[mscuwa]

    1,000,000 Revenue
  - 1,000,000 Salary expense
  -----------
            0 Profit

We are talking about an extremely lucky company if it's the first year. How many startups are able to get revenue equal to salary expenses in the first year? While they might exists, it's not very common. For all others and if it's not the first year you already have losses carried forward which will offset those 800,000 (since you didn't amortize them in the previous years, right?), so in your example if it's the first year you get any revenue you would have (years since founding) * $1,000,000 in losses. What do I miss here?

[ilandsman]

Why are you only considering the first year? My company has been around almost 20yrs and is impacted. There's no years since founding in any part of the calculation.

[mscuwa]

If we are considering a stable company the only problem is that you expensed more since 2017 than you would have normally done, i.e. you effectively paid less taxes over 5 years. Now you need to catch up. I admit it's not fun, especially if everybody expects it won't happen, but overall it's the same tax.

[robocat]

Here’s a few thought experiments.

1. Your landlord decides that you needs to pay 5 years rent in advance. Each year you have paid off one year, however you need to pay another year to keep up. When you leave, the landlord will pay you back 1 year rent every year for 4 years. [landlord == government]

2. You develop an exact Facebook clone. The business tanks. How much was the software worth? Facebook’s value is only minimally in the software itself. Facebooks value is mostly in daily user eyeballs and advertising contracts and network effects.

3. You get some VC funding and spend 5 years developing software. You start making a profit, so you can claim the prior losses. However, the losses are not inflation adjusted (nor risk adjusted, nor discount adjusted). Your taxes are not adjusted for inflation, so you earn less than you should fairly.

4. You sell your business. Now you need to decide on the a valuation of the software, since it affects taxable income in the future. Leads to valuation games that have no benefit to anyone.

5. You go bankrupt - software valued at zero. Now do you need to claim those R&E taxes back from the IRS? Does that cause a lump in your personal income that puts you into a higher tax bracket?

6. You spend a year writing v1. Next year you completely rewrite v2 using cleanroom techniques, and deploy it. Do you get to claim 100% depreciation on the now obsolete code?

7. A data analyst writes a one-off query that is never to be used again. Is the time they spent on it R&E?

[mscuwa]

3. Agree, but this applies to assets depreciation too, how software is different?

I understand the rest and I'm not saying it's a good law. It's just not as bad as in the example with $1,000,000 above as IMO most companies won't be in that position, especially newly founded startups. The worst part is that it happens without a ramp up and with high interest rates.