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Comment by ghc

6 months ago

Under the new rules, all software development, excluding bug fixes, must be expensed in this manner. "Turn the crank" development is included.

https://larsco.com/blog/section-174-updates-navigating-the-i...

6 comments

ghc

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ndriscoll  6 months ago

Which makes sense. Software is functionally a capital asset, so really it should be depreciated across the length of the copyright term (unless the company wants to release it to the public domain to fully depreciate it early).

  • robocat  6 months ago

    Maybe software should be a capital asset, but these depreciation rules don't fix that issue.

    The rule says if you pay someone $200k to develop software: then you now have a $200k asset that then devalues to value of $0 over 5 years (starting midyear). That's just plain weird.

    For our example a depreciation table might look like:

      Year, %Amortized, Amount
  2025 10% $20,000
  2026 20% $40,000
  2027 20% $40,000
  2028 20% $40,000
  2029 20% $40,000
  2030 10% $20,000

    The final effect of the 174 rule change is that you still finally end up with a software asset worth $0. However you now have taxable income of $200k in year one and expenses equalling $200k spread over 5 years. The taxes paid could be a lot: although the taxation money is really just being lent to the government for a few years at 0%. The actual financial costs are fucking complicated.

    Understanding accounting and taxes are two absolutely essential skills if you ever wish to be a founder (and useful anyways).

    Finding a solution to dealing with the valuation of assets is difficult. The historical solution of depreciation is broken for software, intellectual property and goodwill. In theory, taxes on dividends and capital gains taxation already deal with the issue (company taxation at x% kinda ends up at $0 because the shareholder pays y% and claims back the x% through imputation).

    And remember that salaries are properly taxed.

    • ndriscoll  6 months ago

      Right, that weirdness is why it should be depreciated over the length of the copyright term. You spend $200k this year, and now you have a useful asset for the next 95 years (or 120 years if you never publish it).

      If it turns out it's not useful, we could then allow companies publish the source and release it into the public domain to immediately "destroy" the asset (the copyright) and claim their deduction. So failed r&d projects would be deductible right away as long as the public gets them, and ones that result in a useful asset get depreciated based on how long they actually last, which is currently potentially multiple lifetimes.

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  • ghc  6 months ago

    In my experience, most software is not a capital asset that can be sold. Most software is a one off throwaway script to generate a report, or a modification to an existing piece of software to change its behavior. Most software isn't even written by software companies, and now having a software engineer on staff is prohibitively expensive, despite their job being functionally similar to a factory worker.

    By your logic, the salaries of technical writers should be amortized too, because theoretically the bank operations manual could also be a capital asset.