Comment by jere
6 months ago
I can see why it would affect startups not making a profit but why would it dramatically affect FAANG (e.g. some of the most profitable companies in the world that have been running for decades)? The article contributes all these large layoffs in FAANG, in part, to this tax rule.
Because they are profitable. So the cost is deductible over 5 years, instead of one year.
A very simple example:
Revenue: $ 1 000 All other cost except software: $ 500 Software cost: $ 100
Net profit (if software is allowed as opex): $400
Tax on $400 (@30%): $120
Net profit after tax: $280
However, if it is capex(amortized over 5 years):
Revenue: $ 1 000 Other cost (except software): $500 Software cost: $ 100
Net profit before tax: $ 400
Important: But now for tax purposes you can only deduct $20 this year as a cost ($100 amortized over 5 years)
So now you have to add back $80 to net profit for tax purposes: $480
Tax (@30%): $ 144
Net profit after tax: $400 - $144 = $256
So the difference is $280 - $256 = $24
Just a few notes:
1. I assume tax rate at 30%, it can be something else, principle stay the same
2. That all other expenses are tax deductible
There's a difference of $24 but I have $1200 in cash reserves. And I make up the difference later. Oh no! Guess I have to lay off 10% of my employees now.