Comment by layer8
6 months ago
As a non-American, it seems strange to me that the cost of regular software development, i.e. that is neither “research” nor “experimental” in a conventional sense, would be deductible in the first place (amortized or not). Isn’t that subsidizing a whole business sector? Maybe I’m misunderstanding something.
We're not talking about a tax deduction in the sense of a special privilege, we're talking about simple calculations of profit.
Before this change, tax for software development was calculated against:
* Profit = Revenue - Expenses
And software developer salaries fell neatly into Expenses unless you were looking for an R&D tax credit.
After this change, tax for software development is calculated against this new equation:
* Profit = Revenue - (1/5 * YearlyExpenses[-1]) - (1/5 * YearlyExpenses[-2]) - (1/5 * YearlyExpenses[-3]) - (1/5 * YearlyExpenses[-4]) - (1/5 * YearlyExpenses[-5])
Which means that if you are in Year 1 of operation, your values for YearlyExpenses[-2:-5] are all 0 and you only get to deduct 1/5 of your actual operating costs for the year from your "profit". So you can be in the hole but still owe taxes on your "profit" for the year because what you spent money on was classified as R&D.
Wasn't there something when this went into effect about the mid-year being the start so it is 10% in years 1 and 6?
Yeah, I just read that. So it's actually 10-20-20-20-20-10, which is both weirder and also slightly worse than my formula above.
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It is a subsidy!
Why should money spent on software _development_ not have to be deprecated over time like other money spent on _development_?
I get that it sucks from a cash flow standpoint but the same is going to be true of other R&D expenses. It's just that we're more exposed to this specific R&D expenditure and not others.
The root of this subthread makes it clear why the current provisions to force software expenses to be amortized are different than other kinds of R&D.
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I mean, yes, it will be true for other R&D types. But that's also new and also broken for the same reason: it means new R&D companies are at a massive disadvantage in their first few years compared to the established players who have lots of expenses queued up to deduct. It's wealth redistribution from young startups to established players who have 5 years of past expenses to use in their favor, and that is going to be a very bad thing for the health and vibrancy of our economy.
And, as a sibling points out (and as I pointed out in a comment at the top level), software is in this regime singled out from all other possible R&D expenses, making it particularly vulnerable. A skilled accountant/lawyer can probably turn big chunks of other R&D expenses into something that doesn't fall under 174. No amount of skill can do that for software, because we're singled out.
Because you slinging a React component or Vibecoding a security pile requires no Technology Readiness Level assessment nor does it have development liability. Rather, what we call Software Development is more appropriately labeled Software Engineering.
Salaries in general (not just of software developers) are tax deductible in many countries. This is desirable because we do not want companies to be paying taxes on revenue.
I dunno, I pay taxes on revenue.
Are you a company? If not, then you probably don't have revenue -- you have income.
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Do you take a standard deduction?
It's clearly not enough to cover all of the expenses that are required to generate your "revenue", but it's a gesture in that direction.
Businesses are taxed on profits, not revenue. Paying people to write code is an expense, so you'd normally deduct that expense (plus all your other expenses) from your revenue to arrive at an amount that should be taxed.
That's the rub. Is it an operational expense, like rent or a capital expense, like buying machinery?
It is sort of between the two in my view and is highly dependant on what the software engineer does each day.
Are they fixing a bug, helping a customer, refactoring? I think that is operational.
Are they building out a new feature? That is capital. But it is not quite like buying equipment because it adds no value to the books. So depreciation seems off.
But the same issue applies to other roles. Is a sales persons day trying to land a sale, or trying to develop the business.
It all comes down to "intangible assets" and whether you are making them.
I think it is easier to just say if you are paying someone to work then you can deduct. There must be better ways to claw it back.
The whole reason for most business to exist is to use operations (operational costs) as a lever to increase the growth and intangible value of the business.
The answer is that it's an operational experience when it's a salaried employee and a capital expense when it's a contractor. Like not in a theoretical sense, this is how it's classified right now.
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It stems from the difference in treatment of capital gains and income. Either way it’s deductible, the difference being when it is deductible and how much tax is saved. Capital deductions are typically done later since they require a taxable event.
It’s a fudge to make projections look better to allow congress to pass a budget neutral reconciliation bill with the intent that congress would remove the fudge before the consequences triggered.
Governments in general are pushing for capital gains tax normalization where instead of requiring a taxation event the capital gains tax would be levied yearly. In such a scenario the only difference remaining would stem from the difference taxation rates.
> Governments in general are pushing for capital gains tax normalization where instead of requiring a taxation event the capital gains tax would be levied yearly.
You’re alluding to wealth taxes, right?
Because taxing unrealised gains are wealth taxes.
Or maybe I’ve misunderstood?
> Because taxing unrealised gains are wealth taxes.
No, wealth taxes are a tax on retained wealth (a stock). Taxing unrealized gains is a tax on income (a flow), it just changes the point at which taxation attaches from a realization event to the actual gain.
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If pegged to inflation then they are not, but I think they generally will not be pegged. People who might think this is great should understand that the government makes more money increasing wealth inequality aligning the interest of the government and the ultra rich.
Most businesses let you deduct inputs and capital expenses from your revenue so that tax only applies to profit.
Since this is done on annual buckets it's very common to try to move items in both columns between years to minimize tax.
So if company A pays company B to develop some software, that revenue for company B (or rather, its profit) is still taxable? Then it makes sense I guess.
The revenue minus expenses is taxable, yes. And if the business itself makes no money, that means all of it was taxed through payroll.
> Isn’t that subsidizing a whole business sector?
It is if the only thing your company does is create software. No operations, no sales, no physical assets to purchase sell or manage.
No, you have it right. Software was getting a special exception from the normal rule that salaries spent on creating capitalized assets are capitalized (which is the general rule for most industries, as well as for software development in most of the EU).
Yes and part of the reason America is so rich