Software firms across US facing tax bills that threaten survival(cnbc.com)
cnbc.com
Software firms across US facing tax bills that threaten survival
https://www.cnbc.com/2023/04/18/software-firms-face-huge-tax-bills-that-threaten-tech-startup-survival.html
981 comments
I’ve not read all the comments but I’d note that this issue becomes less serious every year as you build a pipeline of amortization. Assuming 1mm stays the same YoY in 5 years you’re paying no taxes again. Each year taxable income reduce by a further $200k until year 5. That provides no relief now but even without action it resolves eventually - except for new firms.
> Assuming 1mm stays the same YoY in 5 years
That's a pretty big assumption.
That's a pretty big assumption.
... growing firms are also penalized. Also, if a company goes bankrupt (like the majority of companies), those last 4 years of amortization just go into the government's pocket. Even if you could ignore the time value of money, it doesn't actually even out over the long run.
Yes. It also penalizes shrinking firms as you simply lose the benefit of amortization if you can’t use it.
Penalizes shrinking revenues, not shrinking firms. Shrinking firms who maintain revenue (layoffs!!) do well by winding down tax liability.
My bad you’re right!
But the first year is the hardest...
There's a lot of attacking in this thread from people who haven't bothered to think about the math. It's an existential risk to some companies, and one that wasn't more widely planned for because it wasn't even believed to be intended to actually occur.
Most tax experts considered the removal a budget gimmick so that the 2017 December republican majority could quickly pass a new budget using the budget reconciliation process, which can't be used to increase the deficit after a 10-year period so they had to add a time limit to a bunch of benefits "on paper" to use the reconciliation process. There appeared to be broad support for fixing it later, but the bipartisan spending bill expected to include it fell apart because they couldn't get agreement on other parts of it.
To the best I can tell this isn't tech companies complaining about paying fair tax; it's a congressional oversight that is quadrupling the taxes of small business out of nowhere which nobody in power has bothered to fix.
Most tax experts considered the removal a budget gimmick so that the 2017 December republican majority could quickly pass a new budget using the budget reconciliation process, which can't be used to increase the deficit after a 10-year period so they had to add a time limit to a bunch of benefits "on paper" to use the reconciliation process. There appeared to be broad support for fixing it later, but the bipartisan spending bill expected to include it fell apart because they couldn't get agreement on other parts of it.
To the best I can tell this isn't tech companies complaining about paying fair tax; it's a congressional oversight that is quadrupling the taxes of small business out of nowhere which nobody in power has bothered to fix.
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I understand the arguments for it, and maybe even on net it’s beneficial because it prevents other bad things from happening, but the amount of byzantine dysfunction that’s downstream of the United States Senate Filibuster rule is really something to behold.
To the extent that the filibuster's beneficial, I'd say it's only so because of our bad electoral system that stabilizes at only two viable parties, and sometimes results in minority rule.
The filibuster guarantees minority rule, in the Senate.
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Yes, but it also means that the minority is less effective when it gains an electoral majority and takes 'hold of the gavel. That makes it harder for them to, say, change things to further entrench minority rule—which is real problem in several state-level governments.
This sounds like a positive because it makes sure the support backing actually enacted policies is not balanced on a knife edge.
This might be true, if the policies advanced by legislators more-closely reflected what voters want. Instead, we have a bunch of very-popular reforms that never get done for a variety of reasons, but the one-two punch of the two-party system and the Senate filibuster are a big part of why. Though, personally, I'd say our system naturally stabilizing at two parties is the bigger of those two problems—it's the core reason why major legislative bodies in the US can end up maintaining or advancing laws and policy that differ sharply from what a large majority of voters want, session after session. Unfortunately, fixing that would require a bunch of legislators or a bunch of states to vote against their own interests. So, probably not gonna happen, ever.
This is why the civil rights act was never passed, and schools in the US are still segregated to this day, because Sen Byrd (D) filibustered
The founders designed a system that was slow to act on purpose. They did not want a strong federal government.
Given how difficult it is to predict policy outcomes this is probably a good idea. Even if a collection of policies are good on the individual level there is no way to figure out if the interaction will be net positive, nor if the cost of remedy reverses the calculus.
Given how difficult it is to predict policy outcomes this is probably a good idea. Even if a collection of policies are good on the individual level there is no way to figure out if the interaction will be net positive, nor if the cost of remedy reverses the calculus.
But now we have a strong federal government that can't agree enough to keep up with the needs of it's citizens. The worst possible outcome, IMO.
Or perhaps the predictable outcome?
The problem now is that the government is large and it is nearly impossible to shed the cruft that has accumulated.
Nothing ever gets shed or revised. The stale regulatory agencies are captured, corrupted, and stale/weak.
OSHA has no teeth (they are just a nuisance to the scofflaws)
FTC is underpowered
EPA needs shut down
FDA is on record for enabling very harmful medical devices
I remember something about Boeing colluding with regulators to put people in harms way.
I could hop on a search engine and dig up a tome-worth of completely unacceptable shit from the last 40 yrs in this regard.
OSHA has no teeth (they are just a nuisance to the scofflaws)
FTC is underpowered
EPA needs shut down
FDA is on record for enabling very harmful medical devices
I remember something about Boeing colluding with regulators to put people in harms way.
I could hop on a search engine and dig up a tome-worth of completely unacceptable shit from the last 40 yrs in this regard.
We'd be so much better if there were no environmental rules, wouldn't we? Medical regulation, who needs it?
"Starve the beast" is a political strategy employed by American conservatives to limit government spending by cutting taxes, to deprive the federal government of revenue in a deliberate effort to force it to reduce spending.
https://en.wikipedia.org/wiki/Starve_the_beast
https://en.wikipedia.org/wiki/Starve_the_beast
The most dangerous, murderous things in history are powerful central governments. They are like the Ring of Power, everyone thinks they can wield it for good, but it doesn't work out that way.
Powerful and authoritarian are two different things. I want a powerful but democratically controlled via popular vote government.
Power abhors a vacuum. I would rather that power be in the hands of the citizen votes.
Power abhors a vacuum. I would rather that power be in the hands of the citizen votes.
That’s a nice general principle but you didn’t provide evidence of specific harm. I think arguing past each other from first principles is exactly why the US is in this mess in the first place.
The fact is that all these government agencies are preventing specific harms. Throwing them out because of some vague “big government is bad because it might turn into a tyrrany later” isn’t an argument that the harms being prevented don’t exist. It’s a non-sequitor, like saying the sky is blue when someone complains about airplane noise.
The fact is that all these government agencies are preventing specific harms. Throwing them out because of some vague “big government is bad because it might turn into a tyrrany later” isn’t an argument that the harms being prevented don’t exist. It’s a non-sequitor, like saying the sky is blue when someone complains about airplane noise.
And what does spending indicate. Has the beast been starved?
I dont live in USA so I dont know. But here the ruling party is losing in local elections in town, so they cut the amount of taxes aplocated to muncipialities while at the same time they ask them to deal with more issues. So muncipialities are forced to degrade the quality of their services - since they dont have enough money. Then the ruling party claims that the local politicians cannot rule properly. What is just a lie. But this lie works.
I believe it is possible it is happening at some municipal levels but my question was more directed towards your statement
>employed by American conservatives ... to deprive the federal government of revenue
which appears to refer to federal level. The general trend of federal receipts have been fairly flat above 15% for decades (except during great recession circa 2009), and the spending slightly different rising a bit above and funded by debt and/or inflationary effects.
My takeaway is here the beast has not been starved, although the beast is spending more of our children's future incomes in the form of increasing debt.
https://stats.areppim.com/ressources/us_spendxrevxgdp_29x10_...
>employed by American conservatives ... to deprive the federal government of revenue
which appears to refer to federal level. The general trend of federal receipts have been fairly flat above 15% for decades (except during great recession circa 2009), and the spending slightly different rising a bit above and funded by debt and/or inflationary effects.
My takeaway is here the beast has not been starved, although the beast is spending more of our children's future incomes in the form of increasing debt.
https://stats.areppim.com/ressources/us_spendxrevxgdp_29x10_...
The size is less a problem than our system stabilizing at two viable parties, both of which would stand to lose a great deal of power if they actually fixed some of the core problems with the Constitution.
It's not that the government is "large". It's that the representatives from different parties are unable to work together to get stuff done. I think it's mostly the way the media cover politics - they can't be seen to be weak.
Sure, the founders in 1776 desired a weak federal government.
But the writers of the constitution in 1788 wanted a strong one because the existing weak one sucked.
But the writers of the constitution in 1788 wanted a strong one because the existing weak one sucked.
The founders in 1776 were happy with things in 1788 and generally opposed the constitution. After reading the articles of confederation (yes I actually did that), there are some things that should have been cleaned up, but overall I think it was a good enough system that didn't need to be replaced.
It wasn't, then or in the 1860s, hence the strong, modern, adaptive federalism we have today that treats states as provinces and makes important things move quickly.
One could squint and say states matter today, but that's just admitting a need for glasses. They are ghosts of what they were, and increasingly need to be retired.
It will be nice when we put to pasture the policy-as-experiments across states for things that are clearly universally demanded: finance, health insurance, women's medical care, education, defense, gun control, decreased corporate control of the food supply, transportation, environmental regulation, and so forth. It's amazing how much the modern GOP has pushed folks towards this, may they continue their business Republican-led shenanigans to unite the country and encourage progress when otherwise we would be slovenly.
Why is this the case? Duplication of fixed costs are expensive.
Let's get rid of these crufty overindulgent home-owners-associations-on-steriods and federalize already.
(paragraphs 1, 4 serious, the rest in jest)
One could squint and say states matter today, but that's just admitting a need for glasses. They are ghosts of what they were, and increasingly need to be retired.
It will be nice when we put to pasture the policy-as-experiments across states for things that are clearly universally demanded: finance, health insurance, women's medical care, education, defense, gun control, decreased corporate control of the food supply, transportation, environmental regulation, and so forth. It's amazing how much the modern GOP has pushed folks towards this, may they continue their business Republican-led shenanigans to unite the country and encourage progress when otherwise we would be slovenly.
Why is this the case? Duplication of fixed costs are expensive.
Let's get rid of these crufty overindulgent home-owners-associations-on-steriods and federalize already.
(paragraphs 1, 4 serious, the rest in jest)
While paragraph 3 may be in jest, the non-standization meant that some states did allow women to vote long before it was constitutionally mandated. Of course it also meant some people were enslaved long before it was explicitly constitutionally allowed.
>and increasingly need to be retired.
There's ~150 million people that think the opposite should be done.
There's ~150 million people that think the opposite should be done.
Phew, just a minority in the US then that doesn't digest a whole comment. I was worried!
I think you have it backwards. The states should be given more power, and possibly broken up. There's no accountability once your number of constituents exceeds about 1M people.
That only makes sense if you think slavery should’ve never been abolished. How would it have ended under the Articles of Confederation?
It would have ended because the Industrial Revolution made slave labor un-economic, in the worst case.
Modern capitalists prefer seasonal labor for agriculture. They don't have to feed/clothe/house people year round, and have no personal investment. Seasonal migrant agriculture labor cheap and easily exploited, with little legal protection. Slaves, like domestic a nimals (reprehensible as that simily is), must be treated well enough to keep working productively. There is no such need with migrant labor. If they are abused or killed it is easy to sweep under the rug. There'll be new migrants available next year.
NOTE: I'm not saying slavery is good, or even better than migrant labor. They are both highly unethical if you consider how corporations treat migrant labor today.
Modern capitalists prefer seasonal labor for agriculture. They don't have to feed/clothe/house people year round, and have no personal investment. Seasonal migrant agriculture labor cheap and easily exploited, with little legal protection. Slaves, like domestic a nimals (reprehensible as that simily is), must be treated well enough to keep working productively. There is no such need with migrant labor. If they are abused or killed it is easy to sweep under the rug. There'll be new migrants available next year.
NOTE: I'm not saying slavery is good, or even better than migrant labor. They are both highly unethical if you consider how corporations treat migrant labor today.
> It would have ended because the Industrial Revolution made slave labor un-economic, in the worst case.
…except slavery still exists all over the place in industrialized countries? There’s nothing incompatible between industrialization and slavery, as myriad historic and contemporary examples have shown.
https://www.walkfree.org/reports/global-estimates-of-modern-...
…except slavery still exists all over the place in industrialized countries? There’s nothing incompatible between industrialization and slavery, as myriad historic and contemporary examples have shown.
https://www.walkfree.org/reports/global-estimates-of-modern-...
1) in the USA slavery would have eventually ended due to the economics. Steam engines are cheap compared to human manual labor.
2) Migrant labor is the replacement for slave labor in the USA. These are workers who do not legally exist and thus are subject to the worst of exploitations by employers and criminal concerns.
3) Human beings of all races have a pretty bad record of how they may treat other races/tribes/outgroups. Genghis Kahn killed and raped so many people that he altered the genetic profile of humans. African tribes routinely enslaved each other. Arabs took white slaves. People can be dicks. The list goes on and on: cruelty is a part of the universal human condition.
As bad as the USA, it's the only country to go to civil war to free slaves of another race, even if that wasn't the complete reason for the Civil war.
2) Migrant labor is the replacement for slave labor in the USA. These are workers who do not legally exist and thus are subject to the worst of exploitations by employers and criminal concerns.
3) Human beings of all races have a pretty bad record of how they may treat other races/tribes/outgroups. Genghis Kahn killed and raped so many people that he altered the genetic profile of humans. African tribes routinely enslaved each other. Arabs took white slaves. People can be dicks. The list goes on and on: cruelty is a part of the universal human condition.
As bad as the USA, it's the only country to go to civil war to free slaves of another race, even if that wasn't the complete reason for the Civil war.
Slaves worked in a lot of crafts and services, not just field agriculture.
It's weird that you think that they had it better than migrant laborers.
It's weird that you think that they had it better than migrant laborers.
Slaves had it way worse than migrant workers. But slaves costed owners more than migrant workers cost employers.
You added a note to try to cover yourself but no, slavery is not comparable, not the same as migratory workers. Migratory workers have it very hard & it's to the shame of America how we treat those vulnerable people at our borders. For migratory workers, generally no one kidnaps their children, rapes them as part of their job, forces them to carry their children to term, murders them, sold them off. It's basically one step away from the classic "black people had it better as slaves" comment.
The industrial revolution predated the abolition of slavery in the US by decades. Indeed, one of the (not very high minded!) gripes of the northern states was that their industrial economies had to compete on an uneven playing field, against states with free labor.
Go read a few slave narratives — Fredrick Douglass’s autobiography for one is great, extremely readable, and pretty short.
And just notice how often the writers mention not having enough food, or basic clothing. Then get back to us on the idea that slave owners would have taken even minimal care of slaves.
You’ve written how you think it ought to have worked. But that’s not how it actually worked.
And just notice how often the writers mention not having enough food, or basic clothing. Then get back to us on the idea that slave owners would have taken even minimal care of slaves.
You’ve written how you think it ought to have worked. But that’s not how it actually worked.
Anecdote is not data.
Many types of slaves existed and still exist in the history of humanity.
The slaves around Julias Ceasar probably had a different life than the average native Columbus slave (they where almost all quickly worked to death genocide style and he was a total sadist).
Many types of slaves existed and still exist in the history of humanity.
The slaves around Julias Ceasar probably had a different life than the average native Columbus slave (they where almost all quickly worked to death genocide style and he was a total sadist).
There is a different between enough food and feeling full. Most people want to eat enough to get fat. A slave would be given cheap food, enough that they can work. Starving a slave to death isn't a good use of them. However feeding them so much they get fat isn't economic as well.
Fredrick Douglas didn't have motivation to treat slavery fairly either. (few writers of the day did - thus making it hard for historians to figure out the truth, though in this area there is a lot more data than historians studying something of several thousand years ago).
Fredrick Douglas didn't have motivation to treat slavery fairly either. (few writers of the day did - thus making it hard for historians to figure out the truth, though in this area there is a lot more data than historians studying something of several thousand years ago).
Does it make logical sense to abuse and weaken your own property?
If they were too harsh with slaves they'd spend a lot more time and energy managing their behavior. Even in prison privileges are given so they can be taken away. Slave owners probably treated their slaves well enough, in aggregate, that they were capable to work productively and did not have immediate cause for revolt. The slave owners had to live in close proximity to their slaves after all.
The Hollywood portrayals of slavery as essentially unrelenting cruelty and sadism don't make sense, except for on TV. Any farmer would have known that you don't get the best work out of your horses or mules by abusing and starving them. There's a knee point of optimal treatment for all labor arrangements. The EVIL fact that slaves were property of their masters does not change this.
If they were too harsh with slaves they'd spend a lot more time and energy managing their behavior. Even in prison privileges are given so they can be taken away. Slave owners probably treated their slaves well enough, in aggregate, that they were capable to work productively and did not have immediate cause for revolt. The slave owners had to live in close proximity to their slaves after all.
The Hollywood portrayals of slavery as essentially unrelenting cruelty and sadism don't make sense, except for on TV. Any farmer would have known that you don't get the best work out of your horses or mules by abusing and starving them. There's a knee point of optimal treatment for all labor arrangements. The EVIL fact that slaves were property of their masters does not change this.
The industrial revolution radically increased slavery.
Read the history of the cotton gin and then how steam power made larger transportation easier and expanded populations to consume cotton and tobacco. Industrially produced guns and other tools helped "manage" slaves and later prisoners.
Post-civil war, industrial prison system instituted chain gangs to recreate "legal" slavery and forced prison labor still exists in many states.
Read the history of the cotton gin and then how steam power made larger transportation easier and expanded populations to consume cotton and tobacco. Industrially produced guns and other tools helped "manage" slaves and later prisoners.
Post-civil war, industrial prison system instituted chain gangs to recreate "legal" slavery and forced prison labor still exists in many states.
Not really. It increased some types of slavery as before steam power those parts you name were not economical. However slaves were a major way to grow food prior to the industrial revolution. Industry created machine that needed only a few trained crew to operate. That you only needed a few meant that the slave master could do all the work without having to watch the slaves (who did tend to rebel or not work hard if you didn't watch them closely). You couldn't have a lone slave run a machine in general because the slave not being watched would find it easy to run away - possibly with the machine.
The US south ended slavery with the civil war, but most places in the world had a peaceful end. It wouldn't have been peaceful if it was economical as the rich would have fought to keep it.
The US south ended slavery with the civil war, but most places in the world had a peaceful end. It wouldn't have been peaceful if it was economical as the rich would have fought to keep it.
It doesn't matter whether slavery would have been abolished, because what wouldn't have been legally enshrined without the Constitution were the 14th, 15th, and 24th amendments (and later civil rights laws that finally gave power to these amendments), and possibly the 19th amendment.
Well, yes, this is effectively restating my point. Barring the constitution, there was little conceivable way for slavery to be abolished under the Articles of Confederation because there would’ve been insufficient authority to impose that on the states, nor likely the justification to enforce the wholeness of their union.
The states switched to the constitution because the confederation was too weak and didn't handle or clarify many important issues. Most of the founders were still around.
https://en.m.wikipedia.org/wiki/Confederation_period. "...could not accomplish anything independent of the states. It had no chief executive, and no court system. Congress lacked the power to levy taxes, regulate foreign or interstate commerce, or effectively negotiate with foreign powers. The weakness of Congress proved self-reinforcing, as the leading political figures of the day served in state governments or foreign posts. The failure of the national government to handle the challenges facing the United States led to calls for reform and frequent talk of secession".
https://en.m.wikipedia.org/wiki/Confederation_period. "...could not accomplish anything independent of the states. It had no chief executive, and no court system. Congress lacked the power to levy taxes, regulate foreign or interstate commerce, or effectively negotiate with foreign powers. The weakness of Congress proved self-reinforcing, as the leading political figures of the day served in state governments or foreign posts. The failure of the national government to handle the challenges facing the United States led to calls for reform and frequent talk of secession".
The people behind the constitution were not the same people behind the articles of confederation. Yes they were around, but they were happy back on their farms and businesses and didn't even realize what was going on until the constitution was nearly a done deal. They rushed back and eventually came up with the bill of rights.
And the federalists were correct about the Bill of Rights too
I don't think this is right. I've read a bunch of people who didn't like The Constitution, but they weren't making full throated arguments for just keeping the status quo. Can you point me to arguments from "the founders in 1776" for just keeping the Articles in their form at the time?
>But the writers of the constitution in 1788 wanted a strong one because the existing weak one sucked.
The founders wrote reams upon reams discussing exactly what they wanted to do with the constitution and how they intended each and every bit of the constitution to work toward that goal. The intent was basically "we need just a little more centralization in order to deal with the truly national issues."
The government they created to replace the articles of confederation was weak by the standards of the time let alone modern ones.
The founders wrote reams upon reams discussing exactly what they wanted to do with the constitution and how they intended each and every bit of the constitution to work toward that goal. The intent was basically "we need just a little more centralization in order to deal with the truly national issues."
The government they created to replace the articles of confederation was weak by the standards of the time let alone modern ones.
1. The much-mythologized founders disagreed on how strong the federal government would be; the first political parties were the Federalists and Anti-Federalists (technically the Democratic-Republicans, but carrying on that same ideology).
2. Filibusters are not in the Constitution, weren't possible for decades after it was signed, weren't used for half a century after it was signed, and didn't become the "sixty votes required for anything" tool they are today until 10-15 years ago. The founders had nothing to do with it.
2. Filibusters are not in the Constitution, weren't possible for decades after it was signed, weren't used for half a century after it was signed, and didn't become the "sixty votes required for anything" tool they are today until 10-15 years ago. The founders had nothing to do with it.
[deleted]
You're incorrect, the first filibuster was 11 years after the Constitution was ratified and have been common since 1917 and common in their current form since 1970 (that's 53 years not 10-15)
https://en.wikipedia.org/wiki/Filibuster_in_the_United_State...
https://en.wikipedia.org/wiki/Filibuster_in_the_United_State...
Using the filibuster the way it's used now and not actually trying to come to a compromise is definitely new. It's not something that changed about the rule itself, but about the way it's used. See the graph in this article: https://www.statista.com/chart/25929/number-of-senate-filibu...
IMO it all comes down to the insight that the opposition party has nothing to gain from cooperating. If something good gets passed, the majority party gets the credit. If nothing gets passed, the majority party gets the blame, regardless details how that outcome was achieved and what role the minority party played. So blocking everything is the best strategy. IMO, it's disgusting to have politicians put party over country, but here we are.
IMO it all comes down to the insight that the opposition party has nothing to gain from cooperating. If something good gets passed, the majority party gets the credit. If nothing gets passed, the majority party gets the blame, regardless details how that outcome was achieved and what role the minority party played. So blocking everything is the best strategy. IMO, it's disgusting to have politicians put party over country, but here we are.
I wonder if there has been a change in how senators are judged by their constituents. We’re they judged on their individual records rather than party records in the past?
Prior to spending reform, the party had some broad behind-the-scenes levers to “encourage” support (read: pork). Today, power vests in subcommittee chairs which typically go to those with tenure (e.g. DiFi who can’t manage to do her job because of old age but also can’t really be kicked out by Schumer)
I would imagine all politicians have always been judged similarly:
The ones who represent me are highly skilled, very experienced, and have the seniority to ensure my hometown gets it’s fair share,
The ones who represent you are lazy, entitled scammers who should be prevented from fleecing my hometown by the imposition of term limits.
The ones who represent me are highly skilled, very experienced, and have the seniority to ensure my hometown gets it’s fair share,
The ones who represent you are lazy, entitled scammers who should be prevented from fleecing my hometown by the imposition of term limits.
Maybe 15 to 30 years ago. These days it seems more like:
"The ones who represent me give me feelings of schadenfreude over how they deal with the other party and people"
"The ones who represent you give me feelings of angst over how my party is treated"
"The ones who represent me give me feelings of schadenfreude over how they deal with the other party and people"
"The ones who represent you give me feelings of angst over how my party is treated"
The legislative process changed when the baby boomers entered Congress in the 1970s and started opening up committee processes and requiring publicly recorded votes. At the same time, there was a corporate reaction to a glut of environmental and consumer safety regulation. In 1973, you see the birth of the lobbying industry as ALEC is the first of many "think-tanks" to form.
Now legislators are accountable to corporate donors, not their constituents. It's easy to track which legislators provide a good ROI. There's more to it than that, but those are the major causal events that lead to the change in legislator incentives.
Now legislators are accountable to corporate donors, not their constituents. It's easy to track which legislators provide a good ROI. There's more to it than that, but those are the major causal events that lead to the change in legislator incentives.
> common in their current form since 1970 (that's 53 years not 10-15)
A chart of filibuster usage over the past ~century speaks for itself: https://bit.ly/3mL6IOU
And that's not even fully up to date: the 2019-20 session ended with 298 cloture votes and the 2021-22 session with 289, per https://www.senate.gov/legislative/cloture/clotureCounts.htm .
> the first filibuster was 11 years after the Constitution was ratified
Sure, whatever - your citation is "wikipedia.org/wiki/Filibuster_in_the_United States_Senate" and mine is "wikipedia.org/wiki/Filibuster#Senate". The exact details don't matter: the relevant points are that it's not a mechanism created by the Constitution, was not common in the lifetime of the Constitution's drafters, and has massively different effects on the governance of the country now than it did in the 20th century, much less the 19th or 18th.
A chart of filibuster usage over the past ~century speaks for itself: https://bit.ly/3mL6IOU
And that's not even fully up to date: the 2019-20 session ended with 298 cloture votes and the 2021-22 session with 289, per https://www.senate.gov/legislative/cloture/clotureCounts.htm .
> the first filibuster was 11 years after the Constitution was ratified
Sure, whatever - your citation is "wikipedia.org/wiki/Filibuster_in_the_United States_Senate" and mine is "wikipedia.org/wiki/Filibuster#Senate". The exact details don't matter: the relevant points are that it's not a mechanism created by the Constitution, was not common in the lifetime of the Constitution's drafters, and has massively different effects on the governance of the country now than it did in the 20th century, much less the 19th or 18th.
Not coincidentally, 10 to 15 years ago is around when people started viewing the "other" party as "evil." You can justify a lot of behavior when you declare yourself full of righteous indignation.
I'm not sure that makes sense. The modern filibuster is a bipartisan agreement for inaction.
It's really a bipartisan agreement to defer to Senate Republicans on everything controversial, and to let them take both the blame and credit for it. Democrats are happy with that because when their votes don't count, they can pretend to support anything. When Democrats lose, it energizes their base. Republicans are happy to take credit for economically liberal and nationalistic legislation. And for the legislation that just rewards the wealthy for being wealthy (say, bailouts), movement right-wing and libertarian Republicans can vote against it (and they're mostly in the House) while small consistent groups of Democrats can cross over to make sure it passes anyway.
This is friends cooperating.
It's really a bipartisan agreement to defer to Senate Republicans on everything controversial, and to let them take both the blame and credit for it. Democrats are happy with that because when their votes don't count, they can pretend to support anything. When Democrats lose, it energizes their base. Republicans are happy to take credit for economically liberal and nationalistic legislation. And for the legislation that just rewards the wealthy for being wealthy (say, bailouts), movement right-wing and libertarian Republicans can vote against it (and they're mostly in the House) while small consistent groups of Democrats can cross over to make sure it passes anyway.
This is friends cooperating.
You definitely could be right. The motivations of the politicians there make perfect sense. Plus it allows them to fit in the "republicans are evil" to their base, and the republicans can fit in the "democrats are evil" to theirs. Meanwhile the politicians are working together.
Seems like a fair number of democrats probably thought Nixon was a criminal and Reagan was satan and ghwb was a liar and gwb was a warmonger and trump was a fraudster. Also seems like a fair number of republicans probably thought Clinton was a degenerate and Obama was subhuman and Biden is illegitimate, which makes 10-15 a pretty low estimate.
eek2121(1)
> Seems like a fair number of democrats probably thought Nixon was a criminal and Reagan was satan and ghwb was a liar and gwb was a warmonger and trump was a fraudster.
Yes true, but it didn't feel widespread then. It was mostly just people who follow politics closely. Now it's nearly everyone.
Yes true, but it didn't feel widespread then. It was mostly just people who follow politics closely. Now it's nearly everyone.
I would tend to agree. Hate is infectious, love is hard work.
You were not alive in the 80s then. Democrats and civil society hated Reagan for what he did to this country. He was definitely seen as evil.
No. The media and democrats hated him. He was an amazing president that ended the Cold War. Ended inflation and kick started 20 years of economic growth.
People forget how quickly Carter screwed up the economy.
People forget how quickly Carter screwed up the economy.
People's opinions are often formed by musicians, partisan journos, and modern documentaries/movies which they then translate to mean it was the popular perception of leaders or the bulk of the people who lived through it.
Most of the journalists who remain popular tend to be those who are more radical/on the edge of cultural which is how they remained relevant beyond their era so it's easy to assume those people are representative of the population or even the educated class.
Most of the journalists who remain popular tend to be those who are more radical/on the edge of cultural which is how they remained relevant beyond their era so it's easy to assume those people are representative of the population or even the educated class.
> People forget how quickly Carter screwed up the economy.
The oil shock and stagflation began under Nixon/Ford, and stagflation itself was spurred by Nixonian policy. People seem to forget this quite often. Carter was only president during the last 3 years of the 70s.
Volcker was appointed by Carter and made things really bad for a brief time, but those 20% interest rates ended stagflation, leading to Volcker's reappointment by Reagan.
The oil shock and stagflation began under Nixon/Ford, and stagflation itself was spurred by Nixonian policy. People seem to forget this quite often. Carter was only president during the last 3 years of the 70s.
Volcker was appointed by Carter and made things really bad for a brief time, but those 20% interest rates ended stagflation, leading to Volcker's reappointment by Reagan.
Ah typical response of bad things happen under democrat president, so blame the last Republican.
Biden Abruptly Pulling out of an Afghanistan, was a complete utter disaster. Let’s blame someone else!
Biden Abruptly Pulling out of an Afghanistan, was a complete utter disaster. Let’s blame someone else!
> He was an amazing president that ended the Cold War. Ended inflation and kick started 20 years of economic growth.
Even a simple look at the timeline shows that is wrong. It doesn't even stand up to a cursory look at the evidence.
Reagan massively escalated the Cold War. There is literally a heading on his wikipedia page entitled "Escalation of the Cold War".
The Soviet Union fell after Reagan left the oval office! The 1989 Revolutions all happened after Reagan left. The breakup of the Soviet Union itself happened well over a year later.
Reagan left the US in bad shape. He slowed down inflation but massively expanded public debt. He left Bush such a crappy economy that it immediately entered a recession that resulted in him losing his reelection run.
Not only that, he started the decline of the US economy. https://www.piie.com/sites/default/files/styles/slimmed_natu... Before Reagan nominal GDP growth was high, after the US turned hardcore conservative, GDP growth has been poor.
I have no idea how Republicans managed to brainwash people so badly that they don't even look at the most basic evidence.
Even a simple look at the timeline shows that is wrong. It doesn't even stand up to a cursory look at the evidence.
Reagan massively escalated the Cold War. There is literally a heading on his wikipedia page entitled "Escalation of the Cold War".
The Soviet Union fell after Reagan left the oval office! The 1989 Revolutions all happened after Reagan left. The breakup of the Soviet Union itself happened well over a year later.
Reagan left the US in bad shape. He slowed down inflation but massively expanded public debt. He left Bush such a crappy economy that it immediately entered a recession that resulted in him losing his reelection run.
Not only that, he started the decline of the US economy. https://www.piie.com/sites/default/files/styles/slimmed_natu... Before Reagan nominal GDP growth was high, after the US turned hardcore conservative, GDP growth has been poor.
I have no idea how Republicans managed to brainwash people so badly that they don't even look at the most basic evidence.
Yes many did, but it was mainly the activists and people who follow politics closely, not the average person. The average Democrat didn't think that about Reagan, as evidenced by the re-election results and the fact that H.W. rode Reagan's coat tails.
The filibuster began its current form almost immediately after the Constitution was amended to require the election of Senators.
Where not otherwise stated, the branches of government are free to decide how to conduct their own internal business. The House and the Senate, for instance, get to decide the rules on how to conduct the votes for legislation, how the bills are even made ready for voting in the first place, etc.
It can really be no other way, short of stuffing all the parliamentary rules like that into the Constitution.
It can really be no other way, short of stuffing all the parliamentary rules like that into the Constitution.
The fact that they founded a nation that has last as long and successfully as the USA is extremely impressive, in the same way Apple is impressive even though Steve Jobs was not a perfect person, except the USA is orders of magnitude more impactful.
Simply on the basis of accomplishments, whether for good or bad, the founders rank amongst the greatest people to ever exist.
Simply on the basis of accomplishments, whether for good or bad, the founders rank amongst the greatest people to ever exist.
That might had make sense 200 years ago when Fed government was small. Nowadays it is a slow death sentence to the country.
Several features of or accidents-resulting-from the US constitution amount to that. With the added "fun" that they also create a system in which fixing any of them is unlikely, from within the system.
There's a reason even we don't tend to push a US-style system on fledgling democracies, when setting them up. It's got well-known, grave, fundamental, and avoidable flaws.
There's a reason even we don't tend to push a US-style system on fledgling democracies, when setting them up. It's got well-known, grave, fundamental, and avoidable flaws.
The big problem is that neither party in power wants to change the system. After all, they're beneficiaries and creators of the status quo. This could only change if somehow a new party emerged, which is quite unlikely.
Right, that's why, despite its being about as close to a dull, settled fact in policy-wonk and poli-sci circles as anything is, that the US system sucks in about a dozen important ways that other modern democratic systems do not, we cannot fix it.
The system is broken in ways that prevent fixing that very brokenness. We know exactly what's wrong, but can't do anything about it. You'd have to get a whole bunch of people whose personal power is tied up with the status quo, to, all at the same time, vote to weaken that power and the power of the organizations that put them where they are. Or you'd have to get at least some of the states that benefit from the brokenness to agree to weaken themselves. Neither is likely to ever happen—short of some very risky and probably-bad-rather-than-good developments that are more likely to end in authoritarianism than an improved democracy.
The system is broken in ways that prevent fixing that very brokenness. We know exactly what's wrong, but can't do anything about it. You'd have to get a whole bunch of people whose personal power is tied up with the status quo, to, all at the same time, vote to weaken that power and the power of the organizations that put them where they are. Or you'd have to get at least some of the states that benefit from the brokenness to agree to weaken themselves. Neither is likely to ever happen—short of some very risky and probably-bad-rather-than-good developments that are more likely to end in authoritarianism than an improved democracy.
Well theoretically you could, it's just that the big states would have to offer up an amazing deal to entice the smaller states to agree to call a constitutional convention.
The supermajority of the electorate in the smaller states might be willing to exchange future political influence for sufficient wealth or some other compensation.
The supermajority of the electorate in the smaller states might be willing to exchange future political influence for sufficient wealth or some other compensation.
"Weak government made sense when it was small but we made it bigger so we should make it stronger now too" is certainly a take, but not a particularly good one.
The vast majority of things the government touches turn to shit, including things with wide bipartisan support. How does making government able to do more, faster, fix that?
The vast majority of things the government touches turn to shit, including things with wide bipartisan support. How does making government able to do more, faster, fix that?
>The vast majority of things the government touches turn to shit
Overtime I've really begun to see this as propoganda that Reagan invented based on little to no empirical data. I'm not convinced that the government is anymore dysfunctional than any large corporation. The belief that the everything the government touches turns to shit does far more harm than good; and furthermore gets in the federal government's way of actually solving problems. The federal government may have a problem with incentives (like any corporation), but it's hard for me to believe they are inept. It ends up being a self fulfilling prophecy - the government tries to do something, a hundred road blocks are put up for fear of ineptitude, then when the government is slow due to said roadblocks, they are called inept. When those roadblocks are removed - for example in the vaccine distribution of 2020, it's clear that the government is capable of good outcomes. Millions of highly controlled and sensitive vaccines were deployed across the country in only a couple months under an administration that nearly became hostile to its deployment.
Overtime I've really begun to see this as propoganda that Reagan invented based on little to no empirical data. I'm not convinced that the government is anymore dysfunctional than any large corporation. The belief that the everything the government touches turns to shit does far more harm than good; and furthermore gets in the federal government's way of actually solving problems. The federal government may have a problem with incentives (like any corporation), but it's hard for me to believe they are inept. It ends up being a self fulfilling prophecy - the government tries to do something, a hundred road blocks are put up for fear of ineptitude, then when the government is slow due to said roadblocks, they are called inept. When those roadblocks are removed - for example in the vaccine distribution of 2020, it's clear that the government is capable of good outcomes. Millions of highly controlled and sensitive vaccines were deployed across the country in only a couple months under an administration that nearly became hostile to its deployment.
Bootlicker
You can't do this here, and we ban accounts that do, so please don't.
If you'd please review https://news.ycombinator.com/newsguidelines.html and stick to the rules when posting here, we'd appreciate it.
If you'd please review https://news.ycombinator.com/newsguidelines.html and stick to the rules when posting here, we'd appreciate it.
Large corporations are utterly dysfunctional too. The difference is that when a large corporation grows too dysfunctional, it's replaced by a small corporation. When a large government grows too dysfunctional, it's replaced by a small government too, but the process is significantly bloodier.
Robust systems are made up of interacting parts that tolerate partial failures. The reason the U.S. economy as a whole remains strong is because its least efficient businesses are continually failing, and their resources get reabsorbed by more competitive parts. When this ceases to happen (eg. the "too big to fail" banks in 2008, "what's good for GM is good for the country" in 1953), the economy as a whole becomes much weaker. There is no similar ablation process for the U.S. government - lately, there hasn't been an easy way to let parts of it fail while still preserving the government as a whole. This will likely lead to the collapse of the whole government, which is unfortunate. It can't avoid the dynamic common to all systems: the way to avoid total failure is to tolerate and adapt to partial failure.
Robust systems are made up of interacting parts that tolerate partial failures. The reason the U.S. economy as a whole remains strong is because its least efficient businesses are continually failing, and their resources get reabsorbed by more competitive parts. When this ceases to happen (eg. the "too big to fail" banks in 2008, "what's good for GM is good for the country" in 1953), the economy as a whole becomes much weaker. There is no similar ablation process for the U.S. government - lately, there hasn't been an easy way to let parts of it fail while still preserving the government as a whole. This will likely lead to the collapse of the whole government, which is unfortunate. It can't avoid the dynamic common to all systems: the way to avoid total failure is to tolerate and adapt to partial failure.
The problem with comparing corporations with governments, is that corporations are (1) ephemeral and (2) have clearer measurable objective functions (profit). The government should do things that are inefficient and unprofitable. Note that services can both provide value and be unprofitable (they can generate value but not capture it). A corporation that needs to cut costs can layoff workers. A government that is dealing with large unemployment can't just do a genocide.
All of this is to say is that even though large corporations and large governments are alike, the most efficient solution for a corporation (bankruptcy) is not a good solution for government and so despite the inefficiencies we are sort of forced to accept them as the engineering realities of the situation. I fully understand large governments have large government problems, I just don't agree with the notion that having a smaller government is a solution and that the small government meme has largely been toxic to the detriment of the middle class.
All of this is to say is that even though large corporations and large governments are alike, the most efficient solution for a corporation (bankruptcy) is not a good solution for government and so despite the inefficiencies we are sort of forced to accept them as the engineering realities of the situation. I fully understand large governments have large government problems, I just don't agree with the notion that having a smaller government is a solution and that the small government meme has largely been toxic to the detriment of the middle class.
There has to be a check on the inefficient and unprofitable things that a government undertakes, though, because otherwise all of the citizenry gets tied up doing inefficient stuff.
In theory democratic government is the check on this - if the government wastes too much money, the electorate is supposed to vote out their representatives and elect new ones that will cut the budget. (In this sense, Reagan-style conservatism is working as intended). In practice, this rarely happens, largely because the average voter is terrible about judging opportunity cost, and every expenditure seems worthwhile in a vacuum.
In theory democratic government is the check on this - if the government wastes too much money, the electorate is supposed to vote out their representatives and elect new ones that will cut the budget. (In this sense, Reagan-style conservatism is working as intended). In practice, this rarely happens, largely because the average voter is terrible about judging opportunity cost, and every expenditure seems worthwhile in a vacuum.
> and (2) have clearer measurable objective functions (profit)
This is a bit like saying that the goal of government is GDP per capita. Yes, both are important, and both are indicators of doing a good job at something, but what a business does is the most important thing: how does it adapt to reality and make sure it is always doing something useful enough to pay for?
Government doesn't necessarily do things people want to pay for, as then it might do much less stuff, but people do want to feel as though they're getting value for money from their taxes, and that the government isn't spending so much that taxes go up vastly and their currency is inflated so much their careful savings are wiped out.
This is a bit like saying that the goal of government is GDP per capita. Yes, both are important, and both are indicators of doing a good job at something, but what a business does is the most important thing: how does it adapt to reality and make sure it is always doing something useful enough to pay for?
Government doesn't necessarily do things people want to pay for, as then it might do much less stuff, but people do want to feel as though they're getting value for money from their taxes, and that the government isn't spending so much that taxes go up vastly and their currency is inflated so much their careful savings are wiped out.
Quite the opposite! Scalia had a great speech[0] where he argued that our Constitution is weak compared to other nations of history but had outlived those nations because of its slow nature to act. The point being, it doesn't matter how great your constitution is if your country is dead.
[0]https://www.youtube.com/watch?v=Ggz_gd--UO0
[0]https://www.youtube.com/watch?v=Ggz_gd--UO0
> it doesn't matter how great your constitution is if your country is dead.
Why is the longevity of a nation more important than the values it stands for (as laid down in its constitution)? One could argue that it's better to have a great constitution that treats its citizens equally and fairly, even if the nation is short-lived and eventually disintegrates into smaller nations.
The interpersonal equivalent of this would be "It doesn't matter how great your relationship is if your marriage is dead". I'm not sure many would agree with keeping a marriage alive at any cost.
Why is the longevity of a nation more important than the values it stands for (as laid down in its constitution)? One could argue that it's better to have a great constitution that treats its citizens equally and fairly, even if the nation is short-lived and eventually disintegrates into smaller nations.
The interpersonal equivalent of this would be "It doesn't matter how great your relationship is if your marriage is dead". I'm not sure many would agree with keeping a marriage alive at any cost.
The long-term risk usually isn't disintegrating into smaller nations, it's being conquered by a larger nation. And that's exactly why it matters if your country is dead - you could have the greatest constitution in the world, but if everybody lives under the totalitarian dictatorship next door, it's not doing you much good. Realistic governance needs to be a balance between quality of life for citizens and the continued survival of the state and independence from conquering powers. Arguably many Native American tribes were a lot happier before the white man came, but that doesn't do you much good when you get genocided.
Relatedly, I'm not sure if the GP's Scalia speech actually gets the causality right. I think we could make a good case that the United State's dominance and longevity comes from two oceans, fertile cropland, and advanced technology, and form of governance is a mostly-irrelevant sideshow. You could plop a different government down in North America, and as long as it had adequate incentives for individual innovation, it'd still end up a superpower.
Relatedly, I'm not sure if the GP's Scalia speech actually gets the causality right. I think we could make a good case that the United State's dominance and longevity comes from two oceans, fertile cropland, and advanced technology, and form of governance is a mostly-irrelevant sideshow. You could plop a different government down in North America, and as long as it had adequate incentives for individual innovation, it'd still end up a superpower.
The founders added a bunch of checks and balances but not the filibuster.
The fillibuster was more of a gentlemanly agreement until the 1970s and it wasn't until the Obama era that it was regularly used on almost every single vote.
The system the founders designed didn't even have an income tax. We should go back to that.
> The founders designed a system that was slow to act on purpose. They did not want a strong federal government.
Spot on. Yet we continue to insist on using the system in a way (i.e., overly strong fed gov) that it's not good for. This isn't a Dem or Republican issue. It's history.
And the more taxes Uncle Sam collects, the stronger and more bloated he gets. At some level we need to come to terms with the fact that we're using a screwdriver as a hammer. That doesn't work well. Ever.
Spot on. Yet we continue to insist on using the system in a way (i.e., overly strong fed gov) that it's not good for. This isn't a Dem or Republican issue. It's history.
And the more taxes Uncle Sam collects, the stronger and more bloated he gets. At some level we need to come to terms with the fact that we're using a screwdriver as a hammer. That doesn't work well. Ever.
The founders also designed a system that a very few people got to vote, and with the assumption it would take days for representatives to hear from their constituents.
Yet nobody seems to be saying the answer is going back to horses and written mail in the name of making our government fit our lives better.
Yet nobody seems to be saying the answer is going back to horses and written mail in the name of making our government fit our lives better.
It's all in the name: The United States. States is the key word.
No one is suggesting horses or written email.
It's a simple understanding of history, and a practical and honest observation of how dysfunctional things continue to be. Yet we keep pushing that the answer is more of the same? That's naive. That's not sustainable.
No one is suggesting horses or written email.
It's a simple understanding of history, and a practical and honest observation of how dysfunctional things continue to be. Yet we keep pushing that the answer is more of the same? That's naive. That's not sustainable.
We certainly need to improve.
I am not convinced in the "go back to the way it was designed" argument, since you either have to cherry pick the aspects you like, or advocate for reversing women's suffrage, emancipation of slaves, etc.
As soon as we agree that the founders got some things right and some things wrong, there is no more argument that they were prescient and we should revert to their designs.
IMO better to take stock of the current situation and seek changes based on their merits today, independently of whether they align to the ideas of 250 years ago.
I am not convinced in the "go back to the way it was designed" argument, since you either have to cherry pick the aspects you like, or advocate for reversing women's suffrage, emancipation of slaves, etc.
As soon as we agree that the founders got some things right and some things wrong, there is no more argument that they were prescient and we should revert to their designs.
IMO better to take stock of the current situation and seek changes based on their merits today, independently of whether they align to the ideas of 250 years ago.
The founders didn’t create the filibuster because they already created a fuck load of checks on the majority. Making even more is senseless.
"The founders" did not create the filibuster. They actively debated whether it should require more than a simple majority to pass legislation, and decided that was a bad idea. They had already designed a system with a ton of friction in it. It didn't need one more hurdle.
The Founders were of diverse positions and ideas on the topic.
A couple overly simplistic examples:
Jefferson wanted the Constitution rethought every 19 with modern wisdom to prevent it becoming a carceral joke society laughs at as dated and sad.
Madison felt the future was forever obligated to fit themselves into a past framework as a kind of thank you for the hard work the long dead performed.
“They did not want a strong federal government” is overly reductive and normalizes into a boring sound bite what was really a complex and lengthy back and forth.
It would be fair to say that most feared a strong executive turning autocratic/monarchic but that’s about all they agreed on readily.
I suppose I fall into Jefferson’s camp. Paraphrasing, he wrote to Madison “clearly the dead so not rule the living.”
To the flames with this outdated gibberish. To us it’s all hand me down spoken tradition we never witnessed anyway.
A couple overly simplistic examples:
Jefferson wanted the Constitution rethought every 19 with modern wisdom to prevent it becoming a carceral joke society laughs at as dated and sad.
Madison felt the future was forever obligated to fit themselves into a past framework as a kind of thank you for the hard work the long dead performed.
“They did not want a strong federal government” is overly reductive and normalizes into a boring sound bite what was really a complex and lengthy back and forth.
It would be fair to say that most feared a strong executive turning autocratic/monarchic but that’s about all they agreed on readily.
I suppose I fall into Jefferson’s camp. Paraphrasing, he wrote to Madison “clearly the dead so not rule the living.”
To the flames with this outdated gibberish. To us it’s all hand me down spoken tradition we never witnessed anyway.
> difficult it is to predict policy outcomes
Are they really - or are they pretty obvious to anyone who casually glances at the headline of the policy, but the consequences are a problem after the next election. If you win you can always just blame the other side and if you lose you can blame the other side as well.
Are they really - or are they pretty obvious to anyone who casually glances at the headline of the policy, but the consequences are a problem after the next election. If you win you can always just blame the other side and if you lose you can blame the other side as well.
> minority rule, in the Senate
If you look away from the senators and consider the people the senators represent, it was intended to be even without the filibuster.
But what should be truly opposed is the cowardly way in which the filibuster is done today.
You should make 41 people vote against the bill, on record with their names, then go back to their constituents and explain why they did it in a town hall sometime soon.
Right now a senator can rely on the fact that their re-election is five years away when killing a bill which is supported by their constituents.
41 of them cannot assume they have years for the public to forget their vote on this particular thing (like hurting small businesses by inaction too).
If you look away from the senators and consider the people the senators represent, it was intended to be even without the filibuster.
But what should be truly opposed is the cowardly way in which the filibuster is done today.
You should make 41 people vote against the bill, on record with their names, then go back to their constituents and explain why they did it in a town hall sometime soon.
Right now a senator can rely on the fact that their re-election is five years away when killing a bill which is supported by their constituents.
41 of them cannot assume they have years for the public to forget their vote on this particular thing (like hurting small businesses by inaction too).
The one person performing a filibuster is presumably doing so very much on record, complete with soundbites.
That's not the kind anyone means anymore, at least when it comes up in relation to the US Senate. They generally don't actually filibuster, they place a procedural hold that requires 60 members to agree to override it.
This is where the insanity really started. It used to require 8-20 senators to physically filibuster to actually kill a bill. On a major bill, the small number of senators also risked reputational harm from the sound bites of them reading their phone books.
Now anyone can start a filibuster, it largely goes unrecorded - and pressure for party unity prevents it from being killed.
Now anyone can start a filibuster, it largely goes unrecorded - and pressure for party unity prevents it from being killed.
So it sounds like it's an even smaller minority rule now?
You could have a single senator block the entire senate from delivering anything. The only back stop on this is whether a party would kick out a miss behaving senator or primary them.
Eh kinda - it’s that way because everyone wants the rules to be that way.
A large enough majority can just change the rules. It isn’t that hard to actually do.
But they prefer it this way.
A large enough majority can just change the rules. It isn’t that hard to actually do.
But they prefer it this way.
Yep, during the Obama administration, Sen. Ted Cruz famously shut down the government for awhile, nearly by himself, pissing everybody on both sides off, except for the small number of people who vote in Republican primaries, who ate it up.
In an effort to provide balance, I'll point out that months before Cruz's stunt, Wendy Davis, a Texas state senator, filibustered for about 11 hours to prevent a vote on an abortion bill.
> people who vote in Republican primaries, who ate it up.
To the best of my knowledge nobody made a movie about Cruz's speech. Davis's speech, on the other hand, became the subject of a documentary debuting at SXSW:
https://spectrumlocalnews.com/tx/austin/news/2022/03/09/docu...
> people who vote in Republican primaries, who ate it up.
To the best of my knowledge nobody made a movie about Cruz's speech. Davis's speech, on the other hand, became the subject of a documentary debuting at SXSW:
https://spectrumlocalnews.com/tx/austin/news/2022/03/09/docu...
Yes but you have that be the person in the safest seat.
No, fillibusters are a matter of procedure now. Nobody's standing up there talking to perform a fillibuster anymore.
From https://constitutioncenter.org/blog/filibustering-in-the-mod...
"When a Senator signals the intent to filibuster, an informal cloture process starts to determine if 60 votes exist to move a measure forward in two ways. One cloture vote is to approve a motion to consider a measure; the second vote is on the actual measure. If either cloture vote fails, the measure remains in limbo. "
From https://constitutioncenter.org/blog/filibustering-in-the-mod...
"When a Senator signals the intent to filibuster, an informal cloture process starts to determine if 60 votes exist to move a measure forward in two ways. One cloture vote is to approve a motion to consider a measure; the second vote is on the actual measure. If either cloture vote fails, the measure remains in limbo. "
If you want to see a real filibuster in action, go to Nebraska!
Machaela Cavanaugh has been filibustering the legislature for weeks! 12+ hours a day, weeks on end. She has monumentally impressive resolve.
Actually, I think you missed it. The Nebraska legislature finally passed a bill today.
Machaela Cavanaugh has been filibustering the legislature for weeks! 12+ hours a day, weeks on end. She has monumentally impressive resolve.
Actually, I think you missed it. The Nebraska legislature finally passed a bill today.
That is great and all, but what folks are communicating here is quite different. Filibusters in the Senate do not require you to even show up, you can simply claim a filibuster to stop a vote from happening.
You don't deserve to be downvoted for just not knowing that this isn't how the filibuster works anymore. All the well known pop culture treatments of it - Mr. Smith Goes to Washington, The West Wing, etc. - show this form of it.
The senate was never meant to represent people. It was meant to represent the interested of the states as sovereign entities. The house was supposed to be the populist dumpster fire.
But then some geniuses decided that we should direct elect both and have two dumpster fires.
But then some geniuses decided that we should direct elect both and have two dumpster fires.
>But then some geniuses decided that we should direct elect both and have two dumpster fires.
this was done because the election process via the state assemblies was so corrupt that Americans regularly made fun of the Senate for this fact.
this was done because the election process via the state assemblies was so corrupt that Americans regularly made fun of the Senate for this fact.
Sure, but so was everything else the states did at the time and they did eventually clean up their act. It's hard to say whether direct electing the senate was good or bad because it's not like there's a control country we can compare to. It certainly gave the states as entities less influence which is probably not great.
You could compare it to the UK's House of Lords, where seats are (unbelievably to me) hereditary - passed down from toffs to their children.
I've always thought of the House of Lords as a descriptive, rather that prescriptive, power structure. You don't intentionally design peerage into a system of government.
Rather, you've just got these people who are, at the time of the government's founding, equally powerful (at least in sum) to the government — thus, peers to the government. These people can do whatever they like; they can even have their own private standing armies et al, because your own standing army — the military — isn't powerful enough yet to prevent that.
Thus, you have to give these powerful people a seat at the table, or they'll challenge the legitimacy of your government (or maybe even just get together to overthrow it.) Maybe that's even what they were just doing, until you got them to calm down and talk to you.
One might say that the whole process of establishing a government out of a feudal or contested state, is the bringing of these "peers" to a common table, convincing them that it's in their best interests to solve their problems with the nascent government using plain in-the-open debate, rather than violence or subtle manipulation.
Whereever the peers meet to have that open debate, then, is a de-facto "House of Lords." It doesn't need any laws about it to make it so. The laws grow up over time to enshrine what would be happening regardless.
And in that light, the way "appointment to" a Westminster-system House of Lords works, makes total sense. The government isn't granting people a seat at the table just because; rather, it's tracing the transfer of political power through dynastic inheritance (and explicitly stamping whoever received it with a heritable noble title, so that there's no argument about who the government thinks received the political power.) This is also why noble titles can be extinguished — if nobody directly inherits a lump of political power, then there should no longer be a seat at the table for "the person who currently holds that lump of political power."
The ideal end to a House of Lords, AFAICT, is that eventually all the noble titles go extinct; all the seats are removed; and the House becomes obsolete. I'm not aware of that having ever happened yet anywhere, but it seems to be the intention from the start of every government.
(The American system, at first glance, is incompatible with this end; but it could in theory have approached it, if the American people had been less fans of federalism, and had instead insisted that their own states revert to territories in exchange for seats allocated in a central parliament. I think this could have even been likely, in an alternate world where any of the colonies went down a monarchic or oligarchic route with their state governments.)
Rather, you've just got these people who are, at the time of the government's founding, equally powerful (at least in sum) to the government — thus, peers to the government. These people can do whatever they like; they can even have their own private standing armies et al, because your own standing army — the military — isn't powerful enough yet to prevent that.
Thus, you have to give these powerful people a seat at the table, or they'll challenge the legitimacy of your government (or maybe even just get together to overthrow it.) Maybe that's even what they were just doing, until you got them to calm down and talk to you.
One might say that the whole process of establishing a government out of a feudal or contested state, is the bringing of these "peers" to a common table, convincing them that it's in their best interests to solve their problems with the nascent government using plain in-the-open debate, rather than violence or subtle manipulation.
Whereever the peers meet to have that open debate, then, is a de-facto "House of Lords." It doesn't need any laws about it to make it so. The laws grow up over time to enshrine what would be happening regardless.
And in that light, the way "appointment to" a Westminster-system House of Lords works, makes total sense. The government isn't granting people a seat at the table just because; rather, it's tracing the transfer of political power through dynastic inheritance (and explicitly stamping whoever received it with a heritable noble title, so that there's no argument about who the government thinks received the political power.) This is also why noble titles can be extinguished — if nobody directly inherits a lump of political power, then there should no longer be a seat at the table for "the person who currently holds that lump of political power."
The ideal end to a House of Lords, AFAICT, is that eventually all the noble titles go extinct; all the seats are removed; and the House becomes obsolete. I'm not aware of that having ever happened yet anywhere, but it seems to be the intention from the start of every government.
(The American system, at first glance, is incompatible with this end; but it could in theory have approached it, if the American people had been less fans of federalism, and had instead insisted that their own states revert to territories in exchange for seats allocated in a central parliament. I think this could have even been likely, in an alternate world where any of the colonies went down a monarchic or oligarchic route with their state governments.)
> This is also why noble titles can be extinguished — if nobody directly inherits a lump of political power, then there should no longer be a seat at the table for "the person who currently holds that lump of political power."
Isn’t this “lump of power” just monetary wealth, property, social connections etc? Why does it have to be passed onto a relative instead of any other individual the current power holder chooses?
Isn’t this “lump of power” just monetary wealth, property, social connections etc? Why does it have to be passed onto a relative instead of any other individual the current power holder chooses?
> You don't intentionally design peerage into a system of government.
Says who?
From Red Roulette:
> The struggle pitted Xi Jinping against an official named Bo Xilai. Both were sons of Communist "immortals", veterans of Mao's revolution. And both owed their careers to a Party decision made in 1981 and pushed by a high-ranking Communist named Chen Yun to establish a special office in the Party's personnel department called the Young Cadres Section. That section's purpose was to ensure that the sons and daughters of senior Party members were given good positions in the government and the Party. "If our sons and daughters succeed us," Chen Yun declared, "they won't dig up our graves."
> The Tiananmen Square crackdown of 1989 gave this work added urgency. A key lesson that the red aristocracy drew from that turmoil was that, as the saying went, "you can best depend on your own kids." Each leading family chose an heir to be groomed for political leadership. Nominated by their fathers, Xi and Bo rose through the Party ranks.
Says who?
From Red Roulette:
> The struggle pitted Xi Jinping against an official named Bo Xilai. Both were sons of Communist "immortals", veterans of Mao's revolution. And both owed their careers to a Party decision made in 1981 and pushed by a high-ranking Communist named Chen Yun to establish a special office in the Party's personnel department called the Young Cadres Section. That section's purpose was to ensure that the sons and daughters of senior Party members were given good positions in the government and the Party. "If our sons and daughters succeed us," Chen Yun declared, "they won't dig up our graves."
> The Tiananmen Square crackdown of 1989 gave this work added urgency. A key lesson that the red aristocracy drew from that turmoil was that, as the saying went, "you can best depend on your own kids." Each leading family chose an heir to be groomed for political leadership. Nominated by their fathers, Xi and Bo rose through the Party ranks.
Hereditary peers are gradually being phased out over a series of reforms over the last 200 years. Only about 10% of current peers are hereditary.
And the House of Lords has very limited influence.
There’s a complex relationship here; the change diminished all states greatly, in favor of passing power to their citizens, but it also empowered the citizens of the big empty states in a way that the citizens of the small urban states were already empowered.
It occurs to me after typing this that when you said “as entities” you were probably alluding to this dichotomy.
It occurs to me after typing this that when you said “as entities” you were probably alluding to this dichotomy.
It did no such thing. It gave state legislatures less influence in Federal governance.
If you’re a big believer in the mythological principles of US government, the idea of people electing representatives shouldn’t be seen as a diminishing of the state. State power is endowed by the creator to the people.
Legislatures aren’t states. The governor is the head of state executing the laws of the people as expressed by the legislature.
If you’re a big believer in the mythological principles of US government, the idea of people electing representatives shouldn’t be seen as a diminishing of the state. State power is endowed by the creator to the people.
Legislatures aren’t states. The governor is the head of state executing the laws of the people as expressed by the legislature.
The concept of a Federal government was only expanded in recent (post Commerce clause) times. Historically, the government was meant to be a thin layer uniting a bunch of States together. Within that framework, the Senate made more sense; it was meant to be more of a UN of the States than a representative body. The Constitution throughout was a balance between populist and non-populist interests as the founders had a strong distrust of purely populist rule.
If you're a believer in the somewhat more modern American ideal of a purely populist government then yes, the current Senate makes more sense, but then it doesn't make sense as to why the Senate grants equal power to each state no matter how populous.
If you're a believer in the somewhat more modern American ideal of a purely populist government then yes, the current Senate makes more sense, but then it doesn't make sense as to why the Senate grants equal power to each state no matter how populous.
> Historically, the government was meant to be a thin layer uniting a bunch of States together.
This has been an argument since the beginning. The thinnest layer (Confederation) was found non-viable and was replaced by a somewhat thicker layer after about six years. There was a lot of argument then, and a lot of argument after the fact, leading to thinning and thickening of the layer.
> but then it doesn't make sense as to why the Senate grants equal power to each state no matter how populous.
Or, under the previous system, why Senators were elected for 6 year terms when they would more easily represent the states' current interests with 2 year terms.
This has been an argument since the beginning. The thinnest layer (Confederation) was found non-viable and was replaced by a somewhat thicker layer after about six years. There was a lot of argument then, and a lot of argument after the fact, leading to thinning and thickening of the layer.
> but then it doesn't make sense as to why the Senate grants equal power to each state no matter how populous.
Or, under the previous system, why Senators were elected for 6 year terms when they would more easily represent the states' current interests with 2 year terms.
the Senate grants equal power because in this way the smaller states do not end up without an equal say.
America built in its own rotten boroughs problem as part of the foundation
America built in its own rotten boroughs problem as part of the foundation
It turned a bicameral system into the crypto-unicameral.
It removed one of the big checks of "checks and balances" fame.
> Legislatures aren’t states. The governor is the head of state executing the laws of the people as expressed by the legislature.
I'd watch that clusterfuck on pay-per-view. But sure, it'd still be an improvement if you want governors to appoint them.
It removed one of the big checks of "checks and balances" fame.
> Legislatures aren’t states. The governor is the head of state executing the laws of the people as expressed by the legislature.
I'd watch that clusterfuck on pay-per-view. But sure, it'd still be an improvement if you want governors to appoint them.
I like the idea of moving back to having the Senate controlled by the States, I think it would help clean up some of the mess.
I disagree on the point that the states have cleaned up their act, what has happened is that the Federal government has taken on more power and responsibility from the States, for better and worse.
Meanwhile, people have become more disconnected from their state politics and only focus on the federal. Up to the point of blaming the federal government for not acting when it is the state's responsibility.
I disagree on the point that the states have cleaned up their act, what has happened is that the Federal government has taken on more power and responsibility from the States, for better and worse.
Meanwhile, people have become more disconnected from their state politics and only focus on the federal. Up to the point of blaming the federal government for not acting when it is the state's responsibility.
I did not really like how fast and loose with history you were, so I will just say that they did not clean up their act on their own, but were forced to. Many things have been forced on the states judicially, brown v board of education, baker v Carr/wesberry v sanders/reynolds v sims all forced more equitable voting schemes(ie, handling gerrymandering) etc are some easy examples I could think of for how your idea that the states figured themselves out is a misconception.
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>>some geniuses
A super majority of both the house and senate with 3/4 of all state legislatures in accordance with the intention of the original founders that people update things as the times change?
Lol. That was done to placate the slave owners.
Just like modern reactionary politics isn’t good for people or popular, the biggest fear of slave owners was that free whites would figure out that slaves gutted the value of their labors.
It doesn’t take a “genius” to figure out that having state legislatures select federal legislators is foolish. Anyone suggesting that the US Senate as constituted for the last century is a populist institution may require institutional help of another kind.
Just like modern reactionary politics isn’t good for people or popular, the biggest fear of slave owners was that free whites would figure out that slaves gutted the value of their labors.
It doesn’t take a “genius” to figure out that having state legislatures select federal legislators is foolish. Anyone suggesting that the US Senate as constituted for the last century is a populist institution may require institutional help of another kind.
While I agree that oligarchy has been the order of the day for some time, perhaps always, it is not self evident that having hierarchical elections is somehow worse than direct votes for people we see talk briefly on TV. I would actually prefer that I always get to choose between people I actually know face to face, that in turn select diminishing numbers of people. When we vote for sound bites it is simply a matter of who can comvince us they believe our own hastily formed opinions predicated on subpar government, economics, and history education combined with a complete lack of relevant work experience are in fact correct. If I select between my neighbors, it would be based on my perception of their character, and the ability to spot both expertise and bs.
> Lol. That was done to placate the slave owners.
The 17th amendment was passed ~50yr after the civil war, a point in time when the overwhelming majority of the electorate had no memory of overt slavery and the people who did or who's parents did were even less influential than before due to immigration waves and industrialization (which concentrated population money and power in the northeast and Midwest generally speaking). Please f right off with your revisionist history.
>Anyone suggesting that the US Senate as constituted for the last century is a populist institution may require institutional help of another kind.
This is rich coming from the guy that just said an amendment passed in the 1900s was done to placate slave owners.
Regardless of the intent of the amendment, only a complete fool would claim that making appointed positions directly elected doesn't make the body formed by those positions more subject to populist sentiments than it previously was.
I'm not entirely sold on the idea that direct electing the senate is a bad thing but it doesn't take a genius to look at the situation before and after and see that there are pros and cons to both. Like you can literally pick up a history book and look at the influences the senate was beholden to and strongly pushed around by before and after the change.
The 17th amendment was passed ~50yr after the civil war, a point in time when the overwhelming majority of the electorate had no memory of overt slavery and the people who did or who's parents did were even less influential than before due to immigration waves and industrialization (which concentrated population money and power in the northeast and Midwest generally speaking). Please f right off with your revisionist history.
>Anyone suggesting that the US Senate as constituted for the last century is a populist institution may require institutional help of another kind.
This is rich coming from the guy that just said an amendment passed in the 1900s was done to placate slave owners.
Regardless of the intent of the amendment, only a complete fool would claim that making appointed positions directly elected doesn't make the body formed by those positions more subject to populist sentiments than it previously was.
I'm not entirely sold on the idea that direct electing the senate is a bad thing but it doesn't take a genius to look at the situation before and after and see that there are pros and cons to both. Like you can literally pick up a history book and look at the influences the senate was beholden to and strongly pushed around by before and after the change.
Read more carefully. The constitutional mandate for state legislators to select senators was a compromise to placate slave owners.
Electing Senators directly took a long time to move forward because constitutional amendments are hard. Senatorial elections are statewide events, they are the only federal elected officials elected by the people of a state free of gerrymandering.
Electing Senators directly took a long time to move forward because constitutional amendments are hard. Senatorial elections are statewide events, they are the only federal elected officials elected by the people of a state free of gerrymandering.
That's an interesting take, to call democracy a dumpster fire. Some people I suppose would have rather kept their parties with tea.
The Senate enables minority rule due to state size as well. Unfortunately we're hostages of the past
The Senate doesn't represent people, it represents States. The Representation is exactly equal, as intended: 1 State == 2 Senators.
No one is questioning that it is working as designed.
That something is working as designed is not an endorsement if the design is bad.
That something is working as designed is not an endorsement if the design is bad.
Right, there are two failure modes in the US governmental system, basically:
1) Things the founders got wrong on purpose. We've fixed a bunch of these, by e.g. broadening the franchise and ending chattel slavery with that whole Civil War thing. The way our Senate is composed is arguably an un-fixed one of these—it's that way on purpose, but it's, you know, bad.
2) Things they got wrong by accident. These are usually cases where politicking, application of game theory, and bad actors in general conspire to make things work differently than they were intended. This is stuff like the system stabilizing at two viable political parties, and the way the electoral college has worked in-practice almost from day one (but not the way the electoral college favors low-population states, because that part was on purpose, so would go under point 1 if we're regarding it as an error)
1) Things the founders got wrong on purpose. We've fixed a bunch of these, by e.g. broadening the franchise and ending chattel slavery with that whole Civil War thing. The way our Senate is composed is arguably an un-fixed one of these—it's that way on purpose, but it's, you know, bad.
2) Things they got wrong by accident. These are usually cases where politicking, application of game theory, and bad actors in general conspire to make things work differently than they were intended. This is stuff like the system stabilizing at two viable political parties, and the way the electoral college has worked in-practice almost from day one (but not the way the electoral college favors low-population states, because that part was on purpose, so would go under point 1 if we're regarding it as an error)
You're conflating something being bad by definition, in an inexcusable fashion, with simply not liking it. There's nothing inherently bad about the upper chamber of a bicameral legislature being explicitly not designed to represent individual people in a perfectly proportional manner.
As originally designed, the US is not a nation with a strong central federal government that happens to be made up up 50 weak states and a handful of territories and districts. It's 50 strong states who happen to be united under one central but relatively weak federal government. In that context, having States represented equally, without regard to their populations, makes complete and total sense.
Completely by chance, that happens to indirectly overrepresent people you disagree with. That's unfortunate (depending on your ideology), but it certainly doesn't make the entire system broken or bad.
As originally designed, the US is not a nation with a strong central federal government that happens to be made up up 50 weak states and a handful of territories and districts. It's 50 strong states who happen to be united under one central but relatively weak federal government. In that context, having States represented equally, without regard to their populations, makes complete and total sense.
Completely by chance, that happens to indirectly overrepresent people you disagree with. That's unfortunate (depending on your ideology), but it certainly doesn't make the entire system broken or bad.
> You're conflating something being bad by definition, in an inexcusable fashion, with simply not liking it
I would love to know what this by-definition version of "bad" is. That's a remarkable finding.
I would love to know what this by-definition version of "bad" is. That's a remarkable finding.
I think they got the Senate right by not allowing direct election the 17 Amendment screwed that up.
The issue is, modernly, people equate not getting what they want with the system being broken.
The idea of compromise rarely survives the day. It's a 100% or zero game, lest we look like we actually agree with some of the other side... oh the horror.
The idea of compromise rarely survives the day. It's a 100% or zero game, lest we look like we actually agree with some of the other side... oh the horror.
> The issue is, modernly, people equate not getting what they want with the system being broken
Since value is subjective, there is literally no other viable definition of broken, and if you think this is a modern idea, you haven't seen much of history.
Since value is subjective, there is literally no other viable definition of broken, and if you think this is a modern idea, you haven't seen much of history.
I think the idea of compromise rarely survives actual scrutiny when it comes to specific values. I don't know what a compromise on the death penalty is to an anti-death penalty stance. I don't know what a compromise on abortion is to an "abortion is murder" stance. Even if I fully understand with and sympathize with someone I disagree with, I may not be at all willing to budge from specific positions I've taken because I believe there is no acceptable compromise. (e.g. I don't think I could budge from being against sex trafficking.)
And even where it does survive scrutiny based on the values of the factions involved in the compromise, it may not for other people in different contexts. I mean, we’re in an age where slavers are, like pirates and torturers, recognized as hostis humani generis, but many of the compromises in the Constitution are between two major factions, one of which thought slavery should be legally tolerated but not especially protected and favored, and the other of which thought that slavery should be specially protected and slavers should be rewarded with full extra votes for each slave – and the compromises all throughout the Constitution between those two factions tended to favor the latter faction. Sure, where it explicitly concerns slavery, those have been mostly reversed (outside of the open door for penal slavery), but the substructures agreed in compromises between those factions whose underlying purpose related to slavery but which did not reference it have been in many cases preserved, and even there defenders often can come up with little beyond “It’s working as designed”.
As a non U.S citizen, sounds like a state with a million residents is represented as much as a state with 10 million residents. Not sure that's fair, be it I get you don't want to be underrepresented based on where you live either.
It is fair because States are sovereign. The United States is a Union of States, after all.
The Union is predicated on the States agreeing to certain terms and conditions that guarantee certain State Rights while compromising on others.
One such compromise is representation within the Union, whereby the Lower House (House of Representatives) has the States represented proportionally by population and the Upper House (Senate) has the States represented equally regardless their population. Territories that aren't a State receive no representation.
Additionally, the Lower and Upper Houses each have different duties and powers afforded to them. The Lower House legislates matters concerning money, among other things, while the Upper House legislates matters concerning government appointments and foreign diplomacy (eg: treaties), among other things. Both Houses must also agree with each other on any bills that are intended to go to the President for signing into law.
The States in the Union are tantamount to independent countries in most other contexts, so States' Rights are a very big deal.
The Union is predicated on the States agreeing to certain terms and conditions that guarantee certain State Rights while compromising on others.
One such compromise is representation within the Union, whereby the Lower House (House of Representatives) has the States represented proportionally by population and the Upper House (Senate) has the States represented equally regardless their population. Territories that aren't a State receive no representation.
Additionally, the Lower and Upper Houses each have different duties and powers afforded to them. The Lower House legislates matters concerning money, among other things, while the Upper House legislates matters concerning government appointments and foreign diplomacy (eg: treaties), among other things. Both Houses must also agree with each other on any bills that are intended to go to the President for signing into law.
The States in the Union are tantamount to independent countries in most other contexts, so States' Rights are a very big deal.
This sounds like it was written in 1860. States have not been tantamount to independent countries in a time where anyone currently alive could remember.
Almost a hundred years before that, but yeah that's kind of the point.
Prior to 1913 Senators weren't even elected by the popular vote, they were elected by state legislators. Literally elected by the State. One could argue that actually makes more sense.
Prior to 1913 Senators weren't even elected by the popular vote, they were elected by state legislators. Literally elected by the State. One could argue that actually makes more sense.
Right the senate is kind of like how in the UN each country only has one vote. It’s by design that Luxembourg and China have the same votes.
The UN comparison doesn't make much sense to me; in the context of the UN these are states with often vastly different languages, cultures, histories etc. not the case for the U.S. or at least nowhere near the same extent.
Did you reply to the wrong comment, by chance? One of the child comments to mine compare to the UN, while I made no such specific comparisons.
Yes, meant to reply to https://news.ycombinator.com/item?id=35622319
Each of those States is represented by two Senators. It's completely equal when you understand that as originally written the Senators represent the States, not the people within the States.
A supermajority threshold requirement is not minority rule. It's supermajority rule.
Minority rule would be if 40% of the Senate could pass laws at will.
Minority rule would be if 40% of the Senate could pass laws at will.
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It guarantees the federal government had a strong bias towards inaction.
The filibuster decreases the rate of change.
I dunno, it still might be pretty tricky to put together 60 votes for cloture in a 3 or 4 party system. It might even be harder!
Fractious multi-party coalitions in parliamentary systems commonly fail to scrape together bare majorities- they're not exactly known for making it easy to produce supermajorities either.
Fractious multi-party coalitions in parliamentary systems commonly fail to scrape together bare majorities- they're not exactly known for making it easy to produce supermajorities either.
Various European democracies seem to have done fine, even if it is at times the coalitions become unstable.
Australia, even with a 2 party preferred, still often has smaller parties hold the balance of power. Often this is quite beneficial since the big party has to water down their ambitions.
Australia, even with a 2 party preferred, still often has smaller parties hold the balance of power. Often this is quite beneficial since the big party has to water down their ambitions.
It's the case in Canada right now too.
I sure would have liked to see the Liberal party follow through on their promise to engage in electoral reform though. It seemed to have completely slipped their minds once they found a majority.
Perhaps related, but I find minority governments to be the most aligned to how I think things should work. It's not that they can't get anything done, but rather they have to actually engage with the other parties to find common ground. Crazy idea, I know...
Perhaps related, but I find minority governments to be the most aligned to how I think things should work. It's not that they can't get anything done, but rather they have to actually engage with the other parties to find common ground. Crazy idea, I know...
Agreed on both counts, with the added note though that minority government only works in multi-party systems. US-style split government is far less functional.
My understanding of what happened with the electoral reform promise is that the Liberals wanted a specific form of electoral reform: ranked choice. Unsurprising, because as the centrist party, they would stand to benefit most from that system. Which isn't to say I necessarily disagree with it; personally I think a system that encourages moderation is probably a good thing. Anyway, when the committee they put together to study the issue didn't come back with that option, they just shelved the whole thing.
My understanding of what happened with the electoral reform promise is that the Liberals wanted a specific form of electoral reform: ranked choice. Unsurprising, because as the centrist party, they would stand to benefit most from that system. Which isn't to say I necessarily disagree with it; personally I think a system that encourages moderation is probably a good thing. Anyway, when the committee they put together to study the issue didn't come back with that option, they just shelved the whole thing.
Ah, very interesting! It seems like some people are making noise about the issue again, so will be watching that closely. Here in BC, there was some attempt a little while back, but it did not gain sufficient support this time around.
Switzerland mandates (okay not by law but an old custom) the government to be put together by all major parties whatever they are at the latest elections. Right now there are 7 persons from 4 parties and lo, it works finely. The USA and its bipartisan system is not exactly the yardstick for functioning politics and (super)majorities should definitely never become goals. As surprising as it might come, negotiations can and do work.
Can't agree more, super majority is a dangerous situation if folks laughing at democracy take helm (like it or not, Trump was a perfect definition of it within western democracies, although dictators like putin run circles with big grin around such people). 4 years is plenty to do a lot of damage if actors at power are malevolent.
The problem of using Switzerland as a yardstick is that barely any population anywhere can match up maturity and morality of them, maybe some nordics. Give a glimpse of same freedom/responsibility to otherwise mature British folks and we have brexit.
US has many fine things running for it, but politics (and healthcare, education, criminality etc) definitely ain't it and should not be taken as inspiration. The whole us-vs-them mentality that such longterm bipartisan system brings is very limiting. What if I like low taxes, while also supporting abortions and legal soft drugs? Or any other mix that would be pretty schizophrenic in US.
The problem of using Switzerland as a yardstick is that barely any population anywhere can match up maturity and morality of them, maybe some nordics. Give a glimpse of same freedom/responsibility to otherwise mature British folks and we have brexit.
US has many fine things running for it, but politics (and healthcare, education, criminality etc) definitely ain't it and should not be taken as inspiration. The whole us-vs-them mentality that such longterm bipartisan system brings is very limiting. What if I like low taxes, while also supporting abortions and legal soft drugs? Or any other mix that would be pretty schizophrenic in US.
> The problem of using Switzerland as a yardstick is that barely any population anywhere can match up maturity and morality of them, maybe some nordics.
GP isn't talking about direct democracy but their governing cabinet which is basically how governing cabinets in the majority of Europe are formed.
GP isn't talking about direct democracy but their governing cabinet which is basically how governing cabinets in the majority of Europe are formed.
The majority of European cabinets are formed by a parliamentarian coalition which usually reached a majority. The Swiss cabinet is formed by design from all the major parties, so there's no coalition needed between them - once you get enough votes you're in. It's just when the ministers are in function they cannot publicly dissent from the governing line or they fly out (it happens) - which is forcing them to negotiate behind the scenes the governing line, of course each according to their party mandate.
Maybe the maturity and morality in CH and the Nordics comes from properly funded and independent curriculum education, which probably stems from good governance, which comes from a system that rewards rough consensus and compromise. It's a virtuous circle.
> The problem of using Switzerland as a yardstick is that barely any population anywhere can match up maturity and morality of them, maybe some nordics.
I don't think that's fair, both to nordics and to British folks. People are mature because the system treats them as mature. If the system obviously has contempt for you and everyone like you, then of course you will act out like a youngest child.
I don't think that's fair, both to nordics and to British folks. People are mature because the system treats them as mature. If the system obviously has contempt for you and everyone like you, then of course you will act out like a youngest child.
I'd rather have the Irish electoral system then the American one any day.
That can be migated. Just make a pre-negotiation round, were post vote, those parties who are below n% can give there vote share to the parties who make it over the limit, for a negotiated "goals" contract. No vote is lost..
It forces fringe, extremist and "eternal" oppossition parties to compromise and negotiate better terms and it can change elections that are really close.
It forces fringe, extremist and "eternal" oppossition parties to compromise and negotiate better terms and it can change elections that are really close.
The US Senate is noteworthy for permitting unlimited debate. IIRC, no other legislative body has this trait.
The filibuster was a hack which has since been weaponized. It should be eliminated. If only to rationalize and normalize the Senate.
The anti-majoritarian case for maintaining the filibuster presumes that tyranny of the minority is preferable to the tyranny of the majority. Often dressed up dressed up in doublespeak slogans like "states rights" (John C. Calhoun) and "entrepreneurial freedom" (James M. Buchanan, Peter Thiel).
The filibuster was a hack which has since been weaponized. It should be eliminated. If only to rationalize and normalize the Senate.
The anti-majoritarian case for maintaining the filibuster presumes that tyranny of the minority is preferable to the tyranny of the majority. Often dressed up dressed up in doublespeak slogans like "states rights" (John C. Calhoun) and "entrepreneurial freedom" (James M. Buchanan, Peter Thiel).
The filibuster rule is from a time when the Senate was selected by the States, not the people. It was designed as an effective State Veto.
It works for that purpose and in that context and IMO is good.
We should return the Senate to be the States representatives in congress, and the House is the People. Instead of having both the Senate and the House be popularly elected.
Return to more republican (i.e Republic not the party) style of governance, and less democratic, but I know that is heresy today where democracy is the new religion and people fail to learn the lesson of Athens
It works for that purpose and in that context and IMO is good.
We should return the Senate to be the States representatives in congress, and the House is the People. Instead of having both the Senate and the House be popularly elected.
Return to more republican (i.e Republic not the party) style of governance, and less democratic, but I know that is heresy today where democracy is the new religion and people fail to learn the lesson of Athens
what would you say was the lesson of athens? a quick search shows a wide range of opinions on different subjects, many of which are interesting.
Democracy tends to depend on Empire Building. The more democratic the US has become the more imperialist we have also become. This results in many of the problems we have were we look to nationalize more things to enable resources and power to be directed external.
Ryan Chapman has a great video on DEMOCRACY: From Antiquity to Modernity [1]
[1] https://www.youtube.com/watch?v=UplwT_a1IT8
Ryan Chapman has a great video on DEMOCRACY: From Antiquity to Modernity [1]
[1] https://www.youtube.com/watch?v=UplwT_a1IT8
So the Spanish American war was not imperialistic...
Or the US controlling most of South America (Monroe Doctrine)...
How about taking control of most of North America from the First Nations through genocidal actions?
Your claim is not based in the actual history of the US, but instead viewing it through a politicized and simplistic lens.
Other than an incredible brief era at the start of the US, we've been imperialistic in our foreign policy.
Your claim is not based in the actual history of the US, but instead viewing it through a politicized and simplistic lens.
Other than an incredible brief era at the start of the US, we've been imperialistic in our foreign policy.
Funnily, my learnings from this are the exact opposite.
The majority of US problems come from the inherent duality of the political system. Every matter gets split among political lines, with one party for, the other against, regardless of merits. What would fix that would be to move to popular votes (real, proportional popular votes, not first past the post disenfranchising the vast majority of the population), which would result in more parties emerging, which would lead to more nuance, actual debates and compromises.
If your proposal is enacted, what changes? Governors, elected by first past the post (checking the stats for 2022, with 40-60% of the vote)[1], or state congresses, which are also elected by first past the post and thanks to gerrymandering are usually highly partisan with near total domination of one party[2], elect the two senators for the state. What's the difference? Same two parties as before, same stupid dividing lines on every single topic, same impossible to achieve supermajority needed to do anything significant.
Oh, and actual political finance limits. Whoever came up with "companies donating millions to politicians is free speech so nothing can be done to limit that" is either a massive idiot or extremely biased towards big money influencing elections.
https://en.wikipedia.org/wiki/2022_United_States_gubernatori...
https://en.wikipedia.org/wiki/2022_United_States_state_legis...
The majority of US problems come from the inherent duality of the political system. Every matter gets split among political lines, with one party for, the other against, regardless of merits. What would fix that would be to move to popular votes (real, proportional popular votes, not first past the post disenfranchising the vast majority of the population), which would result in more parties emerging, which would lead to more nuance, actual debates and compromises.
If your proposal is enacted, what changes? Governors, elected by first past the post (checking the stats for 2022, with 40-60% of the vote)[1], or state congresses, which are also elected by first past the post and thanks to gerrymandering are usually highly partisan with near total domination of one party[2], elect the two senators for the state. What's the difference? Same two parties as before, same stupid dividing lines on every single topic, same impossible to achieve supermajority needed to do anything significant.
Oh, and actual political finance limits. Whoever came up with "companies donating millions to politicians is free speech so nothing can be done to limit that" is either a massive idiot or extremely biased towards big money influencing elections.
https://en.wikipedia.org/wiki/2022_United_States_gubernatori...
https://en.wikipedia.org/wiki/2022_United_States_state_legis...
> Whoever came up with "companies donating millions to politicians is free speech so nothing can be done to limit that" is either a massive idiot or extremely biased towards big money influencing elections.
Isn't this a straightforward deduction from combining an extension of the first amendment with corporate personhood?
I'd think that the actual problem (which manifests itself in many ways other than this one) is that latter legal situation, not the first amendment or the logic itself.
Isn't this a straightforward deduction from combining an extension of the first amendment with corporate personhood?
I'd think that the actual problem (which manifests itself in many ways other than this one) is that latter legal situation, not the first amendment or the logic itself.
>>Whoever came up with "companies donating millions to politicians is free speech so nothing can be done to limit that" is either a massive idiot or extremely biased towards big money influencing elections.
So Elon Musk wants to spend millions on politics it is OK, but if I and 10,000 of my friends want to form a corporation to spend millions it is idiotic??
And if you want to Limit Elon how do you get around the 1st amendment ?
So Elon Musk wants to spend millions on politics it is OK, but if I and 10,000 of my friends want to form a corporation to spend millions it is idiotic??
And if you want to Limit Elon how do you get around the 1st amendment ?
Nope, do it the other way around. No political campaign can receive more than X money in donations / more than Y money of it's own funds, adjusted for inflation yearly, with highly public transparency lists on who donated to what campaign when.
OK. And what do we do about Pelosi's husband? What about his brother? What about his business partner who lives in another country? The primary issue with this line of thinking is that it simply makes things more difficult to track. The idea with the current system is that at least it's all out in the open.
Well then, that will only service to make the media the selector then, as who ever can get the most "free" media air time would win. What if I went all Bezo's and bought a newspaper or TV Station... What about the corporations that own those networks, Does every time they talk favorably about Biden count as a Campaign Ad?
I dont see how you can achieve that while maintaining a support free expression, unless of course you do not care about free speech?
I dont see how you can achieve that while maintaining a support free expression, unless of course you do not care about free speech?
This is already a solved problem in other countries, but of course unless you are for absolute free speech to weird extents like money is speech that means you don't care about free speech. Free speech in politics also means making sure everyone is heard, not only the richest/loudest participants.
You enforce that all media networks give similar time (and slots) to the different political candidates, treating time spent talking about a candidate or interviewing them separately from ad time.
You enforce that all media networks give similar time (and slots) to the different political candidates, treating time spent talking about a candidate or interviewing them separately from ad time.
In general, our government is dysfunctional and has many points at which we may have a tyranny of the minority. I'd do a few things to resolve it:
- greatly reduce the power of the Senate, effectively limiting it to the ability to veto legislation and judicial appointments with a two-thirds majority (effectively a "state's veto" over a runaway federal government)
- the House of Representatives should be elected based on per-state proportional representation; districts are an antiquated concept from an era where people traveled by ship and horseback, and don't really make sense in an age of telecommunications, air travel, automobiles, etc.
- the President should be elected by a direct majority, as the electoral college has outlived its usefulness and exists only to enable a president to win an election with a majority of votes
- greatly reduce the power of the Senate, effectively limiting it to the ability to veto legislation and judicial appointments with a two-thirds majority (effectively a "state's veto" over a runaway federal government)
- the House of Representatives should be elected based on per-state proportional representation; districts are an antiquated concept from an era where people traveled by ship and horseback, and don't really make sense in an age of telecommunications, air travel, automobiles, etc.
- the President should be elected by a direct majority, as the electoral college has outlived its usefulness and exists only to enable a president to win an election with a majority of votes
I could see #1...
I am not sure how that is different from today? Do you want all Reps to be "At Large" so instead of voting for 1 person, in CA would would vote for 54 people?
I am not sure that is tenable but an interesting concept.
I have always supported the Wyoming Rule, and supported taking congressional redistricting out of the hands of legislatures moving towards fixed allocation based on something non-political like zip codes.
On the Electoral College... 10000000% disagree. The President should absolutely not be elected by direct majority, that is taking the same mistake of the senate and making it for the president
First and foremost the office of president should be reduced in power, Congress and abdicated far too much power to the executive, that is what has made the Presidential election soo important, is should not be.
Secondly, I would be in favor of a change to the electoral process where by the votes are allocated proportional just like the house, instead of First Pass the Post like we do today, but I would Strongly Oppose just moving to a pure democracy system. That would effectively make many states have no vote in the election of the president and almost fully remove republicanism from the US system, if not completely put us on that path
I am not sure how that is different from today? Do you want all Reps to be "At Large" so instead of voting for 1 person, in CA would would vote for 54 people?
I am not sure that is tenable but an interesting concept.
I have always supported the Wyoming Rule, and supported taking congressional redistricting out of the hands of legislatures moving towards fixed allocation based on something non-political like zip codes.
On the Electoral College... 10000000% disagree. The President should absolutely not be elected by direct majority, that is taking the same mistake of the senate and making it for the president
First and foremost the office of president should be reduced in power, Congress and abdicated far too much power to the executive, that is what has made the Presidential election soo important, is should not be.
Secondly, I would be in favor of a change to the electoral process where by the votes are allocated proportional just like the house, instead of First Pass the Post like we do today, but I would Strongly Oppose just moving to a pure democracy system. That would effectively make many states have no vote in the election of the president and almost fully remove republicanism from the US system, if not completely put us on that path
"Republic" and "democracy" are not antonyms. This was a bit of linguistic prescriptivism put in by the John Birch Society that I feel the need to correct. "Republic" just means that the head of state is elected and "democracy" just means that there's voting. Whether they're voting on individual bills or voting for representatives, it's still democracy. Hell, people in the UK refer to themselves as "republicans" because they want to get rid of the monarchy, not because they oppose direct democracy.
The problem with state-appointed Senators is that it was warping gubernatorial politics. If you didn't like your Senator, you had to have the state governor replace him, and in practice most people were treating their vote for state governor as a senatorial vote anyway. Direct election of Senators just cut out the middleman.
Furthermore, we should be very careful with veto powers in a democratic system. Have you ever heard about a study which claims that the US is run by rich people? Well, the thing is, it's true, but not entirely. All classes are still capable of advancing an agenda. Louis Rossman can sit on a chair and yell into the microphone about right-to-repair[0] and get a bunch of state bills proposed. But rich people uniquely have veto power. They can, say, have a 'robust conversation' with a Senator or Representative to kill an R2R bill, or have New York State's governor change the R2R bill at the last minute to completely remove the legislative intent.
Filibusters are another veto mechanism; they raise the vote threshold from 50 to 60. Furthermore with the procedural filibuster they are significantly easier to use, so they get used all the time.
You know how Brexiteers were really mad about how the EU has a lot of unelected political appointees making law? They're not wrong about that. You see, whenever a political party in Germany, France, or the UK (pre-Brexit) wanted to push an unpopular policy, they'd make it into an EU-wide regulation and then blame the EU for it, because they think voters are stupid[1]. They were able to do this specifically because the EU works exactly like how the US Senate used to, with member state representatives not elected by the people and thus not accountable to them. And the only democratic accountability provided to stop this is to replace your member state's government with one that'll replace the appointee in the European Commission, which is now two levels of indirection.
Personally I'd rather live in the world with a straightforward democratic system with as little indirection as possible and few veto powers. Yes, you can point to rising populism as a counterargument, but the problem is that populism is rising because nobody's voice is getting heard. The more that the rich use their veto powers instead of relenting to the will of the majority, the more that the majority will turn to non-democratic means of power, and then we'll wind up in a dictatorship with exactly the kinds of people you don't want running things in office.
[0] Right to repair is a political campaign to undo several harmful effects of copyright and trade secrets law by explicitly requiring manufacturers to sell replacement parts and provide unlock codes to pair them onto equipment. It does not actually obligate them to repair the device, in fact that's counterproductive to the actual point, which is to restore ownership of your device (or car, or tractor) back to you.
[1] They're not.
The problem with state-appointed Senators is that it was warping gubernatorial politics. If you didn't like your Senator, you had to have the state governor replace him, and in practice most people were treating their vote for state governor as a senatorial vote anyway. Direct election of Senators just cut out the middleman.
Furthermore, we should be very careful with veto powers in a democratic system. Have you ever heard about a study which claims that the US is run by rich people? Well, the thing is, it's true, but not entirely. All classes are still capable of advancing an agenda. Louis Rossman can sit on a chair and yell into the microphone about right-to-repair[0] and get a bunch of state bills proposed. But rich people uniquely have veto power. They can, say, have a 'robust conversation' with a Senator or Representative to kill an R2R bill, or have New York State's governor change the R2R bill at the last minute to completely remove the legislative intent.
Filibusters are another veto mechanism; they raise the vote threshold from 50 to 60. Furthermore with the procedural filibuster they are significantly easier to use, so they get used all the time.
You know how Brexiteers were really mad about how the EU has a lot of unelected political appointees making law? They're not wrong about that. You see, whenever a political party in Germany, France, or the UK (pre-Brexit) wanted to push an unpopular policy, they'd make it into an EU-wide regulation and then blame the EU for it, because they think voters are stupid[1]. They were able to do this specifically because the EU works exactly like how the US Senate used to, with member state representatives not elected by the people and thus not accountable to them. And the only democratic accountability provided to stop this is to replace your member state's government with one that'll replace the appointee in the European Commission, which is now two levels of indirection.
Personally I'd rather live in the world with a straightforward democratic system with as little indirection as possible and few veto powers. Yes, you can point to rising populism as a counterargument, but the problem is that populism is rising because nobody's voice is getting heard. The more that the rich use their veto powers instead of relenting to the will of the majority, the more that the majority will turn to non-democratic means of power, and then we'll wind up in a dictatorship with exactly the kinds of people you don't want running things in office.
[0] Right to repair is a political campaign to undo several harmful effects of copyright and trade secrets law by explicitly requiring manufacturers to sell replacement parts and provide unlock codes to pair them onto equipment. It does not actually obligate them to repair the device, in fact that's counterproductive to the actual point, which is to restore ownership of your device (or car, or tractor) back to you.
[1] They're not.
>a straightforward democratic system
Is 2 wolves and lamb voting on what they will have for dinner. I have no desire to be ruled by the majority. If we had a a straightforward democratic system we would have no free speech, no gun rights, no rights at all really. We would be like Canada or the EU, I have no desire for that dystopia ( and yes I did call the EU and Canada a dystopia for which I am sure many will disagree)
I abhor collectivism, and systems of government designed to promote majoritarianism over the minority... and the smallest minority is the individual
Is 2 wolves and lamb voting on what they will have for dinner. I have no desire to be ruled by the majority. If we had a a straightforward democratic system we would have no free speech, no gun rights, no rights at all really. We would be like Canada or the EU, I have no desire for that dystopia ( and yes I did call the EU and Canada a dystopia for which I am sure many will disagree)
I abhor collectivism, and systems of government designed to promote majoritarianism over the minority... and the smallest minority is the individual
What you're proposing to fix this is to make sure lamb is always on the menu, no matter how many lambs there are to outvote the wolves.
And yes, there must always be dinner. Ok, we aren't literally eating people in real politics, but still, winners and losers must be picked on occasion. This is simply because political resources are limited. Furthermore, the "2 wolves and lamb" situation is less common than you think. Literally speaking, one lamb cannot support that many wolves. Applied to human politics in the real world, 70% of the population can't benefit from harming the other 30% - there's not enough "meat" to go around. But 1% can benefit greatly from harming 99%. So in practice, democratic accountability puts bounds on how shitty governments can get.
Free speech is not a pesky barrier that democracy tries to get around. It is a peace treaty; an agreement by the government that it will not prosecute culture wars. Furthermore, said culture wars are usually pushed by extremely small minorities - i.e. one wolf splits the two hundred lamb votes in half so he can eat one or two of them in the ensuing chaos. That's how you usually get "two wolves and a lamb" rather than the opposite of "two lambs and a wolf", which is more common
And for the record: yes Canada and the EU have free speech. Maybe not as extremely guarded as America does, but it's still there.
I'm not going to get involved in the gun debate aside from pointing out that guns are not a backstop against abuses of government power. You have a pistol, they have nuclear weapons.
The only thing I can think of for why you'd argue that Canada or the EU are dystopias is that they have mildly more progressive governments and higher tax rates. While I'm not going to argue that paying tax is a moral imperative, I will argue that this is the kind of argument a wolf would make. In fact, wolves have been pointing out the whole "two wolves and a lamb" thing for a while now. This isn't an argument against democracy, it's a threat. "Give us what we want, or we'll stop asking nicely."
Collectivism and individualism are a false dichotomy. Any functional society requires both. Extreme collectivism was the fallacy of the Soviet Union, but extreme individualism has it's own problems.
And yes, there must always be dinner. Ok, we aren't literally eating people in real politics, but still, winners and losers must be picked on occasion. This is simply because political resources are limited. Furthermore, the "2 wolves and lamb" situation is less common than you think. Literally speaking, one lamb cannot support that many wolves. Applied to human politics in the real world, 70% of the population can't benefit from harming the other 30% - there's not enough "meat" to go around. But 1% can benefit greatly from harming 99%. So in practice, democratic accountability puts bounds on how shitty governments can get.
Free speech is not a pesky barrier that democracy tries to get around. It is a peace treaty; an agreement by the government that it will not prosecute culture wars. Furthermore, said culture wars are usually pushed by extremely small minorities - i.e. one wolf splits the two hundred lamb votes in half so he can eat one or two of them in the ensuing chaos. That's how you usually get "two wolves and a lamb" rather than the opposite of "two lambs and a wolf", which is more common
And for the record: yes Canada and the EU have free speech. Maybe not as extremely guarded as America does, but it's still there.
I'm not going to get involved in the gun debate aside from pointing out that guns are not a backstop against abuses of government power. You have a pistol, they have nuclear weapons.
The only thing I can think of for why you'd argue that Canada or the EU are dystopias is that they have mildly more progressive governments and higher tax rates. While I'm not going to argue that paying tax is a moral imperative, I will argue that this is the kind of argument a wolf would make. In fact, wolves have been pointing out the whole "two wolves and a lamb" thing for a while now. This isn't an argument against democracy, it's a threat. "Give us what we want, or we'll stop asking nicely."
Collectivism and individualism are a false dichotomy. Any functional society requires both. Extreme collectivism was the fallacy of the Soviet Union, but extreme individualism has it's own problems.
>>Applied to human politics in the real world, 70% of the population can't benefit from harming the other 30% - there's not enough "meat" to go around. But 1% can benefit greatly from harming 99%. So in practice, democratic accountability puts bounds on how shitty governments can get.
I think we are seeing today that is not true. You seem to be under the same false narrative that the rich do not "pay their fair share", and the poor pay more than their far share when in reality nationally more than 50% of the population pays zero income tax, and 60-70% get more direct government transfer payments than they pay into the system
The people have been continually voting for more and more government largess funded mainly by debt, and by continually moving the goal posts on what "fair share" is and who should be paying that "fair share"
>>Free speech is not a pesky barrier that democracy tries to get around.... And for the record: yes Canada and the EU have free speech. Maybe not as extremely guarded as America does, but it's still there.
Canada and the EU disprove your statement, when people are arrested / convicted because their dog raised a paw on video, or because someone was offended by a tweet or have compelled speech laws to force one person refer to another person based on their declared preference... you can not claim to have free speech. Sorry no the EU nor Canada has free speech today.
>>I'm not going to get involved in the gun debate aside from pointing out that guns are not a backstop against abuses of government power. You have a pistol, they have nuclear weapons.
I guess UKR should just give up to Russia then if that is your logic.
In reality you can not control a nation or its people with tanks, jets, battleships and drones. The fighter jets can not kick down your door at 3AM to search your home... The military can not maintain a police state, and enslave a nation. Those weapons are for decimating, flattening, glassing large area's.
The government would not want to kill all of this people and blow up its own infrastructure. These are the very things they need to be tyrannical in the first place.
Remember it took 20 years, 4 presidents, trillions of dollars, and plenty of tanks, jets, and military arms to replace the Taliban with the Taliban.... All the nuclear weapons in the US arsenal amounted to nothing.
So it is good you refrain from the gun debate as you would lose.
>While I'm not going to argue that paying tax is a moral imperative
not only is it not a moral imperative, Income based taxation is actively immoral and unethical.
Some types of Taxation could be ethical such as a Single Tax system on natural resources. Income based taxation should be viewed for what is it, theft of labor, something I assume you accuse the evil rich of doing
I think we are seeing today that is not true. You seem to be under the same false narrative that the rich do not "pay their fair share", and the poor pay more than their far share when in reality nationally more than 50% of the population pays zero income tax, and 60-70% get more direct government transfer payments than they pay into the system
The people have been continually voting for more and more government largess funded mainly by debt, and by continually moving the goal posts on what "fair share" is and who should be paying that "fair share"
>>Free speech is not a pesky barrier that democracy tries to get around.... And for the record: yes Canada and the EU have free speech. Maybe not as extremely guarded as America does, but it's still there.
Canada and the EU disprove your statement, when people are arrested / convicted because their dog raised a paw on video, or because someone was offended by a tweet or have compelled speech laws to force one person refer to another person based on their declared preference... you can not claim to have free speech. Sorry no the EU nor Canada has free speech today.
>>I'm not going to get involved in the gun debate aside from pointing out that guns are not a backstop against abuses of government power. You have a pistol, they have nuclear weapons.
I guess UKR should just give up to Russia then if that is your logic.
In reality you can not control a nation or its people with tanks, jets, battleships and drones. The fighter jets can not kick down your door at 3AM to search your home... The military can not maintain a police state, and enslave a nation. Those weapons are for decimating, flattening, glassing large area's.
The government would not want to kill all of this people and blow up its own infrastructure. These are the very things they need to be tyrannical in the first place.
Remember it took 20 years, 4 presidents, trillions of dollars, and plenty of tanks, jets, and military arms to replace the Taliban with the Taliban.... All the nuclear weapons in the US arsenal amounted to nothing.
So it is good you refrain from the gun debate as you would lose.
>While I'm not going to argue that paying tax is a moral imperative
not only is it not a moral imperative, Income based taxation is actively immoral and unethical.
Some types of Taxation could be ethical such as a Single Tax system on natural resources. Income based taxation should be viewed for what is it, theft of labor, something I assume you accuse the evil rich of doing
> Canada and the EU disprove your statement, when people are arrested / convicted because their dog raised a paw on video, or because someone was offended by a tweet or have compelled speech laws to force one person refer to another person based on their declared preference... you can not claim to have free speech. Sorry no the EU nor Canada has free speech today.
Cancel culture is a US thing, bro.
Having lived for more than a decade in both the US and France, I'd say the former is probably a bit more dystopic in terms of how awful it is if you're poor. Also, waaaayy more mass shootings (muh gun rights!).
The only real difference in free speech restrictions between the US and France is you're not allowed to be Nazi in France. You can critique the government all you want, the whole ultra-woke pronouns is somewhat present amongst leftist types but overall if you're a public figure (eg bigshot CEO) with a habit of saying outrageous things you're probably better off being French than American, you're less likely to get completely cancelled for saying something that isn't politically correct in France, although that may change.
> Some types of Taxation could be ethical such as a Single Tax system on natural resources. Income based taxation should be viewed for what is it, theft of labor, something I assume you accuse the evil rich of doing
Let's get one thing straight here - a government is a protection racket. They take your stuff, in return give you "protection", but the exchange is never voluntary - you can't really opt out short of leaving the country. Because the government needs to know just how much of your stuff to take, they invent money - you can read Graeber's Debt if you'd like more info on this, but basically, there's a reason all primitve coins had the heads of kings on them. Because now you know that every tax season you have to give the taxman X gold coins or risk being thrown in jail, gold coins are valuable.
Now if you define a rich person as someone with a lot of resources, you'll notice two things -
1) insofar as they are exploiting the labor of others to enrich themselves, they can only do so *with the help of the government*. Employment contracts only work when you have the threat of force to enforce them.
2) the government being a protection racket, the more you have to protect, the more work it has to do for you - the government do a lot more work making sure Bobby Billionaire's 3 houses don't get robbed, his private jet works because of all the massive technical and regulatory infrastructure that exists to make sure it doesn't fall out of the sky or crash into something, and his hundreds of happy collaborators are all educated in some common language so that they can efficiently create wealth and controlled by a legal system that ensure they won't do anything that could harm his business interest then it does for Homeless Harry who lives off of rats he manages to trap using a piece of moldy peanut butter as bait.
So they "rich people should pay more taxes thing" is not a moral argument - it's just business logic.
You expect AWS to charge Netflix more than some one dev team running a website that 5 people visit per year? Because it seems logical that if you get more value out of a business, that business will charge you more?
Congrats, you believe the rich should pay more taxes, by the logic expounded in the preceding paragraphs ^_^
feel free to ask for clarification if needed, or you can try to point out any flaws in my argument if you see any :)
Cancel culture is a US thing, bro.
Having lived for more than a decade in both the US and France, I'd say the former is probably a bit more dystopic in terms of how awful it is if you're poor. Also, waaaayy more mass shootings (muh gun rights!).
The only real difference in free speech restrictions between the US and France is you're not allowed to be Nazi in France. You can critique the government all you want, the whole ultra-woke pronouns is somewhat present amongst leftist types but overall if you're a public figure (eg bigshot CEO) with a habit of saying outrageous things you're probably better off being French than American, you're less likely to get completely cancelled for saying something that isn't politically correct in France, although that may change.
> Some types of Taxation could be ethical such as a Single Tax system on natural resources. Income based taxation should be viewed for what is it, theft of labor, something I assume you accuse the evil rich of doing
Let's get one thing straight here - a government is a protection racket. They take your stuff, in return give you "protection", but the exchange is never voluntary - you can't really opt out short of leaving the country. Because the government needs to know just how much of your stuff to take, they invent money - you can read Graeber's Debt if you'd like more info on this, but basically, there's a reason all primitve coins had the heads of kings on them. Because now you know that every tax season you have to give the taxman X gold coins or risk being thrown in jail, gold coins are valuable.
Now if you define a rich person as someone with a lot of resources, you'll notice two things -
1) insofar as they are exploiting the labor of others to enrich themselves, they can only do so *with the help of the government*. Employment contracts only work when you have the threat of force to enforce them.
2) the government being a protection racket, the more you have to protect, the more work it has to do for you - the government do a lot more work making sure Bobby Billionaire's 3 houses don't get robbed, his private jet works because of all the massive technical and regulatory infrastructure that exists to make sure it doesn't fall out of the sky or crash into something, and his hundreds of happy collaborators are all educated in some common language so that they can efficiently create wealth and controlled by a legal system that ensure they won't do anything that could harm his business interest then it does for Homeless Harry who lives off of rats he manages to trap using a piece of moldy peanut butter as bait.
So they "rich people should pay more taxes thing" is not a moral argument - it's just business logic.
You expect AWS to charge Netflix more than some one dev team running a website that 5 people visit per year? Because it seems logical that if you get more value out of a business, that business will charge you more?
Congrats, you believe the rich should pay more taxes, by the logic expounded in the preceding paragraphs ^_^
feel free to ask for clarification if needed, or you can try to point out any flaws in my argument if you see any :)
The filibuster continues to exist each new day because a simple majority of senators continue to want it to exist. Don’t let that majority off the hook for anything by pointing to a rule they could remove at will.
IMO doing anything at the federal level should require a supermajority anyway. The country shouldn’t swing back and forth due to a simple majority. If a supermajority can’t agree, leave it to states.
We would all be a lot better off.
We would all be a lot better off.
There’s already a de facto supermajority requirement in that you need the senate, which represents states, and the house, which represents people.
Also, it turns out that when the legislature doesn’t act, because it was deliberately hobbled by its designers, you end up with an ultra powerful executive rather than things being left to the states.
It would be better if more Americans recognized the flaws in the design of our system of government instead of quasi-worshipping the Founding Fathers and insisting that any problems are because we are unworthy of their great design.
Also, it turns out that when the legislature doesn’t act, because it was deliberately hobbled by its designers, you end up with an ultra powerful executive rather than things being left to the states.
It would be better if more Americans recognized the flaws in the design of our system of government instead of quasi-worshipping the Founding Fathers and insisting that any problems are because we are unworthy of their great design.
That’s a valid point. IMO the executive should have been more limited.
> hobbled by its designers
Minor quibble, but the filibuster is nowhere in the Constitution. And it was most recently modified in 1975.
Minor quibble, but the filibuster is nowhere in the Constitution. And it was most recently modified in 1975.
The legislature was split in two because it was considered the most dangerous branch. Or at least that’s one of the explanations they gave when arguing for its ratification.
A party gaining the majority but being unable to functionally govern is awful for democratic legitimacy. Why vote when even if your party wins an election, you don't get your preferred policy implemented, even partially?
And beyond that, it lets party politicians who don't really want to have to take hard votes hide behind the procedural hurdles.
And beyond that, it lets party politicians who don't really want to have to take hard votes hide behind the procedural hurdles.
Indeed. That results in the political system being bypassed, and so critical progress in America was made by the judiciary, which doesn't have popular support and is vulnerable to court-stacking and now, it appears, bribery.
It may have been beneficial on net at some point in the past, but it's just bad at this point.
The filibuster is fine, in its original form. Manipulate the parliamentary process to push the date close to the end of session, then have some windbag with sufficient endurance read the phone book for a few days.
The current version, where you declare yourself filibustered, is too cheap. In the old days, they just filibustered stuff like voting rights, not procedures for borrowing money to support the adopted budget.
The current version, where you declare yourself filibustered, is too cheap. In the old days, they just filibustered stuff like voting rights, not procedures for borrowing money to support the adopted budget.
A proper endurance filibuster is fine, the current version is just pretending
How does that happen anyway. Why does the party with the majority allow a filibuster to happen without an actual speech?
The modern ("two-track") system was designed to be less disruptive to the Senate overall because it allows votes to happen on other, non-controversial bills while the filibuster is ongoing.
Thanks. Seems it was put in place in the 1970s after the filibuster of a civil rights bill.
Still think they should make someone talk somewhere to keep the filibuster going. Cure seems worse than disease. Doubt they expected routine filibusters
Still think they should make someone talk somewhere to keep the filibuster going. Cure seems worse than disease. Doubt they expected routine filibusters
I think both are undemocratic, and doubly so since it's in the vestigial organ of our former slave-driven agrarian economy.
There's no good reason to have the senate, let alone the filibuster and effective super majority required for legislation.
There's no good reason to have the senate, let alone the filibuster and effective super majority required for legislation.
Thank you for providing the actual political context. It is much more helpful to know who did this and why then to complain about an amorphous and unchanging "Congress".
I read the message you are replying to three times and I still don’t understand who did this and why? Can elaborate more?
It's the House of Representatives. That body is the origin of all taxing. The leader of the House is Kevin McCarthy. It's is ultimately on him to lead the House (or get out of other's way) in passing a tax bill. The reconciliation process allows this to occur with less bipartisan support.
The interesting part of this appears to be that the Republicans removed this from the tax code but were expected to add it back in a new form. This did not occur in time for tax bills to be due.
The interesting part of this appears to be that the Republicans removed this from the tax code but were expected to add it back in a new form. This did not occur in time for tax bills to be due.
To get the tax cut law through congress without requiring support from democrats, they had to raise revenue somehow, so they cancelled this provision, with the idea they would add it back later.
Sure. Here's the key sentence:
> Most tax experts considered the removal a budget gimmick so that the 2017 December republican majority could quickly pass a new budget using the budget reconciliation process, which can't be used to increase the deficit after a 10-year period so they had to add a time limit to a bunch of benefits "on paper" to use the reconciliation process.
In 2017, the Republican majorities in Congress passed a budget that would have increased the federal debt significantly over a ten-year period (i.e., it was a long-term deficit increase). Such an increase is not allowed under the rules of the Senate's budget reconciliation process, so they added sunset provisions that would have brought the deficit back down by making some of the deficit-increasing provisions (in this case, mostly tax cuts) expire early.
The next sentence clarifies:
> There appeared to be broad support for fixing it later, but the bipartisan spending bill expected to include it fell apart because they couldn't get agreement on other parts of it.
These changes were made "on paper" to meet the reconciliation rules in time to pass a budget and avoid a government shutdown, but they were not intended to be permanent -- they were just a quick hack to work around procedural limitations. The intent was to fix this later, but the fixes were never implemented due to disagreement about how to handle other parts of the bill.
The advantage of this kind of description is that it gives you a piece of a larger story and leads to some obvious follow-up questions. Why did it take until the last minute for Republicans to pass a budget when they had full control of Congress and the White House? Why couldn't they pass a budget that didn't increase the deficit? Why does the Senate have such weird procedural issues and why haven't they been fixed? You can find some of the answers by looking into the bill itself[1]. But even if you don't you can pick up other pieces later by hearing other bits of news. The factions and political processes that produce bad legislation can be understood, and with that understanding the power to alter them, even if only by voting.
The other kind of description, which I see far too often, treats bad legislation the same way we treat bad weather. It can be predicted a few days in advance, but we have no control over it. It's just something that happens, and all we can do is let it wash over us. The clouds bring the rain and Congress brings bad legislation; thus has it ever been. It's an ahistorical form of learned helplessness.
[1] https://en.wikipedia.org/wiki/Tax_Cuts_and_Jobs_Act_of_2017
> Most tax experts considered the removal a budget gimmick so that the 2017 December republican majority could quickly pass a new budget using the budget reconciliation process, which can't be used to increase the deficit after a 10-year period so they had to add a time limit to a bunch of benefits "on paper" to use the reconciliation process.
In 2017, the Republican majorities in Congress passed a budget that would have increased the federal debt significantly over a ten-year period (i.e., it was a long-term deficit increase). Such an increase is not allowed under the rules of the Senate's budget reconciliation process, so they added sunset provisions that would have brought the deficit back down by making some of the deficit-increasing provisions (in this case, mostly tax cuts) expire early.
The next sentence clarifies:
> There appeared to be broad support for fixing it later, but the bipartisan spending bill expected to include it fell apart because they couldn't get agreement on other parts of it.
These changes were made "on paper" to meet the reconciliation rules in time to pass a budget and avoid a government shutdown, but they were not intended to be permanent -- they were just a quick hack to work around procedural limitations. The intent was to fix this later, but the fixes were never implemented due to disagreement about how to handle other parts of the bill.
The advantage of this kind of description is that it gives you a piece of a larger story and leads to some obvious follow-up questions. Why did it take until the last minute for Republicans to pass a budget when they had full control of Congress and the White House? Why couldn't they pass a budget that didn't increase the deficit? Why does the Senate have such weird procedural issues and why haven't they been fixed? You can find some of the answers by looking into the bill itself[1]. But even if you don't you can pick up other pieces later by hearing other bits of news. The factions and political processes that produce bad legislation can be understood, and with that understanding the power to alter them, even if only by voting.
The other kind of description, which I see far too often, treats bad legislation the same way we treat bad weather. It can be predicted a few days in advance, but we have no control over it. It's just something that happens, and all we can do is let it wash over us. The clouds bring the rain and Congress brings bad legislation; thus has it ever been. It's an ahistorical form of learned helplessness.
[1] https://en.wikipedia.org/wiki/Tax_Cuts_and_Jobs_Act_of_2017
taxopinion(1)
It gets worse, we do not reach true majorities in the House and Senate until 2030. Thus until then budgets get passed under budget reconciliation.
The thing that is most striking to me about your explanation is that the change was made six years ago; it seems that anyone responsible for a company's tax position and cashflow (CFO, accountant, etc) should have been planning for this between then and now. Much like the SVB panic, a great deal of this seems to be people running companies without either paying attention to things that could have a significant impact, or hiring someone who does.
When I took tax law, one of the things that blew my mind is that it can be retroactive.
An exemption might expire, but then be retroactively reinstated. This happens all the time.
There is the tax law that applies to your 2022 income now, and then there's the tax law that will apply to your 2022 taxes in five years.
An exemption might expire, but then be retroactively reinstated. This happens all the time.
There is the tax law that applies to your 2022 income now, and then there's the tax law that will apply to your 2022 taxes in five years.
They have been. Large companies have been engaging with Congress since 2019 on this, reminding them that they intended to revert this before it took effect. CFOs wrote a letter to Congress in November. https://investinamericasfuture.org/Communications/letters/
Maybe they put too much trust in the US congress' functioning
I don’t know why you’d think it was an oversight. After all, they pushed SALT, which raised the taxes of any homeowner living in a high cost of living state, and further transfers wealth to flyover country and the south.
This whole thing sounds so shady to me, can't believe this is how they are running a country.
There are means to offset, defer, and reduce tax burden that you also get from doing R&D, so honestly the change in the way the salary is treated is somewhat balancing these other tax benefits that startups are also taking. It's a balancing change to a larger system, not a targeted change to screw startups. A comparison over just Year #1 is disingenuous.
Only a small portion of activities count as R&D for R&D tax credit purposes. R&E is a much bigger category and where the problem lies. This write up has a good graphic showing the magnitude (scroll halfway) https://www.striketax.com/journal/tcja-and-the-resulting-tax...
This seems a silly question but are you forced to label software development as "R&D" instead of just expensing it in the first year.
I mean this is an accounting trap, it seems the best way to get out of it is to use accounting.
I mean this is an accounting trap, it seems the best way to get out of it is to use accounting.
The accounting standards forbid expensing things that should be capitalised, and if you go ahead and do it anyway your investors will wonder why your accounts show you have no assets.
Your CA would certainly prevent that from happening well before your investors look at your accounts.
The law has a call out that software development costs are all R&D now. So yes according to my understanding (as one of the signers) and those who have written about this as well.
I think this is flawed in both directions. Sure when you’re primarily building new stuff maybe the cost of that should be amortized. What happens if you’re just maintaining a product though rather than actually developing new stuff? That doesn’t feel like R&D effort.
Maintenance of existing software doesn't count as R&D under this categorization. The IRS will have some helpful guidance available in June. You know, two months after the deadline.
Good luck figuring out how to do that accounting when teams are blended and all your workers are salaried.
Right now, adding features to an existing SaaS is looking a lot like maintenance work to me.
Great, now we have to ask tax accountants how long the Microservice of Theseus was officially in maintenance mode while we rewrote it.
When you say "as one of the signers" do you mean you signed the federal bill which modified this tax? i.e. you are a congressperson? Surely I'm misunderstanding you; your post history is utterly incompatible with any sitting congressperson. But I can't figure out what you meant by it.
Per the article, some 600 business owners signed a letter to congress asking for urgent relief;
> As the House legislation is introduced, a grassroots effort is gaining momentum among software developers, with nearly 600 small business owners including Landsman and Bennett signing a letter to the Hill desks of House Way and Means Committee chair Jason Smith (R-Missouri) and Senate Finance Committee chair Ron Wyden (D-Oregon) on Tuesday morning, asking for “urgent relief” and warning that failure to bring back full R&D expensing may wipe out their companies.
I assume that's what he signed.
> As the House legislation is introduced, a grassroots effort is gaining momentum among software developers, with nearly 600 small business owners including Landsman and Bennett signing a letter to the Hill desks of House Way and Means Committee chair Jason Smith (R-Missouri) and Senate Finance Committee chair Ron Wyden (D-Oregon) on Tuesday morning, asking for “urgent relief” and warning that failure to bring back full R&D expensing may wipe out their companies.
I assume that's what he signed.
Yes. You could look at this as an indictment of the tax system, in that the plain language says what it says, but the IRS expects you to hire an account to make an "appropriate determination."
No small business accountant is incentivized to give you creative opinions, they're just going to go with whatever is the most popular practice. They don't give a fuck how much tax you actually pay.
No small business accountant is incentivized to give you creative opinions, they're just going to go with whatever is the most popular practice. They don't give a fuck how much tax you actually pay.
It doesn’t matter what you label an expense. Accounting principles and regulations decide what category expenses fall into. That’s a major reason CAs exist, to ensure that your expenses are correctly categorized.
I am not an accountant, but I took 2 years of accounts, and learning to categorize expenses correctly was probably 75% of the classes.
I am not an accountant, but I took 2 years of accounts, and learning to categorize expenses correctly was probably 75% of the classes.
IANA accountant but this seems...fine? The point of writing software is typically to get some benefit from it in future years, just as GM expects to get more than one year's use out of a lathe or a sheet metal press. Of course they won't be able to cover the entire expense of buying the lathe entirely out of revenue they receive in the same tax year that they buy it. Why should they expect to be able to do the same for software?
How closely did you read the line items?
In the example given they received a revenue that covers the entire cost of the software. The problem is that they then used that revenue for payroll which would be fine previously as if you make $X and pay $X in payroll then you pay ($X - $X) 0 in taxes and there isn't a cash flow problem.
To stick with the apples-oranges lathe example. Imagine GM got a loan of $1M for the lathe and they can only depreciate 1/5 the cost of the lathe. So come tax time, GM has to pay taxes on their 800K of "profit" since they can't fully count the cost of the lathe against the loan.
In the example given they received a revenue that covers the entire cost of the software. The problem is that they then used that revenue for payroll which would be fine previously as if you make $X and pay $X in payroll then you pay ($X - $X) 0 in taxes and there isn't a cash flow problem.
To stick with the apples-oranges lathe example. Imagine GM got a loan of $1M for the lathe and they can only depreciate 1/5 the cost of the lathe. So come tax time, GM has to pay taxes on their 800K of "profit" since they can't fully count the cost of the lathe against the loan.
I think I'm failing to see your point, as I cannot find one here.
If GM needs a lathe and has a reasonable business strategy, they should be able to get their accounting office and their leadership to align on how to make it make sense over 5 years. If they can't, it's a business run poorly, and according to the basic tenets of free market capitalism (which you seem to be leaning on heavily) that business would and should fail.
More generally, this seems a natural consequence of the impersonal ways that businesses treat employees, aka "human capital stock" to use the term of art. Capital stock / assets used for generating revenue should be taxed the same across the board.
If GM needs a lathe and has a reasonable business strategy, they should be able to get their accounting office and their leadership to align on how to make it make sense over 5 years. If they can't, it's a business run poorly, and according to the basic tenets of free market capitalism (which you seem to be leaning on heavily) that business would and should fail.
More generally, this seems a natural consequence of the impersonal ways that businesses treat employees, aka "human capital stock" to use the term of art. Capital stock / assets used for generating revenue should be taxed the same across the board.
In a world where you venture-fund software development, this is fine, since the venture funding isn't revenue. In a world where you fund software development with revenue, this hurts a lot, particularly for young companies (and especially for companies that get research grants, which are revenue).
Established companies can probably debt-finance development the way GM would debt-finance a lathe (yes, large enterprises often use debt to buy everything possible). Small companies likely won't have that benefit. Particularly because that software isn't necessarily a capital asset that can back a secured loan, the way a lathe is.
Established companies can probably debt-finance development the way GM would debt-finance a lathe (yes, large enterprises often use debt to buy everything possible). Small companies likely won't have that benefit. Particularly because that software isn't necessarily a capital asset that can back a secured loan, the way a lathe is.
Software definitely is a capital asset: if it weren't, it wouldn't be IP and all code would be open-source.
VC has spoiled software folks for the past decade. This is just how small businesses become bigger businesses. The dogma of "bootstrapping" in software circles has been distorted into what is now clearly, retrospectively, an unsustainable means of developing industries. There doesn't seem to be any reason to treat software differently from others.
The arguments here given scream of panicked, defensive rationalizations how actually we're super special and saving the world through technology, and how dare they claw back the rewards we're given for enabling humanity's progress.
VC has spoiled software folks for the past decade. This is just how small businesses become bigger businesses. The dogma of "bootstrapping" in software circles has been distorted into what is now clearly, retrospectively, an unsustainable means of developing industries. There doesn't seem to be any reason to treat software differently from others.
The arguments here given scream of panicked, defensive rationalizations how actually we're super special and saving the world through technology, and how dare they claw back the rewards we're given for enabling humanity's progress.
I point you to IRC 1221(a)(3): https://www.law.cornell.edu/uscode/text/26/1221
Arguably, software fits this definition, and under 1221(a)(3)(C) it would not be a capital asset for most closely-held companies (eg a lot of bootstrapped firms).
Arguably, software fits this definition, and under 1221(a)(3)(C) it would not be a capital asset for most closely-held companies (eg a lot of bootstrapped firms).
Considering that this entire discussion revolves around how the law is misaligned from the economic impacts of business activities, it is a circular argument to use law to explain and justify your argument.
Considering that this entire discussion revolves around what is and isn't a "capital asset," which itself is a legal term, I would suggest to you that the law is all we have to argue about it. And the law, in general, sucks here.
For most companies, 1221 doesn't apply, but some companies are going to get screwed on this front by having to incur a capital loss to pay for something that is not a capital asset.
In a less legalistic sense, I'm not sure if there are many companies who provide software-backed debt anyway. That would make software less of a "capital asset" than almost any other intangible asset out there.
For most companies, 1221 doesn't apply, but some companies are going to get screwed on this front by having to incur a capital loss to pay for something that is not a capital asset.
In a less legalistic sense, I'm not sure if there are many companies who provide software-backed debt anyway. That would make software less of a "capital asset" than almost any other intangible asset out there.
Revenue Ruling 55-706 provides that IP created by employees of a corporation does not fall within the scope of 1221(a)(3).
And generally, corporate-created IP is treated as a capital asset on the books. This is in line with how capital assets are generally treated; as other commenters have noted, the expense of building a factory (including the salaries of the construction workers, if employed directly by the taxpayer) is also subject to capitalization.
And generally, corporate-created IP is treated as a capital asset on the books. This is in line with how capital assets are generally treated; as other commenters have noted, the expense of building a factory (including the salaries of the construction workers, if employed directly by the taxpayer) is also subject to capitalization.
I'd prefer to get away from the lathe example because it's not actually a great example of whats going on. I solely used it because the person I was responding to used it.
So back to software. If I have an idea for some company (lets say Twitter2.0) and I bring in ~10M in revenue from selling ad slots but I also paid a bunch of programmers ~8M over the course of the year and somehow the rest of overhead/expense was 1M. I think we can both agree 10M > 9M and so my business venture is profitable.
However, come end of year I have book 10M - (1M + 1.6M) = 7.4M of profit. You may wonder how I can book 7+M of profit when I spent 9M on 10M of revenue and this is exactly what this whole thread is about, programming salaries must be amortized.
This leads to the problem I have to pay taxes on 7.4M of profit using the 1M that I actually have left over so as long as the tax rate is below 13% there's no problem but if its any higher than I need to take out a loan to pay taxes.
So back to software. If I have an idea for some company (lets say Twitter2.0) and I bring in ~10M in revenue from selling ad slots but I also paid a bunch of programmers ~8M over the course of the year and somehow the rest of overhead/expense was 1M. I think we can both agree 10M > 9M and so my business venture is profitable.
However, come end of year I have book 10M - (1M + 1.6M) = 7.4M of profit. You may wonder how I can book 7+M of profit when I spent 9M on 10M of revenue and this is exactly what this whole thread is about, programming salaries must be amortized.
This leads to the problem I have to pay taxes on 7.4M of profit using the 1M that I actually have left over so as long as the tax rate is below 13% there's no problem but if its any higher than I need to take out a loan to pay taxes.
Loan example doesn't work because it's not revenue used to buy the lathe. That type of loan situation is exactly what depreciation/amortization/MACRS is for. If the company brings in $500,000 but buys a $1,000,000 lathe with a loan, they have a net cash flow of +$500,000. Their NPV isn't immediately affected by the loan liability because it's offset by the positive value of the lathe asset.
Then they pay taxes on $357,100 of adjusted earnings because under a 7-year MACRS depreciation, it's assumed the lathe lost $142,900 of value in its first year of ownership (under double-declining or straight-line methods).
Your first part is accurate though.
Anyways, this tax law is fucking terrible. W2 Wages should not be capital expenses because you generally won't be using loans to pay them.
Then they pay taxes on $357,100 of adjusted earnings because under a 7-year MACRS depreciation, it's assumed the lathe lost $142,900 of value in its first year of ownership (under double-declining or straight-line methods).
Your first part is accurate though.
Anyways, this tax law is fucking terrible. W2 Wages should not be capital expenses because you generally won't be using loans to pay them.
It might be fine if that's how it long had been, maybe. What's definitely not fine is the sudden change of rules that an entire industry had been relying on for all their expense planning.
Then the argument would be "let us transition smoothly to the new mode". But all we're seeing in these threads is "bad bad no good very bad" with relatively little nuance.
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This is backwards. Capital expenses are amortized because you purchase an asset that will give you value over multiple years. So, for example, if you buy an office building, you amortize the capital expense.
But what this does is says that if the product you created is an asset, the salaries that go into creating that asset should be treated as if it were purchasing that asset. The office building equivalent would be the builder having to treat the salary it paid its labor as a capital expense and amortizing it.
That sounds beyond insane.
That being said, it’s not a material change, if phased in properly, so companies have time to spread their expenses over a period of time.
But it looks like neither was this planned for (not surprising because it’s ridiculous on its face), nor does the legislation phase it in a manner that can be properly absorbed.
In practice companies will get hit hard the first year, but save the equivalent amount over the next 3-4 years. So after 5 years it will be a wash (ignoring the time value of money…factoring in that makes it a loss, but not as much of a loss). The problem is that it will create tremendous cash flow problems as 5 years of tax is paid in 1 year.
But what this does is says that if the product you created is an asset, the salaries that go into creating that asset should be treated as if it were purchasing that asset. The office building equivalent would be the builder having to treat the salary it paid its labor as a capital expense and amortizing it.
That sounds beyond insane.
That being said, it’s not a material change, if phased in properly, so companies have time to spread their expenses over a period of time.
But it looks like neither was this planned for (not surprising because it’s ridiculous on its face), nor does the legislation phase it in a manner that can be properly absorbed.
In practice companies will get hit hard the first year, but save the equivalent amount over the next 3-4 years. So after 5 years it will be a wash (ignoring the time value of money…factoring in that makes it a loss, but not as much of a loss). The problem is that it will create tremendous cash flow problems as 5 years of tax is paid in 1 year.
> Capital expenses are amortized because you purchase an asset that will give you value over multiple years. So, for example, if you buy an office building, you amortize the capital expense.
Even that seems like a pretty weak argument for what is essentially a tax penalty.
At least for a purchase of a liquid (or somewhat liquid) capital asset, one could, in principle, re-sell it. But most R&D has essentially no direct resale value and is not being done to create a salable asset. It’s done to create knowledge or IP, which, in turn, is used to create something salable.
I assume the purpose of requiring amortization of capital expenses is to prevent abuses like buying an extremely liquid asset, deducting the purchase price, and thus deferring a tax bill.
Even that seems like a pretty weak argument for what is essentially a tax penalty.
At least for a purchase of a liquid (or somewhat liquid) capital asset, one could, in principle, re-sell it. But most R&D has essentially no direct resale value and is not being done to create a salable asset. It’s done to create knowledge or IP, which, in turn, is used to create something salable.
I assume the purpose of requiring amortization of capital expenses is to prevent abuses like buying an extremely liquid asset, deducting the purchase price, and thus deferring a tax bill.
> The office building equivalent would be the builder having to treat the salary it paid its labor as a capital expense and amortizing it.
If the builder is building the thing for themself, they do in fact have to depreciate over the IRS-provided lifespan of the building.
The software equivalent to a builder is an agency. If the agency is building their own software, they now have to do the same thing. If the agency is building for someone else, they expense the labor immediatley.
If the builder is building the thing for themself, they do in fact have to depreciate over the IRS-provided lifespan of the building.
The software equivalent to a builder is an agency. If the agency is building their own software, they now have to do the same thing. If the agency is building for someone else, they expense the labor immediatley.
Honestly if a company's business model revolved around getting 100% tax credits for dev salaries, that company should in fact go away. A 100% rebate on taxes on an already high margin and low expense business segment just feels wrong.
If the company has high margins and low expenses, then their profits are already taxed. Its not like hiring one SWE makes your tax bill go to zero.
It's not a rebate, it's salary. For a company bringing in 1 million in revenue and paying 1 million in salary, they literally don't have any money in the bank to pay taxes because they haven't profited yet. If they profit the next year because of their new "asset" giving them long term benefits, they would pay then.
Isn't the simple solution to just not give away all of your revenue before you pay your taxes?
The two constants are death and taxes, if you don't have the revenue to pay them at your current burn rate, you either find a way to burn less or your company just isn't viable.
The two constants are death and taxes, if you don't have the revenue to pay them at your current burn rate, you either find a way to burn less or your company just isn't viable.
The idea of corporate taxes is to tax profits, not revenue
Which just ends up with corporate accountants structuring the books to minimize "profit".
I for one can't find it in me to get all that upset about startups paying their fair share of taxes instead of artificially inflating salaries to consume all of their "revenue", thereby hoarding talent away from the labor pool that would likely better serve the country as a whole by working in... really anything besides risky chronically unprofitable startups.
I for one can't find it in me to get all that upset about startups paying their fair share of taxes instead of artificially inflating salaries to consume all of their "revenue", thereby hoarding talent away from the labor pool that would likely better serve the country as a whole by working in... really anything besides risky chronically unprofitable startups.
What's wrong with paying employees more? Income tax is a thing and that's on revenue, not profit. You'll get a bigger cut of that then other expenses. And a bigger cut of that than equity comp and share buybacks where that's cap gains. Income is great!
Are you arguing the government is actually getting less tax this way?
For the economic activity that happened this year, yeah they get more by forcing people to delay recognizing expenses, which is essentially an interest free loan for the irs that they don't have to pay back if the lender goes bankrupt. But this doesn't actually create a new nominal tax increase, in nominal dollars its a wash, and so the question is if the interest free loan is worth the decrease that would result from companies finding more tax efficient ways to pay employees and any decrease in future economic activity this will cause. Corporate tax and cap gains tax are likely lower than the income tax bracket those revenues would have gone to as income.
Why are you so hostile to startups? Maybe if you could articulate what small software companies are actually abusing when they offset their revenue with wages like literally every other industry out there I could start to understand your viewpoint.
But without that you just seem like you have a chip on your shoulder.
You do understand that if this law were applied to any industry it would similarly kill small companies in those? Like if restaurants had this rule for wages it would devastate smaller, family run restaurants.
But without that you just seem like you have a chip on your shoulder.
You do understand that if this law were applied to any industry it would similarly kill small companies in those? Like if restaurants had this rule for wages it would devastate smaller, family run restaurants.
I'm simply stating the idea the P's present of "How terrible is this? I made 1,000,000, spent 1,000,000, but now I don't have money for taxes!" is quite literally a lesson any kid should have learned when they first went to the store to buy a $5 candy with a $5 bill and learned the way of the world.
Given restaurants aren't in the business of R&D I don't see why you're trying to make an argument based on applying R&D tax law to them. It's disingenuous, at best.
Given restaurants aren't in the business of R&D I don't see why you're trying to make an argument based on applying R&D tax law to them. It's disingenuous, at best.
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>But what this does is says that if the product you created is an asset, the salaries that go into creating that asset should be treated as if it were purchasing that asset.
This is precisely what happens!!
This is precisely what happens!!
One potential difference is that for many things that are capital expenses (a building for example) a business is likely to take out a loan in order to buy it, so they don't have the full expense up front. A bank is probably not going to loan you money to pay your developers at the same terms they will loan you money to buy a building.
Makes sense, but why not (genuinely asking)? Is it just that the bank can repossess the building if necessary, but repossessing bespoke software is kind of pointless?
Right. The bank can generally resell a repossessed building to recover the loan principal, but repossessed software may be worth literally anything, including zero in many cases. That makes loans for building software extremely risky, which is why software companies are rarely ever funded by bank loans.
What about software written on contract? It's my understanding that a signed contract with a customer to deliver something for $x is usually enough to convince a bank to lend you $x for approximately the length of time until you get paid. IOW if I'm an engineering firm that has a contract with the DOT to design a highway interchange, I can go down to the bank and a get a loan to pay my engineers' salary until we deliver and get paid. Can I do the same as a software shop that has a contract to rewrite the DOT's payroll software? I guess this scenario is still different because I'm (probably) not paying the loan off over several years -- it's more like an inventory loan.
In any case, it seems like the result of these changes (if they stand) will probably be to change in some way the amount /and type/ of software that gets written. If the tax treatment of software essentially requires it to be a capital asset, we will probably see people write more software that behaves like a capital asset: shrinkwrapped software rather than SaaS. This may not be a bad thing.
In any case, it seems like the result of these changes (if they stand) will probably be to change in some way the amount /and type/ of software that gets written. If the tax treatment of software essentially requires it to be a capital asset, we will probably see people write more software that behaves like a capital asset: shrinkwrapped software rather than SaaS. This may not be a bad thing.
The key problem here is that for 70+ years companies have had the option to amortize or expense these costs. This change was made as an accounting sleight of hand to make the 2017 tax cuts look paid for over a long-term basis, but Congress never intended for this change to take effect. They know it isn't good tax or economic policy.
So now small businesses and startups are being thrown into crisis because Congress has accidentally implemented policy that they haven't gotten around to fixing.
So now small businesses and startups are being thrown into crisis because Congress has accidentally implemented policy that they haven't gotten around to fixing.
It really depends of your business. Sure if your are a SaaS company, SAP, Google,... that's the case.
But if you are a small shop that build software for other companies, it isn't. You write the software, get a one off paiement and you'll not be able to get more revenue from it in the future outside of a possible maintenance contract. You can't resale it to someone else.
To summarise, the work of many software companies is akind to the work of design office : you do R&D for someone else. The amortization will have to be done by your customer, not by you.
But if you are a small shop that build software for other companies, it isn't. You write the software, get a one off paiement and you'll not be able to get more revenue from it in the future outside of a possible maintenance contract. You can't resale it to someone else.
To summarise, the work of many software companies is akind to the work of design office : you do R&D for someone else. The amortization will have to be done by your customer, not by you.
That sounds a lot like that delicious regulatory capture that giant companies like very much.
It benefits VCs because it makes it impossible to sustainably self-fund a business.
Seems like a big deal but have not heard it come up til now? Maybe cause tax season?
It's not a big deal because this change affects very few companies outside of Silicon Valley and it only affects companies at the start of the R&D process.
After 5 years, the tax impact evens out to be the same as currently expensing R&D salaries.
And generally, software companies have gotten the benefit of the R&D credit even for things would not have qualified for the R&D credit if it had not involved software, so this change was merely seen as correcting a tax loophole that the software industry has been exploiting (and arguably abusing) for several decades.
After 5 years, the tax impact evens out to be the same as currently expensing R&D salaries.
And generally, software companies have gotten the benefit of the R&D credit even for things would not have qualified for the R&D credit if it had not involved software, so this change was merely seen as correcting a tax loophole that the software industry has been exploiting (and arguably abusing) for several decades.
It very much affects bootstrapped companies building a software product. I'm not sure where you got the idea that it only affect Silicon Valley companies?
If you bootstrap your company to the point where you can afford one engineer's salary, you can only deduct 20% of that against your revenue. I.e. you've paid out all the cash and but you still have to pay taxes on the 80% that is not allowed to be expensed this year.
If you bootstrap your company to the point where you can afford one engineer's salary, you can only deduct 20% of that against your revenue. I.e. you've paid out all the cash and but you still have to pay taxes on the 80% that is not allowed to be expensed this year.
This is how it has always worked for non software companies...
If your business isn't solvent without tax loopholes, your business isn't really a business.
If your business isn't solvent without tax loopholes, your business isn't really a business.
Businesses have always been able to deduct salaries at 100%. Software businesses are now not allowed to do that. I have no idea what you're talking about.
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This is a pretty ignorant comment.
The R&D tax impact will NOT even out. its taxes you pay for 5 years that you don't get back.
R&D tax credits is a small right-off and not worth the efforts.
Lots of startups don’t even do the R&D tax credits because of the cost and time evolved to do all the necessary records, backups and reports.
This also looks like it completely screws people who get government research grants for their for-profit companies (eg SBIRs). When I was thinking about one, my accountant was telling me that the grant is technically revenue, which would make it convert to taxable income less expenses. Forcing companies to capitalize R&D basically means that you have to pay tax on the grant funding first, leaving only the after-tax value of the grant for actual R&D.
I doubt most grant proposals have a 20-30% haircut built into the budget like that...
I doubt most grant proposals have a 20-30% haircut built into the budget like that...
Yup, I am screwed because I got an SBIR grant in 2022. The default indirect cost rate is ~30%. In this new scenario, it should be something more like 60%, which reduces the usable funds that can be spent on actual development (IF you can even get a high rate like that approved by the govt agency)
EDIT: By "screwed" I mean that I'm facing a $100k personal tax bill because the company is an LLC taxed as an S-Corp. You can say all you want about lack of planning, etc, but the reality is that many times very small business do not have the budget for a high-end business accountant on retainer. If I were to try to "plan better" to avoid this situation, I would have just not written the grant or tried to do any of it and gotten a FT job or something instead. It's an innovation-killer.
EDIT: By "screwed" I mean that I'm facing a $100k personal tax bill because the company is an LLC taxed as an S-Corp. You can say all you want about lack of planning, etc, but the reality is that many times very small business do not have the budget for a high-end business accountant on retainer. If I were to try to "plan better" to avoid this situation, I would have just not written the grant or tried to do any of it and gotten a FT job or something instead. It's an innovation-killer.
I am personally very happy that my LLC's SBIR grant proposals in 2022 were all turned down, because I wasn't thinking about the disastrous tax consequences.
Right? Like, should I even bother applying for Phase II in September? There is no way I could afford to pay taxes on $1.8M.
IMO you should talk to an accountant. It's pretty cheap to do that in comparison to the tax bills (my accounting bills are <$1000/year for a similar situation to you). Phase II is a lot of money, and you may be able to get some venture debt now that you're past Phase I to cover what the SBIR doesn't (ie the taxes). There's also some chance that the law around this will be reversed.
Which agency is this from? 30% is an insanely low indirect rate. My experience comes dominantly from DoD SBIR, where for Phase I's you propose your own indirect rate.
But yes, this law is awful for SBIR companies, because we're forced to give a giant out of pocket interest-free loan back to the gov
But yes, this law is awful for SBIR companies, because we're forced to give a giant out of pocket interest-free loan back to the gov
They are indeed hard hit as well. SBIR grant awardees sent their own letter to Congress about this a month ago: https://sbtc.org/sbtc-letter-to-congress-on-sec-174-tax-conc...
> I doubt most grant proposals have a 20-30% haircut built into the budget like that...
Most university research budgets do yes, and actually more than that.
Most university research budgets do yes, and actually more than that.
Universities already have their indirect cost rate negotiated (most are like 80-120%). Default for newcomers is around 30%, until you can build up the history and wherewithal to navigate the negotiations for establishing your own rate.
After 4 years are you back to where you started? With the fifth year stacking on top of the other 200K chunks from the first four years?
(If your hiring keeps accelerating I guess not, so major scaling of your team would seem to be discouraged by this change.)
(If your hiring keeps accelerating I guess not, so major scaling of your team would seem to be discouraged by this change.)
Assuming everything stays the same, this rule actually results in marginally lower tax burden (since progressive income tax means that 5 years of tax at $800k < 4 years of tax at $1 million). Assuming that it changes, no. In a worst case scenario, you may be paying a lot more if you do most of your development in a peak year and then lose the revenue stream later.
> (since progressive income tax means that 5 years of tax at $800k < 4 years of tax at $1 million)
This is corporate tax, not income tax, so is not progressive.
This is corporate tax, not income tax, so is not progressive.
I would assume you aren't laying off your whole staff after year 1, so the comparison if costs stay the same seems like this instead?
Old:
Year 1: 0 Profit
Year 2: 0 Profit
Year 3: 0 Profit
Year 4: 0 Profit
Year 5: 0 Profit
New:
Year 1: 800K Profit
Year 2: 600K Profit
Year 3: 400K Profit
Year 4: 200K Profit
Year 5: 0 Profit
E.g. stack another amortized round of annual salary each time.
Even if revenue stays the same but costs increase, your Year 5 total for each is "X Profit" where X is the amount of revenue delta from Year 1 to Year 5?
If rapid hiring growth followed by layoff scenarios, you are worse off here: you pay the tax on the hiring boom for at least the first year or two before your revenue might drop enough to make it not matter?
If you're further away from profitability, it's maybe still a wash.
Hire up to 10 Million in salaries in 1 year, but your revenue after 2 years is just 4M - you're still under the window. You only get hit by the difference in the bill if your revenue accelerates a lot (which is an OK problem to have)?
So on one hand it seems like it could reduce poorly planned impulse hiring by spreading out the costs, but on the other hand the "run big losses until we make it" plan is less affected anyway because of the "big" in "run big losses"... so it seems to hurt the sustainable folks more in that case.
Old:
Year 1: 0 Profit
Year 2: 0 Profit
Year 3: 0 Profit
Year 4: 0 Profit
Year 5: 0 Profit
New:
Year 1: 800K Profit
Year 2: 600K Profit
Year 3: 400K Profit
Year 4: 200K Profit
Year 5: 0 Profit
E.g. stack another amortized round of annual salary each time.
Even if revenue stays the same but costs increase, your Year 5 total for each is "X Profit" where X is the amount of revenue delta from Year 1 to Year 5?
If rapid hiring growth followed by layoff scenarios, you are worse off here: you pay the tax on the hiring boom for at least the first year or two before your revenue might drop enough to make it not matter?
If you're further away from profitability, it's maybe still a wash.
Hire up to 10 Million in salaries in 1 year, but your revenue after 2 years is just 4M - you're still under the window. You only get hit by the difference in the bill if your revenue accelerates a lot (which is an OK problem to have)?
So on one hand it seems like it could reduce poorly planned impulse hiring by spreading out the costs, but on the other hand the "run big losses until we make it" plan is less affected anyway because of the "big" in "run big losses"... so it seems to hurt the sustainable folks more in that case.
The flipside is that that 5-year amortization continues even if you did fire everyone, right? Because the costs already happened. So if we consider forward from year 5 of your example, with everyone being fired at year 5:
Old:
Year 6: 1000K profit
Year 7: 1000K profit
Year 8: 1000K profit
Year 9: 1000K profit
Year 10: 1000K profit
New:
Year 6: 200K profit (End of year 1 amortization)
Year 7: 400K profit (End of year 2 amortization)
Year 8: 600K profit (End of year 3 amortization)
Year 9: 800K profit (End of year 4 amortization)
Year 10: 1000K profit (End of year 5 amortization)
Of course this "wind-down" period is unhelpful if you're actually shuttering the business...
Old:
Year 6: 1000K profit
Year 7: 1000K profit
Year 8: 1000K profit
Year 9: 1000K profit
Year 10: 1000K profit
New:
Year 6: 200K profit (End of year 1 amortization)
Year 7: 400K profit (End of year 2 amortization)
Year 8: 600K profit (End of year 3 amortization)
Year 9: 800K profit (End of year 4 amortization)
Year 10: 1000K profit (End of year 5 amortization)
Of course this "wind-down" period is unhelpful if you're actually shuttering the business...
You didn't generate an additional $1m in revenue in years 2-5. So in a situation where you get paid a $1m contract once, and pay $1m in salaries every year, here's what happens.
Year 2022: $1m revenue, -$1m expenses amortized to $200k: $800k profit, approximately 20% ($160k) is paid to tax.
Year 2023: -$1m expenses amortized to $200k, previous year's $200k: -$400k loss, carryforward. You cannot carryback 2023 losses to 2022 taxes.
The carryback is how Congress will resolve the issue for people who paid the tax.
The dispute is that you paid $160k in tax in year 1. Is that inefficient? In my opinion, it is. You paid $1m in salaries!
Year 2022: $1m revenue, -$1m expenses amortized to $200k: $800k profit, approximately 20% ($160k) is paid to tax.
Year 2023: -$1m expenses amortized to $200k, previous year's $200k: -$400k loss, carryforward. You cannot carryback 2023 losses to 2022 taxes.
The carryback is how Congress will resolve the issue for people who paid the tax.
The dispute is that you paid $160k in tax in year 1. Is that inefficient? In my opinion, it is. You paid $1m in salaries!
Is a business that generates 1M revenue off of 1M salary for one year, and then nothing for 4 years, worth discussing here?
In markets like game development it's not uncommon to have one big release that generates a lot of revenue in one year, and then not release anything for a couple years and have minimal revenue as a result while you keep paying salaries. Carryforward won't help you in that case. Without this stupid amortization you could at least write off a full year's salaries against your launch income.
In a reasonable world where you can depreciate your assets over their expected lifespans rather than a fixed 5 or 15 years, video game dev would probably actually be fine with capitalization. A SaaS startup that fails fast still gets really screwed in that more reasonable world.
At the same time, wouldn't it discourage reducing headcount (or at least headcount expenditure) for companies with roughly flat or linear revenue growth (see all the big tech layoffs), because you'd be paying more in taxes next year, etc. ?
edit: never mind, I completely misunderstood. It really only seems to harm "moonshot" companies; big tech and sustainable companies appear to be largely unaffected. If anything they may benefit as it will be more costly for upstarts to try competing
edit: never mind, I completely misunderstood. It really only seems to harm "moonshot" companies; big tech and sustainable companies appear to be largely unaffected. If anything they may benefit as it will be more costly for upstarts to try competing
Ok, but in year five, it would look like this again:
So even in year 5, it's an adverse incentive for putting new/more talent to work.
Even big business may not be able to make as many growth project budgets work.
1,000,000 Revenue
- 1,000,000 1/5 Salary expense x 5 years rolling
-----------
0 Profit
So even in year 5, it's an adverse incentive for putting new/more talent to work.
Even big business may not be able to make as many growth project budgets work.
Startup subsidy?
This seems to be penalizing competition and new competitors, for literally no reason.
This seems to be penalizing competition and new competitors, for literally no reason.
No reason? Regulatory capture is the reason.
Unconstrained growth is not tolerated anywhere else, but somehow people bend over backwards to explain how actually any constraints on business growth are Very Bad And Evil.
Unsustained growth is just one type of growth though and this affects all growth so I don't see you point as relevant here.
That's a natural outcome in any complex system. It's not reasonable to assume that changes can only affect some parts and not others. What's important is not the first-order changes, but the second-order equilibrium that such a change engenders.
What's important is that unconstrained growth is meaningfully checked. This at least makes it possible for others to thrive, even if they're asked to adapt to a new paradigm. I don't see how a thorough analysis could ever ignore this.
What's important is that unconstrained growth is meaningfully checked. This at least makes it possible for others to thrive, even if they're asked to adapt to a new paradigm. I don't see how a thorough analysis could ever ignore this.
I'm commenting on one of your older comments so it doesn't appear in the current discussion.
What I think needs to be adjusted with GR is simple: Just as time dilates, t'=γt, gravity emission itself must time dilate: g'=γg.
In the case of GR, just replace t with g. t'=t√(1−(2GM/rc^2)).
The problem here is solving for gravity self-interaction concerning gravity emission.
What I think needs to be adjusted with GR is simple: Just as time dilates, t'=γt, gravity emission itself must time dilate: g'=γg.
In the case of GR, just replace t with g. t'=t√(1−(2GM/rc^2)).
The problem here is solving for gravity self-interaction concerning gravity emission.
No
Year one: You go broke. Everyone loses their jobs. You file for bankruptcy. Game over. There is no year 5.
Year one: You go broke. Everyone loses their jobs. You file for bankruptcy. Game over. There is no year 5.
European software companies don't go broke and AFAIK they have 0% tax credit for salaries (in most countries, I know there are some R&D schemes in UK).
> 0% tax credit for salaries
I don't think that's what's being discussed here. The question is whether salaries are (completely) expensed immediately (reducing profits) or whether they are (partly) capitalised (which will reduce profits later but not now).
I don't think that's what's being discussed here. The question is whether salaries are (completely) expensed immediately (reducing profits) or whether they are (partly) capitalised (which will reduce profits later but not now).
In Sweden, salaries are 100% deductible. You pay company taxes on the profit you make. There is an option to capitalize some R&D expenses if you can show that they are directly responsible for a future asset that you can set a value on (like, a startup where all engineers work on a single product).
We're not talking about a tax credit at all though... We're talking about being able to deduct salaries paid.
A tax credit is usually an incentive, like if you spend 10k on solar panels you get to deduct the 10k and then the government might say "hey thanks for pushing renewable energy, deduct an extra 2k from your tax bill." That's a credit, which we're not discussing here.
A tax credit is usually an incentive, like if you spend 10k on solar panels you get to deduct the 10k and then the government might say "hey thanks for pushing renewable energy, deduct an extra 2k from your tax bill." That's a credit, which we're not discussing here.
>European software companies don't go broke
They don't do that well either. Which is perhaps why the biggest ones are all American
>they have 0% tax credit for salaries
At least in some countries I know that's totally wrong, but depends what you mean by "credit". Salaries are expenses, are not counted in profit.
They don't do that well either. Which is perhaps why the biggest ones are all American
>they have 0% tax credit for salaries
At least in some countries I know that's totally wrong, but depends what you mean by "credit". Salaries are expenses, are not counted in profit.
Ever heard of that small German company called SAP?
they're more the exception than the rule.
The biggest software companies (Facebook/Meta, Google/Alphabet, Microsoft, Apple) are all American.
The biggest software companies (Facebook/Meta, Google/Alphabet, Microsoft, Apple) are all American.
You think European software companies count software engineering salary expenses as profit that they are taxed on?
No one is talking about tax credits.
The expense of salaries isn’t deductible against income.
The expense of salaries isn’t deductible against income.
The lack of specificity in your little table should illuminate for you why this is such a complex issue to comprehend. I understand there is some fictional, meaningless interpretation hidden inside your head where that table is "right," but for all normal interpretations, it's wrong.
That’s if you could have afforded to pay the tax on the $2,000,000 of phantom profit you had until this point, which no one can.
You don’t get that back unless you somehow fire everyone so you can offset income and expenses without more amortization.
You don’t get that back unless you somehow fire everyone so you can offset income and expenses without more amortization.
You can if you raise debt or equity to pay salaries.
Something is getting lost translation here. You can capitalize certain projects of that meet a certain threshold. I can't capitalize something as trivial as changing some colors. The capitalization is based on the expected lifespan of deliverable. Web pages is like 2 years. Bug fixes/maintenance, and project management are not capitalizable and its common to use 80/20. Public companies want to capitalize everything to improve earnings and kick up their stock price but they are kept in check by auditors.
How is this going to change?
How is this going to change?
As it relates to developer salaries, you don't have an option to decide if you're going to capitalize or immediately expense. With this bill, you must amortize over five years.
You're talking about deciding whether or not to capitalize a laptop, a piece of equipment, a vehicle, etc, and over what period. There's lots of guidance for that. This is very specifically affecting the salaries you pay software developers.
You're talking about deciding whether or not to capitalize a laptop, a piece of equipment, a vehicle, etc, and over what period. There's lots of guidance for that. This is very specifically affecting the salaries you pay software developers.
Is it mandatory for software companies to classify engineer salaries as "R&D"? I haven't yet gotten an answer for this each time this issue comes up.
I know it used to be advantageous due to the R&D amortization period, and I feel this was abused in cases were there was effectively no research or development (in the traditional sense). How is your example materially different from a furniture shop that has similar revenue & salary numbers, but previously wasn't able to amortize salaries as "R&D"?
I know it used to be advantageous due to the R&D amortization period, and I feel this was abused in cases were there was effectively no research or development (in the traditional sense). How is your example materially different from a furniture shop that has similar revenue & salary numbers, but previously wasn't able to amortize salaries as "R&D"?
What would a software developer do that isn't research or development? Maybe my understanding of "research and development" is wrong. Is there a formal definition that I can go by?
What would a welder do that isn't research or development? I believe for both jobs certain tasks are journeyman-like, but others are legit R&D. I don't think software ought to be blanket-exempted because its done on a computer.
Here's the IRS' guidance on software: https://www.irs.gov/businesses/audit-guidelines-on-the-appli...
Here's the IRS' guidance on software: https://www.irs.gov/businesses/audit-guidelines-on-the-appli...
> What would a welder do that isn't research or development?
Weld stuff?
Weld stuff?
Isn't welding just "developing" metal products?
That's why you have to take into account that it's "research and development", and not "research" and "development". As in research and the development of that research, not separately research and development.
That's why you have to take into account that it's "research and development", and not "research" and "development". As in research and the development of that research, not separately research and development.
Yeah, forcing physical-world norms into technology will always result in weird shit like this.
For the "real" world, Research would be studying different compounds to see which ones work well as anode or cathode.
Development would be creating the industrial processes required to scale up manufacturing, or the ancillary infrastructure to support the new battery, or designing a new package for this awesome new cell. All the things that take the new thing from the lab to a marketable product.
So if you come up with a new method for welding ("My new filler alloy reduces argon requirements by half!" or "My new pulsing methodology results in 23% stronger welds between dissimilar alloys.") That's Research. Then the Development of that might be "How do we manufacture these new filler rods to the exacting specs required?" or "We need to have the EE people incorporate my pulsing algo in our welders. Right now it's running on an Arduino in the lab, we need it included in next year's Welder XL4000 model."
Actually doing the weld is just doing the job.
So, back to software. What kind of coding is considered R&D and what is considered "just doing the job"? I guess creating new algorithms, or new features that you expect to be in the product for years to come; those would be R&D. Whereas fixing bugs, working on Kubernetes stuff, writing database backup routines, etc. would not be?
I don't know. This is just my impression of the difference. I'm no economist.
For the "real" world, Research would be studying different compounds to see which ones work well as anode or cathode.
Development would be creating the industrial processes required to scale up manufacturing, or the ancillary infrastructure to support the new battery, or designing a new package for this awesome new cell. All the things that take the new thing from the lab to a marketable product.
So if you come up with a new method for welding ("My new filler alloy reduces argon requirements by half!" or "My new pulsing methodology results in 23% stronger welds between dissimilar alloys.") That's Research. Then the Development of that might be "How do we manufacture these new filler rods to the exacting specs required?" or "We need to have the EE people incorporate my pulsing algo in our welders. Right now it's running on an Arduino in the lab, we need it included in next year's Welder XL4000 model."
Actually doing the weld is just doing the job.
So, back to software. What kind of coding is considered R&D and what is considered "just doing the job"? I guess creating new algorithms, or new features that you expect to be in the product for years to come; those would be R&D. Whereas fixing bugs, working on Kubernetes stuff, writing database backup routines, etc. would not be?
I don't know. This is just my impression of the difference. I'm no economist.
> So, back to software. What kind of coding is considered R&D and what is considered "just doing the job"? I guess creating new algorithms, or new features that you expect to be in the product for years to come; those would be R&D. Whereas fixing bugs, working on Kubernetes stuff, writing database backup routines, etc. would not be?
I would still count the later as R&D. It's akin to having an industrial engineer re-design the manufacturing floor to accommodate for the different manufacturing process of the anodes.
As soon as you need to customize something, it becomes R&D (else you would have purchased it). The "just the job" part is invisible because, well, it's the machine who's doing it (applications auto-start, install, send updates).
I would still count the later as R&D. It's akin to having an industrial engineer re-design the manufacturing floor to accommodate for the different manufacturing process of the anodes.
As soon as you need to customize something, it becomes R&D (else you would have purchased it). The "just the job" part is invisible because, well, it's the machine who's doing it (applications auto-start, install, send updates).
Welding stuff is developing a product. Basically the same thing software developers do. It seems like a nonsense differentiation if those are categorized differently for taxes.
As some one who took a welding class.. no it isn’t. It’s production.
It can be development, if you are building a prototype for example. a good welder will notice that a bracket is missing and design one one the spot so the whole can be built for now - while telling the engineers about the problem.
That is a small % of welding though. Most is just straight production work. The % is open to question - if I ask you to put a winch mount on my trailer how much of that is custom R&D, and how much is production of the one off product?
That is a small % of welding though. Most is just straight production work. The % is open to question - if I ask you to put a winch mount on my trailer how much of that is custom R&D, and how much is production of the one off product?
If you have an off the shelf solution, then close to 0 development.
If you have a clear, standard approach to the installation, then the development is likely to be a small portion of the work.
If neither of those are true then you are in the hard to figure area.
If you have a clear, standard approach to the installation, then the development is likely to be a small portion of the work.
If neither of those are true then you are in the hard to figure area.
A carpenter building a custom solution for room x
A programmer building a custom abstraction for domain feature x
A plumber laying a new line from the basement to the second floor
All require some surveying and development of a solution, gluing existing parts together in a unique way
A programmer building a custom abstraction for domain feature x
A plumber laying a new line from the basement to the second floor
All require some surveying and development of a solution, gluing existing parts together in a unique way
Sure, I agree, but there are likely standard approaches, especially in the older trades, where the development is making ~1 decision and then measuring.
Like if the carpenter is installing some shelves, they are most likely picking a shelving system or approach they know how to work with and measuring for fit, not coming up with a brand new way to mount shelves. They might come up with a new way, it just isn't all that likely.
Like if the carpenter is installing some shelves, they are most likely picking a shelving system or approach they know how to work with and measuring for fit, not coming up with a brand new way to mount shelves. They might come up with a new way, it just isn't all that likely.
The same can be said for a lot of software developers. How many people spend their days gluing together existing libraries vs. writing their own? This rule seems ridiculous; I fail to understand why they're are different tax write off rates for employees based on what they're doing. Either way they're being paid by the business!
The entirety of the rule seems to exist to punish small players in the market. A barrier to entry to box out competition.
The entirety of the rule seems to exist to punish small players in the market. A barrier to entry to box out competition.
In "research and development", that typically means "research of new ideas and methods, and developing them into commercially viable products". So are there things that software engineers do that fall under R+D? Absolutely! Is adding a sorting feature to a grid in your app one of those things? Probably not!
You should never assume legal terms mean what they colloquially mean.
Just like how "work" in physics has a precise definition which doesn't mean what it colloquially means, or "tree" in computer science.
In this case, software development of any kind is explicitly included:
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
https://www.law.cornell.edu/uscode/text/26/174
Just like how "work" in physics has a precise definition which doesn't mean what it colloquially means, or "tree" in computer science.
In this case, software development of any kind is explicitly included:
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
https://www.law.cornell.edu/uscode/text/26/174
What I find most confounding is that I know some folks who do what I'd call research, in that they do EDA and develop models, but since those aren't necessarily destined for development of software, their hours are not counted in this exercise. It's too, um, researchy to qualify as research, I guess? or it's just classified as fancy analytics.
> and develop models
The debate over whether Excel counts as programming and thus software development just got a lot more heated. The question is how is "software" defined in the context of the tax code, in particular in the phrase "development of any software" from above.
https://www.lawinsider.com/dictionary/software gives a couple definitions.
The debate over whether Excel counts as programming and thus software development just got a lot more heated. The question is how is "software" defined in the context of the tax code, in particular in the phrase "development of any software" from above.
https://www.lawinsider.com/dictionary/software gives a couple definitions.
The full IRS clarification on this will helpfully be available in a few months (a few months after the deadline), but it doesn't look like things like maintenance work will qualify, only new software projects. I'm expecting that a lot of savvy companies are going to decide that a lot of software development (using the common term) is not software development in the legal sense.
> I'm expecting that a lot of savvy companies are going to decide that a lot of software development (using the common term) is not software development in the legal sense.
Even if this risks an IRS judgement against them, a savvy company might want to take such a judgement to court, and let a jury decide.
Even if this risks an IRS judgement against them, a savvy company might want to take such a judgement to court, and let a jury decide.
> Is adding a sorting feature to a grid in your app one of those things?
Yeah, the love the tax write-off - they don't love paying people to actually research anything.
Yeah, the love the tax write-off - they don't love paying people to actually research anything.
[deleted]
I still don’t understand why it has to be RnD? If I made a million dollars and spent a million in salaries, I made no profit. The government shouldn’t be taxing me on no money made. They already get taxes on the salaries I’m giving out.
It comes down to whether these salaries were a sheer cost and not partly an investment.
If you made a million dollar and bought a million in patents, you still would have no money but wouldn't expect to be paying 0 tax, would you ? How RnD should be taxed is up for debate, but at least the logic is that it's not a simple cost (in comparison to paying a janitor to clean the office for instance)
If you made a million dollar and bought a million in patents, you still would have no money but wouldn't expect to be paying 0 tax, would you ? How RnD should be taxed is up for debate, but at least the logic is that it's not a simple cost (in comparison to paying a janitor to clean the office for instance)
Fair enough. If you made a million dollars and bought land with it, sure you can tax it. But something as basic as employee salaries that are a cost to any business should definitely be deductible from the profits as cost of running the business. Especially when the company is supposed to pay payroll taxes and the employees themselves pay income tax on their salaries.
I'm with you in that it probably needs more nuance on what exaclty the developpers are doing (TBF I haven't read the details, so maybe there is already a lot of nuance in all of it.)
I kinda see many cases where a salary isn't as clear cut as a simple cost...for instance comparing two cases:
- we buy for a million dollar an exclusive right on an innovative system from a freelance guy that developed it on his own
- we contract for 10k a month the same guy to design and develop the same innovative system, he takes a year or two to develop it.
In one case it's a purchase of an asset, in the other case it's a salary. The resulting asset is the same though.
I kinda see many cases where a salary isn't as clear cut as a simple cost...for instance comparing two cases:
- we buy for a million dollar an exclusive right on an innovative system from a freelance guy that developed it on his own
- we contract for 10k a month the same guy to design and develop the same innovative system, he takes a year or two to develop it.
In one case it's a purchase of an asset, in the other case it's a salary. The resulting asset is the same though.
First one is a product, second is a service.
Second one you paid a service to get a product.
If you buy something for a million dollar you are buying an asset.
But if you make an employment contract with somebody it is totally unknown what is the value you are or will be getting out of the employee. You are not buying an "asset" because you can not own an employee. They can quit any time.
But if you make an employment contract with somebody it is totally unknown what is the value you are or will be getting out of the employee. You are not buying an "asset" because you can not own an employee. They can quit any time.
I'm with you on the unknown part. We could this it as a risk, with the upside that you might have paid less in total by taking the risk and hiring the guy, than buying the proven end result at price reflecting the total value of the asset.
> you can not own an employee.
You own everything the employee produced during the contract, whenever they quit.
> you can not own an employee.
You own everything the employee produced during the contract, whenever they quit.
Right but what you paid for was not the outputs of the employee, you paid for the inputs of the employee -- meaning the employee's time spend on the work.
Time spent is NOT an asset, it is consumed, hour by the hour. It is an expense.
It is not an asset also because you can not choose to sell it to someone else and thus recoup the money you have placed on it.
Time spent is NOT an asset, it is consumed, hour by the hour. It is an expense.
It is not an asset also because you can not choose to sell it to someone else and thus recoup the money you have placed on it.
It feels like a distinction without a difference: trying to apply the same logic to something that is material and not just bits in a computer:
You'd be saying you didn't pay for a house, instead you paid an architect to come up with the blueprint and paid the salaries and purchases of a construction team hour by hour for X months to execute on the design, additional work included, until you got a satisfying product. An accountant looking at it afterwards would still tell you you now have an asset estimated at Y thousands on the market.
> you can not choose to sell it to someone else
You can of course sell a developped product or a service to another company. Or even just the research part if it would cost enough to the buyer to reproduce it.
You'd be saying you didn't pay for a house, instead you paid an architect to come up with the blueprint and paid the salaries and purchases of a construction team hour by hour for X months to execute on the design, additional work included, until you got a satisfying product. An accountant looking at it afterwards would still tell you you now have an asset estimated at Y thousands on the market.
> you can not choose to sell it to someone else
You can of course sell a developped product or a service to another company. Or even just the research part if it would cost enough to the buyer to reproduce it.
> you paid an architect to come up with the blueprint
You didn't pay the architect to work on the blueprint, you paid FOR the blueprint.
The blueprint is an asset, architect's time is not. You are not the employer of the architect, you are their client. The business transaction is money-for-blueprint. Whereas with an inhouse software developer the business-transaction is salary-for-time-spent.
If the software developer does not come up with a working program you can not take away their already earned salary. Whereas if the architect does not give you the blueprint you don't have to pay for it.
And once you get the blueprint you can sell it to someone else, it is an asset. Once the SW-developer-employee goes home you might or might not be able to sell their work-products to somebody else, because maybe the program does not run. If it does not run you can not sue the employee. If the architect's blueprints do not produce a working house you can sue them.
You didn't pay the architect to work on the blueprint, you paid FOR the blueprint.
The blueprint is an asset, architect's time is not. You are not the employer of the architect, you are their client. The business transaction is money-for-blueprint. Whereas with an inhouse software developer the business-transaction is salary-for-time-spent.
If the software developer does not come up with a working program you can not take away their already earned salary. Whereas if the architect does not give you the blueprint you don't have to pay for it.
And once you get the blueprint you can sell it to someone else, it is an asset. Once the SW-developer-employee goes home you might or might not be able to sell their work-products to somebody else, because maybe the program does not run. If it does not run you can not sue the employee. If the architect's blueprints do not produce a working house you can sue them.
For many small software companies, making software is more like making a custom table rather than an actual investment.
Because it was a way to get the budget "balanced". They declared R&D expenses to be different from operating expenses -- if you have the money to spend on R&D then you have money to spend funding the country.
It's never supposed to be about what's "fair" or what they "should" do. It's about the fact that they want to spend $X, and need to raise $X one way or the other.
In this case, though, it was purely a trick. They were required to balance the budget over the long term, so they spent money now and identified a pot of money they could take from later. They just kicked the can down the road, and now we've arrived where the can landed. They actually don't think it's fair, or reasonable, or productive. But changing it does make somebody responsible for a huge increase in the deficit... and it's the people who spent the money 5 years ago.
It's never supposed to be about what's "fair" or what they "should" do. It's about the fact that they want to spend $X, and need to raise $X one way or the other.
In this case, though, it was purely a trick. They were required to balance the budget over the long term, so they spent money now and identified a pot of money they could take from later. They just kicked the can down the road, and now we've arrived where the can landed. They actually don't think it's fair, or reasonable, or productive. But changing it does make somebody responsible for a huge increase in the deficit... and it's the people who spent the money 5 years ago.
There is no budget, for a long time. Only spending resolutions. And they’re not b balanced.
Spending resolutions are more important than budgets. So much more important that they're usually just called "budgets" because nobody cares about the thing that is actually a budget.
That’s literally the point of this entire thread.
This change taxes you on profit you never made, and specifically targets software companies.
It’s insane.
This change taxes you on profit you never made, and specifically targets software companies.
It’s insane.
Kinda like options - you get taxed on imaginary numbers on money you don't have access to. You received zero profits but owe taxes.
Maintain services. Why was everyone expecting Twitter to go down after the layoffs if software developers only do research and development of new products?
Honestly this whole thing looks like a huge tax loophole, now being closed. I don't know of any jurisdiction (apart from the US, apparently) which allowed 100% non-amortized tax credit for loosely defined R&D salaries. No wonder everyone and their dog started software companies in the US.
It is not. If I pay a worker to frame up a house it is an expense. If I pay a swe to frame up a mobile app it is R&D. Again NOT a loophole.
?
Are you just framing up a mobile app for funzies?
Wouldn't it be a professional service, therefore an expense, therefore fully tax deductible?
Are you just framing up a mobile app for funzies?
Wouldn't it be a professional service, therefore an expense, therefore fully tax deductible?
No, that's what's changing and it's why everyone is freaking out - software development is no longer a fully-deductible expense.
No, this is completely wrong.
It's not "just an expense". Think about an architect designing a house. The tax treatment depends on how the person spending the money "uses" the labor. It might be an ordinary operating expense (fully deductible), but could also be inventory, or a depreciated "capital asset" (closely related to the idea of "capital gains" taxes) whose value is spread over a long period of time, generally related to the asset's usable life.
There is a large body of work around the correct treatment of this stuff, which sits at the core of accounting in the same way data structures sit at the core of CS. It's not the most straightforward thing to explain. The tax code contains a ton of exceptions, but in general, a thing that is long-lived, expensive, not routinely bought or sold, and provide some kind of long-lived economic benefit (e.g. shelter, the ability to produce something, or facilitate some kind of industrial process), is a capital asset. (Sounds a lot like software, doesn't it?) Inventory is something routinely bought and sold, generally for profit. A server is inventory for Dell. For a typical software startup, it's a capital asset.
The whole point of accounting is trying to accurately measure economic activity. It's more complicated than it looks. If you agree to a five-year contract and get paid upfront, not all that money is "earned" (hence taxable) in the first year. If you're in debt and the debt is forgiven, no money changes hands, but that's very much beneficial (and taxable) to you. And if you own a long-lived asset, you don't just get to say, oh, I spent all this money upfront, that's an expense I can use to reduce my taxes. Not how it works.
Just trying to shed some light on this. It is indeed rather complex.
It's not "just an expense". Think about an architect designing a house. The tax treatment depends on how the person spending the money "uses" the labor. It might be an ordinary operating expense (fully deductible), but could also be inventory, or a depreciated "capital asset" (closely related to the idea of "capital gains" taxes) whose value is spread over a long period of time, generally related to the asset's usable life.
There is a large body of work around the correct treatment of this stuff, which sits at the core of accounting in the same way data structures sit at the core of CS. It's not the most straightforward thing to explain. The tax code contains a ton of exceptions, but in general, a thing that is long-lived, expensive, not routinely bought or sold, and provide some kind of long-lived economic benefit (e.g. shelter, the ability to produce something, or facilitate some kind of industrial process), is a capital asset. (Sounds a lot like software, doesn't it?) Inventory is something routinely bought and sold, generally for profit. A server is inventory for Dell. For a typical software startup, it's a capital asset.
The whole point of accounting is trying to accurately measure economic activity. It's more complicated than it looks. If you agree to a five-year contract and get paid upfront, not all that money is "earned" (hence taxable) in the first year. If you're in debt and the debt is forgiven, no money changes hands, but that's very much beneficial (and taxable) to you. And if you own a long-lived asset, you don't just get to say, oh, I spent all this money upfront, that's an expense I can use to reduce my taxes. Not how it works.
Just trying to shed some light on this. It is indeed rather complex.
> If I pay a worker to frame up a house it is an expense
If you are getting paid to build the house because you're in the business of building houses, then yes it is an expense. If you're building a house to keep ownership of and rent out, then no, that cost has to be capitalized and depreciated over the expected lifetime of the improvement.
The general question addressed by this law is "should it be allowed to reinvest profits tax-free and delay paying taxes indefinitely?". There are many places in the tax code where this answer is "no" (eg you pay taxes on bank interest yearly, even on a long term CD), and there are many places where this answer is "yes" (retirement accounts, US savings bonds, stock buybacks, 1031 exchange).
It's ridiculous that software development is getting singled out, given that for most business activity the answer is default yes, with only specific list of things that have to be capitalized. I'm just saying the right answer isn't set in stone, apart from of what the tech industry has gotten used to and how effectively abrupt this change was.
If you are getting paid to build the house because you're in the business of building houses, then yes it is an expense. If you're building a house to keep ownership of and rent out, then no, that cost has to be capitalized and depreciated over the expected lifetime of the improvement.
The general question addressed by this law is "should it be allowed to reinvest profits tax-free and delay paying taxes indefinitely?". There are many places in the tax code where this answer is "no" (eg you pay taxes on bank interest yearly, even on a long term CD), and there are many places where this answer is "yes" (retirement accounts, US savings bonds, stock buybacks, 1031 exchange).
It's ridiculous that software development is getting singled out, given that for most business activity the answer is default yes, with only specific list of things that have to be capitalized. I'm just saying the right answer isn't set in stone, apart from of what the tech industry has gotten used to and how effectively abrupt this change was.
Came here to say this. The level of general ignorance of how accounting and tax works on this thread (not you, others) is astounding.
Of course, if anyone had owned real estate, they'd understand things like depreciation, and the fact that you can spend money without it being an 'expense', or that no, just because you 'made $1,000,000 and spent $1,000,000' doing something like building a house, or a piece of code, you could of course show an accounting profit. You created something of value--that's the point. There's something of value left over. Maybe there won't be in five years, but you can't expense the entire thing immediately.
I actually think this treatment (capitalization of software R&D) is more "correct" from a theoretical accounting perspective. Clearly, software companies are creating something that has residual value with all those developer salaries. As for the politics, I'm not sure. I do know that RE has the same problem (accounting profit can run far ahead of cashflow), but has so much crazy advantaged tax treatment (arguably "loopholes")--1031 exchanges, bonus depreciation--and that's on top of stuff like 179 expensing (not specific to RE I know, but still), that maybe software just needs to work more like RE, where the baseline is "many things capitalized", but all sorts of crazy loopholes driven by the whims of short-term politics.
It certainly makes the accountants rich...
FWIW, my wife's architecture practice is dealing with this 174 amortization (on their salaries, some of which were classified as R&D) and it's killing them, too.
Of course, if anyone had owned real estate, they'd understand things like depreciation, and the fact that you can spend money without it being an 'expense', or that no, just because you 'made $1,000,000 and spent $1,000,000' doing something like building a house, or a piece of code, you could of course show an accounting profit. You created something of value--that's the point. There's something of value left over. Maybe there won't be in five years, but you can't expense the entire thing immediately.
I actually think this treatment (capitalization of software R&D) is more "correct" from a theoretical accounting perspective. Clearly, software companies are creating something that has residual value with all those developer salaries. As for the politics, I'm not sure. I do know that RE has the same problem (accounting profit can run far ahead of cashflow), but has so much crazy advantaged tax treatment (arguably "loopholes")--1031 exchanges, bonus depreciation--and that's on top of stuff like 179 expensing (not specific to RE I know, but still), that maybe software just needs to work more like RE, where the baseline is "many things capitalized", but all sorts of crazy loopholes driven by the whims of short-term politics.
It certainly makes the accountants rich...
FWIW, my wife's architecture practice is dealing with this 174 amortization (on their salaries, some of which were classified as R&D) and it's killing them, too.
TBF I hate accounting too, and now that it's past tax season I look forward to pushing as much as possible to the back of my head...
When you say some of your wife's architecture practice's salaries "were classified" as R&D, who/what did that classification?
I'm wondering if a large part of the pain is businesses that were classifying as much as possible as R&D to get the R&D tax credit, and now that classification is a liability and they can't change so quickly. Otherwise it would seem that established companies could call much of their software engineer activity "maintenance" rather than "development" (and the change shouldn't really matter to pre-revenue startups).
When you say some of your wife's architecture practice's salaries "were classified" as R&D, who/what did that classification?
I'm wondering if a large part of the pain is businesses that were classifying as much as possible as R&D to get the R&D tax credit, and now that classification is a liability and they can't change so quickly. Otherwise it would seem that established companies could call much of their software engineer activity "maintenance" rather than "development" (and the change shouldn't really matter to pre-revenue startups).
What jurisdiction doesn't count employee salaries as an expense?
Salaries are already taxed as individual income. Taxing them as corporate profits and individual income is not closing a loophole, its double-taxing.
Salaries are already taxed as individual income. Taxing them as corporate profits and individual income is not closing a loophole, its double-taxing.
This is misinformation. You owe this tax even if you do not claim any R&D tax credit.
https://www.grantthornton.com/insights/articles/tax/2023/sec...
https://www.grantthornton.com/insights/articles/tax/2023/sec...
Maybe it was the point? Didn't you notice that the US gained certain lead in software technologies?
The developers, who are paid rather handsomely, also pay rather large amounts of taxes from their salaries. (If fired and jobless, they stop doing that.)
The developers, who are paid rather handsomely, also pay rather large amounts of taxes from their salaries. (If fired and jobless, they stop doing that.)
The Trump voters will be happy with the software developers all fired and jobless, because it brings them down to their level.
100%
Well, salaries are expenses though. And software development is not necessarily R&D, so if 99% of software development has to be classified as such, that's a problem.
We are not talking about a tax credit here, but a deduction.
Uhhhhh… every single one up until this change.
> I don't know of any jurisdiction (apart from the US, apparently) which allowed 100% non-amortized tax credit for loosely defined R&D salaries.
This is not about tax credits, this is about whether salaries are an expense. If Widget Inc makes and sells a bunch of widgets for $100m, and then they pay $20m in rent, and $30m for materials, and $40m for salaries, with $10m left over, with no other complexities (eg, interest, depreciating factory equipment, etc.), then is their profit this year:
1) $10m (or maybe a bit less, if they got any tax credits)?
2) Some other larger number closer to $50m?
You'd be hard pressed to find many jurisdictionns where the answer isn't option 1. I certainly don't know any offhand.
This is not about tax credits, this is about whether salaries are an expense. If Widget Inc makes and sells a bunch of widgets for $100m, and then they pay $20m in rent, and $30m for materials, and $40m for salaries, with $10m left over, with no other complexities (eg, interest, depreciating factory equipment, etc.), then is their profit this year:
1) $10m (or maybe a bit less, if they got any tax credits)?
2) Some other larger number closer to $50m?
You'd be hard pressed to find many jurisdictionns where the answer isn't option 1. I certainly don't know any offhand.
This is a complicated question.
On the one hand, Section 174 clearly stipulates: "(3)Software development For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure." [1]
Section 174 R&E expenses are much more expansive than what qualifies under the R&D tax credit criteria. This article has a rundown of some of the activities included in 174. It's well beyond software or salaries -- it also includes things like market research. It also includes any expenses in connection with R&E, so for example time using a server for new features or new products would have to be amortized but maintenance (bug fixes) wouldn't. Even if a company files for R&D tax credits, they won't be able to offset this increase. [2]
Lastly, since Congress was widely expected to revert this before it took effect, the IRS didn't issue full guidance on how to implement it. They've never had to define software development before, but the interpretation that Big 4 accounting firms are taking is that it covers new products AND new features on existing commercial products, but not straight maintenance.
[1] https://www.law.cornell.edu/uscode/text/26/174 [2] https://www.forbes.com/sites/lynnmucenskikeck/2023/03/24/fiv...
On the one hand, Section 174 clearly stipulates: "(3)Software development For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure." [1]
Section 174 R&E expenses are much more expansive than what qualifies under the R&D tax credit criteria. This article has a rundown of some of the activities included in 174. It's well beyond software or salaries -- it also includes things like market research. It also includes any expenses in connection with R&E, so for example time using a server for new features or new products would have to be amortized but maintenance (bug fixes) wouldn't. Even if a company files for R&D tax credits, they won't be able to offset this increase. [2]
Lastly, since Congress was widely expected to revert this before it took effect, the IRS didn't issue full guidance on how to implement it. They've never had to define software development before, but the interpretation that Big 4 accounting firms are taking is that it covers new products AND new features on existing commercial products, but not straight maintenance.
[1] https://www.law.cornell.edu/uscode/text/26/174 [2] https://www.forbes.com/sites/lynnmucenskikeck/2023/03/24/fiv...
Is it? "In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—" is pretty clear. That means what someone wants to claim as research and experimental expenditures. "For the purposes of this section" also seems pretty clear. If you want to claim software development as R&E, it unambiguously qualifies. And now all R&E must be amortized.
I am not a tax expert, but it doesn't seem like there's any reason you have to claim software development as R&E.
I am not a tax expert, but it doesn't seem like there's any reason you have to claim software development as R&E.
This is my understanding as well. This whole issue seems rather… sensationalized.
I assume there were-are other benefits claiming software development as R&D/E - and that the vast majority of it probably shouldn’t.
Yup. Exactly. And from that perspective this is actually a good thing, because now you don’t have to worry about whether software development qualifies as R&E.
For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
I wonder what this section and any software means
I wonder what this section and any software means
It means before you may have had to justify whether software development qualified as R&E, now you don’t. It unambiguously qualifies, if you’re claiming it as R&E. And unlike before, R&E must now be amortized.
But AFAIK you don’t need to claim it as R&E. That everyone has to claim all software development as “research and experimental expenditure” seems completely unfounded and a misunderstanding.
But AFAIK you don’t need to claim it as R&E. That everyone has to claim all software development as “research and experimental expenditure” seems completely unfounded and a misunderstanding.
> maintenance (bug fixes) wouldn't.
Link [2] lists activities related to software development and includes maintenance and debugging. As I understand it this is for the older #41?
• Programming
• Tuning and benchmarking of software
• Performing software maintenance and debugging
...
Am I understanding this correctly that there are two different things at play here: the Section 41 tax credit which works in the companies' favor by allowing them to deduce R&D expenses. Then the Section 174 that requires all expenses to be amortized and the big issue for software firms is that the definitions of R&D differes where it's narrow R&D for the credit, but very broad for #174, resulting in a cash flow problem?
Link [2] lists activities related to software development and includes maintenance and debugging. As I understand it this is for the older #41?
• Programming
• Tuning and benchmarking of software
• Performing software maintenance and debugging
...
Am I understanding this correctly that there are two different things at play here: the Section 41 tax credit which works in the companies' favor by allowing them to deduce R&D expenses. Then the Section 174 that requires all expenses to be amortized and the big issue for software firms is that the definitions of R&D differes where it's narrow R&D for the credit, but very broad for #174, resulting in a cash flow problem?
"I haven't yet gotten the answer for this each time this issue comes up."
Asnwer: It's not mandatory.
Asnwer: It's not mandatory.
There are various tax breaks for R&D spending - so companies try and classify lots of things that aren't R&D as R&D.
There's been a bit of stink recently in the UK around R&D tax credits and how companies have been taking the tax man for a bit of a ride.
There's been a bit of stink recently in the UK around R&D tax credits and how companies have been taking the tax man for a bit of a ride.
How does this work with consultants/contractors? Are they still booked under R&D expenses?
yes.
So doesn't this just incentivize replacing FTE's with contracting firms when starting up?
https://www.claconnect.com/en/resources/articles/2023/a-cost...
> The amortization period is five years for domestic expenses and 15 years for foreign expenses. Additionally, for the first year of the amortization period, the expenses are “placed in service” at the midpoint of the tax year. Thus, the deduction in year one is only half the amount it will be in subsequent years.
> The amortization period is five years for domestic expenses and 15 years for foreign expenses. Additionally, for the first year of the amortization period, the expenses are “placed in service” at the midpoint of the tax year. Thus, the deduction in year one is only half the amount it will be in subsequent years.
Yes.
This sounds like sheer madness.
Does anyone know what the situation is in other countries (in particular, in Canada) for the same situation as above?
One option companies have, if this isn't fixed, might be to re-incorporate, or relocate their company to Canada[1].
[1] Assuming Canada taxes sensibly (and allows R&D or developer salaries to be deducted).
Does anyone know what the situation is in other countries (in particular, in Canada) for the same situation as above?
One option companies have, if this isn't fixed, might be to re-incorporate, or relocate their company to Canada[1].
[1] Assuming Canada taxes sensibly (and allows R&D or developer salaries to be deducted).
You’d expect to run into transfer pricing issues if did that, unless you’d already structured your company avoid those problems. This problem here, and many others like it stem from the fact that corporate tax is a stupid concept. It doesn’t generate any additional tax revenue, because any tax that is paid as corporate tax will simply be used to offset taxes that would otherwise be paid as income tax. It also simply preferences operating models which are more accessible to large companies, disadvantaging SMEs. Any company can theoretically choose to not be profitable, by reinvesting all of its profits, and investors typically don’t care if their value is returned via growth or dividends. But many SME operators do, and the accounting and compliance costs associated with that place a higher burden on SMEs. But the whole debate around the topic is muddied by people who intentionally misrepresent how these systems work for their political gain, and their followers who don’t understand how these systems work (until some stupid change like this affects them, and the stupidity of the system is made clear).
"Any company can theoretically choose to not be profitable, by reinvesting all of its profits, and investors typically don’t care if their value is returned via growth or dividends. " - the Amazon model for its first 20 years :).
Amazon was founded in 1994 and it started to make profits reliably in 2016 : https://www.macrotrends.net/stocks/charts/AMZN/amazon/net-in...
Amazon was founded in 1994 and it started to make profits reliably in 2016 : https://www.macrotrends.net/stocks/charts/AMZN/amazon/net-in...
In Canada, qualifying R&D spending generates a tax credit that can be worth 60% of engineers’ salaries. In other words, a company that spends $1M on engineers in Canada not only writes off the $1M in spending, but also gets a credit of $600,000.
Fine print: this is only available to Canadian-controlled entities. Foreign-controlled entities can claim R&D tax credits as well, but the rate is far less generous.
Fine print: this is only available to Canadian-controlled entities. Foreign-controlled entities can claim R&D tax credits as well, but the rate is far less generous.
Wow, this is amazing. Do you have any links with more details on this?
It sounds like Canada is trying to make it as easy as possible for companies to set up shop in Canada.
Personally, even incorporating in Canada is so much easier. A federal corporation just costs $100 to make, and even less to maintain annually. (In contrast, in the United States, an LLC set up through Stripe Atlas costs $500, and you have an annual recurring fee $300 owed to Delaware + registered agent fees.)
It sounds like Canada is trying to make it as easy as possible for companies to set up shop in Canada.
Personally, even incorporating in Canada is so much easier. A federal corporation just costs $100 to make, and even less to maintain annually. (In contrast, in the United States, an LLC set up through Stripe Atlas costs $500, and you have an annual recurring fee $300 owed to Delaware + registered agent fees.)
Google Scientific Research and Experimental Development. Personally I am not a fan of this system because I believe it distorts incentives and crowds out private investment. On the other hand, it is a pragmatic solution that relatively efficiently shifts investment activity to R&D and away from the Canadian traditions of shifting rocks and oil and trees around.
IANAA, but very important to remember that:
1) R&D classification of a single employee should be a percentage. Accountants don't list employees one by one on a tax return, they're grouped together and a percentage of their wages can be allocated to different functions of a business outside of R&D.
2) A lot of things do not qualify as "R&D". For example...
- Fixing bugs
- Maintaining existing features
- Improving existing features (even enhancing functionality)
- Building a feature because sales promised it to a customer
- Refactoring code
- Anything related to devops/infrastructure, upgrading servers, updating dependencies
- Anything related to customer support, onboarding or retention
- Anything related to helping Sales/Marketing close new business or get more leads
- Anything related to supporting day-to-day business operations
I'm not an expert, but I think it will be relatively easy for accountants to do some magic behind the scenes by classifying only a small percent of wages toward R&D.
I think the average engineer spends less than 20% of their time on "true" R&D, and if that's the case, 80% of wages can be deducted as an expense without amortizing.
1) R&D classification of a single employee should be a percentage. Accountants don't list employees one by one on a tax return, they're grouped together and a percentage of their wages can be allocated to different functions of a business outside of R&D.
2) A lot of things do not qualify as "R&D". For example...
- Fixing bugs
- Maintaining existing features
- Improving existing features (even enhancing functionality)
- Building a feature because sales promised it to a customer
- Refactoring code
- Anything related to devops/infrastructure, upgrading servers, updating dependencies
- Anything related to customer support, onboarding or retention
- Anything related to helping Sales/Marketing close new business or get more leads
- Anything related to supporting day-to-day business operations
I'm not an expert, but I think it will be relatively easy for accountants to do some magic behind the scenes by classifying only a small percent of wages toward R&D.
I think the average engineer spends less than 20% of their time on "true" R&D, and if that's the case, 80% of wages can be deducted as an expense without amortizing.
It would be interesting if this reintroduced "10% time" with strict wording about not working on R&D in your 90% time. Just to simplify the labor involved in calculating it.
> I think the average engineer spends less than 20% of their time on "true" R&D
Based on all of the items in #2, the average software engineer spends close to 0% of their time on R&D - with rare exceptions for those working on cutting edge tech, in research roles or maybe super senior engineers figuring out how to solve complex technical problems
The rest of us just write code and sit in meetings
Based on all of the items in #2, the average software engineer spends close to 0% of their time on R&D - with rare exceptions for those working on cutting edge tech, in research roles or maybe super senior engineers figuring out how to solve complex technical problems
The rest of us just write code and sit in meetings
Do you have a source for this? The law seems pretty clear to me:
> ANY amount paid or incurred in connection with the development of ANY software shall be treated as a research or experimental expenditure.
https://www.law.cornell.edu/uscode/text/26/174
> ANY amount paid or incurred in connection with the development of ANY software shall be treated as a research or experimental expenditure.
https://www.law.cornell.edu/uscode/text/26/174
I guess there might be a distinction between "development" of software and "maintenance" of software (e.g., bug fixing, refactoring, etc.)?
[deleted]
Without getting into the finer points, my understanding is this:
My company needs to make metal squares. There is a defined process for it. I just need a welder to weld all four corners. No R&D here.
I need a website with some features. Asking a sample of professional software developers how to build it, you get a variety of answers.
If anything, that the basics of software development still requires R&D is an indictment of our fields lack of professionalism.
I need a website with some features. Asking a sample of professional software developers how to build it, you get a variety of answers.
If anything, that the basics of software development still requires R&D is an indictment of our fields lack of professionalism.
Wait, what? There's more than 1 way to make metal squares, and which you want to choose is gonna vary based upon your needs and the fabricator, even if you, for whatever reason, pre-determine you want them welded!
> If anything, that the basics of software development still requires R&D is an indictment of our fields lack of professionalism.
This is a bit much. "Research" maybe, but not "development". Many things are developed -- land, buildings, etc. Someone still has to do the work.
This is a bit much. "Research" maybe, but not "development". Many things are developed -- land, buildings, etc. Someone still has to do the work.
> My company needs to make metal squares. There is a defined process for it. I just need a welder to weld all four corners.
What are they welding that has four corners to make squares?
What are they welding that has four corners to make squares?
There's a very important clause immediately before that though: "For purposes of this section".
Also the parent clause says: "In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—"
So just don't specify the expenditures as research or experimental if you don't want this section to apply.
Also the parent clause says: "In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—"
So just don't specify the expenditures as research or experimental if you don't want this section to apply.
[deleted]
More like:
1,000,000 Revenue
- 1,000,000 Salary expense # this does not magically shrink to 200K
- 200,000 tax on revenue (random percentage out of a hat)
-----------
(200,000) In the red!
Yeah that would be the cash flow, my example was taxable income. But yes, that's the whole problem!
I don’t think you understand amortized expense accounting and income tax, you have a line item labeled tax on revenue.
What you are showing is cash flow not the income statement and also you don’t understand the tax is based on the income statement and not the salaries being paid or the revenue, but the calculated income for tax purposes.
In the 2nd year it will be 2/5ths, $200K, amortized expense of prior year plus current year, assuming same numbers, and by the 5th year would be full amount.
Your cash flow is correct and yes it becomes -$200K which is really bad. However I wanted to clarify the mechanics.
What you are showing is cash flow not the income statement and also you don’t understand the tax is based on the income statement and not the salaries being paid or the revenue, but the calculated income for tax purposes.
In the 2nd year it will be 2/5ths, $200K, amortized expense of prior year plus current year, assuming same numbers, and by the 5th year would be full amount.
Your cash flow is correct and yes it becomes -$200K which is really bad. However I wanted to clarify the mechanics.
Here in Canada we have similar fractional write-offs called CCA (capital cost allowance). That's for assets though, like a company building, car or equipment.
I've written an accounting system before for business activities and successfully used its reports to win a tax dispute.
I'm not so interested in the details of this, particularly because it's in another country, but I do understand the implications of suddenly not being able to entirely write off the likely most important and large business expense.
I've written an accounting system before for business activities and successfully used its reports to win a tax dispute.
I'm not so interested in the details of this, particularly because it's in another country, but I do understand the implications of suddenly not being able to entirely write off the likely most important and large business expense.
Ok so you understand but your original comment, before you changed it, talked about a tax on revenue, which isn’t accurate.
I also wrote my own accounting systems based on ledger-cli and regularly deal with amortization of assets.
The change is extremely bad and I’m not trying to say otherwise. Just wanted to clarify the exact calculation and difference between income statement and cash flow calculation.
I also wrote my own accounting systems based on ledger-cli and regularly deal with amortization of assets.
The change is extremely bad and I’m not trying to say otherwise. Just wanted to clarify the exact calculation and difference between income statement and cash flow calculation.
The answer is simple: you just cut the developers' salaries to minimum wage. They'll all be happy to just have a job and will stick around, right?
When seeing it written out like this is simple math, this tax change seems absolutely insane. It would mean some (many?) small businesses will face tax bills that are far higher than any actual cash they have on hand. How did anyone ever think this was a good idea?
It was written to fuck over smaller companies. That was the point of it.
Written by whom? What was the original bill?
If it wasn't done by accident, then it was likely lobbied for by bigger tech companies that are already profitable. They stand to benefit the most from this kind of legislation by destroying all the small competition, and by being able to buy them up for cheap.
Answered upthread: https://news.ycombinator.com/item?id=35615264
Republicans. As always they are the enemy.
https://www.nytimes.com/2017/12/19/us/politics/tax-bill-vote...
"the most sweeping rewrite of the tax code in decades"
https://www.nytimes.com/2017/12/19/us/politics/tax-bill-vote...
"the most sweeping rewrite of the tax code in decades"
The amortization change was a deliberate part of the 2017 tax cut. One of the express purposes of the tax changes was to raise taxes on liberals, and I guess they figured that companies that take the R&D credit are run by liberals.
It is insane.
If they don’t fix it a lot of companies (and their owners) are going to go bankrupt.
If they don’t fix it a lot of companies (and their owners) are going to go bankrupt.
Only those where CFOs are incompetent. And the owner is not responsible for the company’s debt, usually.
Nope. CFOs are beholden to law as are others.
What could've been done differently with a "competent" CFO?
Is the IRS willing to let companies make payments of the tax over years? Would would the IRS want to put companies out of business?
This is a topic I know very little about but doesn't this type of "absolutely insane" thing happen to other small businesses due to estate taxes too?
For example:
For example:
- Your uncle owns a farm for the last 50 years
- Over the 50 years the farm's land value has risen to $1,000,000
- The farm itself only generates $20,000 a year in profit which is spent on living expenses
- Your uncle has no savings
- Your uncle dies
- A 40% federal estate tax is applied onto the farm's current value from your uncle's death (state taxes might also be added)
- Whoever owns the farm is now responsible for coming up with $400,000+ or you're forced to sell the farm to cover the tax bill
Assuming your uncle was single and not able to leverage the double estate tax exemption for married couples, the $1,000,000 farm value is only $11.92 million short of the threshold at which estate tax would start to apply, and only to the amount above the threshold, at an initial marginal rate of 18%. It only reaches a marginal rate of 40% on the amount more than $1 million over the exemption threshold.
If, instead of being $1 million, the farm (assuming it was the whole of the estate) was worth $13.92 million, the actual estate tax would be $345,800. Assuming the same ratio of annual profit to value in your hypothetical, the annual profit would be $278,400; so if you had no other assets to pay the tax, you’d probably need to borrow against the profits, but that shouldn’t be too hard given their magnitude.
If, instead of being $1 million, the farm (assuming it was the whole of the estate) was worth $13.92 million, the actual estate tax would be $345,800. Assuming the same ratio of annual profit to value in your hypothetical, the annual profit would be $278,400; so if you had no other assets to pay the tax, you’d probably need to borrow against the profits, but that shouldn’t be too hard given their magnitude.
> Federal estate tax is due if an estate's value exceeds the estate tax exemption amount, which is $12.92 million for deaths in 2023
The numbers are much, much larger than a simple $1m family farm.
Also, remember, that cap is a exemption from the value. If you have a farm worth $14m, you will have to pay approximately $400,000 in estate tax (NOT 5.6 million like you would naively calculate). At that point, if the farm doesn't generate (effectively) any revenue, and it's not mortgageable or you can't secure a personal loan, it's probably best for everyone that it be sold. You certainly wouldn't be able to e.g. pay property tax on a property that size.
The estate tax is the most widely misrepresented thing in the tax code. It's designed to prevent multimillionaires and billionaires from passing down their entire fortune to the next generation intact. It almost never affects anyone but the top 0.5% wealthiest people in the country, and only then if they do absolutely no estate planning whatsoever.
The numbers are much, much larger than a simple $1m family farm.
Also, remember, that cap is a exemption from the value. If you have a farm worth $14m, you will have to pay approximately $400,000 in estate tax (NOT 5.6 million like you would naively calculate). At that point, if the farm doesn't generate (effectively) any revenue, and it's not mortgageable or you can't secure a personal loan, it's probably best for everyone that it be sold. You certainly wouldn't be able to e.g. pay property tax on a property that size.
The estate tax is the most widely misrepresented thing in the tax code. It's designed to prevent multimillionaires and billionaires from passing down their entire fortune to the next generation intact. It almost never affects anyone but the top 0.5% wealthiest people in the country, and only then if they do absolutely no estate planning whatsoever.
Thomas Jefferson argued strenuously for the estate tax and for inheritances (without a will) to be divided evenly among the children. In Europe the law of primogeniture put inheritances in the hands of the firstborn male which guaranteed that a dynasty could always be preserved! Ick!
Fortunately he has passed away and can no longer argue this idea with the hagiographic veil of authority.
> it prevents a smaller business being able to exist multiple generations.
In addition to what everyone else says, if you have a multi-generational business the owner should be bringing their child(ren) in as executives and part owners of the business. The estate tax would only apply to the part of the business the original owner still owned at their death, not the part of the business owned by the child(ren).
In addition to what everyone else says, if you have a multi-generational business the owner should be bringing their child(ren) in as executives and part owners of the business. The estate tax would only apply to the part of the business the original owner still owned at their death, not the part of the business owned by the child(ren).
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This is disingenuous though, because they would also have 4 other years of salaries to amortize.
If anything HN should be cheering this law since it incentivizes growing your R&D team quickly and consistently.
If anything HN should be cheering this law since it incentivizes growing your R&D team quickly and consistently.
If you make a million and pay a million in salaries, you have no cash left, right?
But! You get to pay taxes as if you made 800k in profit. So lucky you, you have zero dollars and now you get to pay 240,000 in tax (800k * 30%) to the government.
You're now 240k in the hole. Game over, no year two, three, or four.
This doesn't affect venture funded companies as badly because they have millions in funding and they can ride out the amortization. It does, however, affect bootstrappers trying to start a thing. Perhaps you could call them small, indie hackers?
If anything, HN should not be cheering this law as it doesn't affect large incumbents and those with millions in VC funding, but crushes the little guys.
But! You get to pay taxes as if you made 800k in profit. So lucky you, you have zero dollars and now you get to pay 240,000 in tax (800k * 30%) to the government.
You're now 240k in the hole. Game over, no year two, three, or four.
This doesn't affect venture funded companies as badly because they have millions in funding and they can ride out the amortization. It does, however, affect bootstrappers trying to start a thing. Perhaps you could call them small, indie hackers?
If anything, HN should not be cheering this law as it doesn't affect large incumbents and those with millions in VC funding, but crushes the little guys.
We aren’t supposed to ask direct questions on here, but you “get” that a company charges 20% of each of the past 5 years, right?
Like, we agree that’s what depreciation/amortization is, right?
So this most affects companies that have a relatively large R&D org relative to the past few years (aka my point about growing R&D ahead of other functions).
Like, we agree that’s what depreciation/amortization is, right?
So this most affects companies that have a relatively large R&D org relative to the past few years (aka my point about growing R&D ahead of other functions).
I'm a CPA, so I super do get it.
Weird to not include that in the example then.
Maybe this will help you.
If (as you imply) SW developers are critical to this year’s revenue (vs. building for future years revenue), then why don’t they go in COGS?
Seems like an easy way to solve the problem…
Maybe this will help you.
If (as you imply) SW developers are critical to this year’s revenue (vs. building for future years revenue), then why don’t they go in COGS?
Seems like an easy way to solve the problem…
> If (as you imply) SW developers are critical to this year’s revenue (vs. building for future years revenue), then why don’t they go in COGS?
Ok, so we're on the same page! Salaries should be expensed!
Unfortunately, the page that you and I are on is NOT the page that United States Government is on. Which... is the point.
You said in a parent comment
> So this most affects companies that have a relatively large R&D org
This has nothing to do with R&D orgs. We're talking about software developer salaries, not R&D. According to the new change, all software developer expenses must be amortized over 5 years, which you and I both agree seems like a silly idea.
I think you're arguing for a common sense approach of not categorizing them as R&D, which I would highly encourage you to run past your CPA before you accidentally commit tax evasion.
Ok, so we're on the same page! Salaries should be expensed!
Unfortunately, the page that you and I are on is NOT the page that United States Government is on. Which... is the point.
You said in a parent comment
> So this most affects companies that have a relatively large R&D org
This has nothing to do with R&D orgs. We're talking about software developer salaries, not R&D. According to the new change, all software developer expenses must be amortized over 5 years, which you and I both agree seems like a silly idea.
I think you're arguing for a common sense approach of not categorizing them as R&D, which I would highly encourage you to run past your CPA before you accidentally commit tax evasion.
Wait wait wait.
You think that all sw devs now are in R&D and not COGS?
Golly! Plenty of SW devs who work on this years revenue are COGS throughout the industry. The game is putting sw devs who work on future years’ revenue in opex.
Since you’re so attuned to cash accounting let’s change up your example.
I prepay $1mn in advertising cost for ads that will run over 5 years. I spent that cash now, but should I be able to expense that whole $1mn this year?
EDIT: Don't believe me, here's Airbnb:
Cost of revenue includes payment processing costs, including merchant fees and chargebacks, costs associated with third-party data centers used to host our platform, and amortization of internally developed software and acquired technology.
You think that all sw devs now are in R&D and not COGS?
Golly! Plenty of SW devs who work on this years revenue are COGS throughout the industry. The game is putting sw devs who work on future years’ revenue in opex.
Since you’re so attuned to cash accounting let’s change up your example.
I prepay $1mn in advertising cost for ads that will run over 5 years. I spent that cash now, but should I be able to expense that whole $1mn this year?
EDIT: Don't believe me, here's Airbnb:
Cost of revenue includes payment processing costs, including merchant fees and chargebacks, costs associated with third-party data centers used to host our platform, and amortization of internally developed software and acquired technology.
> You think that all sw devs now are in R&D and not COGS?
Huh? I don't think that, that's literally what this law is doing. Moving all software developer expenses out of COGS and into R&D that must be amortized.
You're arguing what should be, and I agree with you. It should be COGS. If you go read the law (or... even the article) you'll realize that what should be the case, is not the case.
It has nothing to do with what I think!
> Since you’re so attuned to cash accounting let’s change up your example.
> I prepay $1mn in advertising cost for ads that will run over 5 years. I spent that cash now, but should I be able to expense that whole $1mn this year?
Umm if you're doing cash accounting, yeah. Haha. That's not the point you were trying to make though. If you're doing accrual accounting, no. That's a prepaid expense (asset) which changes to an expense over time as you incur it.
If you want to learn more about accounting, I have a website where I teach introduction to financial accounting topics at https://acct229.com. You might enjoy it!
Huh? I don't think that, that's literally what this law is doing. Moving all software developer expenses out of COGS and into R&D that must be amortized.
You're arguing what should be, and I agree with you. It should be COGS. If you go read the law (or... even the article) you'll realize that what should be the case, is not the case.
It has nothing to do with what I think!
> Since you’re so attuned to cash accounting let’s change up your example.
> I prepay $1mn in advertising cost for ads that will run over 5 years. I spent that cash now, but should I be able to expense that whole $1mn this year?
Umm if you're doing cash accounting, yeah. Haha. That's not the point you were trying to make though. If you're doing accrual accounting, no. That's a prepaid expense (asset) which changes to an expense over time as you incur it.
If you want to learn more about accounting, I have a website where I teach introduction to financial accounting topics at https://acct229.com. You might enjoy it!
I appreciate the offer, but this level of misunderstanding makes me believe I wouldn't get a lot of value out of you as a teacher.
My earnest advice to you is sometimes slow down and really think about what other people are saying.
My earnest advice to you is sometimes slow down and really think about what other people are saying.
Happy to schedule a call to better understand what you're saying. I'm pretty easy to find online.
Sorry but you are the one that needs to slow down and understand what people are trying to say. According to the tax law, it is now a stipulation that all Software Engineers (SWEs) are classified as R&D professionals. This is not a matter of personal interpretation or opinion.
Replying to your edit.
That note is financial accounting, we're talking about tax accounting. Entirely different worlds with entirely different rules.
That note is financial accounting, we're talking about tax accounting. Entirely different worlds with entirely different rules.
How is this relevant to one year old companies?
If the developers worked on this years revenue, they should go into COGS, but if they are building things that will have value over many years they should be charged over many years.
Should go into COGS, yes. Unfortunately, that is now called "tax evasion."
Yes, it's tax evasion because the value delivered by those engineers is realized over multiple years? Which is why this old amortization rule is coming back into effect?
EDIT: Just my final reply - this law has nothing to do with COGS. I'm saying R&D is usually a category with multi-year amortization, it's only recently that an exception was made for political reasons.
You are arguing that R&D expense should always be expensed in year, which I assume is a product of not having seen what the normal world was like.
This isn't even a new law fwiw, it's not extending the exception to the existing law.
EDIT: Just my final reply - this law has nothing to do with COGS. I'm saying R&D is usually a category with multi-year amortization, it's only recently that an exception was made for political reasons.
You are arguing that R&D expense should always be expensed in year, which I assume is a product of not having seen what the normal world was like.
This isn't even a new law fwiw, it's not extending the exception to the existing law.
You're missing the point entirely.
You said:
> If the developers worked on this years revenue, they should go into COGS,
That's no longer legal.
You said:
> If the developers worked on this years revenue, they should go into COGS,
That's no longer legal.
You hire consultants.
You paid them a million, you also made a million on the product they produced that year.
So they were not really 'researchers', working out on unknown with high risk probabilities, instead they were building an asset that made you money the same year.
You would deduct the payment to these consultants as expense. they pay their own taxes on their salaries.
You are left with an asset that you can make money on, year after year.
That's, I think what they are thinking.
But a) you were not prepared to turn your salaried employees into consultants b) the asset requires extensive up-keep, that costs as much as money as it was to 'create it' c) the asset value without the up-keep can become zero in year d) the asset itself is very risky and may not have value later on.
So I overall agree with your sentiment.
The gov does not want to classify software dev as 'research', but yet -- they have not established how to fairly classify it.
This is a clustferfuck.
So they were not really 'researchers', working out on unknown with high risk probabilities, instead they were building an asset that made you money the same year.
You would deduct the payment to these consultants as expense. they pay their own taxes on their salaries.
You are left with an asset that you can make money on, year after year.
That's, I think what they are thinking.
But a) you were not prepared to turn your salaried employees into consultants b) the asset requires extensive up-keep, that costs as much as money as it was to 'create it' c) the asset value without the up-keep can become zero in year d) the asset itself is very risky and may not have value later on.
So I overall agree with your sentiment.
The gov does not want to classify software dev as 'research', but yet -- they have not established how to fairly classify it.
This is a clustferfuck.
It's the opposite. It disincentivizes growing all software dev (not just R&D) by front-loading taxes.
How can you grow your R&D team when you’re no longer in business because your tax bill is more money than you have? It makes zero sense.
Wages aren’t R&D lmao
Unfortunately, the Government of the United States disagrees with you.
It can also be positive to amortize r&d and software development costs eg. when you have no revenue this year but expect revenues the following years, you pay less taxes then and overall. In Germany software development and r&d with unknown outcomes cannot be amortized whereas you have the choice with say self developed factory equipment.
Agreed, options are great! Unfortunately this bill removes all options.
Also operating losses can be carried forward and used for 20 years, so recognizing a big loss in a single year isn't really that bad.
Also operating losses can be carried forward and used for 20 years, so recognizing a big loss in a single year isn't really that bad.
Realistically though the first year is:
0 Revenue
- 1,000,000 Salary expense
-----------
- 1,000,000 Profit
This has nothing to do with year one though. This is hitting companies that are in year 5, 10, 20, etc.
If you were running a small software company that make 2m in revenue and puts 200k to the bottom line, your business no longer works.
If you were running a small software company that make 2m in revenue and puts 200k to the bottom line, your business no longer works.
I was wondering how the end of highly paid engineers like myself would come to an end. Maybe this is it.
Even worse: amortization under § 174 begins at the mid-point in the year in which the expense was incurred, so it's actually 1/10th salary expense in the first year (6/60 months).
I have a favor to ask HN: is there anyone going through this that would be willing to share a redacted version of their accounting change statement[0] required to comply with this law by Rev. Proc. 2023-11? It's not at all clear to me (not a CPA or tax lawyer, but normally perfectly capable of doing bookkeeping/accounting for my single-member LLC) how specific "(D) a description of the type of expenditures included as specified research or experimental expenditures" is supposed to be. I filed an extension today because I'm now second-guessing what I wrote; my Google-fu has thus far turned up zero examples of a CPA-blessed version of this statement. (Probably because one of the other statutory requirements is that it includes the taxpayer's identification number.)
[0] Rev. Proc 2023-11: https://www.irs.gov/pub/irs-drop/rp-23-11.pdf [PDF]
I have a favor to ask HN: is there anyone going through this that would be willing to share a redacted version of their accounting change statement[0] required to comply with this law by Rev. Proc. 2023-11? It's not at all clear to me (not a CPA or tax lawyer, but normally perfectly capable of doing bookkeeping/accounting for my single-member LLC) how specific "(D) a description of the type of expenditures included as specified research or experimental expenditures" is supposed to be. I filed an extension today because I'm now second-guessing what I wrote; my Google-fu has thus far turned up zero examples of a CPA-blessed version of this statement. (Probably because one of the other statutory requirements is that it includes the taxpayer's identification number.)
[0] Rev. Proc 2023-11: https://www.irs.gov/pub/irs-drop/rp-23-11.pdf [PDF]
What is the rationale for amortizing R&D expenses in general? Even outside software, what is the motivation for this?
One reason is that sometimes companies claim money from the government for their R&D spend (some sort of scheme by government to incent R&D spending, presumably). In that event the government wants to prevent companies from gaming the system by simply saying that they spent all their profits each year on R&D. So rules are created that say you have to spread the spend over N years for tax purposes. Same as asset depreciation -- you're generally not allowed to depreciate a large asset in one year.
The R&D isn't a pure expense, it typically has a result. Say you spend a million dollars developing a widget and then sell it for 10 years. The money spent in year one results in multiple years of income.
I don't have a strong enough understanding of the change to really have an opinion, but that seems to be the clearer description, the R&D spending is being treated as an investment in the business (which it probably is) that results in capital (who knows if that is true).
I don't have a strong enough understanding of the change to really have an opinion, but that seems to be the clearer description, the R&D spending is being treated as an investment in the business (which it probably is) that results in capital (who knows if that is true).
As someone who's taken a couple semesters of college-level accounting, and filed my corporate taxes correctly many years without audit (but am not an accountant/CPA), this seems broadly correct.
I'm actually surprised people are freaking out about this. Of course software is R&D. And of course you don't just get to expense it all at once. It's long-lived, like you said.
Maybe we could have some tax breaks like our friends over in real estate, but I very much think the base assumption should be that software dev is capitalized.
I'm actually surprised people are freaking out about this. Of course software is R&D. And of course you don't just get to expense it all at once. It's long-lived, like you said.
Maybe we could have some tax breaks like our friends over in real estate, but I very much think the base assumption should be that software dev is capitalized.
I don't know why you're saying "of course you don't" when it's been that way every year until now.
People are freaking out because it's a gigantic change that there wasn't any awareness around.
People are freaking out because it's a gigantic change that there wasn't any awareness around.
R&D spending used to be ridiculously privileged - you could operationalize your loss and in some cases still capitalize the transferrable portion of the resulting assets. People don't really understand that. However, this kind of accounting makes things like government grants work, so it's not exactly good that it changed this way.
FWIW when I was in business school, one professor strongly argued (based on an Aswath Damodaran blog/video - he is a business school "celebrity") that R&D should generally be considered a capital expense in terms of valuing companies even when it can be considered an operational loss on an income statement. Technically, this (likely catastrophic) accounting change may be kind of correct in a pure sense.
However, the "asset" associated with software development seems pretty uniquely hard to transfer. Almost every other intangible asset has a strong marketable component (eg a patent on a widget, a copyright on a song), whereas software just doesn't have one. Licensing doesn't count here - that's not a transfer of the asset.
However, the "asset" associated with software development seems pretty uniquely hard to transfer. Almost every other intangible asset has a strong marketable component (eg a patent on a widget, a copyright on a song), whereas software just doesn't have one. Licensing doesn't count here - that's not a transfer of the asset.
The rights to software get transferred all the time though. It doesn't have to be highly marketable to be an asset.
For sure, lots of software is pretty tied up with the day to day operations of a particular company, but so are things like a specialized manufacturing line or whatever.
Not really trying to argue how that should impact the accounting, just arguing the specific point.
For sure, lots of software is pretty tied up with the day to day operations of a particular company, but so are things like a specialized manufacturing line or whatever.
Not really trying to argue how that should impact the accounting, just arguing the specific point.
Not disagreeing with you at all, but I want to suggest that we look at it another way - which is that accounting principles as a whole are really not built for technology companies, and we are straining them right now to fit ourselves in.
When you build a manufacturing line, you usually buy your equipment off-the-shelf (capex, with good resale value) and hook it up in a semi-custom way with cheap, movable conveyors (also capex, with resale value). This means that you can make a "stuff" company with practically no R&D. In that world, you only do significant R&D of any kind once you are big enough that your chance of going bankrupt before the end of even a 15-year amortization period is pretty small.
Even in those companies, the work product of R&D groups is often relatively modularizable and transferable. For example, your R&D group may modify a machine to produce coke cans 10% faster. That improvement is likely transferable to pepsi. You may also patent the improvement, but that's not required for it to transfer well. Your R&D can also be hard to transfer, like specific factory layouts to make $widget that only you would ever want to make, but you're only doing that research when you are an established manufacturer, which makes the depreciation not a big deal (you probably prefer to capitalize that expense anyway).
The fact that the work product of R&D is somewhat transferable at a price near how much it cost to produce is what allows you to get loans backed by R&D work (technologies, patents). Without the secondary market value, you don't really have an asset.
In contrast, companies whose primary work product is technology (software companies and some digital hardware companies) do significant R&D from day one, both before proving the value of the R&D work and in a way that it usually isn't sellable or modularizable.
Like the coke cans, there's probably a market of people who would buy the product "patch that makes redis 10% faster," but the tech transfer mechanisms we have today don't support that market well (if at all), and most startups don't waste time improving redis. There is almost certainly no market that would buy "efficient database schema for a SaaS for gravediggers," which actually is what occupies your time if you're building a SaaS for gravediggers.
That suggests, using the "capitalized R&D" and "software development is R&D" ideas, that the first few years of a software company will pretty much always involve vastly overpaying for an asset with likely no real resale value. That is very different than how a traditional capex works: usually the vast majority of the price you pay on a capex goes into the value of the asset.
So that leaves us in a weird sort of void. I assume the very-long-term solution is to figure out how to make an IP rights system that actually works for software (eg a new kind of patent), so you can finance your software R&D the way you do a house.
When you build a manufacturing line, you usually buy your equipment off-the-shelf (capex, with good resale value) and hook it up in a semi-custom way with cheap, movable conveyors (also capex, with resale value). This means that you can make a "stuff" company with practically no R&D. In that world, you only do significant R&D of any kind once you are big enough that your chance of going bankrupt before the end of even a 15-year amortization period is pretty small.
Even in those companies, the work product of R&D groups is often relatively modularizable and transferable. For example, your R&D group may modify a machine to produce coke cans 10% faster. That improvement is likely transferable to pepsi. You may also patent the improvement, but that's not required for it to transfer well. Your R&D can also be hard to transfer, like specific factory layouts to make $widget that only you would ever want to make, but you're only doing that research when you are an established manufacturer, which makes the depreciation not a big deal (you probably prefer to capitalize that expense anyway).
The fact that the work product of R&D is somewhat transferable at a price near how much it cost to produce is what allows you to get loans backed by R&D work (technologies, patents). Without the secondary market value, you don't really have an asset.
In contrast, companies whose primary work product is technology (software companies and some digital hardware companies) do significant R&D from day one, both before proving the value of the R&D work and in a way that it usually isn't sellable or modularizable.
Like the coke cans, there's probably a market of people who would buy the product "patch that makes redis 10% faster," but the tech transfer mechanisms we have today don't support that market well (if at all), and most startups don't waste time improving redis. There is almost certainly no market that would buy "efficient database schema for a SaaS for gravediggers," which actually is what occupies your time if you're building a SaaS for gravediggers.
That suggests, using the "capitalized R&D" and "software development is R&D" ideas, that the first few years of a software company will pretty much always involve vastly overpaying for an asset with likely no real resale value. That is very different than how a traditional capex works: usually the vast majority of the price you pay on a capex goes into the value of the asset.
So that leaves us in a weird sort of void. I assume the very-long-term solution is to figure out how to make an IP rights system that actually works for software (eg a new kind of patent), so you can finance your software R&D the way you do a house.
> However, the "asset" associated with software development seems pretty uniquely hard to transfer
Isn't it what's happening when a company gets acquired? Buyer pays for a software and a team (more for the latter usually, including business process as a whole), not for laptops or servers. It's not "equal" to salaries but you can't create the former without the latter. So in a sense when you pay salaries your create the above-mentioned "asset".
Isn't it what's happening when a company gets acquired? Buyer pays for a software and a team (more for the latter usually, including business process as a whole), not for laptops or servers. It's not "equal" to salaries but you can't create the former without the latter. So in a sense when you pay salaries your create the above-mentioned "asset".
Yes, but that's basically the only mechanism for this kind of IP transfer. Other types of IP are a lot more transferable and don't have to be tied to a team. Think about book/song copyrights or widget patents.
Do these companies have an option of moving overseas to avoid this?
What happens if they pay an 3rd party company?
Also: this specifically singles out software development for ??? reasons.
Office Manager: 100% expense.
Software Engineer: 20% over 5 years (actually only 10% for the first year).
If they’re international then 6.67% over 15 years.
Not only that, but the effect “stacks” over the years.
If you’re a C Corp that’s $420,000 in extra federal taxes (plus whatever state tax).
If you’re a smaller company you’re probably a S Corp and federal and state tax could be ~50% passed through to your personal return.
How any owner survives that, I’m not sure.
Office Manager: 100% expense.
Software Engineer: 20% over 5 years (actually only 10% for the first year).
If they’re international then 6.67% over 15 years.
Not only that, but the effect “stacks” over the years.
So year 1:
1,000,000
- 100,000
————————-
900,000 Profit
Year 2:
1,000,000
- 200,000
- 200,000
- 100,000
————————-
500,000 Profit
Year 3:
1,000,000
- 200,000
- 200,000
- 200,000
————————-
400,000 Profit
Year 4:
1,000,000
- 200,000
- 200,000
- 200,000
- 200,000
————————-
200,000 Profit
Year 5+:
1,000,000
- 200,000
- 200,000
- 200,000
- 200,000
- 200,000
————————-
0 Profit
If you’re a C Corp that’s $420,000 in extra federal taxes (plus whatever state tax).
If you’re a smaller company you’re probably a S Corp and federal and state tax could be ~50% passed through to your personal return.
How any owner survives that, I’m not sure.
That sounds pretty horrible. Am I correct in assuming though that once you get over the five year hump, you're OK? Also wouldn't startups mostly be paying devs out of VC funding rather than revenue the first five years?
Only if you’re not growing.
No. If you are growing and increasing expenses you’re always behind. The only case where you get ahead is if you stop growing or shrink.
[deleted]
That makes sense, thanks for clarifying. How do you think businesses would react to this? For example, I imagine self-hosted servers would need to be depreciated too, so the tech community invented cloud as the solution. Maybe this policy change will cause tech companies to hire more TVCs rather than FTEs?
Contractor expenses to develop software are also R&D. As would cloud expenses for your test environment, probably. More likely, companies will engage in activities that are arguably not "software development," including things like maintaining existing software.
Presumably if a company doesn't build software in-house and "buys a product", then that's not R&D? Then, the companies making said "products" would be based in countries that don't have such draconian laws...
Have your 'office manager' do everything with 'no code' environments .. maybe with them using some sort of java to 'no code' compiler for parts.
No, you never “catch up” unless you fire every software engineer (so income and trailing five years of amortization cancel out).
Year 5 is just a steady state of no more phantom profit taxes, but you never really get that extra tax you paid back if you want to keep operating at the same level or grow.
Year 5 is just a steady state of no more phantom profit taxes, but you never really get that extra tax you paid back if you want to keep operating at the same level or grow.
[deleted]
> No, you never “catch up” unless you fire every software enginee
So Musk was following a playbook after all...
So Musk was following a playbook after all...
After 5 years dont you end up with some "finished" R&D project that then can be later amortized, over say next 3 (or 5 years), so you reduce your tax base by those 2 million later on?
No.
After 5 years the first years salaries are considered to be a "finished" R&D project, which means there's nothing left to amortize.
The only thing like that is that if, after a few years, you fire all your devs (or at least, all devs working on adding new features and building new products), then you can keep amortizing the last 4 years of salaries for your now-fired workers over the next few years, which reduces your tax base. But I mean, by that point, who cares? Any software business that has fired all its devs is over.
After 5 years the first years salaries are considered to be a "finished" R&D project, which means there's nothing left to amortize.
The only thing like that is that if, after a few years, you fire all your devs (or at least, all devs working on adding new features and building new products), then you can keep amortizing the last 4 years of salaries for your now-fired workers over the next few years, which reduces your tax base. But I mean, by that point, who cares? Any software business that has fired all its devs is over.
Could start a rotating door policy. You have to be rehired every period.
Doesn't help; what matters is your total R&D spend which - apparently according to current guidance - includes all/most of programmer salaries.
If you spend is going up, you're pre-paying more and more tax on profits you haven't earned yet. If your spend is constant, you'll stay the same amount behind. If your spend declines you'll start to catch up, and if it drops to 0 and stays there for ~4 years you'll catch up to where you would have been without the law change...but if you start spending again you have to start pre-paying again.
If you spend is going up, you're pre-paying more and more tax on profits you haven't earned yet. If your spend is constant, you'll stay the same amount behind. If your spend declines you'll start to catch up, and if it drops to 0 and stays there for ~4 years you'll catch up to where you would have been without the law change...but if you start spending again you have to start pre-paying again.
Software was targeted directly because they couldn't agree how to change 230. There are those who want to punish the "tech" people who were "censoring" things they didn't want censored. It was designed to be tactical retribution.
Do you have a source for that claim?
The general public absolutely despises software engineers for being able to earn good money with good work-life balance. It's pure jealousy. The general public has been cheering during the tech layoffs.
I haven't much evidence for that, and what little I did see was more about validation that a lot of large tech companies have insane, managerial bloat.
I don’t see any evidence of that. Care to share any?
Software has a long life, like buildings and whatnot, so that is likely why it is singled out versus the office manager.
If you buy a building, you can’t depreciate the whole thing instantly, you do it over the life of the building.
If you buy a building, you can’t depreciate the whole thing instantly, you do it over the life of the building.
> If you buy a building, you can’t depreciate the whole thing instantly
The same should hold of course if you buy software.
But if you ask your employee to perform a task like writing a program you are not buying anything. You are paying the employee's salary whether the software they are writing ever gets out of the compiler or not.
So wouldn't there be a way around this by changing the titles of software developers to "software janitors" for instance ?
The same should hold of course if you buy software.
But if you ask your employee to perform a task like writing a program you are not buying anything. You are paying the employee's salary whether the software they are writing ever gets out of the compiler or not.
So wouldn't there be a way around this by changing the titles of software developers to "software janitors" for instance ?
What about an architect's salary? Does the firm who designs the building amortize the cost of that labor, while the purchaser of the building also amortizes the entire cost of the building?
How about EEs who design the hardware? Are they included?
They get acquired by companies that have unused deductions. That is how monopolies form.
When you lay it out like that...
Feels like this is just a move to stop companies from gaming expenses to avoid profiting. Piercing the corporate veil, if you will.
Feels like this is just a move to stop companies from gaming expenses to avoid profiting. Piercing the corporate veil, if you will.
What part of it is gaming anything? They're not profiting from money they're paying to their employees as salary.
You can balance hiring additional staff and potential tax savings (not a great idea but possible-ish). And a lot of software dev does feel like R&D (experimental development).
I appreciate the suddenness of the change, but aside of that, how is this different than amortizing the cost of a million dollars worth of equipment? Couldn't they borrow the money for their taxes against future profits?
Thinking about it more, perhaps it's a mistake to assume that the software being written has a service lifespan of five years.
Thinking about it more, perhaps it's a mistake to assume that the software being written has a service lifespan of five years.
Because you don't stop paying developers starting the second year?
But aren't you deriving value from what they developed in the first year? I mean, maybe that's my mistake.
If they spent a million, made a million, and are now back to square one, it would make more sense to not amortize the investment because it's not an investment.
If they spent a million, made a million, and are now back to square one, it would make more sense to not amortize the investment because it's not an investment.
Yes, but according to this law you're not allowed to do that; you have to amortize it over five years.
That seems to be the rub. It doesn't differentiate between different reasons and business models for writing software: Software as wealth, and software as pure expense.
It's also pretty harsh on a business that's just plain unprofitable. The laws should be arranged so that if you start a business and it's a flop, but you have no debts, you can walk away pretty much unscathed.
It's also pretty harsh on a business that's just plain unprofitable. The laws should be arranged so that if you start a business and it's a flop, but you have no debts, you can walk away pretty much unscathed.
> Couldn't they borrow the money for their taxes against future profits?
In theory, but good luck getting a loan secured against IP for a reasonable rate.
In theory, but good luck getting a loan secured against IP for a reasonable rate.
The change isn't really sudden and honestly I have a hard time having sympathy for those firms that were caught unaware. This provision was in the law since 2017 - anyone taking a chunk of VC money (including the VC lending it) should have been well aware of what would happen if Congress did not strike it before it took effect.
Honestly this is a bit like SVB all over again - poor management, in this case not knowing or understanding critical tax laws. And if you did know, shame on you for not contingency planning for Congressional ineptitude.
Honestly this is a bit like SVB all over again - poor management, in this case not knowing or understanding critical tax laws. And if you did know, shame on you for not contingency planning for Congressional ineptitude.
The only way to really plan for it, if you're running a small business with lower margins, is to raise prices, grow users or cut salary expenses. None of those are easy, even if you can see the tax bill coming.
Also, to be clear, it will eventually stack up and roughly even out as you amortize 1/5 of each of 5 years’ worth of R&D spend per year. Basically the part that sucks is that there was no 4-year phase-in period.
^^ This is the core issue.
It doesn't even out if the company keeps growing - if your headcount is growing 50% per year you can have very significant tax drag.
I think you may have that backwards but yes. You are effectively always paying for expenses incurred 2.5 years ago.
EDIT: Nevermind, you had it the right way.
EDIT: Nevermind, you had it the right way.
Damn, what are they thinking right now?
Not an accountant
But I think,
they are thinking that software devs should be consultants
( unless they are researches doing something very risky, something that may not work (from technical not business sense))
This way, they are an expense to the corporation, and each one of the consultants pay their own income tax.
In that way the corporation building software for sale/SaaS is treated the same way that a corporation that's buying and then renting out real-estate, for example.
This way, they are an expense to the corporation, and each one of the consultants pay their own income tax.
In that way the corporation building software for sale/SaaS is treated the same way that a corporation that's buying and then renting out real-estate, for example.
Are software dev salaries treated differently than regular employees. I thought 100% of salary and benefits were deductible against revenue.
I’m missing why software salaries are amortized against just straight expenses?
I’m missing why software salaries are amortized against just straight expenses?
[deleted]
> The new law would instead work like this:
Forcing sofware dev salaries to be considered R&D then forcing all R&D expenses to be amortized over five years? There's a name for that kind of behavior.
It's theft.
Forcing sofware dev salaries to be considered R&D then forcing all R&D expenses to be amortized over five years? There's a name for that kind of behavior.
It's theft.
[deleted]
Salaries aren’t tax deductible normally? That seems wrong.
IMHO the solution is really more simple than people are making it out to be and it’s weird politics among CPAs causing all the distress. To people wiling to challenge their CPAs style of doing things: don’t classify your core expenses as “research and development”. I believe this follows the letter and spirit of the law. R&D is extra stuff you do on top of an already profitable business. When you’re building a product you’re implementing. It’s entirely a semantic problem that has happened because we call the job function “software development” and the tax code uses “research and development” (a different function) as the language. The CPA thing is caused by there being a central source of “doing things” that all the CPAs follow because they’re not qualified to be a tax lawyer and think for themselves. So everyone is stuck in whatever rut their guild’s status quo tax setup for #startups has caused.
You know, this is pretty clearly the right answer. Software developer salaries are ordinary business expenses. There’s some alarming language in the section about deductibility of R&E expenses, but core business functions aren’t R&E.
Really perceptive comment.
Really perceptive comment.
All sw dev is considered R&E. Soo you have no choice
That doesn't make sense since there is both greenfield development and maintenance development. By this logic we would have to track our hours and write down when we do maintenance work and when we do R&D.
You do, if you want to claim the tax credit. But the R&D tax credit and R&E under Section 174 are two completely different things.
Until 2022, companies had the choice between expensing and amortizing software development under Section 174. (Section 174 specifically calls out all software development as falling under that section.) So they would only time track when they wanted to get the R&D tax credit, which only covers a portion of software development activities. R&D tax credit software development is a much narrower scope than R&E software development. So it didn't matter until now.
Until 2022, companies had the choice between expensing and amortizing software development under Section 174. (Section 174 specifically calls out all software development as falling under that section.) So they would only time track when they wanted to get the R&D tax credit, which only covers a portion of software development activities. R&D tax credit software development is a much narrower scope than R&E software development. So it didn't matter until now.
“In the case of a taxpayer’s specified research or experimental expenditures for any taxable year” …
Seems pretty obvious to me that the section only applies to what is claimed as R&E. Software development doesn’t have to be claimed as R&E, but if it is, now it unambiguously qualifies.
Seems pretty obvious to me that the section only applies to what is claimed as R&E. Software development doesn’t have to be claimed as R&E, but if it is, now it unambiguously qualifies.
Isn't the main problem that this change forces all software development, regardless of purpose, to be classified as R&E and therefore forced to be amortized?
No! That’s what confused CPAs are telling gullible startup founders.
Nothing forces you to classify engineering salaries or even contract expenses under the provisions of section 174 which describe “research and experimental expenditure”. There are some reasons historically why people elected to do that, but that may be a bad idea moving forward and honestly seems rather dishonest to me. No, your Jira clone is not “research and experimental expenditure”, it’s just a fucking database with a UI… just like 97% of all other startups. It’s more like: if you can use section 174 because you spun up a project to research curing diabetes with nano bots, then your software development allocated towards the project also counts as R&E, cheers.
Repeat after me: “my core business is not a research and experimental expenditure, it’s just a normal mundane boring operating expense”.
Nothing forces you to classify engineering salaries or even contract expenses under the provisions of section 174 which describe “research and experimental expenditure”. There are some reasons historically why people elected to do that, but that may be a bad idea moving forward and honestly seems rather dishonest to me. No, your Jira clone is not “research and experimental expenditure”, it’s just a fucking database with a UI… just like 97% of all other startups. It’s more like: if you can use section 174 because you spun up a project to research curing diabetes with nano bots, then your software development allocated towards the project also counts as R&E, cheers.
Repeat after me: “my core business is not a research and experimental expenditure, it’s just a normal mundane boring operating expense”.
You don't specify what is R&E, the statute does. It's specified in the next section, and section c(3):
" “specified research or experimental expenditures” means, with respect to any taxable year, research or experimental expenditures which are paid or incurred by the taxpayer during such taxable year in connection with the taxpayer’s trade or business."
and
"For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure."
" “specified research or experimental expenditures” means, with respect to any taxable year, research or experimental expenditures which are paid or incurred by the taxpayer during such taxable year in connection with the taxpayer’s trade or business."
and
"For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure."
Honestly people like you posting these articles claiming that “weird legislative inaction is fucking over startups and small business” and further pushing the “all work that involves scripting a computer 110% must be classified as software R&E” narrative in comments, in spite of so many people telling you that such a conclusion is batshit stupid, makes me question whether there’s some ulterior motive in play. Like what, are all the accounting firms realizing their CPAs don’t outperform TurboTax if they can’t use their secret software R&E magic loophole and have thus deployed the shills, who show founders ridiculous mega tax bills..obviously perturbing them into posting their re-shills? Anecdotally, I know exactly zero founders who are getting “fucked over” by this because they aren’t stupid enough to structure their taxes in a way that causes their employees’ salaries to magically become capitalized voodoo money. Like, man, cut the histrionics… and find a better tax person.
Whether you can shop around to find someone who can tell you what you want to hear is unrelated to the mixed fact and law question of whether it is a defensible position that software development salaries must be capitalized.
> That doesn't make sense
And yet that's the letter of the law. R&D expenses must be amortized over 5 years. Software development must be counted as R&D.
There is no consideration in the law as written for categorizing software development differently.
That's the reason this whole scenario is a problem in the first place.
And yet that's the letter of the law. R&D expenses must be amortized over 5 years. Software development must be counted as R&D.
There is no consideration in the law as written for categorizing software development differently.
That's the reason this whole scenario is a problem in the first place.
I don’t think the law says all software development has to be part of a mandatory R&E credit.
It says “For the purposes of this section…”, so it doesn’t apply if you’re not claiming R&E credit.
It says “For the purposes of this section…”, so it doesn’t apply if you’re not claiming R&E credit.
From https://uscode.house.gov/view.xhtml?req=(title:26%20section:...
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
Where "this section" is "§174. Amortization of research and experimental expenditures"
Tax credit is separate from amortization afaict.
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
Where "this section" is "§174. Amortization of research and experimental expenditures"
Tax credit is separate from amortization afaict.
Where does it say that all your business expenditure must be considered R&E and consequently are subject to the provisions of section 174?
Yes, if some of your expenditure falls under R&E, then you use section 174 which says any portion thereof involving software development must be amortized.
What’s described is a cause and effect relationship, not a global mutation of all expenses.
Yes, if some of your expenditure falls under R&E, then you use section 174 which says any portion thereof involving software development must be amortized.
What’s described is a cause and effect relationship, not a global mutation of all expenses.
@dcow
> Where does it say that all your business expenditure must be considered R&E and consequently are subject to the provisions of section 174?
It doesn't, and neither did I. It states that all software development is seen as R&E
> Yes, if some of your expenditure falls under R&E, then you use section 174 which says any portion thereof involving software development must be amortized.
> What’s described is a cause and effect relationship, not a global mutation of all expenses.
That's not how I interpret it. Section 174 states that all sw dev will fall under R&E. By your logic, you could rule out any "Special rules and definitions" of all sections. Again, it's not about "all expenses". It's about "any amount paid or incurred in connection with the development of any software". Basically payroll, contractors, and even outsourced companies.
To prevent massive outsourcing, the amortization rate is 7% (15 years) instead of 20%.
Look at it this way:
A "machine" must be amortized. In its lifespan it wil generate some sort of income (almost by itself). Software can be seen as a "machine". Makes total sense.
Here in NL, if you mine bitcoin. You'll have to pay income tax over it, as it's seen similar as "labor".
> Where does it say that all your business expenditure must be considered R&E and consequently are subject to the provisions of section 174?
It doesn't, and neither did I. It states that all software development is seen as R&E
> Yes, if some of your expenditure falls under R&E, then you use section 174 which says any portion thereof involving software development must be amortized.
> What’s described is a cause and effect relationship, not a global mutation of all expenses.
That's not how I interpret it. Section 174 states that all sw dev will fall under R&E. By your logic, you could rule out any "Special rules and definitions" of all sections. Again, it's not about "all expenses". It's about "any amount paid or incurred in connection with the development of any software". Basically payroll, contractors, and even outsourced companies.
To prevent massive outsourcing, the amortization rate is 7% (15 years) instead of 20%.
Look at it this way:
A "machine" must be amortized. In its lifespan it wil generate some sort of income (almost by itself). Software can be seen as a "machine". Makes total sense.
Here in NL, if you mine bitcoin. You'll have to pay income tax over it, as it's seen similar as "labor".
The section starts with
> In general
> In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—
Note specified.
Then the special rule says
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
So the section says its purpose is to govern specified R&E expenditure. And the special rule regarding software is caveated to make it clear that it is subject to the general purpose of the section.
To your analogy, if I pay an employee to build a machine rather than buy a machine, that’s opex not capex. I don't amortize the labor cost of the machine out over 5 years and pay taxes on the 80% of the employees salary that now doesn’t count as an expense because they made a machine. I also don't get to add the value of the machine as an asset and record losses as it depreciates over the years, either.
> In general
> In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—
Note specified.
Then the special rule says
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
So the section says its purpose is to govern specified R&E expenditure. And the special rule regarding software is caveated to make it clear that it is subject to the general purpose of the section.
To your analogy, if I pay an employee to build a machine rather than buy a machine, that’s opex not capex. I don't amortize the labor cost of the machine out over 5 years and pay taxes on the 80% of the employees salary that now doesn’t count as an expense because they made a machine. I also don't get to add the value of the machine as an asset and record losses as it depreciates over the years, either.
But in "(b) Specified research or experimental expenditures" it says:
> For purposes of this section, the term "specified research or experimental expenditures" means, with respect to any taxable year, research or experimental expenditures which are paid or incurred by the taxpayer during such taxable year in connection with the taxpayer's trade or business.
So that's R&E expenditures. It's further specified that all swdev is R&E.
My interpretation would be that sw dev = R&E. And R&E = specified R&E, UNLESS it's not in connection to the trade or business. (Not sure when that would happen though).
Afaik, it works like that when activating any piece of IP using an expenses based valuation method.
I'm gonna let it rest now. I'm not affected anyway. At least not directly.
> For purposes of this section, the term "specified research or experimental expenditures" means, with respect to any taxable year, research or experimental expenditures which are paid or incurred by the taxpayer during such taxable year in connection with the taxpayer's trade or business.
So that's R&E expenditures. It's further specified that all swdev is R&E.
My interpretation would be that sw dev = R&E. And R&E = specified R&E, UNLESS it's not in connection to the trade or business. (Not sure when that would happen though).
Afaik, it works like that when activating any piece of IP using an expenses based valuation method.
I'm gonna let it rest now. I'm not affected anyway. At least not directly.
> All sw dev is considered R&E
In the UK the relevant document is CIRD81900[0] which sets out what conditions must be satisfied to qualify for R&D tax relief. It's lengthy, but worth the read.
One section that stands out is:
"A process, material, device, product, service or source of knowledge does not become an advance in science or technology simply because science or technology is used in its creation"
[0] https://www.gov.uk/hmrc-internal-manuals/corporate-intangibl...
In the UK the relevant document is CIRD81900[0] which sets out what conditions must be satisfied to qualify for R&D tax relief. It's lengthy, but worth the read.
One section that stands out is:
"A process, material, device, product, service or source of knowledge does not become an advance in science or technology simply because science or technology is used in its creation"
[0] https://www.gov.uk/hmrc-internal-manuals/corporate-intangibl...
Unsure if you were getting at this too, but software development in the UK can absolutely be ineligible for R&D tax credits yet still require treatment as capital expenditure for tax purposes (and thus not simply fully deductible in year 1 like revenue expenditure) - see [0] from the AAT on this.
Disclaimer: Not an accountant, not your accountant, get professional advice.
[0] https://www.att.org.uk/tax-treatment-software-and-website-co...
Disclaimer: Not an accountant, not your accountant, get professional advice.
[0] https://www.att.org.uk/tax-treatment-software-and-website-co...
> software development in the UK can absolutely be ineligible for R&D tax credits yet still require treatment as capital expenditure for tax purposes
Indeed. Although:
"If businesses develop their own software, the classification of expenditure relating to this (including salaries of in-house IT staff) should be assessed following the same principles. The fact that expenses such as salaries may be recurring does not on its own prevent them from being capital in nature. However, it should be noted that:
The salaries of IT staff will not normally be capital expenditure unless some major new project can be identified. If staff are making only piecemeal changes or minor improvements to software, their salaries are likely to be revenue costs."
Yet from the [US-based] contibutions in the thread it sounds as though _all_ in-house software developers' salaries may _have_ to be treated as capital expenditure for tax purposes in the US.
This seems, frankly, bonkers. I appreciate that portions of the US tax code might well be exactly that(!)
Indeed. Although:
"If businesses develop their own software, the classification of expenditure relating to this (including salaries of in-house IT staff) should be assessed following the same principles. The fact that expenses such as salaries may be recurring does not on its own prevent them from being capital in nature. However, it should be noted that:
The salaries of IT staff will not normally be capital expenditure unless some major new project can be identified. If staff are making only piecemeal changes or minor improvements to software, their salaries are likely to be revenue costs."
Yet from the [US-based] contibutions in the thread it sounds as though _all_ in-house software developers' salaries may _have_ to be treated as capital expenditure for tax purposes in the US.
This seems, frankly, bonkers. I appreciate that portions of the US tax code might well be exactly that(!)
Yeah we've helped hundreds of start-ups do their R&D claims, and you have to have specific projects that fall within the definition of "novel" and even then you need to explicitly specify exactly which people worked on it and for how long. It's not a blank cheque at all, and they've tightened the requirements this year on top of that.
In NL, there's a tax relief for R&D, but it will have to be approved on forehand, and has to be described and estimated in detail, and will be audited. The tax relief gives you a discount on employee taxes.
Stop parroting this nonsense. If you really think gluing a React UI onto MongoDB and then jamming it into an Electron app so that you can charge a subscription for your juice-pulp-bag-squeezing-machine is “research and experimental expenditure” you have either drown yourself so far in Kool-Aid that your skin is blue or you’re certifiably committing tax fraud.
> (3) Software development
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
I'm just "parroting" from house.gov
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
I'm just "parroting" from house.gov
For purposes of this section
This section describes how to handle expenses you consider to honestly be research and experimental expenditure. It does not supersede all other sections of the tax code and magically cause all software expenses to get sucked under this section. It simply instructs you how to proceed when evaluating your R&E expenditure, of which software development unambiguously qualifies.
Section 174 literally begins with
> In General
> In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—
This section describes how to handle expenses you consider to honestly be research and experimental expenditure. It does not supersede all other sections of the tax code and magically cause all software expenses to get sucked under this section. It simply instructs you how to proceed when evaluating your R&E expenditure, of which software development unambiguously qualifies.
Section 174 literally begins with
> In General
> In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—
And this section is "26 USC 174: Amortization of research and experimental expenditures"
Why is it so hard to believe? The US has a credit problem. There's a ton of money going to software dev. It gives the government some easy access to capital. It's essentially a loan from tech companies
Why is it so hard to believe? The US has a credit problem. There's a ton of money going to software dev. It gives the government some easy access to capital. It's essentially a loan from tech companies
Amortization of research and experimental expenditures applies to research and experimental expenditures. It doesn't apply to the money you spent paying a contractor to hook your PoS and Shopify into Stripe. If you’re researching how to cure brain cancer by experimenting on rats with gene therapy, then yeah, you might consider organizing your expenses under the provisions of section 174. But even then it’s not a requirement.
@dcow, sure, but it says, and that's what all the fuzz imo is about:
"For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure."
"For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure."
I certainly agree the wording is wholly suboptimal and confusing, but what I don't understand is the determination to pick the obviously borked interpretation, especially after clarification is given. There is no honest fair rational interpretation of the tax code that would result in needing to e.g. capitalize your IT team’s salary because they wrote a script to provision employee laptops. It can’t be interpreted that way because it’s not just. The for the purposes of this section caveat is really important. But also, pulling one sentence out of the document out of context is also somewhat fraught. The government isn’t allowed to steal money from software companies just because. That’s not remotely close to the spirit of the tax code.
PS: if the reply button doesn't show up click the timestamp (X minutes|hours ago) on the comment you’re wanting to reply to and you’ll get a reply option.
PS: if the reply button doesn't show up click the timestamp (X minutes|hours ago) on the comment you’re wanting to reply to and you’ll get a reply option.
TIL hidden features of HN :-)
Was clarification given? If so, it would be rather strange to see these posts pop up on cnbc and other big sites, as it was already known and discussed some time ago.
I think that's up to the judicial branch to see if the new law/regulations are unconstitutional.
Whil I do agree it's messed up, but they're not really stealing, they're just borrowing from companies. Timing is pretty shitty though; a year or two ago, it would've made less of an impact, as capital was cheaper and easier to get.
Was clarification given? If so, it would be rather strange to see these posts pop up on cnbc and other big sites, as it was already known and discussed some time ago.
I think that's up to the judicial branch to see if the new law/regulations are unconstitutional.
Whil I do agree it's messed up, but they're not really stealing, they're just borrowing from companies. Timing is pretty shitty though; a year or two ago, it would've made less of an impact, as capital was cheaper and easier to get.
Is borrowing the right term here? You don't get the tax you paid on your phantom profits back if you lose money the next year. You just pay marginally less tax if you make money. You’re spending money you would never have spent. A loan implies you get repaid.
That’s what is really fucked up as others are pointing out. If I don’t grow or grow slowly The gov’t is flat out robbing me. If I start a venture that I don’t expect will start generating revenue for 5 years, then the government has taken 5 * 1/5(sw-expenses)(tax-rate). Thats not a loan, it’s larceny.
That’s what is really fucked up as others are pointing out. If I don’t grow or grow slowly The gov’t is flat out robbing me. If I start a venture that I don’t expect will start generating revenue for 5 years, then the government has taken 5 * 1/5(sw-expenses)(tax-rate). Thats not a loan, it’s larceny.
>> All sw dev is considered R&E. Soo you have no choice
You certainly have a choice to claim it as such or not.
More importantly, why TF has the government been paying software engineers salary all these years? That's the real question. Also, has it occurred to anyone that this may be why the big tech companies are laying off engineers in droves?
You certainly have a choice to claim it as such or not.
More importantly, why TF has the government been paying software engineers salary all these years? That's the real question. Also, has it occurred to anyone that this may be why the big tech companies are laying off engineers in droves?
The government has not been paying software engineer salaries in any sense. This is in regards to profit calculation where business typically pays taxes on profits, so a zero profit company whose largest expense is developers gets a "fuck you, go out of business now" tax bill.
This is categorically untrue, many developers are COGS.
> The salaries of the team responsible for keeping the production instance of the software up and running should also be included in COGS. All other R&D expenses should not be in COGS.
https://www.saas-capital.com/blog-posts/what-should-be-inclu...
> The salaries of the team responsible for keeping the production instance of the software up and running should also be included in COGS. All other R&D expenses should not be in COGS.
https://www.saas-capital.com/blog-posts/what-should-be-inclu...
Great source! To add:
> Amortized software development costs (we discourage capitalizing these costs in the first place)
Emphasis mine. They're saying if you amortize your other software dev as R&E (stuff that isn't ops/infra/etc. and thus considered COGS) then it doesn't count towards your COGS. But then what they're pretty clearly saying in the parenthetical is that they don't recommend doing that in the first place, which implies that you have a choice.
> Amortized software development costs (we discourage capitalizing these costs in the first place)
Emphasis mine. They're saying if you amortize your other software dev as R&E (stuff that isn't ops/infra/etc. and thus considered COGS) then it doesn't count towards your COGS. But then what they're pretty clearly saying in the parenthetical is that they don't recommend doing that in the first place, which implies that you have a choice.
> 174(c)(3)SoftwareDevelopment
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
My understanding is the problem is the phrase "any amount paid or incurred in connection with". It is unambiguous and provides no leeway. Any costs related to software development are R&D. Period.
My understanding is the problem is the phrase "any amount paid or incurred in connection with". It is unambiguous and provides no leeway. Any costs related to software development are R&D. Period.
The ambiguous part is "the development of any software". What does "development" mean? Is it used in the same sense as "real estate development" or "software development"? Does "development" include maintenance of existing software? As everyone here knows, software development (the profession and practice) is a lot more than just greenfield projects to create brand new products and IP.
[deleted]
How do you explain the CBO scoring?
From the Section 174 text:
To me it doesn't sound like classification is discretionary to me, or that splitting semantic hairs will prove effective (IANAL).
(Additionally, the R&E classification is different from R&D)
26 U.S. Code § 174 - Amortization of research and experimental expenditures
(c) Special rules
(3) Software development
For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
To me it doesn't sound like classification is discretionary to me, or that splitting semantic hairs will prove effective (IANAL).
(Additionally, the R&E classification is different from R&D)
Guys, this entire section is under the ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS section. Taking a deduction is never mandatory (though usually recommended if applicable). Context matters.
> In computing taxable income under section 63, there shall be allowed as deductions the items specified in this part,
Generally, these sections explaining deductions, including 174, are things you adopt. From the beginning of the section
> (a) In general
> In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—
Everything that follows is subject your specified R&E. Which is all part of the itemized deductions framework which is all completely discretionary.
For instance, here’s section 162
> a) In general
> There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—
> (1) a reasonable allowance for salaries or other compensation for personal services actually rendered;
You are simply carrying on business ordinarily. People don’t operate businesses on R&E expenditure. It’s just not a rational interpretation of the tax code and you don't even need to be a lawyer to read this document or form that conclusion.
https://news.bloombergtax.com/tax-insights-and-commentary/ch...
> In computing taxable income under section 63, there shall be allowed as deductions the items specified in this part,
Generally, these sections explaining deductions, including 174, are things you adopt. From the beginning of the section
> (a) In general
> In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—
Everything that follows is subject your specified R&E. Which is all part of the itemized deductions framework which is all completely discretionary.
For instance, here’s section 162
> a) In general
> There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—
> (1) a reasonable allowance for salaries or other compensation for personal services actually rendered;
You are simply carrying on business ordinarily. People don’t operate businesses on R&E expenditure. It’s just not a rational interpretation of the tax code and you don't even need to be a lawyer to read this document or form that conclusion.
https://news.bloombergtax.com/tax-insights-and-commentary/ch...
Shall means shall, as in it’s mandatory.
That's literally not true. I could file taxes with no itemized deductions and the IRS would happily take my overly large payment.
I was referring to the statute, in that you shall capitalize R&D. That's not just the plain language of the statute [1], or how the Congress who passed it interpreted it [2], it's the plain language as the IRS describes it in Pub 535 [3]:
> Research or experimental expenditures paid or incurred in tax years beginning after December 31, 2021, must be charged to a separate specified research or experimental capital account and amortized ratably over a 5-year period ... The expenses cannot be deducted in full in the current year.
> Research or experimental expenditures, as used in section 174, are research and development costs ... you incur in connection with your trade or business [..] The costs related to developing software are treated as research and experimental expenditures.
Nothing contradicts this plain meaning. Rev Proc 2023-11 [5] just reiterates that yes, all software development is included in R&E expenses:
> 2.02 (5) Section 174(c)(3) provides that for purposes of § 174, any amount paid or incurred in connection with the development of any software is treated as a research or experimental expenditure accounted for under the required § 174 method.
And yes, no deduction is allowed:
> 2.02 (1) As amended by § 13206(a) of the TCJA, § 174(a)(1) provides that in the case of a taxpayer’s specified research or experimental expenditures for any taxable year, except as provided in § 174(a)(2), no deduction is allowed for such expenditures.
The sad part is that it's not even that much money. The Joint Committee estimates [4] that it will gain about 12 billion per year on average, but most of that is front-loaded into TY22 and 23. So they force larger companies like Google to hand over their cash so they can collect the float on it or whatever, and they don't care it will fuck over all these startups. They probably modeled it in.
[1] https://www.law.cornell.edu/uscode/text/26/174 [2] https://www.jct.gov/publications/2018/jcs-1-18/ [3] https://www.irs.gov/publications/p535 [4] https://www.jct.gov/publications/2017/jcx-67-17/ [5] https://www.irs.gov/pub/irs-drop/rp-23-11.pdf
> Research or experimental expenditures paid or incurred in tax years beginning after December 31, 2021, must be charged to a separate specified research or experimental capital account and amortized ratably over a 5-year period ... The expenses cannot be deducted in full in the current year.
> Research or experimental expenditures, as used in section 174, are research and development costs ... you incur in connection with your trade or business [..] The costs related to developing software are treated as research and experimental expenditures.
Nothing contradicts this plain meaning. Rev Proc 2023-11 [5] just reiterates that yes, all software development is included in R&E expenses:
> 2.02 (5) Section 174(c)(3) provides that for purposes of § 174, any amount paid or incurred in connection with the development of any software is treated as a research or experimental expenditure accounted for under the required § 174 method.
And yes, no deduction is allowed:
> 2.02 (1) As amended by § 13206(a) of the TCJA, § 174(a)(1) provides that in the case of a taxpayer’s specified research or experimental expenditures for any taxable year, except as provided in § 174(a)(2), no deduction is allowed for such expenditures.
The sad part is that it's not even that much money. The Joint Committee estimates [4] that it will gain about 12 billion per year on average, but most of that is front-loaded into TY22 and 23. So they force larger companies like Google to hand over their cash so they can collect the float on it or whatever, and they don't care it will fuck over all these startups. They probably modeled it in.
[1] https://www.law.cornell.edu/uscode/text/26/174 [2] https://www.jct.gov/publications/2018/jcs-1-18/ [3] https://www.irs.gov/publications/p535 [4] https://www.jct.gov/publications/2017/jcx-67-17/ [5] https://www.irs.gov/pub/irs-drop/rp-23-11.pdf
I think you’re missing a variable here. Corporations == bad
Is this applicable to different titles developing software, such as Member of Technical staff?
1,000,000 Revenue
- 1,000,000 Salary expense
-----------
0 Profit
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.
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.
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?
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?
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.
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.
This calculation will apply with any level of profitability. The tax simply goes up. My questions is how the large software development companies (Google) are dealign with this? It would be $10s of billions of extra tax for each of them. We didn't hear the outcry. If they were to pay extra $10s of billions, presumably they could get the whole country up in arms quickly. Maybe this relates only to the portion of software development that us declared as an R&D expense? The regular software engineers' salaries would be the cost of goods/services sold?
It’s a cash flow issue, not a tax rate issue.
Luckily, barely any startups actually have revenue.
Huh? It's not about startups. It's about small software businesses that were moderately profitable yesterday and are potentially out of business today.
Oh, hiring 1099 consultants now looking rather attractive
Not forgetting that the government is ALSO taking money on the other side of the salary as well.
I much prefer Estonia's system of taxation. Flat 20% on share dividends. Any money that stays within the business (or gets spent on wages, other expenses) isn't taxed (aside: there are social and income taxes on wages).
Coming from Australia's system it's just so simple to be compliant. Feels designed to help businesses grow.
I much prefer Estonia's system of taxation. Flat 20% on share dividends. Any money that stays within the business (or gets spent on wages, other expenses) isn't taxed (aside: there are social and income taxes on wages).
Coming from Australia's system it's just so simple to be compliant. Feels designed to help businesses grow.
I have been thinking this for a while. Corporation tax creates so much work, and it would be better to tax certain inflows of money.
So my salary is taxed; my dividends are taxed; my purchases are taxed with VAT, that sort of thing.
Stop making companies employ armies of accountants to figure out all the tax credits/implications/corporate structures etc so the government doesn't take too much.
So my salary is taxed; my dividends are taxed; my purchases are taxed with VAT, that sort of thing.
Stop making companies employ armies of accountants to figure out all the tax credits/implications/corporate structures etc so the government doesn't take too much.
I pay the Estonian accountant (xolo.io) ~100€ a month and that covers just about everything required to keep the company in good standing. Minor amounts of admin to sign off the annual report (all done with my smart card).
That sounds exactly as it should be. Very neat.
[deleted]
Isn't this all referring to the "R&D tax credit"? My understanding of the word 'tax credit" is that any labor that could be classified as R&D would essentially be funded by the government. When this came out I thought "what a scam" because companies were going to develop their next-gen products anyway, but now some of our work could qualify as "R&D" and basically be free to the company. If my interpretation was correct, that would explain why big tech companies pay so many people so well - they weren't actually paying them at all, the government was. Even though I may benefit from that, that's not how I think it should be.
OTOH, I'm not a biz guy but I was under the impression that paying employees was an expense anyway and would be deducted from revenue and not taxed. How is R&D different?
OTOH, I'm not a biz guy but I was under the impression that paying employees was an expense anyway and would be deducted from revenue and not taxed. How is R&D different?
> Isn't this all referring to the "R&D tax credit"?
No, it is not.
No, it is not.
>> Congress failed to extend a key tax provision last year allowing companies to fully expense research & development costs in the year incurred, a blow to big corporations that had lobbied for it.
OK, so what is it?
OK, so what is it?
Like the quote above says, it's about expensing costs. It has nothing to do with credits. R&D credits are a thing, but a thing we are not talking about!
> Isn't this all referring to the "R&D tax credit"?
No. The terminology is confusing. Section 174, specifically point 3, classifies software development as R&E as of 2022 and requires amortization over 5-15 years. This prevents software engineering salaries as a standard business tax deduction. This has nothing to do with the R&D tax credit (section 41).
No. The terminology is confusing. Section 174, specifically point 3, classifies software development as R&E as of 2022 and requires amortization over 5-15 years. This prevents software engineering salaries as a standard business tax deduction. This has nothing to do with the R&D tax credit (section 41).
>> Now the company must pay taxes on 800,000 of profit because "R&D salaries," which includes software devs, must be amortized over five years. Obviously the company has no wherewithal to pay, given that they made a million and spent a million.
So stop claiming software development as R&E and just say they're regular salaried employees. The government never should have been paying them in the first place!
So stop claiming software development as R&E and just say they're regular salaried employees. The government never should have been paying them in the first place!
It's not up to you to categorize them one way or another. This law mandates that they are r&d and thus amortized.
No, no it doesnt.
I'm not sure how to convince you other than telling you to read the law (or the article.)
That's why everyone is freaking out about this
That's why everyone is freaking out about this
> Under new Section 174(c)(3), software development costs are treated as R&E expenditures and must also be capitalized and amortized in accordance with the new rules.
https://www.grantthornton.com/insights/alerts/tax/2022/flash...
https://www.grantthornton.com/insights/alerts/tax/2022/flash...
I have a hard time understanding why this so bad and the article does nothing to explain it. As I understand it companies only pay taxes on their profits, which generally speaking is what's left after expenses, including salaries, are subtracted. If that's the case then why would higher taxes on profits force a company out of business or to layoff staff. If anything layoffs would tend to have the short term effect of increasing profits, which would only further increase taxes.
I can understand how a sudden unexpected change to the tax code could catch people off guard and cause short term problems but overall I don't see why this particular change should be so devastating once any transient effects have been absorbed.
I can understand how a sudden unexpected change to the tax code could catch people off guard and cause short term problems but overall I don't see why this particular change should be so devastating once any transient effects have been absorbed.
The issue here is in the way it is deducted.
Previously, $1.000.000 spent on R&D in 2023 would result in a $1.000.000 deduction on your 2023 taxes. Under the new system the same spending would result in a $200.000 deduction in 2023, $200.000 in 2024, $200.000 in 2025, $200.000 in 2026, and $200.000 in 2027.
You still get the same deduction, but spread out over multiple years. However, it also means that you can now deduct $800.000 less in 2023 than expected, resulting in a far higher tax bill this year! If you are a startup you probably don't have that spare $800.000 just lying around doing nothing.
Previously, $1.000.000 spent on R&D in 2023 would result in a $1.000.000 deduction on your 2023 taxes. Under the new system the same spending would result in a $200.000 deduction in 2023, $200.000 in 2024, $200.000 in 2025, $200.000 in 2026, and $200.000 in 2027.
You still get the same deduction, but spread out over multiple years. However, it also means that you can now deduct $800.000 less in 2023 than expected, resulting in a far higher tax bill this year! If you are a startup you probably don't have that spare $800.000 just lying around doing nothing.
That's still taxed off profits, not gross.
Yes, but it's changing the way profits are calculated, which massively impacts cash flows.
If I can only deduct 200k of the 1m I spent that inflates my net profits by 800k that I dont actually have, because I spent it on what I thought was an expense.
You deduct (eligible) expenses from revenue to get (taxable) profit
If you make $2,000,000 gross, spend $800,000 on operating expenses, and $1,000,000 on R&D, you practically have $200,000 profit; but you have pay $210,000 in federal tax on $1,000,000.
Well no, you have a 1.2M profit, and decided to reinvest 1M into R&D to produce a software asset.
It's bad that the tax treatment changes suddenly because businesses need stability, but the change itself is perfectly rational.
It's bad that the tax treatment changes suddenly because businesses need stability, but the change itself is perfectly rational.
It changes what is considered a deductible expense.
Profits = Revenue net Costs
Taxes are a cost. Taxes are defined as some rate t, tax = t * (Revenue net Deductible Expenses)
So Profits = Revenue - t * (Revenue - Deductible Expense) - Non-deductible Expense
Percent of t is small relative to the value of 100% applied to non-deductible expense. What this has done is to take salary, deployment infra, everything, from Deductible to Non-deductible expense, leaving 20% of what was there before. That is very large.
Profits = Revenue net Costs
Taxes are a cost. Taxes are defined as some rate t, tax = t * (Revenue net Deductible Expenses)
So Profits = Revenue - t * (Revenue - Deductible Expense) - Non-deductible Expense
Percent of t is small relative to the value of 100% applied to non-deductible expense. What this has done is to take salary, deployment infra, everything, from Deductible to Non-deductible expense, leaving 20% of what was there before. That is very large.
its like a weird inverse of paying quarterly taxes...the same goal - more of your money stays with the government longer
>The issue here is in the way it is deducted.
The issue is that the rules changed. Businesses that relied on the former rules are now faced with a (possibly insurmountable) challenge to accommodate the new rules.
Washington loves to fiddle with tax rules, and lobbyists spend a lot of time and money encouraging it, but nobody can anticipate the ripple effects. It all looks great on CBO spreadsheets and congressional press releases, but the real-world impacts can be devastating.
The issue is that the rules changed. Businesses that relied on the former rules are now faced with a (possibly insurmountable) challenge to accommodate the new rules.
Washington loves to fiddle with tax rules, and lobbyists spend a lot of time and money encouraging it, but nobody can anticipate the ripple effects. It all looks great on CBO spreadsheets and congressional press releases, but the real-world impacts can be devastating.
I only hope they include some kind of small letter that the same person needs to still be employed to get the amortization - I think that's actually implied by it. The same way you got to keep a machine to keep deducting it.
I think the gov't got fed up of the mass layoffs and this is how they are fixing it.
If you can deduct the remaining amortized expense immediately upon termination, could companies just fire everybody and rehire them the next day?
Assuming you had no other expenses the tax bill would be $168k on the $800k right? So what we're saying is a business with $1M each in revenue and salary expense would have an additional $168k in current year tax expense?
The problem is that this tax change is artificially inflating profits. Companies previously had the choice between expensing (writing off entirely) and amortizing (spreading out) these costs, and now they must be amortized.
It is especially problematic since it categorizes all software development as R&D even if we don't think of it as R&D. It's still unclear what the IRS considers "software development" since they've never had to define it, but the way most big companies with their well-paid accountants are proceeding are that it covers new product development AND new features on existing products, but not bug fixes/maintenance.
Let's take a simple example. Imagine a profitable small software company that made $1M in revenue last year, spent $700,000 on developer salaries and $200,000 on other expenses. Ordinarily, they'd be able to write off $900,000 and have a taxable net income of $100,000 that matches their actual profit. Assuming a tax rate of 25% that's a $25,000 tax bill.
Now, if you assume developers spent 50% of their time building new products and new features, and 50% of other expenses were on new features, only $420,000 of the salary costs and $110,000 of other expenses are write-offs. Their taxable income just went from $100,000 to $470,000.
Assuming a 25% tax rate, their tax bill is now $117,500 for 2022 — which exceeds their actual net income. This also inflates their quarterly tax payments for 2023, both of which hit right now.
This gets even worse for companies that aren't profitable, as they don't have the cash flow to cover a tax bill when they hadn't planned on having one at all. And given the current financial environment, it's hard for startups to get any kind of additional financing or funding.
This news article about our effort gets into this a bit more: https://technical.ly/civic-news/section-174-small-software-c...
It is especially problematic since it categorizes all software development as R&D even if we don't think of it as R&D. It's still unclear what the IRS considers "software development" since they've never had to define it, but the way most big companies with their well-paid accountants are proceeding are that it covers new product development AND new features on existing products, but not bug fixes/maintenance.
Let's take a simple example. Imagine a profitable small software company that made $1M in revenue last year, spent $700,000 on developer salaries and $200,000 on other expenses. Ordinarily, they'd be able to write off $900,000 and have a taxable net income of $100,000 that matches their actual profit. Assuming a tax rate of 25% that's a $25,000 tax bill.
Now, if you assume developers spent 50% of their time building new products and new features, and 50% of other expenses were on new features, only $420,000 of the salary costs and $110,000 of other expenses are write-offs. Their taxable income just went from $100,000 to $470,000.
Assuming a 25% tax rate, their tax bill is now $117,500 for 2022 — which exceeds their actual net income. This also inflates their quarterly tax payments for 2023, both of which hit right now.
This gets even worse for companies that aren't profitable, as they don't have the cash flow to cover a tax bill when they hadn't planned on having one at all. And given the current financial environment, it's hard for startups to get any kind of additional financing or funding.
This news article about our effort gets into this a bit more: https://technical.ly/civic-news/section-174-small-software-c...
I've seen previous discussions about this on HN but there seemed to be disagreement about whether this change required developer salaries to be treated as R+D or only allowed it.
If this is really the way it works, defining some salaries as necessarily not being deductible from revenues, then it makes no sense for multiple reasons.
First the developers are still paying income tax on their salaries so that money is getting doubly taxed in the year the revenues are received.
Second the government generally seeks to encourage employment. This would have the exact opposite effect because any employee you hire who's doing software development would cost you (1 + 4/5) times their salary in the near term.
I wonder how much of the downturn in tech employment this year is being caused by this.
If this is really the way it works, defining some salaries as necessarily not being deductible from revenues, then it makes no sense for multiple reasons.
First the developers are still paying income tax on their salaries so that money is getting doubly taxed in the year the revenues are received.
Second the government generally seeks to encourage employment. This would have the exact opposite effect because any employee you hire who's doing software development would cost you (1 + 4/5) times their salary in the near term.
I wonder how much of the downturn in tech employment this year is being caused by this.
> any employee you hire who's doing software development would cost you (1 + 4/5) times their salary in the near term
How can that be true? You only pay them once, not 1 4/5 times.
How can that be true? You only pay them once, not 1 4/5 times.
Yeah, what I said isn't completely accurate, because I didn't take into account the tax rate. But the factor is still larger than 1, assuming you have any revenue at all, because in addition to what you payed them in salary you have to pay tax on the 4/5ths of their salary you couldn't deduct in the current year.
> The problem is that this tax change is artificially inflating profits
Not exactly. It's a well-established accounting principle that you capitalize costs that provide a benefit over multiple years. Depreciation is an easy-to-understand example. It's more true that the historic practice of expensing R&D costs was artificially inflating costs.
What the tax change is doing is forcing amortization, which, for early-stage companies is difficult, because they have depended on expensing early and recognizing income later.
It's a difficult issue. There are good arguments on both sides. But it sounds like this was a surprise, which is surely not optimal.
fwiw, when I was running start-ups (80s/90s/00s), my recollection is that we amortized our software development costs. I guess this got turned around by the rise of the sophisticated startup world, with more accountants, lawyers, and lobbyists. And now the government is pushing back, not without reason.
Not exactly. It's a well-established accounting principle that you capitalize costs that provide a benefit over multiple years. Depreciation is an easy-to-understand example. It's more true that the historic practice of expensing R&D costs was artificially inflating costs.
What the tax change is doing is forcing amortization, which, for early-stage companies is difficult, because they have depended on expensing early and recognizing income later.
It's a difficult issue. There are good arguments on both sides. But it sounds like this was a surprise, which is surely not optimal.
fwiw, when I was running start-ups (80s/90s/00s), my recollection is that we amortized our software development costs. I guess this got turned around by the rise of the sophisticated startup world, with more accountants, lawyers, and lobbyists. And now the government is pushing back, not without reason.
>> Not exactly. It's a well-established accounting principle that you capitalize costs that provide a benefit over multiple years.
OK, so lets flip this. I'm a founder working for free, as many founders do. We code on nights and weekends and produce hundreds of thousands of dollars of capital value. If the business doesnt work out, can I claim all this as a loss?
We cant have it both ways, can we? So I should be able to take losses on these hundreds of git repos I have with thousands of hours of unpaid work?
OK, so lets flip this. I'm a founder working for free, as many founders do. We code on nights and weekends and produce hundreds of thousands of dollars of capital value. If the business doesnt work out, can I claim all this as a loss?
We cant have it both ways, can we? So I should be able to take losses on these hundreds of git repos I have with thousands of hours of unpaid work?
I've got lots of 'failed' projects I've spent obscene amounts of time on. Where's the Lambo dealership?
Technically, I would assume that you probably can claim this as a capital loss if you have actually realized a loss (eg you spent money on software related to the business or something), but those are capped at $6,000 a year. Those expenses previously could have gone on a schedule C, though.
So are the taxes capped also? Didn’t think so.
The gains on taxes are uncapped, but the losses are capped per year. I think if you have a bigger loss, you can carry it forward even as an individual and apply it against future gains (or take another $3000 deduction). Apparently the limit is $3000 for married couples, I thought it was $3000 for individuals.
It's $3k period, for offsetting normal earned income. There is no cap on offsetting capital gains (for example, from selling stock). And you can do both, e.g. wipe out for example $20k in capital gains then another $3k in normal income.
I sold a business at a $60k loss 4-5 years ago and between capital gains offsets and normal income deductions I still have about $30k in deductions left.
I sold a business at a $60k loss 4-5 years ago and between capital gains offsets and normal income deductions I still have about $30k in deductions left.
Founders work for free because they're investing, taking a risk like all investments. If they lose the bet, they lose. No harm, no foul. That's true of any investment you and I make. People lose money on investments every day.
There are a lot concepts being not very well defined here: employment, investing, taxation, salaries. It's not all one thing.
What is it that you think "we" are having both ways?
There are a lot concepts being not very well defined here: employment, investing, taxation, salaries. It's not all one thing.
What is it that you think "we" are having both ways?
Catch 22: if you claimed the loss for the value of the hours worked, you would also end up having to pay income tax on the value of hours worked.
Paying yourself is a lose-lose game.
Paying yourself is a lose-lose game.
> And now the government is pushing back, not without reason.
What reason is that? Increased tax revenue (in the short term at least)? Because if there's no difference in the long term then it seems pretty dumb to inflict financial turmoil for no net gain.
What reason is that? Increased tax revenue (in the short term at least)? Because if there's no difference in the long term then it seems pretty dumb to inflict financial turmoil for no net gain.
Well, yes, increased tax revenue, of course. There may be no/little difference in the long term; that's over my economics pay grade. It seems like the model of raise a lot of money, spend a lot of money, expense it, pay no taxes, then go bankrupt is a pretty straightforward way there might be a difference long term. And that's a very common scenario, I think you'd agree.
> And now the government is pushing back, not without reason.
Is it? Seems like lawmakers just messed up in reaching an agreement to extend something that is usually extended. Typical congress games.
From light reading, Republican leadership seems to be the main blocker since extending the provision has bipartisan support. You would think that extending this and child tax credits would be no-brainers for Republican leadership, but here we are.
Is it? Seems like lawmakers just messed up in reaching an agreement to extend something that is usually extended. Typical congress games.
From light reading, Republican leadership seems to be the main blocker since extending the provision has bipartisan support. You would think that extending this and child tax credits would be no-brainers for Republican leadership, but here we are.
That could well be. But maybe it's not so obviously a good thing as it may sound to startup ears. Matching income and expenses is a pretty good way to keep your financial head about you.
> That could well be.
No, it is. That's literally why this happened, it was used as a bargaining chip/to buy time and they never cleaned it up. It's not supposition or a guess, it's the stated intent and consequence.
> it's not so obviously a good thing
Let's say you earn a million dollars before salary and you have 10 engineers working for you each making $100k. You pay out your salary and have $0 profit at the end of the year.
With this change, you are taxed as if you made $800k profit, so unless you've got a couple hundred grand in your bank account this is easily enough to bankrupt a business and put those 10 engineers out of work.
It would be one thing if the $800k was in the bank and this was Hollywood accounting to make it seem like it's not profit. But this is money that was paid to employees and now the business is expected to pay taxes on it as if it was never paid. It's absolutely farcical how anyone could look at this and not see it as ridiculous.
No, it is. That's literally why this happened, it was used as a bargaining chip/to buy time and they never cleaned it up. It's not supposition or a guess, it's the stated intent and consequence.
> it's not so obviously a good thing
Let's say you earn a million dollars before salary and you have 10 engineers working for you each making $100k. You pay out your salary and have $0 profit at the end of the year.
With this change, you are taxed as if you made $800k profit, so unless you've got a couple hundred grand in your bank account this is easily enough to bankrupt a business and put those 10 engineers out of work.
It would be one thing if the $800k was in the bank and this was Hollywood accounting to make it seem like it's not profit. But this is money that was paid to employees and now the business is expected to pay taxes on it as if it was never paid. It's absolutely farcical how anyone could look at this and not see it as ridiculous.
> No, it is. That's literally why this happened, it was used as a bargaining chip/to buy time and they never cleaned it up. It's not supposition or a guess, it's the stated intent and consequence.
Unfortunately, I think a lot of hacker news posters give plausible deniability to that leadership in order to avoid cognitive dissonance with how certain political leaders that they support are not business friendly at all.
Unfortunately, I think a lot of hacker news posters give plausible deniability to that leadership in order to avoid cognitive dissonance with how certain political leaders that they support are not business friendly at all.
I think you're just missing the whole venture capital/startup ecosystem concept. VCs and founders are well aware of accounting principles and can/should plan accordingly.
BTW, I founded and ran four companies and faced this very situation plenty of times. In my day (this was a while ago), we generally had to, or did, amortize development costs. I'm not saying I loved paying the tax bills, but the concept is neither farcical nor ridiculous.
BTW, I founded and ran four companies and faced this very situation plenty of times. In my day (this was a while ago), we generally had to, or did, amortize development costs. I'm not saying I loved paying the tax bills, but the concept is neither farcical nor ridiculous.
> that you capitalize costs that provide a benefit over multiple years
Do you see a difference between software development in a consulting business model (instant one-off benefit) and software development in a saas product business model (benefit over multiple years)?
> There are good arguments on both sides. Can you provide the good arguments for capitalizing software development costs and not expensing it?
Can you explain the reasoning of charging taxes to a company that has revenue beyond merely 1/5th of its expenses (actually 1/10th in the first year, or 1/30th for international operations) and hence still heavily investing cash?
Do you see a difference between software development in a consulting business model (instant one-off benefit) and software development in a saas product business model (benefit over multiple years)?
> There are good arguments on both sides. Can you provide the good arguments for capitalizing software development costs and not expensing it?
Can you explain the reasoning of charging taxes to a company that has revenue beyond merely 1/5th of its expenses (actually 1/10th in the first year, or 1/30th for international operations) and hence still heavily investing cash?
> Do you see a difference between software development in a consulting business model (instant one-off benefit) and software development in a saas product business model (benefit over multiple years)?
Yes. Not sure what that has to do with this discussion.
> Can you provide the good arguments for capitalizing software development costs and not expensing it?
Yes. The well-established accounting principle of matching income and expenses.
> Can you explain the reasoning of charging taxes to a company that has revenue beyond merely 1/5th of its expenses (actually 1/10th in the first year, or 1/30th for international operations) and hence still heavily investing cash?
Yes. See the answer to your second question. Companies often have to make investments. If they buy a Big Machine, they don't get to write it off in one year. There's nothing nefarious about amortizing costs over their useful life.
Yes. Not sure what that has to do with this discussion.
> Can you provide the good arguments for capitalizing software development costs and not expensing it?
Yes. The well-established accounting principle of matching income and expenses.
> Can you explain the reasoning of charging taxes to a company that has revenue beyond merely 1/5th of its expenses (actually 1/10th in the first year, or 1/30th for international operations) and hence still heavily investing cash?
Yes. See the answer to your second question. Companies often have to make investments. If they buy a Big Machine, they don't get to write it off in one year. There's nothing nefarious about amortizing costs over their useful life.
> Yes. Not sure what that has to do with this discussion.
Because the law seems to be very strict that all software development should be capitalized. So would you suggest to split the revenue recognition depending on the corresponding business model of the product corresponding to the software development?
> If they buy a Big Machine, they don't get to write it off in one year. There's nothing nefarious about amortizing costs over their useful life.
It seems the capitalization of the wage of a software developer is being defended and put equal to the capitalisation of the cost of a Big Machine. I still see an unfair difference made in the reasoning. Let’s take following example
* Software developer has a wage cost in year 1 and builds a SaaS tool in year 1. The developer’s useful life w.r.t. the incurred cost is indeed 1 year and the revenue generating period of the product is 5 years.
* Big machine (crane) has a purchase cost in year 1 and builds a warehouse in year 1. The crane’s useful life w.r.t. the incurred cost is 5 years and the revenue generating period of the product is 30 years.
It’s being claimed that both the software developer's first year wage and the Big Machine purchase cost should be capitalised over 5 years. But that’s comparing apples with pears: either both should be capitalised over their own useful life w.r.t. the incurred cost (1 year vs. 5 years) or both should be capitalised over the revenue generating period of their product (5 year vs. 30 years).
Three other thought experiments:
* You should capitalize a crane when you buy it and you should expense when you (properly w.r.t. accounting principles) rent and use it for a year to build something. But when you rent a software developer (= hire) for a year to build something, that should be capitalized?
* When the crane is being sold or breaks down, you recognise a gain or loss and the capitalization stops. When the software developer leaves the company, is the capitalisation of the developer’s wage still continuing?
* I come work for you for the next five years as a software developer, but you have to pay me my wage immediately for the upcoming five years. Also you have to buy a GPU server that I will use to build my product and that will supposedly last 5 years. Are you capitalising both my cost and the GPU over 5 years? Or will you be capitalising my cost way longer than the GPU, even both I’m gone after 5 years and the GPU broke down?
Because the law seems to be very strict that all software development should be capitalized. So would you suggest to split the revenue recognition depending on the corresponding business model of the product corresponding to the software development?
> If they buy a Big Machine, they don't get to write it off in one year. There's nothing nefarious about amortizing costs over their useful life.
It seems the capitalization of the wage of a software developer is being defended and put equal to the capitalisation of the cost of a Big Machine. I still see an unfair difference made in the reasoning. Let’s take following example
* Software developer has a wage cost in year 1 and builds a SaaS tool in year 1. The developer’s useful life w.r.t. the incurred cost is indeed 1 year and the revenue generating period of the product is 5 years.
* Big machine (crane) has a purchase cost in year 1 and builds a warehouse in year 1. The crane’s useful life w.r.t. the incurred cost is 5 years and the revenue generating period of the product is 30 years.
It’s being claimed that both the software developer's first year wage and the Big Machine purchase cost should be capitalised over 5 years. But that’s comparing apples with pears: either both should be capitalised over their own useful life w.r.t. the incurred cost (1 year vs. 5 years) or both should be capitalised over the revenue generating period of their product (5 year vs. 30 years).
Three other thought experiments:
* You should capitalize a crane when you buy it and you should expense when you (properly w.r.t. accounting principles) rent and use it for a year to build something. But when you rent a software developer (= hire) for a year to build something, that should be capitalized?
* When the crane is being sold or breaks down, you recognise a gain or loss and the capitalization stops. When the software developer leaves the company, is the capitalisation of the developer’s wage still continuing?
* I come work for you for the next five years as a software developer, but you have to pay me my wage immediately for the upcoming five years. Also you have to buy a GPU server that I will use to build my product and that will supposedly last 5 years. Are you capitalising both my cost and the GPU over 5 years? Or will you be capitalising my cost way longer than the GPU, even both I’m gone after 5 years and the GPU broke down?
The burn cash but not necessarily profit. If they built the software in 1 year for 1,000,000, they would carry an asset of 1,000,000. They burned 1,000,000 in cash but have a 1,000,000 asset. They had salary expense of 1,000,000 and revenue of 0. Say they make 300,000 in revenue for the next 5 years based on that software. That means they would be able to expense $200,000 against the $300,000 in income, paying taxes on just $100,000 in income each of those years. At the end of that time the asset has zero value.
The other option is they take a 1,000,000 loss that first year, and then pay tax on all $300,000 for each of the succeeding years. Either way, at the end of six years, There was $1,500,000 in revenue and $1,000,000 in expenses.
As far as the treatment of bug fixes, the rules around improvements and repairs probably cover that. If you fix a bug like a bad calculation - that's probably opex, like replacing a part on a machine. If you add a feature that extends the life of the product, like adding an API for outside developers, that would be an improvement and capitalized. This is like refurbishing equipment to extend its useful service life.
The other option is they take a 1,000,000 loss that first year, and then pay tax on all $300,000 for each of the succeeding years. Either way, at the end of six years, There was $1,500,000 in revenue and $1,000,000 in expenses.
As far as the treatment of bug fixes, the rules around improvements and repairs probably cover that. If you fix a bug like a bad calculation - that's probably opex, like replacing a part on a machine. If you add a feature that extends the life of the product, like adding an API for outside developers, that would be an improvement and capitalized. This is like refurbishing equipment to extend its useful service life.
> If they built the software in 1 year for 1,000,000, they would carry an asset of 1,000,000.
Isn't normal accounting principles usually that if a company pays $M salaries, then regardless of whether those salaries paid for an asset or not, they are an expense that's 100% deducted from the income when calculating taxes?
Are we saying that at a company with 2 desks where 1 is a marketing person or accountant and 1 is a software dev, their salaries would deduce differently from the company bottom line, because the software developer is said to create "assets"? Isn't the marketing of that asset likely to be build the value of it in the same way as the research and engineering does?
Isn't normal accounting principles usually that if a company pays $M salaries, then regardless of whether those salaries paid for an asset or not, they are an expense that's 100% deducted from the income when calculating taxes?
Are we saying that at a company with 2 desks where 1 is a marketing person or accountant and 1 is a software dev, their salaries would deduce differently from the company bottom line, because the software developer is said to create "assets"? Isn't the marketing of that asset likely to be build the value of it in the same way as the research and engineering does?
A quick google search shows that advertising is also a treated as an asset, just like software, at least some of the time
https://www.journalofaccountancy.com/issues/1999/may/maples....
IMO it does make sense to amortize software expenses like other capital expenditures.
https://www.journalofaccountancy.com/issues/1999/may/maples....
IMO it does make sense to amortize software expenses like other capital expenditures.
It does make some logical sense, but I don't see how it would be worth the hassle, especially when you consider that it only "works" in the long term scenario but creates all sorts of cash flow problems in the short term.
And THAT is the real question. Does it make economic sense long term. I can’t believe I got downvoted by saying from an accounting perspective it makes sense to test it like any other asset. But does it promote a better outcome if we do? We have all sorts of accelerated depreciation schedules for tax purposes, to promote certain activities. Note that for financial reporting purposes it’s possibly what some companies already do. Even though they expense it for tax purposes. We’re just talking about taxable, not GAAP income.
Yes, that is the case. If you’re building a warehouse, the wages paid to the construction workers are capitalized. The wages paid to your accounts payable are probably not capitalized with construction cost.
[deleted]
R&D = "research and development"
If what you are doing is software development then obviously it is a development activity that falls within the meaning of development for purposes of tax laws.
Software programming that does not constitute development, such as bug fixing, is not subject to capitalization.
If what you are doing is software development then obviously it is a development activity that falls within the meaning of development for purposes of tax laws.
Software programming that does not constitute development, such as bug fixing, is not subject to capitalization.
R+D is "research and development", not "research" and "development". It's specifically development of research into new products. Otherwise a carpenter could be seen as "developing" wood into cabinets. If there's no research or experimental process involved in the work, then it's not R+D.
I can imagine Unicorn Research Inc deciding to rename all “developer” titles to “programmer” titles, and removing the word “Research” from the company name.
I love when people on the Internet tell me I've been doing my job wrong for a decade...
It's research (as in new knowledge) and development (as in new products based on existing research and knowledge). Software generally falls into the latter category. A scientific process is not required but does make it easier to document qualification for the R&D credit.
And yes, a carpenter developing new cabinet designs absolutely would qualify for the R&D credit (and their salary could fall under the scope of this rule change).
It's research (as in new knowledge) and development (as in new products based on existing research and knowledge). Software generally falls into the latter category. A scientific process is not required but does make it easier to document qualification for the R&D credit.
And yes, a carpenter developing new cabinet designs absolutely would qualify for the R&D credit (and their salary could fall under the scope of this rule change).
> It's research (as in new knowledge) and development (as in new products based on existing research and knowledge).
This is... Exactly what I said?
> And yes, a carpenter developing new cabinet designs absolutely would qualify for the R&D credit (and their salary could fall under the scope of this rule change).
I feel I pretty clearly alluded to the physical process of turning wood into a cabinet, not developing novel new techniques for doing such.
This is... Exactly what I said?
> And yes, a carpenter developing new cabinet designs absolutely would qualify for the R&D credit (and their salary could fall under the scope of this rule change).
I feel I pretty clearly alluded to the physical process of turning wood into a cabinet, not developing novel new techniques for doing such.
What about work-for-hire?
You’re off about the major problem with Section 174 — money is being taxed *before* expenses, and there is no “out” because software has been labeled fully R&D back in 2017 (of course the republicans carved an out for oil, mineral, and gas lol).
What makes it worse is that accountants at real deal firms like Plante Moran didn’t bother sounding the alarm early because they figured like every time in the last 70 years Congress would push off the effects.
It is an absolutely crushing situation that is going to put a lot of shops out of business unless they have cash on hand to weather the 5 year R&D tax amortization schedule.
What makes it worse is that accountants at real deal firms like Plante Moran didn’t bother sounding the alarm early because they figured like every time in the last 70 years Congress would push off the effects.
It is an absolutely crushing situation that is going to put a lot of shops out of business unless they have cash on hand to weather the 5 year R&D tax amortization schedule.
Even if you have the cash, in a high inflation environment with higher costs of lending, paying tax on ~80% today and getting that tax back over 4 years, leads to indirect costs. Especially for startups.
Previously: fully deduct R&D salaries from income to calculate taxable profit.
Now: deduct 20% of R&D salaries from income to calculate taxable profit, with the remaining 80% spread 1/5 per year over the next 4 years.
For software companies, where costs are basically eng salaries, this is a huge tax increase. It will kind of even out over time, but it wacks new companies very hard.
Now: deduct 20% of R&D salaries from income to calculate taxable profit, with the remaining 80% spread 1/5 per year over the next 4 years.
For software companies, where costs are basically eng salaries, this is a huge tax increase. It will kind of even out over time, but it wacks new companies very hard.
> R&D salaries
> For software companies, where costs are basically eng salaries,
... it smells like this might be fallout from mis-classifying workers and/or fudging categorization of labor for some benefit. Am I on to something?
> For software companies, where costs are basically eng salaries,
... it smells like this might be fallout from mis-classifying workers and/or fudging categorization of labor for some benefit. Am I on to something?
The IRS forces the miscategorization, leading to tax bills that can exceed actual net income.
Even companies that don't take R&D credits (which is a benefit which can be fudged) are still forced to treat software development expenses as R&E subject to 5 year amortization. Companies have no choice in that matter (see https://www.law.cornell.edu/uscode/text/26/174 (c)(3))
What's the reason for that? I can find a lot of coverage of the effects, and of efforts to change it, but why was it made that way to begin with?
I'm not sure if this is true, but I've heard that the Republicans needed ways to offset the tax cuts made by The Tax Cuts and Jobs Act of 2017. One of the ways was changing the treatment of R&E expenses.
This is true - it was an accounting sleight of hand to make the tax cuts look paid for during Congressional Budget Office scoring
Because long ago the politicians got this "brilliant" idea of requiring many things to not increase the deficit.
The result has been things that cost money are "balanced" by raising taxes somewhere--but politicians don't want to raise taxes. Thus we get all sorts of garbage that fiddles with the details without "raising" taxes, but "raises" revenue--often by pulling it forward rather than actually changing the total amount.
We have also seen a lot of things that employers used to simply pay changed to income for the employee but deductible--but that causes the FICA taxes to be paid in all cases and since an awful lot of employees aren't in a position to itemize those deductions are lost. Something that was tax free now becomes income, but they didn't "raise" taxes.
I'd like to take the idiotic idea and stand it on it's head: I would not permit *any* measure to fund itself. A measure would either be a tax bill or a spending bill, it would be prohibited for a bill to do both. That would remove much of the drive to create insanities like this and Congress could work on cleaning up all the garbage. To accomplish this, though, we will have to evict all those idiots who "promised" never to raise taxes (but are perfectly willing to vote for stealth increases that cause a lot more pain per $ raised than doing it honestly would.)
The result has been things that cost money are "balanced" by raising taxes somewhere--but politicians don't want to raise taxes. Thus we get all sorts of garbage that fiddles with the details without "raising" taxes, but "raises" revenue--often by pulling it forward rather than actually changing the total amount.
We have also seen a lot of things that employers used to simply pay changed to income for the employee but deductible--but that causes the FICA taxes to be paid in all cases and since an awful lot of employees aren't in a position to itemize those deductions are lost. Something that was tax free now becomes income, but they didn't "raise" taxes.
I'd like to take the idiotic idea and stand it on it's head: I would not permit *any* measure to fund itself. A measure would either be a tax bill or a spending bill, it would be prohibited for a bill to do both. That would remove much of the drive to create insanities like this and Congress could work on cleaning up all the garbage. To accomplish this, though, we will have to evict all those idiots who "promised" never to raise taxes (but are perfectly willing to vote for stealth increases that cause a lot more pain per $ raised than doing it honestly would.)
Is there a legal definition of "development" that needs to be used? In the dictionary, the definition that most fits "software development" is "The application of techniques or technology to the production of new goods or services."
Which means that at the very least, companies should be able to classify at least some portion of salary costs as "not software development". Maintenance, bug fixing, useless meetings, etc?
Which means that at the very least, companies should be able to classify at least some portion of salary costs as "not software development". Maintenance, bug fixing, useless meetings, etc?
As far as I can tell, the law does not define it, and the IRS has provided no guidance.
It would certainly be consistent with the spirit of R&E to not classify maintenance and bug fixes as R&E, and it would definitely reduce the sting of this change for established companies. Startups would still be pretty screwed.
It would certainly be consistent with the spirit of R&E to not classify maintenance and bug fixes as R&E, and it would definitely reduce the sting of this change for established companies. Startups would still be pretty screwed.
Even during greenfield, you probably fix 5 bugs for every feature. It's just that the bugs you fix were ones you created yesterday and not something a customer reported in the version you shipped a year ago. Writing tax law that even makes people need to think about what is a bug and what isn't is insane. What was wrong with making it simple like (I assume) most countries where you just treat all salaries as expenses that are completely deducted? What would be lost?
Thank you for the first comment I’ve come across that points to the specific problem. Yes, this seems quite bad.
One could probably apportion some blame to the businesses who assumed a fix from Congress would be forthcoming, but on the whole it seems to me like a spectacularly il-conceived bit of the tax code that never should have been passed in the first place.
One could probably apportion some blame to the businesses who assumed a fix from Congress would be forthcoming, but on the whole it seems to me like a spectacularly il-conceived bit of the tax code that never should have been passed in the first place.
"It will kind of even out over time, but it wacks new companies very hard."
Amortizing salaries seems really weird since they are recurring every year. After 5 years you can deduct your full salary expenses for that year. And after you have laid off everybody you can deduct for a few more years. Definitely makes it hard to hire a lot of people quickly if you don't have a ton of profit.
Amortizing salaries seems really weird since they are recurring every year. After 5 years you can deduct your full salary expenses for that year. And after you have laid off everybody you can deduct for a few more years. Definitely makes it hard to hire a lot of people quickly if you don't have a ton of profit.
The companies spent all the money this year on R&D expenditures. That was cash out of their pocket (they spent it this year, so it reduced this year's cash on hand). The effect of the rollback is that they can now only count 20% of those expenditures to reduce their profits (and, by extension, their taxes) this year, so they are paying taxes this year on the remaining 80%. While yes, the profits are higher, the cash is not any higher, and cash pays the tax bill.
Note, this was not an "unexpected" change (it's been in the code), but it WAS unexpected that the provision was not extended.
Note that this affects not just startups. My wife's firm is a small, employee-owned, non-tech S-corp. This hit them as well. It resulted in tax bills for the shareholders approximately 25-30% greater than the firm's accountants expected them to be. The shareholders are on the hook for those higher taxes, although the company did the right thing and distributed extra cash to them to offset the higher taxes.
Note, this was not an "unexpected" change (it's been in the code), but it WAS unexpected that the provision was not extended.
Note that this affects not just startups. My wife's firm is a small, employee-owned, non-tech S-corp. This hit them as well. It resulted in tax bills for the shareholders approximately 25-30% greater than the firm's accountants expected them to be. The shareholders are on the hook for those higher taxes, although the company did the right thing and distributed extra cash to them to offset the higher taxes.
I've been wanted to someday start an employee-owned, non-tech S-corp. However these changes are squeezing out small players.
Well, yeah because you're a normal person who pays tax by the book and don't look at tax optimization schemes all your waking hours. Classing devs as R&D was morally wrong anyway due to the 100% tax credit.
Although I think a better approach could have been an immediate credit in the same year, but a reduced amount.
malfist(4)
What I don't understand is why software developers salaries are treated different than other salaries?
They sort of are, and they sort of aren't.
If Ford builds a car factory, that's a capital asset - the costs should be amortized against the useful life of the factory. So if it costs $10 million and lasts for 10 years, they can expense $1 million a year. Those costs will include the salary of the workers to build the factory. The workers inside the factory making the cars though, that's a cost that matches to the revenue from selling those cars, so their salaries are an expense, and they can be claimed in that year. For most businesses, most of the time, they're producing work product (or supporting that) to be sold as quickly as possible.
Now - when Microsoft writes Windows or Excel, or Epic makes Unreal Engine, I think there's certainly an argument that it's a capital asset they're making, and maybe costs should be amortized over the useful life. I wouldn't even be surprised if their accountants have claimed the same thing. Is that universal across software dev? No. The problems with this change are:
a) It allows no nuance. If I worked for 4 months on a game that I expected to have zero sales outside the first year, I think it's silly to call that a capital asset in any real way. Not all software dev work makes capital assets. The janitor at the Ford factory doesn't get his salary expense amortized, nor should the bug fixer.
b) It's all taking effect in this year. Could have switched it gradually over 10 years or something (you need to amortize x% in year 1, 2x% in year 2, etc)
c) It's especially tough on small businesses. Microsoft can borrow the cash and make it clear in financial statements that this is a weird tax rule, but according to GAAP/accounting rules it's fine. But a sudden big tax bill is really tough for years 1, 2, 3 of a small business.
If Ford builds a car factory, that's a capital asset - the costs should be amortized against the useful life of the factory. So if it costs $10 million and lasts for 10 years, they can expense $1 million a year. Those costs will include the salary of the workers to build the factory. The workers inside the factory making the cars though, that's a cost that matches to the revenue from selling those cars, so their salaries are an expense, and they can be claimed in that year. For most businesses, most of the time, they're producing work product (or supporting that) to be sold as quickly as possible.
Now - when Microsoft writes Windows or Excel, or Epic makes Unreal Engine, I think there's certainly an argument that it's a capital asset they're making, and maybe costs should be amortized over the useful life. I wouldn't even be surprised if their accountants have claimed the same thing. Is that universal across software dev? No. The problems with this change are:
a) It allows no nuance. If I worked for 4 months on a game that I expected to have zero sales outside the first year, I think it's silly to call that a capital asset in any real way. Not all software dev work makes capital assets. The janitor at the Ford factory doesn't get his salary expense amortized, nor should the bug fixer.
b) It's all taking effect in this year. Could have switched it gradually over 10 years or something (you need to amortize x% in year 1, 2x% in year 2, etc)
c) It's especially tough on small businesses. Microsoft can borrow the cash and make it clear in financial statements that this is a weird tax rule, but according to GAAP/accounting rules it's fine. But a sudden big tax bill is really tough for years 1, 2, 3 of a small business.
Also with the factory analogy - unreal is the car factory and you are like the worker who built the factory. (Asking out of ignorance) The workers wages are not treated as a capital to be amortized right?
For the factory - yes, your wages as a worker building the factory would be treated as a capital expense to be amortized, at least from the perspective of the factory owner. But in the usual case where the owner is hiring an outside contractor to build the factory, then from the perspective of the contractor, your wages would not be a capital expense.
The company that pays for the factory would basically just pay $1B of capex for a factory. The contractor doesn't get the factory - they get income. And your wages from them are just an operating expense. The contractor is not making a capital investment - they are just doing a job for money.
The company that pays for the factory would basically just pay $1B of capex for a factory. The contractor doesn't get the factory - they get income. And your wages from them are just an operating expense. The contractor is not making a capital investment - they are just doing a job for money.
Nifty3929 explains this well, let me just add that good accounting rules try to minimize how much you can tweak by "build" vs "buy". Like building a $1b factory or buying one, if you intend to keep and use it to make cars, should be treated broadly the same way.
If you bought a 10-year license to use Unreal Engine, you'd amortize that out. If you instead built it (to use it!), the same rules should (generally) apply to the expenses you incur. If you build it to sell it...well, that gets complicated, especially as it's tough to estimate the useful life of software, and it's tough to say whether certain costs are improvements or maintenance (which are treated differently), etc.
Doing a sudden switch from salary costs being 100% expensed to 100% amortized (over 5 years for domestic, 15 years for foreign) is really bad, it's legitimately harmful for a ton of small businesses in this space. But honestly having it as 100% expensed is pretty silly. Hopefully this gets fixed with a middle ground and a gradual switchover.
If you bought a 10-year license to use Unreal Engine, you'd amortize that out. If you instead built it (to use it!), the same rules should (generally) apply to the expenses you incur. If you build it to sell it...well, that gets complicated, especially as it's tough to estimate the useful life of software, and it's tough to say whether certain costs are improvements or maintenance (which are treated differently), etc.
Doing a sudden switch from salary costs being 100% expensed to 100% amortized (over 5 years for domestic, 15 years for foreign) is really bad, it's legitimately harmful for a ton of small businesses in this space. But honestly having it as 100% expensed is pretty silly. Hopefully this gets fixed with a middle ground and a gradual switchover.
>nor should the bug fixer.
Is a maintenance contract on a capital asset not capex?
Is a maintenance contract on a capital asset not capex?
It depends. If you have a truck - capital asset - the oil changes are probably opex, but replacing the transmission is probably capex. Regular sweeping and cleaning of a building is likely opex, upgrading the wiring capex. Software I can certainly see getting tricky here - is updating dependancies an oil change or a transmission?
"Betterment, restoration or adaptation" is the usual test for something being capex.
"Betterment, restoration or adaptation" is the usual test for something being capex.
Fixing bugs sounds like betterment to me.
My guess is a reported bug is opex, since it's fixing a defect on something that exists. But adding an API would be capex.
Hot take: not one person on earth could make a good/useful distinction between "bug" and "feature" in software development. Some times that's clear, usually it's not. Making tax law depend on the idea that there is a distinction is pretty terrible.
In a world where all software actually has a comprehensive spec, I think the distinction could be made pretty easily, but the line is definitely fuzzy in this one.
Yeah I don't think that has happened even in (say) the most extreme niches like some project with an embedded 8 bit microcontroller in a space/military setting....
The current US tax law is flipping (with no rollout period) between dev salaries being 100% expensed (over 1 year) and 100% amortized (over 5 or 15 years). You actually could make some distinction between those two poles without being able to perfectly categorize every line of code.
A number of things the government could do:
1) Split it between the two. Need to amortize x% but can expense the rest. Maybe that % is mandated, maybe it depends on industry (i.e. if you make games vs an OS vs a SAAS vs embedded software for cars).
2) Tie it to company size, either headcount or revenue.
3) Allow different categorizations for e.g. R&D, product support, building internal tools, building SAAS for sale, whatever.
4) Roll out any changes gradually over x years.
Tax law, over and over again, uses the idea that there's a distinction between CapEx and OpEx. It's not magically impossible to do the same for software.
A number of things the government could do:
1) Split it between the two. Need to amortize x% but can expense the rest. Maybe that % is mandated, maybe it depends on industry (i.e. if you make games vs an OS vs a SAAS vs embedded software for cars).
2) Tie it to company size, either headcount or revenue.
3) Allow different categorizations for e.g. R&D, product support, building internal tools, building SAAS for sale, whatever.
4) Roll out any changes gradually over x years.
Tax law, over and over again, uses the idea that there's a distinction between CapEx and OpEx. It's not magically impossible to do the same for software.
Software is an ongoing expense.
You spend a million a year each year you would have to break that out over 5 years
You spend a million a year each year you would have to break that out over 5 years
The argument is that the software developers are producing an asset (the software) that will produce revenue over time. There is an accounting principal to match revenue with expenses, so if the software will produce revenue in the future, the expense of developing the software should be delayed into the future to match.
Seems it is because companies claim it is R&D. I am not sure accountant's salary is in R&D category.
Companies don't have a choice. The law now requires amortization of software development expenses. Even companies that don't claim R&D tax credits are affected.
I'm not a CPA but I'm pretty sure companies have a choice whether to claim Software Development as R&D expense, or as regular payroll. It sounds like this change is only affecting employers who were previously "saving" payroll tax by classifying employee cost as R&D, and claiming "R&D credits" which can no longer be amortized [0]. That is not the default tax strategy of every tech company. There is no law requiring companies to file for R&D credits. The relevant changes under discussion only affect companies who chose to file for R&D credits.
They should have known they were taking a risk by adopting that strategy. At our company, we got a bunch of spam emails offering to help us file for R&D credits - we just ignored them and continued to pay normal payroll tax.
Searching my inbox for "R&D," it seems that Gusto was the most prolific spammer in this regard - they sent dozens of emails enticing us to save tens of thousands of dollars by talking to their R&D tax specialists. They even included case studies naming specific companies and how much they "saved." In retrospect, that looks like a big oof.
[0] https://www.aprio.com/its-official-software-development-incl...
They should have known they were taking a risk by adopting that strategy. At our company, we got a bunch of spam emails offering to help us file for R&D credits - we just ignored them and continued to pay normal payroll tax.
Searching my inbox for "R&D," it seems that Gusto was the most prolific spammer in this regard - they sent dozens of emails enticing us to save tens of thousands of dollars by talking to their R&D tax specialists. They even included case studies naming specific companies and how much they "saved." In retrospect, that looks like a big oof.
[0] https://www.aprio.com/its-official-software-development-incl...
You are sadly mistaken.
There are two different concepts at work here:
1. R&D credits (IRC 41 https://www.law.cornell.edu/uscode/text/26/41). Companies can choose whether or not to pursue R&D credits. This is what Gusto was spamming you about.
2. R&E expenses (IRC 174 https://www.law.cornell.edu/uscode/text/26/174) which as of 2022 can no longer be fully deducted, but must be amortized over 5 or 15 years. IRC 174 (c)(3) explicitly states "any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure." This applies whether or not the company was treating software development as R&D under IRC 41.
For more details, see https://www.striketax.com/journal/tcja-and-the-resulting-tax...
There are two different concepts at work here:
1. R&D credits (IRC 41 https://www.law.cornell.edu/uscode/text/26/41). Companies can choose whether or not to pursue R&D credits. This is what Gusto was spamming you about.
2. R&E expenses (IRC 174 https://www.law.cornell.edu/uscode/text/26/174) which as of 2022 can no longer be fully deducted, but must be amortized over 5 or 15 years. IRC 174 (c)(3) explicitly states "any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure." This applies whether or not the company was treating software development as R&D under IRC 41.
For more details, see https://www.striketax.com/journal/tcja-and-the-resulting-tax...
I'm not a lawyer nor a CPA, but my reading of that Cornell link is that the definition only applies to expenditures that the company deducts from their return as R&D expenses, which, again - is not the default strategy of every company.
Note this would also only affect profitable companies (i.e., not most VC-funded startups), since there's nothing to deduct if you didn't make enough profit to owe tax in the first place (modulo some change in definition of "profit" based on how software development must be categorized - but still, this would only affect companies with fairly significant revenue; it's not like hiring a software developer suddenly costs 120% more than it did last year.)
Note this would also only affect profitable companies (i.e., not most VC-funded startups), since there's nothing to deduct if you didn't make enough profit to owe tax in the first place (modulo some change in definition of "profit" based on how software development must be categorized - but still, this would only affect companies with fairly significant revenue; it's not like hiring a software developer suddenly costs 120% more than it did last year.)
Because they're not expenses (according to the bill), they're investments in intagible property.
So it stays on the books, the net income isn't lowered, causing a higher tax bill.
So it stays on the books, the net income isn't lowered, causing a higher tax bill.
They're lumped in with Research and Development, which in another more traditional context might make a bit of sense.
If you build a factory or apartment building, you don't get to expense it all at once because it's a capital good and instead you depreciate it over time, taking the expense little-by-little. This kinda makes sense, because it's assumed that you started with (often borrowed) all the money to build the factory, but it's just a one-time expenditure. Then you get ongoing revenue from it, which is offset by the ongoing depreciation. It all works out.
In the IP world, you could think of drug development the same way. We spend $1B to develop a drug, and then get income from that drug down the line. Same deal, conceptually.
The main point is that there are two clear phases: 1. spend a big pile of money to build something, then 2. get income from it. In phase 1, you have a plan for how to fund all that from the get-go. Often just a huge loan. And there is no income to pay taxes on. By the time you get income and need to pay taxes you'll have plenty, because you're not still paying to build the thing.
But then with software it starts to break down. Following the same model, you'd raise enough money to hire a bunch of devs to build your software ALL THE WAY DONE, finish it (like a factory), FIRE ALL THE DEVS because it's done, and then start collecting income from the software. You funded all the development up-front, and then by the time you're getting revenue there's plenty for profit and taxes. In some ways, LARGE companies do roughly do this.
But of course we know that's not how startup software really works. For the most part, development is an ongoing effort that never stops, and in the startup world you don't get funding all at once up-front, you raise money as you need it, as you go along. You're not going to raise $1B up-front to build an ml-blockchain-chrome-extension thing. You spend a little, see how it goes, maybe raise a little more and get a few more customers, add a couple of features, raise a little more, etc.
If you build a factory or apartment building, you don't get to expense it all at once because it's a capital good and instead you depreciate it over time, taking the expense little-by-little. This kinda makes sense, because it's assumed that you started with (often borrowed) all the money to build the factory, but it's just a one-time expenditure. Then you get ongoing revenue from it, which is offset by the ongoing depreciation. It all works out.
In the IP world, you could think of drug development the same way. We spend $1B to develop a drug, and then get income from that drug down the line. Same deal, conceptually.
The main point is that there are two clear phases: 1. spend a big pile of money to build something, then 2. get income from it. In phase 1, you have a plan for how to fund all that from the get-go. Often just a huge loan. And there is no income to pay taxes on. By the time you get income and need to pay taxes you'll have plenty, because you're not still paying to build the thing.
But then with software it starts to break down. Following the same model, you'd raise enough money to hire a bunch of devs to build your software ALL THE WAY DONE, finish it (like a factory), FIRE ALL THE DEVS because it's done, and then start collecting income from the software. You funded all the development up-front, and then by the time you're getting revenue there's plenty for profit and taxes. In some ways, LARGE companies do roughly do this.
But of course we know that's not how startup software really works. For the most part, development is an ongoing effort that never stops, and in the startup world you don't get funding all at once up-front, you raise money as you need it, as you go along. You're not going to raise $1B up-front to build an ml-blockchain-chrome-extension thing. You spend a little, see how it goes, maybe raise a little more and get a few more customers, add a couple of features, raise a little more, etc.
If in your example you hired the construction workers as employees and, for what ever reason, kept them on the payroll, wouldn't you still be able to deduct the salaries you pay them each year ?
If not it seems like a colassal disincentive to employment, which is the opposite of the result usually sought by government policies.
If not it seems like a colassal disincentive to employment, which is the opposite of the result usually sought by government policies.
How you raise money doesn't make a difference. What matters is how fast you can utilize your "engineering assets". More often than not startups don't sell anything (let's say "anything" is > 20% of developers' cost) in the first year, or even in the first 3 years. So for them it's not a problem, you simply carry forward losses until you start getting revenue, and at that point you have enough losses to offset those 80%. It doesn't work for companies which are lucky enough to make substantial (comparable to the salary) sales in the first year. It's like Ford built a new factory, made 600,000 F-150 and sold them and the factory is basically gone in one year, there is nothing left. Doesn't happen with real factories though and usually doesn't happen with startups, but there might be exceptions.
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Talk about doing your lobbying in public
If there was one useful thing a !@#!@#! VCs could do is help police things like this.
Grumble grumble
Grumble grumble
This seems like a great way to push all your development off shore.
It's worse if you push it off shore, actually. Overseas salaries are amortized over 15 years instead of five.
> The new Section 174 rules require taxpayers to capitalize and amortize specified R&E expenditures over a period of five years (attributable to domestic research) or 15 years (attributable to foreign research)
https://www.grantthornton.com/insights/alerts/tax/2022/flash...
> The new Section 174 rules require taxpayers to capitalize and amortize specified R&E expenditures over a period of five years (attributable to domestic research) or 15 years (attributable to foreign research)
https://www.grantthornton.com/insights/alerts/tax/2022/flash...
I wonder how many little companies are going to re-title their software developer as janitors. In many cases that description fits pretty well anyway.
Excuse me! I am a Custodian.
How long was the provision in place before Congress decided not to extend it?
R&E expenses were fully deductible since 1954.
"Extend" is a bit of a misnomer because there was no expiration date. Rather, the The Tax Cuts and Jobs Act of 2017 made a change, effective 2022.
"Extend" is a bit of a misnomer because there was no expiration date. Rather, the The Tax Cuts and Jobs Act of 2017 made a change, effective 2022.
To be fair, software development in 1954 is not software development today. It's less pure research. It's more akin to building the electrical infrastructure you need for a business. Even though I see the logic of treating software developed as a capitalized asset, I don't necessarily think the outcome will be net good.
For software developers, this likely will lead to even more micro-tracking of activities. Who doesn't love spending several hours each week making up wild estimates of how much time was spent in each of dozens of different categories? Now those will have to be broken down further into 'new' and 'maintenance' for most existing categories. For those who don't currently have to do any of this tracking, the taxes create quite the incentive for companies to start requiring it. Once the tracking starts, it end up creeping into more and more areas of smaller fidelity.
The US was practically founded on principle of refusal to pay unfair taxes. As the article suggests some are just filing incorrectly, what are the real risks and consequences of this?
>The US was practically founded on principle of refusal to pay unfair taxes
What exactly is a fair tax?
What exactly is a fair tax?
By the founders definitions? At least 90 percent of the taxes we pay are not fair.
What percentage of the services provided by today's government were not around at the founding?
I'd very much like to see government downsize, but if you want to pay taxes at the level at which the country was founded, you also have to restrict government activity to that level.
Not sure if that is tenable.
I'd very much like to see government downsize, but if you want to pay taxes at the level at which the country was founded, you also have to restrict government activity to that level.
Not sure if that is tenable.
I was thinking more along lines of 100% ...
But hey, point taken taken, we are generally in agreement.
Any tax others have to pay, that I don't.
No tax is fair.
They're all involuntary transactions.
The US is the textbook experiment which proves that even minarchy (a minimal government) can't work.
All form of governments, no matter how small, tend to grow into huge socialist monsters (the usa is the largest employer in the world, second only to China, maybe).
Even if that very first government was founded on not collecting very little taxes for this very reason.
The US is the textbook experiment which proves that even minarchy (a minimal government) can't work.
All form of governments, no matter how small, tend to grow into huge socialist monsters (the usa is the largest employer in the world, second only to China, maybe).
Even if that very first government was founded on not collecting very little taxes for this very reason.
> All form of governments, no matter how small, tend to grow into huge socialist monsters (the usa is the largest employer in the world, second only to China, maybe).
The USA have 330 million citizens and 10 million people without valid residency, in total something around 340 million citizens. The public sector clocks in at 15%, which includes the military and USPS. That is, seriously, not much.
[1] https://www.brookings.edu/policy2020/votervital/public-servi...
The USA have 330 million citizens and 10 million people without valid residency, in total something around 340 million citizens. The public sector clocks in at 15%, which includes the military and USPS. That is, seriously, not much.
[1] https://www.brookings.edu/policy2020/votervital/public-servi...
U.S. total public spending is around 40% of the GDP. [1]
[1] https://www.imf.org/external/datamapper/exp@FPP/USA/FRA/JPN/...
[1] https://www.imf.org/external/datamapper/exp@FPP/USA/FRA/JPN/...
So what? It's not like that money is lost. It ends all back in the economy because people spend their wages.
Money is just paper. The _value_ is lost; if the government buys itself a banana, that's one less banana available to the people.
It's sort of like how when developers learn how much they cost the company per hour and they get mad about how they don't get to take more of that home.
Well, say you work at a company with 100 developers. That's who's making the stuff. Everybody else is there to make sure the stuff gets made. There's a manager for every 6-8 developers (13-17), and there's a couple managers for those managers. Add in HR and you're already up to about a 25% overhead and we haven't talked about equipment and buildings and customer management and advertising and litigation and taxes and so on and so forth.
Well, say you work at a company with 100 developers. That's who's making the stuff. Everybody else is there to make sure the stuff gets made. There's a manager for every 6-8 developers (13-17), and there's a couple managers for those managers. Add in HR and you're already up to about a 25% overhead and we haven't talked about equipment and buildings and customer management and advertising and litigation and taxes and so on and so forth.
Whatever the consensus is.
Good, let tax some minority/marginalized section of the society so that their living becomes hell.
> The US was practically founded on principle of refusal to pay unfair taxes.
Unfair because of lack of legislative representation. One can get into a debate over gerrymandering and whatnot, but American voters most certainly aren't an overseas colony under an unelected king/queen anymore. There is non-rebellion recourse available to citizens if they don't like a tax.
The newborn country (including President Washington himself at the head of the army) very rapidly demonstrated it wouldn't accept "we don't like the tax" as an argument from represented citizens. https://en.wikipedia.org/wiki/Whiskey_Rebellion
Unfair because of lack of legislative representation. One can get into a debate over gerrymandering and whatnot, but American voters most certainly aren't an overseas colony under an unelected king/queen anymore. There is non-rebellion recourse available to citizens if they don't like a tax.
The newborn country (including President Washington himself at the head of the army) very rapidly demonstrated it wouldn't accept "we don't like the tax" as an argument from represented citizens. https://en.wikipedia.org/wiki/Whiskey_Rebellion
> As the article suggests some are just filing incorrectly, what are the real risks and consequences of this?
Provided you never used an R&D tax credit, none.
But if you did, with a huge templated report report about software R&D, you have a verbatim provable record of doing R&D expenses. And those reports, they come from 10 different vendors who all use the same words and formatting. The IRS could easily solve one case and get everyone.
Provided you never used an R&D tax credit, none.
But if you did, with a huge templated report report about software R&D, you have a verbatim provable record of doing R&D expenses. And those reports, they come from 10 different vendors who all use the same words and formatting. The IRS could easily solve one case and get everyone.
Just to clear this up, this change is unrelated to if you've taken the R&D credit. You should take it as it slightly helps offset this change, but regardless the calculation applies to dev salaries and costs without regard to if you've actually taken the R&D credit.
Cool - so I made a script that automates emails to outbound leads, does this mean my capital asset allocation is my full commission since it is the software by which I made the sale? So even my normal SGA is now a capital expense?
The law reads as this as a capital expense (anything to do with software [0]) - the IRS could use agency level logic to make it different, but all this exposes what’s wrong with the US.
What about chatGPT scripts? They too are connected to software and now a part of almost every workflow?
[0] https://irc.bloombergtax.com/public/uscode/doc/irc/section_1...
The law reads as this as a capital expense (anything to do with software [0]) - the IRS could use agency level logic to make it different, but all this exposes what’s wrong with the US.
What about chatGPT scripts? They too are connected to software and now a part of almost every workflow?
[0] https://irc.bloombergtax.com/public/uscode/doc/irc/section_1...
Yet another self-inflicted wound the Congress of old men do to make the US software industry even less competitive. I would argue this is political because the tech industry is a convenient target at the moment, full of young people who tend to vote against the ruling party. That, and legacy industries don't care too much about R&D anyway.
This section of the code was part of Trump's tax legislation of 2017. It is 100% ideological.
Looks to me like a failure to plan properly. It's not like the companies didn't know this could happen. If you put your faith in Congress, be prepared to be disappointed by Congress.
CFO heads should roll over this. It's their job to be up to speed on tax changes and plan for eventualities like this.
CFO heads should roll over this. It's their job to be up to speed on tax changes and plan for eventualities like this.
This is affecting companies with <$10m in revenue that don't have CFOs.
I appreciate your point about not putting faith in Congress, but as a country we should not let them off the hook for passing batshit insane legislation that screws over small businesses.
I appreciate your point about not putting faith in Congress, but as a country we should not let them off the hook for passing batshit insane legislation that screws over small businesses.
Does it matter?
Congress doesn't need to be involved to screw over small businesses.
If the last few years have demonstrated anything, it's the government can freely destroy small businesses by forcibly shutting them down for completely intangible reasons without the slightest repercussion.
Congress doesn't need to be involved to screw over small businesses.
If the last few years have demonstrated anything, it's the government can freely destroy small businesses by forcibly shutting them down for completely intangible reasons without the slightest repercussion.
CFOs have been quite vocal on this.
https://www.wsj.com/articles/u-s-cfos-ask-congress-to-repeal...
Small companies don’t have CFOs.
https://www.wsj.com/articles/u-s-cfos-ask-congress-to-repeal...
Small companies don’t have CFOs.
I own a two-person educational software company. We have a CPA that we engage once a year to do our business taxes and can't afford anything fancier than that. It's an LLC taxed as an S-Corp so all of the "profit" goes directly to me on my Schedule K. For 2022, if this is not reversed, I will owe around $100K in taxes. For reference, my salary was around $100k. I'll have to take out a payment plan with the IRS, and probably shut down the company if nothing changes because I can't do that again for 2023 and beyond.
We aren't making huge profits to absorb the costs and give me a fat bonus to cover my taxes. In fact in 2022, I WAS expecting a nice $30k loss and a refund. Do we deserve to survive? Probably not in some peoples' minds, but we've been scrapping together a living so far. It sucks because we were actually growing and gaining some momentum: any further growth would now be pretty impossible because I can't afford to pay my personal taxes to cover additional dev salaries.
We aren't making huge profits to absorb the costs and give me a fat bonus to cover my taxes. In fact in 2022, I WAS expecting a nice $30k loss and a refund. Do we deserve to survive? Probably not in some peoples' minds, but we've been scrapping together a living so far. It sucks because we were actually growing and gaining some momentum: any further growth would now be pretty impossible because I can't afford to pay my personal taxes to cover additional dev salaries.
Hey, fellow business owner here, but I am just getting started; haven't made a sale yet and haven't "paid" myself anything yet.
I am a single-man business. Would your situation be better if it had just been you? In other words, was it the fact that you had that other employee that is going to cause you to shut down? Or would it have happened with just you?
I am a single-man business. Would your situation be better if it had just been you? In other words, was it the fact that you had that other employee that is going to cause you to shut down? Or would it have happened with just you?
I'm no expert, but my understanding is that any expense related to software development would have to be amortized regardless of company structure or employees.
So, two scenarios: a) If you were a sole-proprietorship, you made $100K revenue, paid $10k in AWS fees, you would pay personal taxes on $98k (100 - 10/5) that year. b) If you paid a contractor $50k that year, you would pay taxes on $88k. (100 - 10/5 - 50/5).
In the past taxes base would be a) $90k (100 - 10) and b) $40k (100 - 10 - 50). So yeah larger tax implications for having employees, but the same would be the case with any expense.
So, two scenarios: a) If you were a sole-proprietorship, you made $100K revenue, paid $10k in AWS fees, you would pay personal taxes on $98k (100 - 10/5) that year. b) If you paid a contractor $50k that year, you would pay taxes on $88k. (100 - 10/5 - 50/5).
In the past taxes base would be a) $90k (100 - 10) and b) $40k (100 - 10 - 50). So yeah larger tax implications for having employees, but the same would be the case with any expense.
Thank you so much.
It looks like I may have to shut down my business before I even get started.
Good luck with your situation!
It looks like I may have to shut down my business before I even get started.
Good luck with your situation!
Any startup that needed a year of runway now needs five years of runway. Runway is money needed before the company can survive off of profits.
If company A has $1M in expenses and $1M in investment, after the tax change it will need ~$5M in investment.
If company A has $1M in expenses and $1M in investment, after the tax change it will need ~$5M in investment.
You've never filed an 1120.
This makes most salaries nondeductible, so you will need about 25% more revenue (80% of 21% federal and up to 10% state income tax) to break even than
otherwise. If you’re pre-revenue your runway doesn’t change.
Apparently the right number is 90% of 21+10%, because amortization starts at the midpoint of the first year. (If you take authoritative tax advice from me you will totally go to jail.)
Could that mean no more migrating code from Lang A to Lang B, Framework C to Framework D and writing blogs about it?
Or even worse no more framework inventions, re-architecting SAAS platforms for performance so they can provide even more features that customers never asked for?
If that's the case I do feel it is indeed threatening startup ecosystem.
Or even worse no more framework inventions, re-architecting SAAS platforms for performance so they can provide even more features that customers never asked for?
If that's the case I do feel it is indeed threatening startup ecosystem.
There's actually a pretty good argument to treat software as capex. It's an asset that allows you to earn revenue over multiple years, and apportioning part of the cost to each year of service is sound from the accounting side. Not a popular opinion, but this is not as arbitrary, crazy, or hidden deep in the weeds of tax law.
I thought about that, but it's also true that most software without any developers maintaining it goes stale in 1 or 2 years at most.
I'm not sure if amortizing it over 5 years is reasonable.
The same is true for other things you amortize and those maintenance costs are opex. If you don't change the oil, filters, spark plugs, etc. on your delivery trucks, they will break down before the end of their service life. Stale is not the same thing as useless. You might get bored by a game, or find the interface "old", but in enterprise environments, 10 year old software is very common. Heck, 90% of your transactions run on a platform first developed in the early 1960's.
The 5 year is arbitrary. Arguably, software doesn't really break or wear out, so the service life is arbitrary. (That's not to say that the OS it's running on doesn't break it during an update). 5 years matches the life of the capitalized equipment on which it runs. I don't have any insight as to the debate around 5 years, but my guess is computers are a 5 year asset.
My guess is the rules apply from other assets, where fixes to bugs and minor updates are opex as maintenance costs. If you make a major change that extends the life of the asset, such as remastering a game or refreshing the UI, or adding a feature, might be capitalized. This would be like adding a lift to a delivery truck or replacing the engine to extend its life.
The 5 year is arbitrary. Arguably, software doesn't really break or wear out, so the service life is arbitrary. (That's not to say that the OS it's running on doesn't break it during an update). 5 years matches the life of the capitalized equipment on which it runs. I don't have any insight as to the debate around 5 years, but my guess is computers are a 5 year asset.
My guess is the rules apply from other assets, where fixes to bugs and minor updates are opex as maintenance costs. If you make a major change that extends the life of the asset, such as remastering a game or refreshing the UI, or adding a feature, might be capitalized. This would be like adding a lift to a delivery truck or replacing the engine to extend its life.
I happen to work on a system that launched more than five years ago, which at my company is pretty unusual (without at least one full rewrite). The teams working on generalizing use cases and new features have expanded every year since launch. Amortization makes sense for spreading out the tax deductions on an investment whose cost is fully front-loaded, but not on an investment whose cost is incremental and continually increasing over the entire lifetime.
This is not that uncommon. It's a headache for the accounting, but if the change materially extends the life of the asset or improves the asset, then it has to be capitalized. So the schedule would look like 1,000,000 for the original asset. Then depreciated 200,000 for the next year, taking it to 800,000 net of amortization. 150,000 of work is added and capitalized. The next year there's 200,000 of depreciation expense plus 30,000 from the improvements. The same thing happens to other assets. If you do it long enough, you amortize off the original investment and what you are amortizing/depreciating are the improvements.
If we spent $1M in year one, we are surely going to spend more than $1M in year two because the same teams keep working and hiring, and we are incrementally building a system whose fully delivered cost as of its last day will be over $5M.
The costs are usually capitalized until the asset is put in service and the amortized expense of the asset plus any maintenance can be matched to the revenue in that period. This is not different than a building that takes years to complete, or even completed in stages when you could have construction and occupancy going on at the same time. The accounting treatment as an asset doesn't require it to be completely built in a year, but until there's revenue to which expenses can be matched, you capitalize the construction/acquisition cost.
Couldn't you say that about the salary of any employee working on a long term project?
I think the problem is having essentially a tax on software development could discourage some investment in that area especially from the smaller companies that could benefit the most.
I think the problem is having essentially a tax on software development could discourage some investment in that area especially from the smaller companies that could benefit the most.
There are a few tests for whether or not something is capitalized.
First, the revenue is earned in future accounting periods. For example, you buy a delivery truck. You expect to earn money over several years with the delivery truck. To match expenses with the revenue generated, a portion of the expense of the truck is allocated to each accounting period. If the revenue is in the current period, then there's no reason to capitalize. For example, fast food worker's wages are not capitalized since the revenue is in the current period. The warehouse construction worker's salary is capitalized int he cost of the warehouse because it will earn revenue for several years.
Another test is if it's assignable to the cost of the asset. The CFO's salary isn't capitalized as part of the investment (unless the company literally does nothing else), because there are a lot of projects and it's hard to specifically assign. Selling expenses aren't capitalized because 1) the asset is complete and 2) they are assignable to the sale and not the cost of the asset. Other costs to acquire the asset, such as delivery fees, installation fees, insurance, etc. are capitalized.
Do you own the asset? If I hire a construction company to build a warehouse, they hae nothing to capitalize since they don't own the asset. I do.
And material. If I have you write a shell script that we'll use for the next five years to copy backups between our servers and Azure, and it takes an afternoon, we don't capitalize that. It's just not material.
If it's leased for 90/95% of the cost and for 90/95% of the useful life, it's capitalized. This prevents companies from treating capitalized costs as leasing expenses in the current period.
First, the revenue is earned in future accounting periods. For example, you buy a delivery truck. You expect to earn money over several years with the delivery truck. To match expenses with the revenue generated, a portion of the expense of the truck is allocated to each accounting period. If the revenue is in the current period, then there's no reason to capitalize. For example, fast food worker's wages are not capitalized since the revenue is in the current period. The warehouse construction worker's salary is capitalized int he cost of the warehouse because it will earn revenue for several years.
Another test is if it's assignable to the cost of the asset. The CFO's salary isn't capitalized as part of the investment (unless the company literally does nothing else), because there are a lot of projects and it's hard to specifically assign. Selling expenses aren't capitalized because 1) the asset is complete and 2) they are assignable to the sale and not the cost of the asset. Other costs to acquire the asset, such as delivery fees, installation fees, insurance, etc. are capitalized.
Do you own the asset? If I hire a construction company to build a warehouse, they hae nothing to capitalize since they don't own the asset. I do.
And material. If I have you write a shell script that we'll use for the next five years to copy backups between our servers and Azure, and it takes an afternoon, we don't capitalize that. It's just not material.
If it's leased for 90/95% of the cost and for 90/95% of the useful life, it's capitalized. This prevents companies from treating capitalized costs as leasing expenses in the current period.
The argument only exist because the one who made the argument has never written a line of code in their entire life.
You don't expect the warehouse to grow rooms and additional bay with each passing year. The warehouse is a capex, the software you bought and expecting to be supported down the line isn't.
You don't expect the warehouse to grow rooms and additional bay with each passing year. The warehouse is a capex, the software you bought and expecting to be supported down the line isn't.
Really, you've never seen a warehouse complex get added to, or a building retrofitted with new loading docks or refrigerators? Hospitals are notorious for growing like a friggin' plant. They just keep adding wings.
Amortising software development is just stealing from the future
It’s what software companies do to make themselves seem profitable than they are
It’s what software companies do to make themselves seem profitable than they are
Actually, not amortizing makes them seem more profitable. At the end of the life of the asset, the totals are the same. However, under one model you show a giant loss, initially, and then profits for the next few years. If I expense the $1,000,000 in the year of acquisition, and show a 1,000,000 loss, I then show my revenue as pure profit. Instead, if I have to amortize, I show no loss my first year (because the cost is on the books as an asset), but profit in future years only when my revenue exceeds 200,000 (1/5 the acquisition price). This is how all other assets that earn revenue over multiple accounting periods are handled. Why should Ford have to capitalize a welding robot, but not the software developed to control the welding robot?
Amortizing makes sense for things that have a huge up-front cost and value over time, like - indeed - a robot, or a laptop, or a house. But salaries are not that, they are a continuous cost. I can take a loan on a house (mortgage), and laptops can be bought on 0% payment plans over 3 years. But how would that work for salaries? I'm forced to take out loans to pay the duplicate tax over salaries (and other minor expenses) over the amortization period. That's the insane bit here.
We do that all the time. If I were to build a power generator, it might take several years. During that time, the salaries of people directly building the project are capitalized. Even when the project is put in service and earning revenue, I still migh capitalize the wages for improvements versus repairs. That’s why what you charge on the time sheets matter, if it’s classified as an operational expense vs a capital expense.
Not amortising is only more profitable if you stop developing…
What many companies who amortise development costs do is make some enhancements to some software or build new software so in theory generating a greater asset value but the reality is they’re just kicking the can of accounting for developer costs down the road
Have worked in several businesses that amortised development costs and it always comes back to bite you at some point
What many companies who amortise development costs do is make some enhancements to some software or build new software so in theory generating a greater asset value but the reality is they’re just kicking the can of accounting for developer costs down the road
Have worked in several businesses that amortised development costs and it always comes back to bite you at some point
The IRS hasn't provided a clear stance on this issue (ask your tax guy).
However, this will definitely hurt a lot companies because they used R&D tax credit for salaries. Convincing the IRS that certain salaries suddenly don't qualify as R&D could prove challenging.
It's worth noting, though, that the R&D tax credit has been raised to $500,000 per year, which could be beneficial for very small companies.
However, this will definitely hurt a lot companies because they used R&D tax credit for salaries. Convincing the IRS that certain salaries suddenly don't qualify as R&D could prove challenging.
It's worth noting, though, that the R&D tax credit has been raised to $500,000 per year, which could be beneficial for very small companies.
> Convincing the IRS that certain salaries suddenly don't qualify as R&D could prove challenging
I always felt the R&D tax credit was too good to be true. Like how could a templated, computer generated report from a vendor ever pass muster with the IRS?
Sure you could take the money, then you cease to exist later because you run out of money. And then there's no one to audit and no one to claw back from. But laws and enforcement changes. It's a crazy thing to gamble on.
The IRS could audit every single R&D tax credit company and find loads of skeletons in those closets. Being a customer of an automated R&D tax credit vendor is the only thing on the APB for those offenders.
What were people thinking?
I always felt the R&D tax credit was too good to be true. Like how could a templated, computer generated report from a vendor ever pass muster with the IRS?
Sure you could take the money, then you cease to exist later because you run out of money. And then there's no one to audit and no one to claw back from. But laws and enforcement changes. It's a crazy thing to gamble on.
The IRS could audit every single R&D tax credit company and find loads of skeletons in those closets. Being a customer of an automated R&D tax credit vendor is the only thing on the APB for those offenders.
What were people thinking?
I wonder how many companies will be doing more bugfixes now...
For example, the initial product generates "hello world".
What it was supposed to do was control a robot to automatically do pick and place.
It's Definitely a bug that the program failed to work, it's even tracked as a defect in the issue management. No R&D involved just fixing a pretty severe software bug, namely that the product does not work.
For example, the initial product generates "hello world".
What it was supposed to do was control a robot to automatically do pick and place.
It's Definitely a bug that the program failed to work, it's even tracked as a defect in the issue management. No R&D involved just fixing a pretty severe software bug, namely that the product does not work.
I like your style.
Somehow I'm reminded of delivering software licenses that don't actually activate, so that revenue could be booked now, and the software + functioning licenses delivered later.
It's not GAAP revenue until the product is out of your hands and in a usable state.
So you can drop the license in an envelope and recognize the revenue immediately, but only if the recipient could have used it if they'd grabbed it from the mailbox.
If the license isn't usable for another month, you can send it to the customer, they can pay for it, and you can even spend the cash, but the payment sits on your balance sheet as a liability until the moment the license becomes valid.
So you can drop the license in an envelope and recognize the revenue immediately, but only if the recipient could have used it if they'd grabbed it from the mailbox.
If the license isn't usable for another month, you can send it to the customer, they can pay for it, and you can even spend the cash, but the payment sits on your balance sheet as a liability until the moment the license becomes valid.
And as with anything, sufficiently motivated legal representation will argue your way into the most favorable grey area possible. Arbitrary example being a license key that activates the software, but the activated software is effectively a hardcoded trade show demo version. The point most folks seem to be making is that “this isn’t corporate america’s first rodeo” and that like many other industries before software will end up with it’s own numerous nuances and loopholes established by extensive litigation.
No, because getting from "hello world" to "controlling a robot" involves a fair amount of research and development to "fix" the "bug" since you need to work out the code needed to get to the "fix". Attempting to treat such work as not R&D would be tax evasion.
But yes, in the sense that work that should not be treated as development work will no longer be treated as development (and thus no longer eligible for the R&D credit). So, actual bug fixing should not be development work going forward if the fix is simple and straightforward to carry out.
But yes, in the sense that work that should not be treated as development work will no longer be treated as development (and thus no longer eligible for the R&D credit). So, actual bug fixing should not be development work going forward if the fix is simple and straightforward to carry out.
Time to update your MVP books and release a 2nd Edition, ladies and germs.
Unfortunately it doesn’t matter. The law is explicit that any costs related to the development of any software must be amortized. Bug fixes included.
Not only that but ALL costs. Salaries, benefits, servers, subscriptions, even the percentage of utilities that go to software development have to be figured out and amortized.
This is insane and bankrupting a lot of small business if left in place.
“For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.”
Not only that but ALL costs. Salaries, benefits, servers, subscriptions, even the percentage of utilities that go to software development have to be figured out and amortized.
This is insane and bankrupting a lot of small business if left in place.
“For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.”
Why are software developer salaries classified as R&D expenses?
R&D == research and development. Now, what do software... developers... do?
Not research and development in the traditional sense which was tied to the creation of a new product, drug, etc. It was intended to offset the cost and risk of invention.
I would not describe what most software engineers do as invention.
Applying this broadly to most software engineers, many who are now more akin to digital plumbers than research scientists, was a lucky break for however long it lasted.
I would not describe what most software engineers do as invention.
Applying this broadly to most software engineers, many who are now more akin to digital plumbers than research scientists, was a lucky break for however long it lasted.
I think the issue is that for much software it’s not a clear distinction.
For a few years of my career, I spent about half of my dev time improving a gigantic distributed system. Much of this work was inventing a new algorithm somewhere in the stack, A/B testing it to see what effects it had, and repeat. Lots of algorithm papers and patents came out of it. At the same time, I also had to keep the systems running well enough to do this, and technically no new customer “product” came out of it (although some open source database features did).
Is this R&D? Seems like much is, and much isn’t. What do you want to incentivize?
For a few years of my career, I spent about half of my dev time improving a gigantic distributed system. Much of this work was inventing a new algorithm somewhere in the stack, A/B testing it to see what effects it had, and repeat. Lots of algorithm papers and patents came out of it. At the same time, I also had to keep the systems running well enough to do this, and technically no new customer “product” came out of it (although some open source database features did).
Is this R&D? Seems like much is, and much isn’t. What do you want to incentivize?
> What do you want to incentivize?
An environment where Americans correctly classify R&D instead of just saying everyone's an engineer doing R&D?
An environment where Americans correctly classify R&D instead of just saying everyone's an engineer doing R&D?
Simply put, they are not. Unless you want them to be. Previously, there were some situations which made doing so favorable. Now, there are not.
I don't know how contracted/outsourced development payments (i.e. non-employee compensation) will be treated.
I don't know how contracted/outsourced development payments (i.e. non-employee compensation) will be treated.
Ugg. Now I got to figure out how this impacts our small business this year. I just e-mailed our CPA so he would be able to look over the changes after their busy season ends. I hope there is some sort of threshold because as a small business some years we barely break even after paying salaries. I mean profit under $10k remaining to role over into January. I am driving a 16 year old Honda Civic. Not living a life of luxury over here :-/
i'm in a similar situation building software and my understanding is while i cannot write off my expenses 100% because i'm building an asset, if you're operating business as usual, maintaining existing software/service then it's 100% expense.
My wife and I am getting a refund this year. Getting beat up in the business by inflation, all costs going up, and cutting income in half is not a great tax strategy.
It is going to make me push tougher time code tracking onto my developers. Fixing a bug is different than feature work is different than legit R&D that might qualify for the actual R&D tax credit. As if software devs love doing time sheets (not!) :-/
It is going to make me push tougher time code tracking onto my developers. Fixing a bug is different than feature work is different than legit R&D that might qualify for the actual R&D tax credit. As if software devs love doing time sheets (not!) :-/
how subjective is it whether feature building qualifies as R&D?
I am not an expert, but there are rules. If it fits the definition of doing or managing the qualified work and "no one is paying for it" than it could count. This is for the R&D tax credit,see https://www.irs.gov/forms-pubs/about-form-6765.
Here is a copy and paste from a e-mail from our CPA:
To qualify for the credit, you have to have what’s called “Qualified Research”. Qualifying research typically meet’s the following criteria ...
1. Was the research related to the development or improvement of the functionality, quality, reliability or performance of a business component (product, process, software, technique, formula or invention)? 2. Was the development technological in nature? 3. Was there technological uncertainty about either the capability or method of developing the business component or its appropriate design? 4. Was the developmental process experimental in nature?
For wages to qualify for the credit, they have to be for qualifying research activities such as –
1. Conducting or executing the qualified research (e.g., testing a manufacturing prototype) 2. Directly supervising the qualified research (e.g., managing a team of software developers) 3. Directly supporting qualified research (e.g., organizing test results on formulation trials)
Here is a copy and paste from a e-mail from our CPA:
To qualify for the credit, you have to have what’s called “Qualified Research”. Qualifying research typically meet’s the following criteria ...
1. Was the research related to the development or improvement of the functionality, quality, reliability or performance of a business component (product, process, software, technique, formula or invention)? 2. Was the development technological in nature? 3. Was there technological uncertainty about either the capability or method of developing the business component or its appropriate design? 4. Was the developmental process experimental in nature?
For wages to qualify for the credit, they have to be for qualifying research activities such as –
1. Conducting or executing the qualified research (e.g., testing a manufacturing prototype) 2. Directly supervising the qualified research (e.g., managing a team of software developers) 3. Directly supporting qualified research (e.g., organizing test results on formulation trials)
thank you!
I know nothing about this topic, But I think your accountant was talking about R&D tax credits, which is a different topic from R&D capitalisation and depreciation. The tax credits might be another reason why companies previously wanted to claim developers salaries as R&D.
The issue here seems to be that software development wages are now supposed to be treated as R&D per https://news.ycombinator.com/item?id=35620164 combined with the fact the IRS wants R&D to be capitalised with a standard depreciation schedule.
Hopefully someone who is an accountant can ELI5 this all, because this topic is mostly basic accountancy. https://news.ycombinator.com/item?id=35614721 explains it a bit, but misses the ELI5 part about what amortisation/depreciation is.
A good example that is about building a thing rather than some software would help. Edit: Best example with good child comments so far: https://news.ycombinator.com/item?id=35615217
The issue here seems to be that software development wages are now supposed to be treated as R&D per https://news.ycombinator.com/item?id=35620164 combined with the fact the IRS wants R&D to be capitalised with a standard depreciation schedule.
Hopefully someone who is an accountant can ELI5 this all, because this topic is mostly basic accountancy. https://news.ycombinator.com/item?id=35614721 explains it a bit, but misses the ELI5 part about what amortisation/depreciation is.
A good example that is about building a thing rather than some software would help. Edit: Best example with good child comments so far: https://news.ycombinator.com/item?id=35615217
Well... looks like everyone thought US Congress might come to its senses before it's too late.
Personally, I'd be inclined to say: let it all fucking burn to the ground. Maybe that's enough incentive for the GOP to come to its senses. But unfortunately, there is a pretty high chance the GOP is willing to risk a major economic crash just to push the responsibility on Biden.
Personally, I'd be inclined to say: let it all fucking burn to the ground. Maybe that's enough incentive for the GOP to come to its senses. But unfortunately, there is a pretty high chance the GOP is willing to risk a major economic crash just to push the responsibility on Biden.
If you're worried about this, check out neo.tax (https://www.neo.tax/). They are one of the few companies that anticipated this and built a product to solve it.
Disclaimer: I work with startups as a consultant (not on optimizing their tax burden).
I know of two companies that used neotax and they were happy with the results.
What I don't know is if there is there anyone else in the space or some of the disadvantages of neotax. But... if you're an exec at a small -> medium size startup and you haven't dealt with this yet you could do a lot worse than giving these guys a call.
I know of two companies that used neotax and they were happy with the results.
What I don't know is if there is there anyone else in the space or some of the disadvantages of neotax. But... if you're an exec at a small -> medium size startup and you haven't dealt with this yet you could do a lot worse than giving these guys a call.
Ah, the mythical “regulatory capture” I keep hearing about
Congress was advised (government has all the data it wants when it wants; they don’t let things like this happen without modeling the political fallout). The goal is claw back cheap money they flooded the economy with, stick it to the avocado toast crowd they felt were not showing proper fealty to spoken political traditions.
It would appear there’s a coordinated effort to diminish software engineering salaries across the board. Is the plan to decimate the industry and ship it all to india and china?
This tax change will still affect you if you hire developers in India & China. You have to actually move your office to India or China instead (which might be a good idea).
Actually. For foreign expenses, the amortization period is 15 years instead of 5, so the cash flow problem is even worse. :-(.
[deleted]
Quick reminder:
- corporate taxes have one of the highest deadweight loss of any tax
- corporate taxes get passed to consumers and employees as higher cost of goods and lower wages / benefits
- the USA has one of the highest rates of corporate tax in the world
- handling the complex tax code is more a burden on small firms (as this case shows)
All of this together means we'd be better off dropping the corporate tax entirely and instead tax income, capital gains, or consumption at higher rates.
- corporate taxes have one of the highest deadweight loss of any tax
- corporate taxes get passed to consumers and employees as higher cost of goods and lower wages / benefits
- the USA has one of the highest rates of corporate tax in the world
- handling the complex tax code is more a burden on small firms (as this case shows)
All of this together means we'd be better off dropping the corporate tax entirely and instead tax income, capital gains, or consumption at higher rates.
> the USA has one of the highest rates of corporate tax in the world
That doesn't seem right. Apparently it ranks 81st?
[1] https://taxfoundation.org/publications/corporate-tax-rates-a...
That doesn't seem right. Apparently it ranks 81st?
[1] https://taxfoundation.org/publications/corporate-tax-rates-a...
My apologies, I was a little outdated. Unfortunately can't update the previous comment. What I said was true as of 2017, when the USA had a corporate tax rate of 39%, which ranked third highest in the world.
It was changed to 26.8% by the Trump tax cuts, which ranks 81st in the world. But that's still higher than 144 countries, including Switzerland, Finland, Sweden, Denmark, Norway, UK, and Spain (just to name a few).
It was changed to 26.8% by the Trump tax cuts, which ranks 81st in the world. But that's still higher than 144 countries, including Switzerland, Finland, Sweden, Denmark, Norway, UK, and Spain (just to name a few).
nitrosn0w(1)
I'm guessing that this will result in many employers reclassing many engineers into COGS, S&M, G&A, etc (in other words, not calling their work R&D).
This is relatively easy to do. If an engineer is fixing bugs, helping support team, helping sales in any way, participating in customer onboarding, keeping the servers online, etc, a company can argue the engineer is a cost of doing business rather than true "R&D".
In reality, the % of time most engineers spend exclusively on 100% new products is much smaller than you'd assume at face value. Even at a young startup, I'd guess at most 50% of the work is true R&D.
To reiterate, things like devops, managing infrastructure, patching servers, upgrading code, fixing bugs, professional services, etc... none of that is R&D and it's pretty easy for a small company to say that the majority of their engineering expense is not R&D (extremely difficult for the IRS to argue otherwise if they audit a company unless detailed timesheets are kept).
Edit: I'm not an accountant, but pretty familiar with R&D / IRS stuff
This is relatively easy to do. If an engineer is fixing bugs, helping support team, helping sales in any way, participating in customer onboarding, keeping the servers online, etc, a company can argue the engineer is a cost of doing business rather than true "R&D".
In reality, the % of time most engineers spend exclusively on 100% new products is much smaller than you'd assume at face value. Even at a young startup, I'd guess at most 50% of the work is true R&D.
To reiterate, things like devops, managing infrastructure, patching servers, upgrading code, fixing bugs, professional services, etc... none of that is R&D and it's pretty easy for a small company to say that the majority of their engineering expense is not R&D (extremely difficult for the IRS to argue otherwise if they audit a company unless detailed timesheets are kept).
Edit: I'm not an accountant, but pretty familiar with R&D / IRS stuff
We won't know where the line is until we get guidance from the courts.
A lot of things in real estate that you might think qualify as just maintenance actually have to be depreciated. Like, repairing a roof has to be capitalized since the roof will be around for awhile. The devops equivalent might be migrating from docker swarm to k8s-- the k8s cluster will be around for awhile.
A lot of things in real estate that you might think qualify as just maintenance actually have to be depreciated. Like, repairing a roof has to be capitalized since the roof will be around for awhile. The devops equivalent might be migrating from docker swarm to k8s-- the k8s cluster will be around for awhile.
The average roof has a lifespan at least an order of magnitude greater than a k8s cluster. Most roofs being put on today will outlast k8s itself.
Software is a liability, not an asset. Treating the construction and maintenance of this horrible liability knows as “code” is a complete misunderstanding of what software actual is.
Software is a liability, not an asset. Treating the construction and maintenance of this horrible liability knows as “code” is a complete misunderstanding of what software actual is.
If the software makes money for the business, it is an asset.
That seems like a very broad way of classifying assets.
Are people assets? Certainly not on the balance sheet I hope.
What about a contract? Is a contract an asset? I’m actually curious, not trying to be a smart ass.
Are people assets? Certainly not on the balance sheet I hope.
What about a contract? Is a contract an asset? I’m actually curious, not trying to be a smart ass.
A contract for a typical SaaS company, billed annually, is actually a liability (from an accounting perspective) up until the point where the contract has been completely fulfilled.
Others (say, an investor) might view a contract as an “asset” because of the future value it might bring, but not in a traditional accounting sense.
Others (say, an investor) might view a contract as an “asset” because of the future value it might bring, but not in a traditional accounting sense.
The value people produce is an asset. After all, you don't own people, you buy their effort.
A contract can be an asset. Usually the unrealized future value of the agreement has value should you need to make a deemed disposition (or have some other valuation event). It gets very obviously complicated and fuzzy though, which is where accountants make the big bucks. It's pretty rare that a company chooses to make a contract valuable, but it often comes up in bankruptcy proceedings.
As an example of contracts having value, a few years ago I was involved in the acquisition of some media distribution assets, and one such asset was a transferable "MFN" contract with a major publisher. That was a very, very valuable asset.
A contract can be an asset. Usually the unrealized future value of the agreement has value should you need to make a deemed disposition (or have some other valuation event). It gets very obviously complicated and fuzzy though, which is where accountants make the big bucks. It's pretty rare that a company chooses to make a contract valuable, but it often comes up in bankruptcy proceedings.
As an example of contracts having value, a few years ago I was involved in the acquisition of some media distribution assets, and one such asset was a transferable "MFN" contract with a major publisher. That was a very, very valuable asset.
Another instance of contracts having value: bonds and options are just contracts, and it would be insane to consider a bond to not be an asset.
It's just an example. Another is paint. The rule is close to but not exactly "if it lasts more than a year it has to be depreciated instead of expensed."
The book value of the k8s work could be completely expensed as soon as it is replaced.
Also, your belief that "software is a liability" is irrelevant. What matters is that tax law calls software an asset (as does most everyone else, even ones who fundamentally understand it).
The book value of the k8s work could be completely expensed as soon as it is replaced.
Also, your belief that "software is a liability" is irrelevant. What matters is that tax law calls software an asset (as does most everyone else, even ones who fundamentally understand it).
> Also, your belief … is irrelevant.
This is true everywhere and always.
I agree with you, lots and lots of software definitely has the properties of an asset. There’s also plenty of software that’s hastily written, untested, and basically not fit for use beyond a short expiration date. More like a jug of milk with a shelf life than a fine grand piano with resale value.
This is true everywhere and always.
I agree with you, lots and lots of software definitely has the properties of an asset. There’s also plenty of software that’s hastily written, untested, and basically not fit for use beyond a short expiration date. More like a jug of milk with a shelf life than a fine grand piano with resale value.
> the k8s cluster will be around for awhile.
without someone maintaining it, it would probably fail by the end of month. That's not considering the constant changes going into it.
without someone maintaining it, it would probably fail by the end of month. That's not considering the constant changes going into it.
"New product" is a distinction without a difference. Literally all software development efforts are in the interest of "new products" depending on your definition of "new product."
How is fixing a bug in the interest of a new product?
It's a bit strained, but car or TV companies often put out a new model that's identical to the old model +- some but fixes. There's a line somewhere but the law does not specify the line, it seems
Exactly. v4.2.34 is a new product compared to v4.2.33.
Not defending this, but in the eyes of the law there's no distinction between new products and features and bug fixes.
Not defending this, but in the eyes of the law there's no distinction between new products and features and bug fixes.
Precisely. The difference with software is that the production process is so iterative that experimentation becomes a relatively rational tactic for getting things done.
Leaving arguments about new patch releases out, how could we practically track this? Would every engineer log the time they work and track feature work separately from bug fixes?
There are already tax credits available to "new development" that doesn't include fixes.
So this isn't a new thing to track
So this isn't a new thing to track
[deleted]
Announcement: New Product v2.0 Features Less Bugs!!!
it would surprise me if the IRS would resolve this favorably for you if your defense was "we didn't keep detailed timesheets"
https://www.law.cornell.edu/uscode/text/26/174
> 26 U.S. Code § 174(c)(3):
> (3) Software development
>
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
> 26 U.S. Code § 174(c)(3):
> (3) Software development
>
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
My guess is they'll treat it like repairs and improvements on physical equipment. Fix a broken calculation, that's opex. Add an API for better Google integration, that's capex.
That's not how that works. The law is pretty explicit.
How is the IRS defining "development"?
I don't think it's the same as we do, and more akin to land development and improvement.
I don't think it's the same as we do, and more akin to land development and improvement.
I think that will actually be decided by IRS interpretation. I can’t imagine an administrative judge would have that narrow a view, given the way other assets are treated.
[deleted]
This is going to give huge amounts of power to non-software and software-adjacent companies. Because their revenue doesn't come from software, they'll be able to hire software developers to work on dream projects and eat the cost.
Yikes! R&D costs, meaning actually paying the devs to make stuff, is your biggest expense, and it's a big one. Rubber bands, paper clips and toner for the office printer don't cost anything.
If your business has one large expense and you depend on writing it off, and suddenly can't, that's bad news.
If your business has one large expense and you depend on writing it off, and suddenly can't, that's bad news.
Yes, let's make research taxable but leave advertising as a deductible expense.
What could go wrong?
What could go wrong?
Advertising is also capex in some cases,
https://www.journalofaccountancy.com/issues/1999/may/maples....
https://www.journalofaccountancy.com/issues/1999/may/maples....
The big, overlooked thing here seems to be that the vast majority of software developers are employed as consultants. Here on HN, you're used to thinking in terms of startups creating products, doing real R&D: creating a product that is speculating that someone will buy it over the next X years. But that's just not how most people who do "computer programming" are employed. Most of us are working to build some stupid CRUD app that would be basically turnkey if it weren't for the fact that consulting is so cut-throat that it can't keep any talented senior developers around. To call what consultoware developers do "R&D" would be like calling a subcontractor who does construction for suburban housing developments an "architecture firm". There's, like, some tangential relation, if you really squint hard, but in reality, there are none of the necessary creativity, or the risks creative work implies, at play.
So, cui bono?
Bigger, stablished companies, for them, this is just an anoying accounting rule, but they surely have the cashflow to sail smoothly over it.
Who is fucked? Workers and small, new companies, and absolutely terrible news for job seekers.
For anyone not living under a rock, it is pretty clear that this was not an accidental decision.
Bigger, stablished companies, for them, this is just an anoying accounting rule, but they surely have the cashflow to sail smoothly over it.
Who is fucked? Workers and small, new companies, and absolutely terrible news for job seekers.
For anyone not living under a rock, it is pretty clear that this was not an accidental decision.
> many small business owners ... the change to require R&D amortization
So - I'm not super sympathetic to taxation in general but... small business are not doing R&D. Big businesses are hardly doing R&D. If anybody outside of _maybe_ Apple and Google are even _claiming_ they're doing enough R&D that not being able to expense it impacts their revenue, they're committing criminal levels on tax fraud.
So - I'm not super sympathetic to taxation in general but... small business are not doing R&D. Big businesses are hardly doing R&D. If anybody outside of _maybe_ Apple and Google are even _claiming_ they're doing enough R&D that not being able to expense it impacts their revenue, they're committing criminal levels on tax fraud.
Look up section 162 vs 174 treatment and the distinction between "new companies" vs "carrying on a trade". It's far from unambiguous and as long as you have a defensible position you absolutely are entitled to push the envelope.
Is implementing a specification a REE "in the experimental or laboratory sense"? I'd say it's not, and I don't have to explain my position unless I'm audited.
https://www.law.cornell.edu/cfr/text/26/1.174-2
Is implementing a specification a REE "in the experimental or laboratory sense"? I'd say it's not, and I don't have to explain my position unless I'm audited.
https://www.law.cornell.edu/cfr/text/26/1.174-2
It looks like the CFR (at least here) hasn't been updated to match the corresponding USC: https://www.law.cornell.edu/uscode/text/26/174
See c(3). Any software development is unambiguously R&D.
See c(3). Any software development is unambiguously R&D.
> See c(3). Any software development is unambiguously R&D.
"For purposes of this section" to me means you don't have to justify software development as R&E if you define that software development work as R&E.
Being pedantic, but it's R&E not R&D.
"For purposes of this section" to me means you don't have to justify software development as R&E if you define that software development work as R&E.
Being pedantic, but it's R&E not R&D.
Except the purpose of the section is to say that R&E has to be amortized. So it seems pretty clear to me that software development costs have to be amortized.
Exactly. I don't see how anyone can read this and tell the IRS with a straight face that their software dev doesn't need to be ammortized.
According to Bloomberg [1], for ongoing business expenses, it doesn’t. For startup costs, it does need to if you want these RD credits.
[1] https://news.bloombergtax.com/tax-insights-and-commentary/ch...
It is ambiguous even if you disagree with Bloomberg.
[1] https://news.bloombergtax.com/tax-insights-and-commentary/ch...
It is ambiguous even if you disagree with Bloomberg.
Not one mention of "software" in that article. It's clearly written in a general context where this may be true. They don't mention c(3) at all:
"For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure."
"For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure."
Section 174 intro: "In general in the case of a taxpayer’s specified research or experimental expenditures for any taxable year".
Note limiting phrase.
Section 174 later: "For purposes of this section, the term “specified research or experimental expenditures” means, with respect to any taxable year, research or experimental expenditures which are paid or incurred by the taxpayer during such taxable year in connection with the taxpayer’s trade or business."
Note the "in connection with the taxpayer's trade or business" and look up the definition of that phrasing versus "carrying on" business and compare to Section 162. (e.g., Snow v. Commissioner of Internal Revenue, 416 U.S. 500 (1974), Cantor v. Commissioner of Internal Revenue, 998 F.2d 1514 (1993), Scoggins v. Commissioner of Internal Revenue, 46 F.3d 950 (1995))
Section 174 later: "For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure."
Note the limiting phrase.
Ultimately we need guidance from the Service but the above are (possibly aggressive) readings some CPAs are taking.
Note limiting phrase.
Section 174 later: "For purposes of this section, the term “specified research or experimental expenditures” means, with respect to any taxable year, research or experimental expenditures which are paid or incurred by the taxpayer during such taxable year in connection with the taxpayer’s trade or business."
Note the "in connection with the taxpayer's trade or business" and look up the definition of that phrasing versus "carrying on" business and compare to Section 162. (e.g., Snow v. Commissioner of Internal Revenue, 416 U.S. 500 (1974), Cantor v. Commissioner of Internal Revenue, 998 F.2d 1514 (1993), Scoggins v. Commissioner of Internal Revenue, 46 F.3d 950 (1995))
Section 174 later: "For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure."
Note the limiting phrase.
Ultimately we need guidance from the Service but the above are (possibly aggressive) readings some CPAs are taking.
You don't specify which expenses, the USC does in the next subsection (if you got to specify it it would be "specified by the taxpayer". "For purposes of this section" is in the same section.
Stranger things have happened but I don't see how someone can defensibly argue that software dev doesn't have to be ammortized.
Stranger things have happened but I don't see how someone can defensibly argue that software dev doesn't have to be ammortized.
It's going to take a lot of arguing but I predict we'll end up back where we started some time ago in the 70's:
The computer hardware is the asset.
Software engineer salaries are the operational expense of that asset.
Fanciful: It was only a brief period of time where some companies were able to resell the operational efforts of their in-house staff to other owners of computer hardware assets. Now it's all bespoke operational activities just like steel presses and sawmills.
The computer hardware is the asset.
Software engineer salaries are the operational expense of that asset.
Fanciful: It was only a brief period of time where some companies were able to resell the operational efforts of their in-house staff to other owners of computer hardware assets. Now it's all bespoke operational activities just like steel presses and sawmills.
sucks to suck
this might encouag small tech biz to outsource even more, i will pay a standard professional service fee to them, will this help me to survive?
aibrahima(2)
Why the taxes are only growing and never go down? Is there going to be a day when they'll be like "We'll reduce taxes"?
Lots of politicians campaign on tax cuts, they've definitely been reduced in US history
We're literally barely 5 years out from the last major tax cut which followed two Obama era tax cuts that followed Bush Era tax cuts. I'm, not exactly sure where your impression of only tax hikes is coming from
Taxes should be written in a way that incentivizes hiring individuals right? Salaries shouldn't be double taxed IMO since it reduces a companies ability to hire individuals. Maybe just do a VAT tax and remove other taxes. Is this a dumb idea?
(Note: I have little idea what I'm talking about)
(Note: I have little idea what I'm talking about)
Most economists would remove income tax in favor of sales / VAT, if the politics of the situation were not part of the equation.
Sales/VAT are regressive, so if by politics you mean "not hosing the already hosed (the poor)", and by most economists you mean folks from the Austrian school of economics, then sure.
Sales and VAT do not have to be regressive, that is a shallow and incorrect talking point that has spread. Sales taxes today already make distinction between necessities and luxuries. In other words, there are many ways to implement sales/VAT taxes and the details matter for the outcomes
If not corrected, the long reaching impact of this could snowball very badly in some places. Look at areas in California, which are largely economies based on software development. If taxes cause those businesses, and jobs to disappear, the impact to unemployment, housing markets, etc. could be quite dire in some areas.
Even in large business, it could make life for engineers harder. Sure, the business can weather the change, but any amount of excess staff? Tax liability now and no longer a write off that can offset other income taxes. I think it's short sighted to view it as a small business only problem.
Which, might actually help it get resolved faster.
Even in large business, it could make life for engineers harder. Sure, the business can weather the change, but any amount of excess staff? Tax liability now and no longer a write off that can offset other income taxes. I think it's short sighted to view it as a small business only problem.
Which, might actually help it get resolved faster.
Bootstrap software founder here
This is just bullshit
Unlike many companies in the software industry, we have grown profitably for nine years without the need for any funding. Our success has been fueled by our ability to invest profits into our business, allowing us to improve our software and expand our operations continuously.
However, the 2022 Section 174 R&D tax credit changes have had an impact. This recent change affects many small, independent technology companies, including my company. We have been busy building products, making our customers successful, and making payroll. We are happy to pay our fair share of taxes on our profits. However, investing in software development is the engine that allows us to grow our company and hire more employees. Our tax laws must continue to reflect this reality.
This is just bullshit
Unlike many companies in the software industry, we have grown profitably for nine years without the need for any funding. Our success has been fueled by our ability to invest profits into our business, allowing us to improve our software and expand our operations continuously.
However, the 2022 Section 174 R&D tax credit changes have had an impact. This recent change affects many small, independent technology companies, including my company. We have been busy building products, making our customers successful, and making payroll. We are happy to pay our fair share of taxes on our profits. However, investing in software development is the engine that allows us to grow our company and hire more employees. Our tax laws must continue to reflect this reality.
I think the point of this law is to capture tax from companies in their growth phase, as the general public sees these companies as tax avoiders and their lack of profit as an accounting trick.
In reality, it will keep small companies small and less of a threat to big companies.
In reality, it will keep small companies small and less of a threat to big companies.
It seems like a wise idea then for Congress to allow small businesses to keep this tax credit.
It's not a tax credit. The tax credit is still there.
It's the deduction which has gone away.
And yes, small businesses are hit hardest by it going away.
It's the deduction which has gone away.
And yes, small businesses are hit hardest by it going away.
It isn't even that the deduction went away, it must now be amortized over five years (an accounting trick on the part of Congress to pretend they're not spending money they are).
This hurts businesses more the smaller they are, but paradoxically it also hurts businesses more the higher percentage of their revenue they spend in payroll. Literally if you give your employees a bigger reward for their work, you're hurt harder by this ridiculous law.
If you're a sociopathic CEO with 8-10 engineers whose work output isn't directly tied to profit, and you're paying out most or all of your profit in salaries, you're definitely going to be looking at letting a few of them go to ease the tax hit.
This hurts businesses more the smaller they are, but paradoxically it also hurts businesses more the higher percentage of their revenue they spend in payroll. Literally if you give your employees a bigger reward for their work, you're hurt harder by this ridiculous law.
If you're a sociopathic CEO with 8-10 engineers whose work output isn't directly tied to profit, and you're paying out most or all of your profit in salaries, you're definitely going to be looking at letting a few of them go to ease the tax hit.
Would you recommend to keep on with favoring this accounting trick for fairness because previous businesses took advantage of it? If so, how/when should the legislator changes laws when needed?
> general public
Not sure what’s your definition, maybe “non-startup founders neither investors” ? I work in startup since a couple of years and all my employers did declare me as r&d while we where only implementing react or so without any “research” difference than a cabinet maker building a piece of furniture. This drives me nuts because I don’t contribute to my country tax while my income is on the very upper side comparing median.
Creative =/= Research
> general public
Not sure what’s your definition, maybe “non-startup founders neither investors” ? I work in startup since a couple of years and all my employers did declare me as r&d while we where only implementing react or so without any “research” difference than a cabinet maker building a piece of furniture. This drives me nuts because I don’t contribute to my country tax while my income is on the very upper side comparing median.
Creative =/= Research
“Software firms across the US have unsustainable business models”
FTFY
FTFY
I wonder if this triggered the recent layoffs?
Is there any silver lining here at all?
[deleted]
Ok, so I was going to be glib, but this sounds like if you employ someone for "R&D" you can't report their salary as an expense during the period the expense is incurred? Ignoring entirely the matter of how the f is R&D expense any different from any other expense? (my assumption is that it's actually a tax break for already rich companies)
The one thing I'm rarely seeing in this thread is any discussion with regards to the continued expansion of tax bureaucracies as these new tax bills are implemented. There are a few threads here that I can find close enough to such discussion:
https://news.ycombinator.com/item?id=35619941
https://news.ycombinator.com/item?id=35615493
https://news.ycombinator.com/item?id=35619572
As noted in the top thread ( https://news.ycombinator.com/item?id=35614968 ) but not discussed further, the tracking of such amortizations mean added accounting expenses for businesses where this would've otherwise been a straightforward deduction. This inevitably means that either additional people need to be brought in to track said expenses, or a business is increasingly reliant on an external service to manage their obligations, both of which are a net negative for the business compared to the straightforward 100% deduction model.
Whilst amortization is beneficial for purchases / investments that can wear down with use, the application of such accounting practices towards R&D in general only serves to increase the burdens on businesses (small or large) for performing such R&D. Arguably, it's an attempt by the government to kill R&D within the US, and to force more companies towards acquisitions & mergers, whether intentional or not.
Futurama's Central Bureaucracy is worryingly becoming a real thing.
https://news.ycombinator.com/item?id=35619941
https://news.ycombinator.com/item?id=35615493
https://news.ycombinator.com/item?id=35619572
As noted in the top thread ( https://news.ycombinator.com/item?id=35614968 ) but not discussed further, the tracking of such amortizations mean added accounting expenses for businesses where this would've otherwise been a straightforward deduction. This inevitably means that either additional people need to be brought in to track said expenses, or a business is increasingly reliant on an external service to manage their obligations, both of which are a net negative for the business compared to the straightforward 100% deduction model.
Whilst amortization is beneficial for purchases / investments that can wear down with use, the application of such accounting practices towards R&D in general only serves to increase the burdens on businesses (small or large) for performing such R&D. Arguably, it's an attempt by the government to kill R&D within the US, and to force more companies towards acquisitions & mergers, whether intentional or not.
Futurama's Central Bureaucracy is worryingly becoming a real thing.
It's interesting that no one sees this as it is: Killing the golden goose so that the IRS can get some meat.
This change, theoretically, doesn't "add" to your tax bill. You'll be paying the same amount of taxes. However, as in the example outlined in the first comment, you'll continually have a credit with the IRS due to the amortization. The questions are:
1. Is this credit recoverable?
2. Why is the IRS doing this anyway? Just for a quick cash/tax boost?
Because that's what failed states look like. The USSR is looking good in proportions...
This change, theoretically, doesn't "add" to your tax bill. You'll be paying the same amount of taxes. However, as in the example outlined in the first comment, you'll continually have a credit with the IRS due to the amortization. The questions are:
1. Is this credit recoverable?
2. Why is the IRS doing this anyway? Just for a quick cash/tax boost?
Because that's what failed states look like. The USSR is looking good in proportions...
They're doing it this way because in the public eye big startups that write off salaries as tax expense look like tax avaiders.
In reality it will just punish bootstrapped companies.
In reality it will just punish bootstrapped companies.
The public eye, as in the general public, has little idea of what's going on in the startup world and let alone specific issues like this one.
> that write off salaries as tax expense look like tax avaiders
This doesn't increase the tax burden. After 5 years, most companies will be back to paying what they are paying now. This gives you a cash boost for this year and next few ones. After that, you just killed bootstrapped companies.
> that write off salaries as tax expense look like tax avaiders
This doesn't increase the tax burden. After 5 years, most companies will be back to paying what they are paying now. This gives you a cash boost for this year and next few ones. After that, you just killed bootstrapped companies.
I have seen a lot of rhetoric about tech companies avoiding taxes; none of it has been that salaries effect a tax dodge.
The IRS isn't doing this. Congress did it, because it's an accounting trick that lets them say something costs less than it actually does, because all of Congress' budgeting is on decade-long horizons, and they factor in theoretical wage/revenue/profit growth, so them front-loading the same tax receipts allows them to very easily lie about the actual cost of programs. They can pull 80% of the tax receipts from made up figures a decade from now into their government revenue calculations.
Who, exactly, is responsible for this? We need names of representatives who wrote this into tax law.
This was done by the Republicans' flagship tax bill, the Tax Cuts and Jobs Act of 2017.
Voting records:
House: https://clerk.house.gov/Votes/2017699
Senate: https://www.senate.gov/legislative/LIS/roll_call_votes/vote1...
Voting records:
House: https://clerk.house.gov/Votes/2017699
Senate: https://www.senate.gov/legislative/LIS/roll_call_votes/vote1...
Current senate bill to restore treatment of R&D expenses to pre 2022 treatment is S.866.
https://www.congress.gov/bill/118th-congress/senate-bill/866...
Call or write you senator.
https://www.congress.gov/bill/118th-congress/senate-bill/866...
Call or write you senator.
With help from gpt4:
"As a concerned citizen and advocate for the technology sector in our great nation, I am writing to express my strong support for S.866, the American Innovation and Jobs Act. I believe this legislation is crucial for fixing the unfair tax treatment faced by startups, technology companies, and software engineers, which together form the backbone of innovation and economic growth in the United States.
The bill will make it easier for startups and small businesses to thrive, create jobs, and compete in the global market. Additionally, the legislation will also make it more attractive for talented software engineers to choose careers in this vital industry.
Our nation's ability to maintain its competitive edge in the global market depends heavily on the health and vibrancy of our technology sector. By passing S.866, we can ensure that our startups and tech companies have the resources they need to innovate, create jobs, and contribute to the economy. Furthermore, this legislation will help attract and retain top-tier talent in software engineering, an essential component of our country's continued success in the tech industry.
As your constituent, I kindly urge you to support and vote in favor of the American Innovation and Jobs Act, S.866. This bill is a vital investment in our nation's future, and its passage will undoubtedly lead to continued growth and prosperity for the United States in the competitive global market.
Thank you for your attention to this important issue, and I appreciate your dedication to representing the best interests of our community and the nation as a whole."
"As a concerned citizen and advocate for the technology sector in our great nation, I am writing to express my strong support for S.866, the American Innovation and Jobs Act. I believe this legislation is crucial for fixing the unfair tax treatment faced by startups, technology companies, and software engineers, which together form the backbone of innovation and economic growth in the United States.
The bill will make it easier for startups and small businesses to thrive, create jobs, and compete in the global market. Additionally, the legislation will also make it more attractive for talented software engineers to choose careers in this vital industry.
Our nation's ability to maintain its competitive edge in the global market depends heavily on the health and vibrancy of our technology sector. By passing S.866, we can ensure that our startups and tech companies have the resources they need to innovate, create jobs, and contribute to the economy. Furthermore, this legislation will help attract and retain top-tier talent in software engineering, an essential component of our country's continued success in the tech industry.
As your constituent, I kindly urge you to support and vote in favor of the American Innovation and Jobs Act, S.866. This bill is a vital investment in our nation's future, and its passage will undoubtedly lead to continued growth and prosperity for the United States in the competitive global market.
Thank you for your attention to this important issue, and I appreciate your dedication to representing the best interests of our community and the nation as a whole."
If helpful for others, my language
--
As a resident of [STATE], I'm writing to express my dismay at some very recent specific tax changes negatively impacting small businesses innovating in technology, as well as express my support for a recently introduced bill to unwind those changes (S.866 - American Innovation and Jobs Act).
As both a software engineer and entrepreneur, changing software development expenses to be exclusively treated as R&D expenses amortized over many years will harm our country's ability to create innovative companies on the frontier of technology, as smaller businesses that take up-front losses in exchange for growth and deferred income will be dramatically penalized and go out of business. Conversely, large companies with established revenue and credit will not be harmed, increasing their ability to reduce competition in the market. So many of America's great companies in the last decades have come from a small number of people working together on software and hardware, losing money up front to gain money in the future. If you cannot write off the up-front expenses as truly spent money with uncertain return, those businesses cannot start.
It's a lose-lose-lose - this change hurts the little guys, helps the incumbent big guys, and will reinforce competitive sclerosis relative to our geopolitical competitors.
I don't know what the exact right answer is, or if S.866 is it - but the current situation is certainly not correct. If we want America to be competitive and create high-paying modern jobs, we can't tax new companies to death before they have a chance to get started.
--
As a resident of [STATE], I'm writing to express my dismay at some very recent specific tax changes negatively impacting small businesses innovating in technology, as well as express my support for a recently introduced bill to unwind those changes (S.866 - American Innovation and Jobs Act).
As both a software engineer and entrepreneur, changing software development expenses to be exclusively treated as R&D expenses amortized over many years will harm our country's ability to create innovative companies on the frontier of technology, as smaller businesses that take up-front losses in exchange for growth and deferred income will be dramatically penalized and go out of business. Conversely, large companies with established revenue and credit will not be harmed, increasing their ability to reduce competition in the market. So many of America's great companies in the last decades have come from a small number of people working together on software and hardware, losing money up front to gain money in the future. If you cannot write off the up-front expenses as truly spent money with uncertain return, those businesses cannot start.
It's a lose-lose-lose - this change hurts the little guys, helps the incumbent big guys, and will reinforce competitive sclerosis relative to our geopolitical competitors.
I don't know what the exact right answer is, or if S.866 is it - but the current situation is certainly not correct. If we want America to be competitive and create high-paying modern jobs, we can't tax new companies to death before they have a chance to get started.
What about software agencies/consultancies? Their salaries would not be capex right? They don’t own the software, they just develop it to spec and sell the development. Their client would be the one to claim R&E right?
Ok, I don't understand this. It basically says that you can't completely deduct any software engineering salaries? This would affect all companies writing software, Google and Meta, for example. If this would affect Google's bottom line so much, wouldn't they change the tax code by now? If not, how are they avoiding these new taxes?
This could create a new industry of double Irish-style/sale-leaseback avoidance schemes that will be a boon to tech lawyers. E.g. Tech co sells its software to an Irish sister company and then its software engineers create software for that Irish firm, which in turn licenses its software _back_ to Tech co.
Sounds like something the same folks who think taxing unrealized gains is a good idea and won't instantly tank the entire world market would think up and then put into law.
This makes zero sense to me. By what logic would a salary paid this fiscal year (be it for R&D or any other activity, I don't see why there would be any difference there) not be a simple expense to be fully deducted from the revenue in the calculation of the profit for this same fiscal year?
One of the goal of this kind of accounting is to make "building the thing" and "buying the thing" as closely equivalent as possible for tax purposes. If you treat all the salaries as expenses then
* Company A has 1M in capital, and builds an in-house database with 1M$ of dev salaries. At the end of the year, company A is worth 0$ because they spent all the money.
* Conpany B has 1M in capital and buys (wholly and exclusively) a custom database for 1M$. At the end of the year, Company B is worth about 1M$, because they have 0$ in cash and a 1M$ database.
Clearly there is an issue there, and the only way to make the two situations equivalent is to treat software development as a capital expenditure which is what it is.
* Company A has 1M in capital, and builds an in-house database with 1M$ of dev salaries. At the end of the year, company A is worth 0$ because they spent all the money.
* Conpany B has 1M in capital and buys (wholly and exclusively) a custom database for 1M$. At the end of the year, Company B is worth about 1M$, because they have 0$ in cash and a 1M$ database.
Clearly there is an issue there, and the only way to make the two situations equivalent is to treat software development as a capital expenditure which is what it is.
Doesn't Company A also have a DB worth $1 million? Or are you simply referring to the way these things are accounted?
not only is this completely wrong, but you aren't taxed on assets, and capital has nothing to do with it either.
assuming you meant revenue and income, your example actually perfectly illustrates the problem. Company A has $1MM in revenue, spends $1MM on SE salaries and is taxed on $800k income. Company B has $1MM in revenue, spends $1MM on some AWS db service and has no income to be taxed on.
assuming you meant revenue and income, your example actually perfectly illustrates the problem. Company A has $1MM in revenue, spends $1MM on SE salaries and is taxed on $800k income. Company B has $1MM in revenue, spends $1MM on some AWS db service and has no income to be taxed on.
This can not stand. We are an innovation nation. Job-creation requires that employing people does not increase your tax burden. It should do the opposite.
If it kills off most of the cryptocurrency ecosystem it will be worth it
"Developers don’t come cheap, and until tax year 2022, these companies could fully expense those costs as R&D rather than having to amortize them over multiple years."
Maybe stupidly high salaries shouldn't be considered R+D expenses.
Maybe stupidly high salaries shouldn't be considered R+D expenses.
And here I sit dreaming of how doing business in the US would be so much nicer than in Germany, where you pay multiple taxes on every Euro I make. Apparently not. I appreciate this thread very much!
Q: what workarounds are there?
Maybe open source development and assign copyright to public domain? If you don’t own the software, you don’t have anything to capitalise?
What are FMAANG doing about it?
Maybe open source development and assign copyright to public domain? If you don’t own the software, you don’t have anything to capitalise?
What are FMAANG doing about it?
[deleted]
[deleted]
This ensures that every innovative company is owned by the financial markets. You cannot run a business unless you raise equity or take on debt.
So the politicians are killing their gold hens (again)?
Somewhat related -- our company has been making use of "R&D credits" (Canadian thing), basically getting the govt to subsidize the business. This never sat right with me, but we were a struggling startup so fair is fair. We've been bought out by a big American corp, and they continue to leverage this approach (why wouldn't they? it's free money!), but it REALLY bugs me.
Calling what software engineers do "R&D" seems such a stretch. You're not doing any research, you're not developing anything new. It's just a coincidence that the word "development" is in the job title. We're closer to factory workers than research scientists, by a lot. Just putting existing widgets together in well-defined ways to implement whatever business workflows.
Calling what software engineers do "R&D" seems such a stretch. You're not doing any research, you're not developing anything new. It's just a coincidence that the word "development" is in the job title. We're closer to factory workers than research scientists, by a lot. Just putting existing widgets together in well-defined ways to implement whatever business workflows.
Had a consulting CFO recommend the same to us, even mentioned they've done so for all other businesses with any software development costs.
It's wild.
I'm sure that at some point there will be similar fallout up here.
It's wild.
I'm sure that at some point there will be similar fallout up here.
Something that doesn't get discussed often when there is an issue is a possible solution. We all just complain or make fun of those who lose out. But the issue here is that sudden changes are a problem. No company should face sudden unexpected tax changes. It creates an unstable business environment and owners cannot adequately plan for the future. Congress needs to extend this write-off for a few years and make it clear that it will not be available in the future. They cannot leave it as a "maybe" situation.
I have personal opinions on this matter that are irrelevant. What matters for the future is how this affects the U.S. competitive advantage with technology, and how this affects the job market. If the impact is significant, Congress needs to act. If not, i.e. if only a few smaller companies are affected, then nothing will change and everyone needs to adjust.
I have personal opinions on this matter that are irrelevant. What matters for the future is how this affects the U.S. competitive advantage with technology, and how this affects the job market. If the impact is significant, Congress needs to act. If not, i.e. if only a few smaller companies are affected, then nothing will change and everyone needs to adjust.
To be clear, its not a sudden change. It's been written into the law since 2017 that it was sunsetting.
People incorrectly assumed that Congress would extend or repeal the sunset. But its not like the tax law was changed on Dec 30th and put into effect on the 31st.
People incorrectly assumed that Congress would extend or repeal the sunset. But its not like the tax law was changed on Dec 30th and put into effect on the 31st.
The CNBC article doesn't really explain the change, or why it's just happening now. I had to do a web search on "Section 174" to find this:
> What are the changes to Section 174, and do they affect the R&D tax credit?
> Among the sweeping changes to the U.S. tax system brought by the Tax Cuts and Jobs Act of 2017 (TCJA) was an amendment to Section 174 of the Internal Revenue Code. Many experts, however, believed — or at least hoped — that the scheduled change to the provision addressing the deductibility of research and experimental (R&E) expenses might never take effect.
> But the amendment did indeed kick in, beginning with the 2022 tax year. It’s left many businesses that conduct qualified research activities confused — about the change itself, how it affects the Section 41 research and development (R&D) credit, and the likely negative impact on their tax bills. Here’s what you need to know.
...
https://gusto.com/resources/articles/taxes/section-174-r&d
> What are the changes to Section 174, and do they affect the R&D tax credit?
> Among the sweeping changes to the U.S. tax system brought by the Tax Cuts and Jobs Act of 2017 (TCJA) was an amendment to Section 174 of the Internal Revenue Code. Many experts, however, believed — or at least hoped — that the scheduled change to the provision addressing the deductibility of research and experimental (R&E) expenses might never take effect.
> But the amendment did indeed kick in, beginning with the 2022 tax year. It’s left many businesses that conduct qualified research activities confused — about the change itself, how it affects the Section 41 research and development (R&D) credit, and the likely negative impact on their tax bills. Here’s what you need to know.
...
https://gusto.com/resources/articles/taxes/section-174-r&d
I have seen several situations where this would be desirable - notably bleeding startups with vc money. There is plenty of window dressing to capitalise expenses and show a better EBITDA.
What this will do is immediately reclassify large chunks of people out of "R&D" into operational resources. Just enough to balance between nice looking EBITDA and low real profit (= low tax)
What this will do is immediately reclassify large chunks of people out of "R&D" into operational resources. Just enough to balance between nice looking EBITDA and low real profit (= low tax)
Classify 80% of your dev time as maintenance. 20% as R&D. Problem solved.
Most companies I've worked for, using R&D credits. Have a timesheet tracker... tracking actual hours of R&D work. That sounds more critical now.
Most companies I've worked for, using R&D credits. Have a timesheet tracker... tracking actual hours of R&D work. That sounds more critical now.
There will be a significant drop in reported research spending. This will seem like China is doing more research than the US. There will be a hueb and cry. Congess will incentivise research spending. Back to where we were.
The skeptical side of me is screaming "just now that the big techs face disruption, this comes up!"
My take on this is that in the USA, software development is now viewed as the creation of an asset with a lifetime of 5 or 15 years. Accordingly, its cost (including labor) can only be expensed (depreciated) over that time period.
It is this assumption that all development results in a valuable asset deriving or enabling income over time, that is contentious. A large proportion does not, yet that is not reflected in the increased tax bill applicable to all.
It is this assumption that all development results in a valuable asset deriving or enabling income over time, that is contentious. A large proportion does not, yet that is not reflected in the increased tax bill applicable to all.
Question: this last year I paid software developers to create a new product, spent $1,000,000 on their wages, then I turned around and sold that software product for $1,000,000. I made no profit on this product. How much federal taxes would I owe based on this new tax rule?
I still need help understanding this new Tax rule.
I might understand capital assets better if you could answer these two questions.
We pay software developers to create a new product. We spend $1m on their wages, then sell that software product for $1.1m. How much federal tax would I owe based on this new tax rule?
We buy a machine for $1m and then sell it for 1.1m. How much federal taxes would I owe?
We pay software developers to create a new product. We spend $1m on their wages, then sell that software product for $1.1m. How much federal tax would I owe based on this new tax rule?
We buy a machine for $1m and then sell it for 1.1m. How much federal taxes would I owe?
This is my employer... were freezing hiring for 5 yeara
Previously if a company has a million dollars in revenue and spends a million dollars on the salaries of software developers, this is how their taxable income might look:
The new law would instead work like this:
Now the company must pay taxes on 800,000 of profit because "R&D salaries," which includes software devs, must be amortized over five years. Obviously the company has no wherewithal to pay, given that they made a million and spent a million. That's the problem.