#2 would imply that anyone who chooses to engage in software development (either personally, or contracting others to do the work) cannot consider the expenses to be regular (non-amortized) deductions.
This means that you cannot, for example, pay yourself a salary and have that treated like the salary you would receive if, for example, you had chosen to be a builder or an artist or a massage therapist.
Another commenter here touched upon what I assume would be the justification for this: with software you spend Y years and C money to develop it, then you sit back and collect revenue, therefore the C money you put it at the beginning is a capital expenditure. But that's rarely the case with any software. Either it is a perennial, on-going process that never stops, or it ceases to be a revenue source. There are exceptions (especially since the dawn of mobile apps) but they are not the rule.
It's also not clear precisely what the difference is between working as a self-employed software developer and a self-employed architect is. They are not exactly the same, but why the former should not be able to take a regular salary from the revenue available, and the latter can doesn't seem clear, let alone equitable.
If anyone has actually thought about things this way, they seem to have a model in their mind that all software development is done following a process of "build first, sell later". This just isn't an accurate reflection of how a lot (most?) s/w development takes place.
Veering into a slightly off topic and controversial opinion, but I always thought it was kind of unfair that corporations could deduct so many of their expenses and not pay taxes on them, but I as an individual cannot deduct most of my major expenses. I don't understand the rationale. Why can corporations deduct their cost of raw materials they use to make products, but I cannot deduct the food I need to eat in order to live? Why can corporations deduct the cost of the office in which they operate, but I cannot deduct rent on an apartment I live in? Why can corporations deduct the cost of company jets, but I cannot deduct the cost of my car? What is the moral justification?
If my salary is $80,000 and my expenses to survive are $70,000, I pay taxes on "$80,000 minus the weak sauce standard deduction."
If I'm a corporation and my revenue is $80,000 and my expenses are $70,000, I pay taxes on $10,000.
People are taxed on income (with only certain deductions), corporations are taxed on profits. If corporations were taxed on income, lots of industries would become unviable, creating huge distortions in the economy. However, people generally have the same expenses (food for example), so at least it’s somewhat fair. It gets unfair and distortive, for example, when health insurance bought for you buy a company is deductible (to the company) but health insurance you buy on your own isn’t.
If corporations could be taxed on income without creating bad distortions, they probably would be. Even taxing profits creates a distortion (profits become double taxed as (1) profit and (2) dividends), leading to behavior like stock buy backs that wouldn’t exist otherwise.
Well the simple argument is that those corporate expenses ultimately benefit other people (customers) while your own expenses only benefit you. The corporation would just mark up prices to reflect tax expenses which would be paid by customers.
So taxing corporate expenses would amount to taxing end-users twice.
If it helps, just think of corporations as legal fiction to help organize the business affairs of natural persons that ultimately own the profits and losses (the "beneficial owners"). So every natural human ends up paying taxes, regardless of how many layers of corporations were involved between the source of the money and their eventual spending.
I could see the argument for perennial still falling under #2: usually in perennial software, you're still building on top of that base you already developed. Basically any SAAS makes sense under #2 to me, despite how much it may suck.
But the contracting work I've done (custom, one-off software) wouldn't make sense under #2, and I don't know how it actually works under this change.
If your contracting work is "company X hired me to write software Y" then any of your expenses (salaries, etc.) are normal expenses. For company X, Y is probably R&D (or a capital asset) and need to be amortized, as #2.
Just like if Ford hires you to build a factory - the amount you pay the plumber is a regular expense, but the bill to Ford is for a capital asset.
> usually in perennial software, you're still building on top of that base you already developed.
Sure, but is revenue tied to work already done, or ongoing work? I.e. are you leveraging prior capital expenditure to realize current revenue, or are you in fact building new stuff right now (updates, features) that will generate right now (or at least, well within the 5/15 year amortization schedules) ?
The fact that the current work relies on earlier work is not in itself an argument that the earlier work was obvious done as a capital investment.
#2 would imply that anyone who chooses to engage in software development (either personally, or contracting others to do the work) cannot consider the expenses to be regular (non-amortized) deductions.
This means that you cannot, for example, pay yourself a salary and have that treated like the salary you would receive if, for example, you had chosen to be a builder or an artist or a massage therapist.
Another commenter here touched upon what I assume would be the justification for this: with software you spend Y years and C money to develop it, then you sit back and collect revenue, therefore the C money you put it at the beginning is a capital expenditure. But that's rarely the case with any software. Either it is a perennial, on-going process that never stops, or it ceases to be a revenue source. There are exceptions (especially since the dawn of mobile apps) but they are not the rule.
It's also not clear precisely what the difference is between working as a self-employed software developer and a self-employed architect is. They are not exactly the same, but why the former should not be able to take a regular salary from the revenue available, and the latter can doesn't seem clear, let alone equitable.
If anyone has actually thought about things this way, they seem to have a model in their mind that all software development is done following a process of "build first, sell later". This just isn't an accurate reflection of how a lot (most?) s/w development takes place.
Veering into a slightly off topic and controversial opinion, but I always thought it was kind of unfair that corporations could deduct so many of their expenses and not pay taxes on them, but I as an individual cannot deduct most of my major expenses. I don't understand the rationale. Why can corporations deduct their cost of raw materials they use to make products, but I cannot deduct the food I need to eat in order to live? Why can corporations deduct the cost of the office in which they operate, but I cannot deduct rent on an apartment I live in? Why can corporations deduct the cost of company jets, but I cannot deduct the cost of my car? What is the moral justification?
If my salary is $80,000 and my expenses to survive are $70,000, I pay taxes on "$80,000 minus the weak sauce standard deduction."
If I'm a corporation and my revenue is $80,000 and my expenses are $70,000, I pay taxes on $10,000.
Not fair.
People are taxed on income (with only certain deductions), corporations are taxed on profits. If corporations were taxed on income, lots of industries would become unviable, creating huge distortions in the economy. However, people generally have the same expenses (food for example), so at least it’s somewhat fair. It gets unfair and distortive, for example, when health insurance bought for you buy a company is deductible (to the company) but health insurance you buy on your own isn’t.
If corporations could be taxed on income without creating bad distortions, they probably would be. Even taxing profits creates a distortion (profits become double taxed as (1) profit and (2) dividends), leading to behavior like stock buy backs that wouldn’t exist otherwise.
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Well the simple argument is that those corporate expenses ultimately benefit other people (customers) while your own expenses only benefit you. The corporation would just mark up prices to reflect tax expenses which would be paid by customers. So taxing corporate expenses would amount to taxing end-users twice.
Believe the income threshold, standard deduction, childcare credit, etc are there for this reason.
But they are capped. Otherwise, many folks might get expensive things instead of paying taxes.
If it helps, just think of corporations as legal fiction to help organize the business affairs of natural persons that ultimately own the profits and losses (the "beneficial owners"). So every natural human ends up paying taxes, regardless of how many layers of corporations were involved between the source of the money and their eventual spending.
I could see the argument for perennial still falling under #2: usually in perennial software, you're still building on top of that base you already developed. Basically any SAAS makes sense under #2 to me, despite how much it may suck.
But the contracting work I've done (custom, one-off software) wouldn't make sense under #2, and I don't know how it actually works under this change.
If your contracting work is "company X hired me to write software Y" then any of your expenses (salaries, etc.) are normal expenses. For company X, Y is probably R&D (or a capital asset) and need to be amortized, as #2.
Just like if Ford hires you to build a factory - the amount you pay the plumber is a regular expense, but the bill to Ford is for a capital asset.
> usually in perennial software, you're still building on top of that base you already developed.
Sure, but is revenue tied to work already done, or ongoing work? I.e. are you leveraging prior capital expenditure to realize current revenue, or are you in fact building new stuff right now (updates, features) that will generate right now (or at least, well within the 5/15 year amortization schedules) ?
The fact that the current work relies on earlier work is not in itself an argument that the earlier work was obvious done as a capital investment.
In other words, businesses need to explain to the IRS that software engineers are really, really bad at engineering.