following the same principles. The fact that expenses such as salaries may be recurring does not on its own prevent them from being capital in nature. However, it should be noted that:
The salaries of IT staff will not normally be capital expenditure unless some major new project can be identified. If staff are making only piecemeal changes or minor improvements to software, their salaries are likely to be revenue costs."
Yet from the [US-based] contibutions in the thread it sounds as though _all_ in-house software developers' salaries may _have_ to be treated as capital expenditure for tax purposes in the US.
This seems, frankly, bonkers. I appreciate that portions of the US tax code might well be exactly that(!)
In NL, there's a tax relief for R&D, but it will have to be approved on forehand, and has to be described and estimated in detail, and will be audited. The tax relief gives you a discount on employee taxes.
This is categorically untrue, many developers are COGS.
> The salaries of the team responsible for keeping the production instance of the software up and running should also be included in COGS. All other R&D expenses should not be in COGS.
> Amortized software development costs (we discourage capitalizing these costs in the first place)
Emphasis mine. They're saying if you amortize your other software dev as R&E (stuff that isn't ops/infra/etc. and thus considered COGS) then it doesn't count towards your COGS. But then what they're pretty clearly saying in the parenthetical is that they don't recommend doing that in the first place, which implies that you have a choice.
> 174(c)(3)SoftwareDevelopment
> 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.
My understanding is the problem is the phrase "any amount paid or incurred in connection with". It is unambiguous and provides no leeway. Any costs related to software development are R&D. Period.
The ambiguous part is "the development of any software". What does "development" mean? Is it used in the same sense as "real estate development" or "software development"? Does "development" include maintenance of existing software? As everyone here knows, software development (the profession and practice) is a lot more than just greenfield projects to create brand new products and IP.
> 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.
Where "this section" is "§174. Amortization of research and experimental expenditures"
> Where does it say that all your business expenditure must be considered R&E and consequently are subject to the provisions of section 174?
It doesn't, and neither did I. It states that all software development is seen as R&E
> Yes, if some of your expenditure falls under R&E, then you use section 174 which says any portion thereof involving software development must be amortized.
> What’s described is a cause and effect relationship, not a global mutation of all expenses.
That's not how I interpret it. Section 174 states that all sw dev will fall under R&E. By your logic, you could rule out any "Special rules and definitions" of all sections.
Again, it's not about "all expenses". It's about "any amount paid or incurred in connection with the development of any software". Basically payroll, contractors, and even outsourced companies.
To prevent massive outsourcing, the amortization rate is 7% (15 years) instead of 20%.
Look at it this way:
A "machine" must be amortized. In its lifespan it wil generate some sort of income (almost by itself).
Software can be seen as a "machine". Makes total sense.
Here in NL, if you mine bitcoin. You'll have to pay income tax over it, as it's seen similar as "labor".
Where does it say that all your business expenditure must be considered R&E and consequently are subject to the provisions of section 174?
Yes, if some of your expenditure falls under R&E, then you use section 174 which says any portion thereof involving software development must be amortized.
What’s described is a cause and effect relationship, not a global mutation of all expenses.
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.
> 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.
This section describes how to handle expenses you consider to honestly be research and experimental expenditure. It does not supersede all other sections of the tax code and magically cause all software expenses to get sucked under this section. It simply instructs you how to proceed when evaluating your R&E expenditure, of which software development unambiguously qualifies.
Section 174 literally begins with
> In General
> In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—
>> 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?
The government has not been paying software engineer salaries in any sense. This is in regards to profit calculation where business typically pays taxes on profits, so a zero profit company whose largest expense is developers gets a "fuck you, go out of business now" tax bill.
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.
You do, if you want to claim the tax credit. But the R&D tax credit and R&E under Section 174 are two completely different things.
Until 2022, companies had the choice between expensing and amortizing software development under Section 174. (Section 174 specifically calls out all software development as falling under that section.) So they would only time track when they wanted to get the R&D tax credit, which only covers a portion of software development activities. R&D tax credit software development is a much narrower scope than R&E software development. So it didn't matter until now.
“In the case of a taxpayer’s specified research or experimental expenditures for any taxable year” …
Seems pretty obvious to me that the section only applies to what is claimed as R&E. Software development doesn’t have to be claimed as R&E, but if it is, now it unambiguously qualifies.
3 replies →
Honestly people like you posting these articles claiming that “weird legislative inaction is fucking over startups and small business” and further pushing the “all work that involves scripting a computer 110% must be classified as software R&E” narrative in comments, in spite of so many people telling you that such a conclusion is batshit stupid, makes me question whether there’s some ulterior motive in play. Like what, are all the accounting firms realizing their CPAs don’t outperform TurboTax if they can’t use their secret software R&E magic loophole and have thus deployed the shills, who show founders ridiculous mega tax bills..obviously perturbing them into posting their re-shills? Anecdotally, I know exactly zero founders who are getting “fucked over” by this because they aren’t stupid enough to structure their taxes in a way that causes their employees’ salaries to magically become capitalized voodoo money. Like, man, cut the histrionics… and find a better tax person.
1 reply →
> That doesn't make sense
And yet that's the letter of the law. R&D expenses must be amortized over 5 years. Software development must be counted as R&D.
There is no consideration in the law as written for categorizing software development differently.
That's the reason this whole scenario is a problem in the first place.
> 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...
Unsure if you were getting at this too, but software development in the UK can absolutely be ineligible for R&D tax credits yet still require treatment as capital expenditure for tax purposes (and thus not simply fully deductible in year 1 like revenue expenditure) - see [0] from the AAT on this.
Disclaimer: Not an accountant, not your accountant, get professional advice.
[0] https://www.att.org.uk/tax-treatment-software-and-website-co...
Yeah we've helped hundreds of start-ups do their R&D claims, and you have to have specific projects that fall within the definition of "novel" and even then you need to explicitly specify exactly which people worked on it and for how long. It's not a blank cheque at all, and they've tightened the requirements this year on top of that.
> software development in the UK can absolutely be ineligible for R&D tax credits yet still require treatment as capital expenditure for tax purposes
Indeed. Although:
"If businesses develop their own software, the classification of expenditure relating to this (including salaries of in-house IT staff) should be assessed following the same principles. The fact that expenses such as salaries may be recurring does not on its own prevent them from being capital in nature. However, it should be noted that:
The salaries of IT staff will not normally be capital expenditure unless some major new project can be identified. If staff are making only piecemeal changes or minor improvements to software, their salaries are likely to be revenue costs."
Yet from the [US-based] contibutions in the thread it sounds as though _all_ in-house software developers' salaries may _have_ to be treated as capital expenditure for tax purposes in the US.
This seems, frankly, bonkers. I appreciate that portions of the US tax code might well be exactly that(!)
In NL, there's a tax relief for R&D, but it will have to be approved on forehand, and has to be described and estimated in detail, and will be audited. The tax relief gives you a discount on employee taxes.
This is categorically untrue, many developers are COGS.
> The salaries of the team responsible for keeping the production instance of the software up and running should also be included in COGS. All other R&D expenses should not be in COGS.
https://www.saas-capital.com/blog-posts/what-should-be-inclu...
Great source! To add:
> Amortized software development costs (we discourage capitalizing these costs in the first place)
Emphasis mine. They're saying if you amortize your other software dev as R&E (stuff that isn't ops/infra/etc. and thus considered COGS) then it doesn't count towards your COGS. But then what they're pretty clearly saying in the parenthetical is that they don't recommend doing that in the first place, which implies that you have a choice.
> 174(c)(3)SoftwareDevelopment > 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.
My understanding is the problem is the phrase "any amount paid or incurred in connection with". It is unambiguous and provides no leeway. Any costs related to software development are R&D. Period.
The ambiguous part is "the development of any software". What does "development" mean? Is it used in the same sense as "real estate development" or "software development"? Does "development" include maintenance of existing software? As everyone here knows, software development (the profession and practice) is a lot more than just greenfield projects to create brand new products and IP.
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.
From https://uscode.house.gov/view.xhtml?req=(title:26%20section:...
> 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.
Where "this section" is "§174. Amortization of research and experimental expenditures"
Tax credit is separate from amortization afaict.
@dcow
> Where does it say that all your business expenditure must be considered R&E and consequently are subject to the provisions of section 174?
It doesn't, and neither did I. It states that all software development is seen as R&E
> Yes, if some of your expenditure falls under R&E, then you use section 174 which says any portion thereof involving software development must be amortized.
> What’s described is a cause and effect relationship, not a global mutation of all expenses.
That's not how I interpret it. Section 174 states that all sw dev will fall under R&E. By your logic, you could rule out any "Special rules and definitions" of all sections. Again, it's not about "all expenses". It's about "any amount paid or incurred in connection with the development of any software". Basically payroll, contractors, and even outsourced companies.
To prevent massive outsourcing, the amortization rate is 7% (15 years) instead of 20%.
Look at it this way:
A "machine" must be amortized. In its lifespan it wil generate some sort of income (almost by itself). Software can be seen as a "machine". Makes total sense.
Here in NL, if you mine bitcoin. You'll have to pay income tax over it, as it's seen similar as "labor".
2 replies →
Where does it say that all your business expenditure must be considered R&E and consequently are subject to the provisions of section 174?
Yes, if some of your expenditure falls under R&E, then you use section 174 which says any portion thereof involving software development must be amortized.
What’s described is a cause and effect relationship, not a global mutation of all expenses.
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.
> (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.
I'm just "parroting" from house.gov
For purposes of this section
This section describes how to handle expenses you consider to honestly be research and experimental expenditure. It does not supersede all other sections of the tax code and magically cause all software expenses to get sucked under this section. It simply instructs you how to proceed when evaluating your R&E expenditure, of which software development unambiguously qualifies.
Section 174 literally begins with
> In General
> In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—
7 replies →
>> 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?
The government has not been paying software engineer salaries in any sense. This is in regards to profit calculation where business typically pays taxes on profits, so a zero profit company whose largest expense is developers gets a "fuck you, go out of business now" tax bill.
Companies have been getting a handout and are now losing it. I'm not gonna cry.
1 reply →