Comment by avsteele
2 years ago
This is about way more than software.
Bear in mind that the way it is written all research and experimentation costs would be amortized. So if you have a chemist, biologist, physicist or even an engineer it plausibly is the case that if you are paying them to develop a new product that carries technical risk then their *salary* needs to be capitalized!
Good luck coming up with the cash to pay a tax bill on 90% of their annual salary. You can't even pull forward the depreciation if you abandon the research! Sure, it mostly stabilizes after about 6 years if your R&E budget is flat, but even in this case there is a huge cost in that you only get to deduct their salary in the far future. It is huge disincentive to developing anything new.
This is a total nightmare and cost many business like mine an absurd amount of money this year. Everyone just filed for extension in April assuming this insanity would be reversed before the late filing deadline... NOPE!
(NB: it is NOT necessarily tied to R&D, or the R&D tax credit. The calculation of this is subject to different rules.)
I don't even know how large companies found the cash to pay this bill. How can a biotech or software company whose annual expenses I'd guess are largely salary have had the money to pay taxes on 90% of their salary budget?
Do any other countries do this?
And if not, why would anyone push for this - unless your intention is to make sure no R&D happens inside the US.
Who's pushing for this?
> Do any other countries do this?
Nov 2023 letter signed by Y Combinator, https://news.ycombinator.com/item?id=38145699
and the other developed country is?
US treatment under the old rule was constant from the 1950's.
I don't know about other countries.
I haven't found anything credible on 'why' this was added, but...I'd hazard a cynical guess that it was put in as a way to reduce the apparent cost of the TCJA. You look for ways of raising revenue in your bill so you can claim it costs less. You do this do this even if you expect that (unpopular) change will be undone later.
A second possibility is that it was added to reduce the benefits of the R&D tax credit, which in fairness a lot of companies probably abuse.
Entire consulting firms exist to twist regular software development into “research and development” for tax purposes.
Or at least they did.
> You can't even pull forward the depreciation if you abandon the research!
Why would that not be a write-down as a result of impairment of a capitalized asset?
Practically speaking its because there is no asset, unlike other CapEx.
The law specifically does not permit this. You just can't deduct the expenditure except as over 60 months (and only 6 months in the first year)