[MasterYoda900]

I don’t see why software should receive special treatment when 99.99% of software engineers/developers are not in any way engaged in what might be considered genuine scientific research and development, which R&D tax advantages should be reserved for.

> Changes to R&D amortization were a rude surprise to them, as they'd never had to amortize software development before, and didn't think of the work they do as R&D.

Precisely. They didn’t think of their work as R&D because it was not R&D. Frankly, they should have seen this coming.

> These are small businesses we're talking about. Almost all of them make under $10M in annual revenue, and the vast majority are under $2M in revenue.

What about the millions of other small businesses that don’t get special tax treatment? Restaurants, bars, plumbing companies, landscaping companies, accounting firms, etc.? Software engineers are not scientists. At the end of the day, a company is supposed to be able to stand on its own two feet, not rely on government handouts. Allowing otherwise unprofitable businesses to stay in business disincentivizes innovation and efficiency, which harms productivity growth and makes us all poorer in the long run.

[itsoktocry]

>Precisely. They didn’t think of their work as R&D because it was not R&D. Frankly, they should have seen this coming

Don't you have this backwards, or do I?

Software development is now going to be treated as R&D, which means that costs have to be amortized. That's not an tax advantage, it's a disadvantage. All the other businesses you list get to expense their labour costs. But we agree, software dev should not be treated differently.

[welder]

MasterYoda900 has it backwards. However, my CPA said software engineer salaries are only categorized as R&D before the product is launched. So this only affects new startups pre-launch... if my CPA is correct.

[mjwhansen]

Your CPA might be referring to rules for R&D tax credits, which covers a much, much more narrow scope of business activities. R&D credits cannot offset the impact of the amortization rules.

[nickjj]

> However, my CPA said software engineer salaries are only categorized as R&D before the product is launched

I wonder how this one will pan out.

Let's say you build out a landing page with a way for folks to input their email address which demonstrates interest in your product. You've released it and people can sign up.

Did it launch? You could make case it did and now you're iterating on the product from here on out. You've launched phase 1 of the product which is probing for demand.

[brianwawok]

If you are a one man startup it doesn’t apply. This would only matter for employee salary.

[MattRix]

Your CPA is incorrect. The law now applies to ALL software development and related activites, regardless of what state the product is in.

[PaulDavisThe1st]

Your CPA is not correct.

Any software development costs related to improving the product by providing new features must be amortized. Only clear bug fixes can have costs that are expensable.

This is made extremely clear in the IRS guidance document.

[indymike]

There will be lots of confusion and litigation on this exact issue.

[john-radio]

Yes, my (lay) understanding is that MasterYoda has it backwards and your explanation is correct.

[Retric]

They have it backwards in two ways. Software isn’t Research, but Software Developers are generally doing Development ie improving existing products or developing new ones.

[tester756]

I used to have similar mindset about this like you, but let's read what's an actual definition of R&D:

>Research and development is the set of innovative activities undertaken by corporations or governments in developing new services or products, and improving existing ones.

>R&D activities differ from institution to institution, with two primary models of an R&D department either staffed by engineers and tasked with directly developing new products, or staffed with industrial scientists and tasked with applied research in scientific or technological fields, which may facilitate future product development. R&D differs from the vast majority of corporate activities in that it is not intended to yield immediate profit, and generally carries greater risk and an uncertain return on investment.

and as you see "R&D department either staffed by engineers and tasked with directly developing new products, or staffed with industrial scientists and tasked with applied research in scientific or technological fields, which may facilitate future product development"

developing new products falls under R&D

[the_mitsuhiko]

Note that the current tax code implies that all software development requires amoritzation of salaries. This is as far as I can tell internationally quite unique. Usually you can write off all salaries as expenses.

I don't have a fully formed opinion on this aspect of the taxation, but it's pretty evident that this is out of the norm.

[foooorsyth]

>software engineers/developers are not in any way engaged in what might be considered genuine scientific research and development

Have you forgotten the D in R&D? Software engineers are building the product. That’s development.

What do you mean by “genuine scientific research”? I suppose you think ML researchers aren’t doing “genuine science” because they wear hoodies instead of lab coats?

[anothernewdude]

That's a different word that is merely spelt the same.

My programmers build software.

Should builders building a house amortise their development work?

[PeterisP]

Yes, if your company has builders that build you an asset (like a warehouse or a factory or office building) then you always had to amortise those salaries together with all the other expenses for building that capital asset.

That's not the case if you contract your builders out to build a house for someone else and they pay you for the hours, but IMHO it's also not the case (even with the new changes) for software developers being 'rented' as contractors to build stuff for others and the company getting paid for their hours.

[Macha]

I think the theory is that you can't keep selling the same house each year so you've just developed inventory and not long term assets.

Though, the country where I work and live, R&D has more profitable tax treatment, your employee costs are a same year expense, but you can get some relief on the rest if your tax bill if you proactively document what's R&D about your work and it doesn't get rejected by the tax department

[Frost1x]

Do your builder developers build the same thing over and over again like builders who build identical houses over?

I get the point but software really is different. Rarely ever are you building the same thing over, both from a “structural” or “architectural” perspective and from a functional perspective.

If your builders are creating a brand new blueprint for every house /structure and designing everything from scratch then I think it’s more similar, probably closer to commercial property builders with large structures.

Now under that perspective, I still don’t exactly understand why you’d treat labor cost deductions differently. Maybe the fact that these more complex products and services being built have higher return potential? I don’t know, I’m searching for a rational reason.

But, I do disagree treating software like something as commodified as many forms of labor. Someday we may get to that point with simple principles and procedures to follow, albeit technically, but we’re not there yet. At higher levels that may not be much “research” that’s needed but where the rubber meets the road, your engineers are checking to see what exists and doesn’t, designing new solutions to fill gaps in between, testing things, digging into previous things that don’t work and trying to fix them… it’s research.

As we continue to move more professions to an intellectual economy, many roles are becoming more and more like this, not just software. I’d say loading more roles and expectations on labor is also creating this situation where we’re asking more people to do more things they don’t know or can’t possibly know everything at a proficient level and the things we’re asking them to do don’t have solutions that can be written down and quickly referenced when needed as a simple recipe to follow. If you make the recipe general enough (e.g if a problem arises, find a solution and fix it at a low cost) then one might point to such highly generalized solutions and pretend it’s a solved problem but it’s not, it lacks any useful concretization. “You're not doing research, I told you ‘if a problem arises fix it’! There’s nothing to research you just do that!” doesn’t cut the muster.

[marcus0x62]

> Comment from MasterYoda900

> The whole thing backwards, he gets.

Not too surprising, I guess.

[kleinsch]

I don’t think you understand what they’re discussing.

If you run a plumbing company, make $100K in revenue, pay a plumber $100K, you have no profits, owe no corporate taxes.

If you run a software company, make $100K in revenue, pay a software engineer $100K, section 174, which just went into effect recently, means you now owe taxes on $90K of profit. This is because you must spread dev costs over 5 years, you can’t deduct them in the year they happened.

https://blog.pragmaticengineer.com/section-174/

[nerdponx]

I assume you meant 80k instead of 90k?

[moron4hire]

The code defines that you start with the midpoint of the taxable year, so even though it covers a five year period, it will also cover 6 tax years. Because of that, the first tax year (which was 2022), only 10% can be deducted. Tax years 2 through 5 is 20%. You can deduct the last 10% in the 6th tax year.

[Agathos]

> Restaurants, bars, plumbing companies, landscaping companies, accounting firms, etc.?

Do any of those businesses owe taxes before they've collected their first cent of revenue? That is the situation a software startup is now looking at.

[IggleSniggle]

You only get taxed on the revenue. So no, if you don't have revenue, you're not paying taxes. But all those businesses CAN deduct their expenses, and only pay taxes on profit.

Software is now in the unique position of being required to pay taxes on revenue instead of profit. If you spent $5M on development and raked in $100k, you'll be taxed on $100k (minus expenses, where the $5M must now be spread over 5 years). Of course, with those numbers, the company might want to spread costs over 5 years anyway (which they could already do).

So really, it's as if the tax code is specifically targeting bootstrapped companies that are reinvesting their profits back into the company. IMHO, the worst possible option of any that could have been chosen to milk software companies. Large established companies can afford it, VC companies were going to amortize anyway.

Yeah, you "eventually" can expense your costs. But that just means that it's a tax grab on the smaller companies that will be put out of business by this move. They pay all the tax this year, go out of business, and never get to reap the profit of the development work.

[Shrezzing]

> I don’t see why software should receive special treatment when 99.99% of software engineers/developers are not in any way engaged in what might be considered genuine scientific research and development, which R&D tax advantages should be reserved for.

Why? There's a clear relationship between R&D spend and economic growth. This is including R&D spend on non-scientific endeavours like commercial products + processes, which the majority of non-maintenance software work falls into.

Estimates vary, but I've never seen a cost/benefit analysis of unrestricted R&D that finds anything lower than a $2 return for every $1 spent in unrestricted R&D.