| > If you are a software company, that $1 million you spent on software devs is your operating expense. Actual profit that year is $0. No, it’s not. Net income here is $800k (20% amortization). Gross income is $1M. Because accounting recognizes that the value of your investments today are useful next year. If you sold a million dollars of your software this year, it’s extremely likely that you will be able to sell the same software next year. You’re not starting from scratch in 2025. > On a cash accounting basis it’s actually worse, because that company is seriously in the red after paying taxes with the new rules. Previously it would have netted out at $0. And that’s an example of why cash based accounting is not they way businesses track their financials. It’s misleading. Your understanding of finance here is completely backwards. Think about it. Would you rather loan money to a company that paid $1M contractors to do work for $1M in revenue? Or to a company that spent $1M building a product that sold $1M in services that year? Obviously, OBVIOUSLY, the second one is more enticing. The contractor company is extracting zero profit and is poised to do the same next year. The software company built a product and they can continue selling. Whether the market is really competitive and whether they might need to continue investing in the product to stay competitive is a tangential concern and a secondary consideration about the business environment that does not factor into our basic understanding of assets here. Whining about funding being hard to get or that business is hard does not define what an asset is. Imagine a factory owner saying “well the Chinese just built an automated factory so I’ll need to double my investment next year to make sure my products can compete in the market, so I’m going to say that my building of factory doesn’t count as an investment because that just works out nicer for me. It’s only fair. The business environment is competitive!” |
Because in theory sure.
Though previously there was the far more profitable and easy to deal with theory of building an actual asset of large value (monetized via stock/equity) while treating the expenses to do it as straightforward business expenses with no amortization to be a PITA, and the IRS was willing to go along on that.
In practice, this is exactly how you run your startup into a wall at 100 mph while you bounce payroll checks and end up in a morass of legal trouble. Because cashflow absolutely matters, and startups and small businesses rarely can just get ‘free’ debt at a moments notice to smooth it all out. Even large ones are having more difficulty than ever.
Call it whining all you want - it’s a significant concern partially driving market behavior. Remote work also meaning outsourcing is back on the table being another.