[gregw2]

To qualify for R&D tax breaks, IIRC having identified qualifying work for a segment of my firm, there must be elements of hypothesis, experimentation, results, etc that I would consider more science-y 'Research' than just turn the crank software 'Development.' It has to be both. And that has to be documented. And offshore research+development doesn't get you a tax break. The irony is that the R+D tax actually discourages onshore pure development as a 'trade' and encourages a split of onshore R+D and offshore D.

This sort of thing appears to be self-reported; I don't know if it ever gets audited. I don't know if big tech lies or creatively interprets what counts and that has contributed to the issue. But this article sort of over-represents what qualifies as R&D for US tax purposes.

[ghc]

Under the new rules, all software development, excluding bug fixes, must be expensed in this manner. "Turn the crank" development is included.

https://larsco.com/blog/section-174-updates-navigating-the-i...

[ndriscoll]

Which makes sense. Software is functionally a capital asset, so really it should be depreciated across the length of the copyright term (unless the company wants to release it to the public domain to fully depreciate it early).

[robocat]

Maybe software should be a capital asset, but these depreciation rules don't fix that issue.

The rule says if you pay someone $200k to develop software: then you now have a $200k asset that then devalues to value of $0 over 5 years (starting midyear). That's just plain weird.

For our example a depreciation table might look like:

  Year, %Amortized, Amount
  2025 10% $20,000
  2026 20% $40,000
  2027 20% $40,000
  2028 20% $40,000
  2029 20% $40,000
  2030 10% $20,000

The final effect of the 174 rule change is that you still finally end up with a software asset worth $0. However you now have taxable income of $200k in year one and expenses equalling $200k spread over 5 years. The taxes paid could be a lot: although the taxation money is really just being lent to the government for a few years at 0%. The actual financial costs are fucking complicated.

Understanding accounting and taxes are two absolutely essential skills if you ever wish to be a founder (and useful anyways).

Finding a solution to dealing with the valuation of assets is difficult. The historical solution of depreciation is broken for software, intellectual property and goodwill. In theory, taxes on dividends and capital gains taxation already deal with the issue (company taxation at x% kinda ends up at $0 because the shareholder pays y% and claims back the x% through imputation).

And remember that salaries are properly taxed.

[ndriscoll]

Right, that weirdness is why it should be depreciated over the length of the copyright term. You spend $200k this year, and now you have a useful asset for the next 95 years (or 120 years if you never publish it).

If it turns out it's not useful, we could then allow companies publish the source and release it into the public domain to immediately "destroy" the asset (the copyright) and claim their deduction. So failed r&d projects would be deductible right away as long as the public gets them, and ones that result in a useful asset get depreciated based on how long they actually last, which is currently potentially multiple lifetimes.

[kelnos]

I don't think copyright term is a good rubric/measure here. For SaaS, a company can keep the software locked up indefinitely, regardless of copyright term. Employees can be contractually obligated not to publish source code, even if the copyright has expired.

Amortizing development cost over the useful life of the software is maybe a reasonable thing to do (I don't think it is, but let's for a minute say I agree), but determining "useful life" is not simple.

[jameshart]

I get your thinking here but copyright isn’t the only relevant intellectual property constraint.

Software built by a business is a trade secret independent of its copyrightability. Even after the expiry of copyright a business can continue to exploit it as a proprietary asset.

[ghc]

In my experience, most software is not a capital asset that can be sold. Most software is a one off throwaway script to generate a report, or a modification to an existing piece of software to change its behavior. Most software isn't even written by software companies, and now having a software engineer on staff is prohibitively expensive, despite their job being functionally similar to a factory worker.

By your logic, the salaries of technical writers should be amortized too, because theoretically the bank operations manual could also be a capital asset.

[nitwit005]

At the last couple of companies we worked at, they just sent out surveys on what time went to different activities. We couldn't possibly fill that out honestly, as that wasn't tracked.

Which, I think is an overlooked part of this. They must constantly have gotten feedback that people were lying to them.