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Comment by gortok

6 months ago

> A startup isn't likely to be making a profit yet, under either accounting rule. Is there a benefit to reporting a larger loss?

As an example, A two person software startup; both drawing a salary, each making $100,000 per year. Each doing things related to software development.

Startup brings in 200,000K in revenue.

Under pre Section 174 changes, the profit is zero. Both salaries are expensible in the year they were incurred.

Post Section 174, the profit is now $160,000 each year. Now they pay taxes on $160,000, even though they literally have no money left over because revenues equaled expenditures.

At 25% tax rate, that’s $40,000 in taxes, for a business that made literally no money.

That’s why this is so devastating to small software businesses; unless you’re highly profitable and have cash reserves, this change hits hard.

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gortok

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mcv  6 months ago

Wait, salary costs do not count as costs for the year they're made in? That is completely nuts, no matter what kind of company you have.

Although for a startup it might be least bad, because for their first few years, their revenue might well be closer to zero; they tend to burn money, sometimes for quite a while.

  • jameshart  6 months ago

    They count as costs, but towards a capital expense. The expectation is that that expenditure resulted in the creation of a valuable asset (and not one which was sold for $200,000).

    Revenue: $200,000 Expenses: -$200,000 Assets: $200,000

    Net income: $200,000

    You’re allowed to say ‘ah, but over the year the value of that $200,000 asset actually fell by 1/5’:

    Asset depreciation: -$40,000

    So your net income is now $160,000

    You owe taxes on that income.

    • dummydummy1234  6 months ago

      But no matter what you are doing, your not spending 100% of your time building a piece of software.

      How does it work when a company uses salaried employees to build a structure. Are the salaried employees not deductible at all?

      1 reply →

crystal_revenge  6 months ago

This example only really has the emotional impact it does because of the specific numbers used, but doesn't really generalize for an arbitrary N.

Clearly if two software engineers build a product that brings in $10M, and each pay themselves $5M, it doesn't seem so outrageous that the can't really claim they're running "a business that made literally no money." Clearly in this second example the problem is that the engineers are paying themselves way too high given the return on their efforts.

What this means is that software engineers will be required to bring in more value to justify their high pay. In your example, it simply means that a software engineer that brings in $100,000 of value to the company, probably shouldn't be paid $100,000.

This seems entirely reasonable to me, and doubly so when I consider how many large corporate teams (who I think will ultimately be impacted more than startups) has huge numbers of highly paid engineers not doing all that much.

In most startups I've worked in it was pretty common for engineers to be delivering multiples of their cost in value, and in every big company I've worked in, it was very common to be delivering fractions of one's cost in value.

  • spwa4  6 months ago

    In case you don't understand: obviously you still pay income tax. What you suggest would mean you now pay income tax on that $10M, which is going to be 40% or even 50% depending, far higher than corporate tax.

    So with your suggested tactic the engineers get $2.55 million each. The rest, $4.5 million, is tax.

    If those 2 engineers paid themselves $0, and instead paid the $10 million as dividends, they'd get 4.25 million each, and only 1.5 million would be paid as tax.

    (Yes, this is a simplification, both situations are artificial and in both cases there'd be other taxes to pay, however, they'd be similar in both cases)

roflmao123  6 months ago

> Post Section 174, the profit is now $160,000 each year. Now they pay taxes on $160,000, even though they literally have no money left over because revenues equaled expenditures.

They have the $200k they pulled from their startup, far more than what most people earn. If you make enough to pay yourself $100k then you make enough to pay taxes.