[Sherlock]

Accounting doesn't work that way. You can have huge profits and reinvest them, but your income statement will show the profits in any case.

Yes, Amazon could be more profitable with different price points, but sales would take a hit, and thus their growth prospects.

FWIW, I think Amazon valuation is fair.

[gitah]

Software R&D (especially for new initiatives) is typically not capitalized so if a lot of investment is in software than it would show up as operating expenses rather than capex.

[nickpsecurity]

I got an idea: build the software, synthesize it into a chip with almost no mask cost, buy the chip, run it in production (as a standby), use the "software version of the chip" for production, and write it off as hardware investment (capital).

Wonder if that would work in some form...

[sokoloff]

Even when software R&D is capitalized, it's often capitalized over just 2 years, so the net effect is close to expensing it, assuming this year's expenses are reasonably close to last year's.

[lsc]

>Accounting doesn't work that way. You can have huge profits and reinvest them, but your income statement will show the profits in any case.

Sort of. I mean, I'm not a tax expert. but i do pay taxes on a bunch of money that, from my point of view, I re-invested in my business. But certainly not all of it.

My understanding of why you end up paying tax on money you re-invest into the business is depreciation.

The idea behind depreciation is that you write off the object as it loses value. So if computers last 5 years (and that's kinda the messed up part, the IRS kinda arbitrarily decides how long something lasts) I write off 1/5th the first year, 1/5th the second, etc... I still get to write off the full value of those servers I buy, I just can't write it off the first year, which means I end up 're-investing' out of post-tax money when I'm just starting or growing.

As an aside, if you have these sorts of problems, get a tax expert. Accounting is at least as deep as programming, and unit testing in accounting, while possible, is super expensive. It's not something you want to seat-of-the-pants.

When you are an S corp, it's super irritating, because 4/5ths of what I paid for servers is marked as income for me, and I've gotta pay taxes on it, which suucks when you have been scrimping all year to pay for servers.

Note, this is part of the "value" that leasing companies offer; It's common for companies in my business to lease their servers, and you write off your lease payments against income in the same year as you make the lease payments.

But from what I've seen, leasing increases hardware costs between 2x and 4x, and is way less flexible, so even if you have to pay tax on all the money you spend on servers, you're still usually coming out ahead. And buying, generally speaking, requires a lot less planning.

but on the other hand, if I hire someone to write code for me? that comes out right away, pre-tax, no depreciation, assuming I earn the money and spend the money in the same year. - so if I want a new software platform? I get to build it entirely using pre-tax money.

(Note, things get way more complex from here; Accounting is a complex thing and I probably don't have a strong enough grasp even as just a businessperson, much less as an accountant. But this is the basic idea on why re-investment money is sometimes taxed.)

[SilasX]

I never thought I'd be in the position of defending the tax system, but ...

Regarding depreciation, I thought there were a few other factors that keep the IRS from arbitrarily deciding how much something lasts:

1) If you sell it, you get to treat it as having depreciated to that value (assuming arms-length and all), not the scheduled one.

2) If you can demonstrate a liquid market, can't you use that as the current value?

Also, for counting 4/5th of servers as income, isn't that mitigated by how you're really paying taxes on the income used to buy the servers? The point of that was to make it so that you're taxed on changes in the book value of your venture.

So if you make $1000 in profit and immediately spend it all on servers, you still made $1000 in taxable profits and that's what you're being taxed on, which you should count the taxes on before buying more capital goods.

[lsc]

I didn't mean to say that taxes are bad. I like civilization, too. I mean, I don't like paying taxes any more than anyone else does, but I prefer living in a state with taxes than in one without. Don't get me wrong; I'm not going to pay more than I have to, but I'm also not going to take risks on things that are maybe legal, and maybe end up with a bunch of debt that can't be cleared by bankruptcy. Student loans and screwing up your taxes. Stay away from both.

In fact, I'm incorporated in California, none of the "I have a condo in vegas" tax dodges so common among people who do corp-to-corp contract work, and most of my labor is done by people paid as employees, you know, paid on W2s, rather than as contractors. I play by the rules to the best of my ability.

>So if you make $1000 in profit and immediately spend it all on servers, you still made $1000 in taxable profits and that's what you're being taxed on, which you should count the taxes on before buying more capital goods.

Assuming it's a capital good that depreciates to near zero (and it's more complicated than that) the depreciation is written off against revenue as a cost, just like payroll. Unlike payroll, it's not all written off at once.

If you stay in business long enough, then yes, nearly all your capital goods are eventually all written off against your revenue.

The problem is that as a growing company, you have to buy shit out of post-tax money at a time when there's a much bigger chance of you being around next year to pay taxes at all if you can write off the whole cost of your depreciating capital purchase up front.

There are also a bunch of small-business loopholes here where you're allowed to write down the whole value all at once, all of which I don't really understand. As you point out, there are also ways of writing off your stuff on schedules different from the official IRS schedule, which I also don't really understand (and I suspect you don't fully understand either) - It's really, really complicated; the IRS doesn't often give you clear guidelines; when they do, it's usually best to follow those guidelines.