Software firms across US facing tax bills that threaten survival

(I put this in a reply further down, but bringing it to the top)<p>Previously if a company has a million dollars in revenue and spends a million dollars on the salaries of software developers, this is how their taxable income might look:<p><pre><code> 1,000,000 Revenue - 1,000,000 Salary expense ----------- 0 Profit </code></pre> The new law would instead work like this:<p><pre><code> 1,000,000 Revenue - 200,000 1&#x2F;5th Salary expense ----------- 800,000 Profit </code></pre> Now the company must pay taxes on 800,000 of profit because &quot;R&amp;D salaries,&quot; which includes software devs, must be amortized over five years. Obviously the company has no wherewithal to pay, given that they made a million and spent a million. That&#x27;s the problem.

Bootstrap software founder here<p>This is just bullshit<p>Unlike many companies in the software industry, we have grown profitably for nine years without the need for any funding. Our success has been fueled by our ability to invest profits into our business, allowing us to improve our software and expand our operations continuously.<p>However, the 2022 Section 174 R&amp;D tax credit changes have had an impact. This recent change affects many small, independent technology companies, including my company. We have been busy building products, making our customers successful, and making payroll. We are happy to pay our fair share of taxes on our profits. However, investing in software development is the engine that allows us to grow our company and hire more employees. Our tax laws must continue to reflect this reality.

I&#x27;m guessing that this will result in many employers reclassing many engineers into COGS, S&amp;M, G&amp;A, etc (in other words, not calling their work R&amp;D).<p>This is relatively easy to do. If an engineer is fixing bugs, helping support team, helping sales in any way, participating in customer onboarding, keeping the servers online, etc, a company can argue the engineer is a cost of doing business rather than true &quot;R&amp;D&quot;.<p>In reality, the % of time most engineers spend exclusively on 100% new products is much smaller than you&#x27;d assume at face value. Even at a young startup, I&#x27;d guess at most 50% of the work is true R&amp;D.<p>To reiterate, things like devops, managing infrastructure, patching servers, upgrading code, fixing bugs, professional services, etc... none of that is R&amp;D and it&#x27;s pretty easy for a small company to say that the majority of their engineering expense is not R&amp;D (extremely difficult for the IRS to argue otherwise if they audit a company unless detailed timesheets are kept).<p>Edit: I&#x27;m not an accountant, but pretty familiar with R&amp;D &#x2F; IRS stuff

The one thing I&#x27;m rarely seeing in this thread is any discussion with regards to the continued expansion of tax bureaucracies as these new tax bills are implemented. There are a few threads here that I can find close enough to such discussion:<p><a href="https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=35619941" rel="nofollow">https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=35619941</a><p><a href="https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=35615493" rel="nofollow">https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=35615493</a><p><a href="https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=35619572" rel="nofollow">https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=35619572</a><p>As noted in the top thread ( <a href="https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=35614968" rel="nofollow">https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=35614968</a> ) but not discussed further, the tracking of such amortizations mean added accounting expenses for businesses where this would&#x27;ve otherwise been a straightforward deduction. This inevitably means that either additional people need to be brought in to track said expenses, or a business is increasingly reliant on an external service to manage their obligations, both of which are a net negative for the business compared to the straightforward 100% deduction model.<p>Whilst amortization is beneficial for purchases &#x2F; investments that can wear down with use, the application of such accounting practices towards R&amp;D in general only serves to increase the burdens on businesses (small or large) for performing such R&amp;D. Arguably, it&#x27;s an attempt by the government to kill R&amp;D within the US, and to force more companies towards acquisitions &amp; mergers, whether intentional or not.<p>Futurama&#x27;s Central Bureaucracy is worryingly becoming a real thing.

I wonder how many companies will be doing more bugfixes now...<p>For example, the initial product generates &quot;hello world&quot;.<p>What it was supposed to do was control a robot to automatically do pick and place.<p>It&#x27;s Definitely a bug that the program failed to work, it&#x27;s even tracked as a defect in the issue management. No R&amp;D involved just fixing a pretty severe software bug, namely that the product does not work.

I have a hard time understanding why this so bad and the article does nothing to explain it. As I understand it companies only pay taxes on their profits, which generally speaking is what&#x27;s left after expenses, including salaries, are subtracted. If that&#x27;s the case then why would higher taxes on profits force a company out of business or to layoff staff. If anything layoffs would tend to have the short term effect of increasing profits, which would only further increase taxes.<p>I can understand how a sudden unexpected change to the tax code could catch people off guard and cause short term problems but overall I don&#x27;t see why this particular change should be so devastating once any transient effects have been absorbed.

Current senate bill to restore treatment of R&amp;D expenses to pre 2022 treatment is S.866.<p><a href="https:&#x2F;&#x2F;www.congress.gov&#x2F;bill&#x2F;118th-congress&#x2F;senate-bill&#x2F;866?s=1&amp;r=7" rel="nofollow">https:&#x2F;&#x2F;www.congress.gov&#x2F;bill&#x2F;118th-congress&#x2F;senate-bill&#x2F;866...</a><p>Call or write you senator.

Ugg. Now I got to figure out how this impacts our small business this year. I just e-mailed our CPA so he would be able to look over the changes after their busy season ends. I hope there is some sort of threshold because as a small business some years we barely break even after paying salaries. I mean profit under $10k remaining to role over into January. I am driving a 16 year old Honda Civic. Not living a life of luxury over here :-&#x2F;

What I don&#x27;t understand is why software developers salaries are treated different than other salaries?

Yikes! R&amp;D costs, meaning actually paying the devs to make stuff, is your biggest expense, and it&#x27;s a big one. Rubber bands, paper clips and toner for the office printer don&#x27;t cost anything.<p>If your business has one large expense and you depend on writing it off, and suddenly can&#x27;t, that&#x27;s bad news.

The IRS hasn&#x27;t provided a clear stance on this issue (ask your tax guy).<p>However, this will definitely hurt a lot companies because they used R&amp;D tax credit for salaries. Convincing the IRS that certain salaries suddenly don&#x27;t qualify as R&amp;D could prove challenging.<p>It&#x27;s worth noting, though, that the R&amp;D tax credit has been raised to $500,000 per year, which could be beneficial for very small companies.

Quick reminder:<p>- corporate taxes have one of the highest deadweight loss of any tax<p>- corporate taxes get passed to consumers and employees as higher cost of goods and lower wages &#x2F; benefits<p>- the USA has one of the highest rates of corporate tax in the world<p>- handling the complex tax code is more a burden on small firms (as this case shows)<p>All of this together means we&#x27;d be better off dropping the corporate tax entirely and instead tax income, capital gains, or consumption at higher rates.

This makes zero sense to me. By what logic would a salary paid this fiscal year (be it for R&amp;D or any other activity, I don&#x27;t see why there would be any difference there) not be a simple expense to be fully deducted from the revenue in the calculation of the profit for this same fiscal year?

Cool - so I made a script that automates emails to outbound leads, does this mean my capital asset allocation is my <i>full commission</i> since it is the software by which I made the sale? So even my normal SGA is now a capital expense?<p>The law reads as this as a capital expense (anything to do with software [0]) - the IRS could use agency level logic to make it different, but all this exposes what’s wrong with the US.<p>What about chatGPT scripts? They too are connected to software and now a part of almost every workflow?<p>[0] <a href="https:&#x2F;&#x2F;irc.bloombergtax.com&#x2F;public&#x2F;uscode&#x2F;doc&#x2F;irc&#x2F;section_174" rel="nofollow">https:&#x2F;&#x2F;irc.bloombergtax.com&#x2F;public&#x2F;uscode&#x2F;doc&#x2F;irc&#x2F;section_1...</a>

The US was practically founded on principle of refusal to pay unfair taxes. As the article suggests some are just filing incorrectly, what are the real risks and consequences of this?

For software developers, this likely will lead to even more micro-tracking of activities. Who doesn&#x27;t love spending several hours each week making up wild estimates of how much time was spent in each of dozens of different categories? Now those will have to be broken down further into &#x27;new&#x27; and &#x27;maintenance&#x27; for most existing categories. For those who don&#x27;t currently have to do any of this tracking, the taxes create quite the incentive for companies to start requiring it. Once the tracking starts, it end up creeping into more and more areas of smaller fidelity.

Seems like a perfect way to prevent software companies from quickly growing their engineer count.<p>The question is, was this done on purpose?

Look up section 162 vs 174 treatment and the distinction between &quot;new companies&quot; vs &quot;carrying on a trade&quot;. It&#x27;s far from unambiguous and as long as you have a defensible position you absolutely are entitled to push the envelope.<p>Is implementing a specification a REE &quot;in the experimental or laboratory sense&quot;? I&#x27;d say it&#x27;s not, and I don&#x27;t have to explain my position unless I&#x27;m audited.<p><a href="https:&#x2F;&#x2F;www.law.cornell.edu&#x2F;cfr&#x2F;text&#x2F;26&#x2F;1.174-2" rel="nofollow">https:&#x2F;&#x2F;www.law.cornell.edu&#x2F;cfr&#x2F;text&#x2F;26&#x2F;1.174-2</a>

So, cui bono?<p>Bigger, stablished companies, for them, this is just an anoying accounting rule, but they surely have the cashflow to sail smoothly over it.<p>Who is fucked? Workers and small, new companies, and absolutely terrible news for job seekers.<p>For anyone not living under a rock, it is pretty clear that this was not an accidental decision.

The big, overlooked thing here seems to be that the vast majority of software developers are employed as consultants. Here on HN, you&#x27;re used to thinking in terms of startups creating products, doing real R&amp;D: creating a product that is speculating that someone will buy it over the next X years. But that&#x27;s just not how most people who do &quot;computer programming&quot; are employed. Most of us are working to build some stupid CRUD app that would be basically turnkey if it weren&#x27;t for the fact that consulting is so cut-throat that it can&#x27;t keep any talented senior developers around. To call what consultoware developers do &quot;R&amp;D&quot; would be like calling a subcontractor who does construction for suburban housing developments an &quot;architecture firm&quot;. There&#x27;s, like, some tangential relation, if you really squint hard, but in reality, there are none of the necessary creativity, or the risks creative work implies, at play.

This could create a new industry of double Irish-style&#x2F;sale-leaseback avoidance schemes that will be a boon to tech lawyers. E.g. Tech co sells its software to an Irish sister company and then its software engineers create software for that Irish firm, which in turn licenses its software _back_ to Tech co.

Somewhat related -- our company has been making use of &quot;R&amp;D credits&quot; (Canadian thing), basically getting the govt to subsidize the business. This never sat right with me, but we were a struggling startup so fair is fair. We&#x27;ve been bought out by a big American corp, and they continue to leverage this approach (why wouldn&#x27;t they? it&#x27;s free money!), but it REALLY bugs me.<p>Calling what software engineers do &quot;R&amp;D&quot; seems such a stretch. You&#x27;re not doing any research, you&#x27;re not developing anything new. It&#x27;s just a coincidence that the word &quot;development&quot; is in the job title. We&#x27;re closer to factory workers than research scientists, by a lot. Just putting existing widgets together in well-defined ways to implement whatever business workflows.

Taxes should be written in a way that incentivizes hiring individuals right? Salaries shouldn&#x27;t be double taxed IMO since it reduces a companies ability to hire individuals. Maybe just do a VAT tax and remove other taxes. Is this a dumb idea?<p>(Note: I have little idea what I&#x27;m talking about)

This can not stand. We are an innovation nation. Job-creation requires that employing people does not increase your tax burden. It should do the opposite.

This is going to give huge amounts of power to non-software and software-adjacent companies. Because their revenue doesn&#x27;t come from software, they&#x27;ll be able to hire software developers to work on dream projects and eat the cost.

And here I sit dreaming of how doing business in the US would be so much nicer than in Germany, where you pay multiple taxes on every Euro I make. Apparently not. I appreciate this thread very much!

This seems like a great way to push all your development off shore.

Who, exactly, is responsible for this? We need names of representatives who wrote this into tax law.

Sounds like something the same folks who think taxing unrealized gains is a good idea and won&#x27;t instantly tank the entire world market would think up and then put into law.

It&#x27;s going to take a lot of arguing but I predict we&#x27;ll end up back where we started some time ago in the 70&#x27;s:<p>The computer hardware is the asset.<p>Software engineer salaries are the operational expense of that asset.<p>Fanciful: It was only a brief period of time where some companies were able to resell the operational efforts of their in-house staff to other owners of computer hardware assets. Now it&#x27;s all bespoke operational activities just like steel presses and sawmills.

Previously <a href="https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=34627712" rel="nofollow">https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=34627712</a>

I wonder how many little companies are going to re-title their software developer as janitors. In many cases that description fits pretty well anyway.

The CNBC article doesn&#x27;t really explain the change, or why it&#x27;s just happening now. I had to do a web search on &quot;Section 174&quot; to find this:<p>&gt; What are the changes to Section 174, and do they affect the R&amp;D tax credit?<p>&gt; Among the sweeping changes to the U.S. tax system brought by the Tax Cuts and Jobs Act of 2017 (TCJA) was an amendment to Section 174 of the Internal Revenue Code. Many experts, however, believed — or at least hoped — that the scheduled change to the provision addressing the deductibility of research and experimental (R&amp;E) expenses might never take effect.<p>&gt; But the amendment did indeed kick in, beginning with the 2022 tax year. It’s left many businesses that conduct qualified research activities confused — about the change itself, how it affects the Section 41 research and development (R&amp;D) credit, and the likely negative impact on their tax bills. Here’s what you need to know.<p>...<p><a href="https:&#x2F;&#x2F;gusto.com&#x2F;resources&#x2F;articles&#x2F;taxes&#x2F;section-174-r&amp;d" rel="nofollow">https:&#x2F;&#x2F;gusto.com&#x2F;resources&#x2F;articles&#x2F;taxes&#x2F;section-174-r&amp;d</a>

I have seen several situations where this would be <i>desirable</i> - notably bleeding startups with vc money. There is plenty of window dressing to capitalise expenses and show a better EBITDA.<p>What this will do is immediately reclassify large chunks of people out of &quot;R&amp;D&quot; into operational resources. Just enough to balance between nice looking EBITDA and low real profit (= low tax)

Ok, so I was going to be glib, but this sounds like if you employ someone for &quot;R&amp;D&quot; you can&#x27;t report their salary as an expense during the period the expense is incurred? Ignoring entirely the matter of how the f is R&amp;D expense any different from any other expense? (my assumption is that it&#x27;s actually a tax break for already rich companies)

I wonder if this triggered the recent layoffs?

Something that doesn&#x27;t get discussed often when there is an issue is a possible solution. We all just complain or make fun of those who lose out. But the issue here is that sudden changes are a problem. No company should face sudden unexpected tax changes. It creates an unstable business environment and owners cannot adequately plan for the future. Congress needs to extend this write-off for a few years and make it clear that it will not be available in the future. They cannot leave it as a &quot;maybe&quot; situation.<p>I have personal opinions on this matter that are irrelevant. What matters for the future is how this affects the U.S. competitive advantage with technology, and how this affects the job market. If the impact is significant, Congress needs to act. If not, i.e. if only a few smaller companies are affected, then nothing will change and everyone needs to adjust.

If not corrected, the long reaching impact of this could snowball very badly in some places. Look at areas in California, which are largely economies based on software development. If taxes cause those businesses, and jobs to disappear, the impact to unemployment, housing markets, etc. could be quite dire in some areas.<p>Even in large business, it could make life for engineers harder. Sure, the business can weather the change, but any amount of excess staff? Tax liability now and no longer a write off that can offset other income taxes. I think it&#x27;s short sighted to view it as a small business only problem.<p>Which, might actually help it get resolved faster.

Yes, let&#x27;s make research taxable but leave advertising as a deductible expense.<p>What could go wrong?

Any startup that needed a year of runway now needs five years of runway. Runway is money needed before the company can survive off of profits.<p>If company A has $1M in expenses and $1M in investment, after the tax change it will need ~$5M in investment.

If there was one useful thing a !@#!@#! VCs could do is help police things like this.<p>Grumble grumble

My take on this is that in the USA, software development is now viewed as the creation of an asset with a lifetime of 5 or 15 years. Accordingly, its cost (including labor) can only be expensed (depreciated) over that time period.<p>It is this assumption that <i>all</i> development results in a valuable asset deriving or enabling income over time, that is contentious. A large proportion does not, yet that is not reflected in the increased tax bill applicable to all.

Why the taxes are only growing and never go down? Is there going to be a day when they&#x27;ll be like &quot;We&#x27;ll reduce taxes&quot;?

I still need help understanding this new Tax rule. I might understand capital assets better if you could answer these two questions.<p>We pay software developers to create a new product. We spend $1m on their wages, then sell that software product for $1.1m. How much federal tax would I owe based on this new tax rule?<p>We buy a machine for $1m and then sell it for 1.1m. How much federal taxes would I owe?

Ok, I don&#x27;t understand this. It basically says that you can&#x27;t completely deduct any software engineering salaries? This would affect all companies writing software, Google and Meta, for example. If this would affect Google&#x27;s bottom line so much, wouldn&#x27;t they change the tax code by now? If not, how are they avoiding these new taxes?

Congress was advised (government has all the data it wants when it wants; they don’t let things like this happen without modeling the political fallout). The goal is claw back cheap money they flooded the economy with, stick it to the avocado toast crowd they felt were not showing proper fealty to spoken political traditions.

Question: this last year I paid software developers to create a new product, spent $1,000,000 on their wages, then I turned around and sold that software product for $1,000,000. I made no profit on this product. How much federal taxes would I owe based on this new tax rule?

What about software agencies&#x2F;consultancies? Their salaries would not be capex right? They don’t own the software, they just develop it to spec and sell the development. Their client would be the one to claim R&amp;E right?

There will be a significant drop in reported research spending. This will seem like China is doing more research than the US. There will be a hueb and cry. Congess will incentivise research spending. Back to where we were.

Classify 80% of your dev time as maintenance. 20% as R&amp;D. Problem solved.<p>Most companies I&#x27;ve worked for, using R&amp;D credits. Have a timesheet tracker... tracking actual hours of R&amp;D work. That sounds more critical now.

Why are software developer salaries classified as R&amp;D expenses?

Q: what workarounds are there?<p>Maybe open source development and assign copyright to public domain? If you don’t own the software, you don’t have anything to capitalise?<p>What are FMAANG doing about it?

This ensures that every innovative company is owned by the financial markets. You cannot run a business unless you raise equity or take on debt.

The skeptical side of me is screaming &quot;just now that the big techs face disruption, this comes up!&quot;

Talk about doing your lobbying in public

How long was the provision in place before Congress decided not to extend it?

If it kills off most of the cryptocurrency ecosystem it will be worth it

If you&#x27;re worried about this, check out neo.tax (<a href="https:&#x2F;&#x2F;www.neo.tax&#x2F;" rel="nofollow">https:&#x2F;&#x2F;www.neo.tax&#x2F;</a>). They are one of the few companies that anticipated this and built a product to solve it.

Ah, the mythical “regulatory capture” I keep hearing about

This is my employer... were freezing hiring for 5 yeara

So the politicians are killing their gold hens (again)?

this might encouag small tech biz to outsource even more, i will pay a standard professional service fee to them, will this help me to survive?

Is there any silver lining here at all?

Well... looks like everyone thought US Congress might come to its senses before it&#x27;s too late.<p>Personally, I&#x27;d be inclined to say: let it all fucking <i>burn to the ground</i>. Maybe that&#x27;s enough incentive for the GOP to come to its senses. But unfortunately, there is a pretty high chance the GOP is willing to risk a major economic crash just to push the responsibility on Biden.

“Software firms across the US have unsustainable business models”<p>FTFY

&quot;Developers don’t come cheap, and until tax year 2022, these companies could fully expense those costs as R&amp;D rather than having to amortize them over multiple years.&quot;<p>Maybe stupidly high salaries shouldn&#x27;t be considered R+D expenses.

It would appear there’s a coordinated effort to diminish software engineering salaries across the board. Is the plan to decimate the industry and ship it all to india and china?

sucks to suck

&gt; many small business owners ... the change to require R&amp;D amortization<p>So - I&#x27;m not super sympathetic to taxation in general but... small business are not doing R&amp;D. Big businesses are hardly doing R&amp;D. If anybody outside of _maybe_ Apple and Google are even _claiming_ they&#x27;re doing enough R&amp;D that not being able to expense it impacts their revenue, they&#x27;re committing criminal levels on tax fraud.

Could that mean no more migrating code from Lang A to Lang B, Framework C to Framework D and writing blogs about it?<p>Or even worse no more <i>framework</i> inventions, re-architecting SAAS platforms for <i>performance</i> so they can provide even more features that customers never asked for?<p>If that&#x27;s the case I do feel it is indeed threatening startup ecosystem.

There&#x27;s actually a pretty good argument to treat software as capex. It&#x27;s an asset that allows you to earn revenue over multiple years, and apportioning part of the cost to each year of service is sound from the accounting side. Not a popular opinion, but this is not as arbitrary, crazy, or hidden deep in the weeds of tax law.

Yet another self-inflicted wound the Congress of old men do to make the US software industry even less competitive. I would argue this is political because the tech industry is a convenient target at the moment, full of young people who tend to vote against the ruling party. That, and legacy industries don&#x27;t care too much about R&amp;D anyway.

Looks to me like a failure to plan properly. It&#x27;s not like the companies didn&#x27;t know this could happen. If you put your faith in Congress, be prepared to be disappointed by Congress.<p>CFO heads should roll over this. It&#x27;s their job to be up to speed on tax changes and plan for eventualities like this.