This is a topic about which I'm very passionate. I've written my congressional representatives several times. I've posted on LinkedIn. I'm raising awareness with my close colleagues. I'm trying to beat the drum as much as I can.
There is a minor win that was just advanced in the House yesterday[0] to delay US onshore amortization through 2025 via The Tax Relief for American Families and Workers Act of 2024[1]. It doesn't touch offshore amortization.
It's not enough. I was geared up to start a business this year; this, specifically, has put the brakes on it. I've written as much to my congressional representatives. I'm doing research into what it would take to incorporate in another country, and the implications therein, if it comes to that.
> It's not enough. I was geared up to start a business this year; this, specifically, has put the brakes on it.
I've read a little about this, but not a lot. How has this put sufficient drag on starting a business that it's impractical to go from zero to one? Is there an aspect of the business model that's particularly impacted?
Michele Hansen is doing an incredible job here and should be recognized for it. Latest news was sent yesterday:
Republicans and Democrats finally struck a tax deal that includes a partial fix for Section 174. It includes expanding the Child Tax Credit, a key Democratic priority, with a handful of business tax issues where were Republican priorities...
Not sure if there is a public copy of that email, but the core info is on the site, it has a list of ways to get your representative's attention and a script to follow. Please call.
Going on a tangent here, but I always hated this idea of reading off a script to try and lobby politicians. If I were the politician, I would ignore all such communiques as indoctrinated spam.
This is going to wipe out a lot of small businesses, including innovative software dev startups.
Here’s a simplified example of this works: Let’s say you’re a four person software dev startup. Everybody is making, say, $125K to get by. That’s $500K in salary expense which normally you can write off as expenses against revenue/funding. For this example, let’s say somehow you also generated $500K in revenue/funding, i.e. you just broke even.
Currently, you would (of course) owe zero taxes. Under the new tax rules, you couldn’t write off those R&D salaries as expenses, only amortize them over 5 years. That is, your salary expenses for this year is only ~ $100K, and this you made a $400K ‘profit’ (!!) on which you owe taxes ($100K).
More detail with math here. Lawmakers are discussing delaying these changes for a few years and/or allowing deductions for domestic employees, but all depends on signing a budget, which is never certain.
So far as I can find the last time Congress bothered to pass a budget was 2016 with the prior one in 2010.
The government has been funding itself instead with “continuing resolutions” which pretty much just continue spending as the prior year modulo marginal changes. Incidentally this is why federal deficits have exploded since 2010: the financial crisis “one time” trillion dollar stimulus has been continued every year since.
Maybe unpopular but I assume this is just what is going to happen. I remember awhile back when I was visiting Ireland one of the tours mentioned that modern whiskey and beer in Ireland came about because of taxes. I wish I could remember more details but the story went along the lines of each time a new tax on some type of alcohol happened the producers would reclassify their beverage or change the method which produced it to avoid the new taxes.
I assume this will be the same in the US, software R&D is now some other title with less taxes. When the small companies do it the IRS isn’t going to care but then big ones will do it and the tax law cat and mouse game will continue.
Yeah, that's what I'm guessing many smaller companies will do. Does the developer talk to customers or do customer success/support? Great, they are now "Sales Engineers" for tax purposes.
(Note: not recommending to do that, but guessing that is a natural byproduct of an unfair tax code).
To be fair, accelerated R&D amortization (immediate full expensing in the year the expense was incurred) is a tax loophole. Essentially, the default tax treatment of expenses is basically to take the expense same as you would treat it under GAAP, but some people (I am one of them BTW) think that we should put a finger on the scales for the case of legitimate R&D.
Now though I happen to think accelerating it is a good idea, everybody thinks their particular loophole is a good idea. To say that removing the special treatment is a policy mistake is a reasonable position to take, though opponents have a reasonable position as well (as I said I'm in favor of the special benefit). But to call this change unfair is, IMHO, unreasonable.
It's also bogus to plead ignorance as the twitter poster did: "as they'd never had to amortize software development before, and didn't think of the work they do as R&D." Their accountants sure did, because otherwise it would not have qualified for the R&D exemption. And their accountant would have to tell them what to do to make it qualify.
I don’t understand why businesses can’t just say that their engineering department is a cost center (COGS) instead of classifying engineer salaries as R&D expenditures.
I guess one downside would be not qualifying for the R&D tax credit.
The majority of software engineering is the equivalent of janitorial work… keeping servers online, fixing bugs, maintaining services, upgrading and refactoring code, etc.
It’s difficult for me to tell how much of this issue is just people making a fuss about the literal interpretation of the tax code compared to how it will, in practice, impact their business.
Nearly all accountants try to operate in the gray, in that accountants know how to tweak the numbers just enough to not get in big trouble with the IRS but enough that the business can slide through various loopholes. I have a feeling most accountants would just say “reclassify your engineers as maintenance workers, COGS” as a solution.
i don't know enough about tax codes and how business works to comment on the actual policy, but it sure does seem to me that changes that result in immediate and massive new liabilities are unfair.
I respectfully disagree. By these arguments, literally every deduction from revenue to calculate taxable income is a "loophole". How far does that go?
What's more absurd than life itself is that you can deduct 100% of a 6000GVWR truck which you financed for 7 years, but my engineers salaries aren't deductible because I'm "building some product" so that's "development".
Since this is already hanging around for an entire tax year a lot of companies are 1/5th into that pain. If this does not get changed in the next few months it would not surprise me if this becomes the new norm. Which would also be quite interesting to see how that would play out. Some companies apparently have already been amortizing salaries for a while in anticipation of this (eg: Google). Given that this also greatly punishes outsourcing I would not be surprised if at least that aspect will remain even if some of the rest will be rolled back.
> Some companies apparently have already been amortizing salaries for a while in anticipation of this (eg: Google)
> Given that this also greatly punishes outsourcing
Anyone help me understand these more? My understanding was that instead of deducting the costs of paying software devs the year it happened, it will be spread over 5 years. Which leads to a bigger tax bill now, and benefits bigger companies with deeper pockets as opposed to smaller businesses which have to raise moneny to pay taxes (or lower costs, potentially lower hiring). This should also push companies towards outsourcing, since not all places have similar laws? Is my understanding wrong?
Is it true that they are 1/5th into the pain? What about every new hire? That's the part I don't understand. It seems to discourage companies from increasing their headcount. Also, what happens when an employee leaves after 2 years? The company paid 2 years of salary but expensed only 35% of year 1 and 15% of year 2.
Update: Now thinking about it, it doesn't matter if an employee leaves, since the company will expense their salary portions that they haven't expensed yet in their future tax bills.
>A handful of these small business owners have bravely spoken to journalists from the Wall Street Journal and CNBC[...]But the vast majority are hesitant to speak to journalists as it might give their competitors free intel or make their employees nervous that they might lose their jobs.
This seems a tad overblown? "brave", "free intel"? Why would we need to hear the same thing from thousands of small businesses? This stuff is all over the industry, but employees are oblivious unless their company is explicitly interviewed?
It's a bad law, but I'm not sure what is interesting about this Tweet.
If this persists, it seems like it’d make sense for many software companies to shift the development and ownership of their software outside of the US, and then pay licensing fees to those overseas subsidiaries for the use of the software, which isn’t taxed as R&D.
Why on earth would someone give up ownership of their product or platform to an overseas subsidiary? The risks of that are massive, especially in a setting that is more prone to conflict as of late. This would increase the risks of losing your IP entirely. If ownership and development move overseas, then you'd be giving what you have away to someone else to entrust them with the entire thing to avoid paying a bit of tax. Software has its own supply chain too, and if you lose your product or platform due to doing this then that's going to be too bad...USA protections means USA presence and USA taxes.
This is exactly why I decided to not make my single-member, zero employee LLC an S Corp; if I'm paying no salaries, I don't have the Section 174 craziness.
With an S Corp, you have to pay yourself a salary, and if your work is primarily software development, Section 174 might hit you. (IANAL or accountant. Talk to one of them.)
Unfortunately, this doesn’t erase the impact. This applies beyond salaries to all resources used for what 174 considers R&D. Servers, software, the desk chair you sit on to do development —- all have to be amortized under 174.
This change was actually part of the Trump tax cuts in 2017. It was delayed by five years as an accounting trick to make the bill look better at the time: the tax cuts’ projected long-term impact on the deficit didn’t look quite so bad when they tacked on a bunch of tax increases that would take effect in the distant future of 2022 (and with the assumption that this could of course be repealed if Republicans stayed in power).
Why target software companies? I guess because their owners look more like Democratic voters than, say, real estate investors who benefit from massive tax breaks that remain untouchable.
Yeah, the "Coastal liberal elite" is a popular boogeyman. I mean, look at the actual "elites", don't see too many Bernie-bros alongside Musk, Thiel, and the Zuck.
The same continuing income occurs for journalists and other fields that produce copyrighted output, in fact it's more true there since there isn't a substantial bug fixing load.
So why just software and not all fields that produce durable intellectual property?
Yes Section 174 is a huge issue for US companies of all sizes. We are seeing a shift in companies and other decentralized projects explore places like Panamá. The blockchain industry is dealing with IRS, SEC and other regulatory challenges. Some companies are choosing to leave the US.
There are options and advantages to operating outside the US. US timezone, a USD economy and a territorial tax system makes it easy to operate from my home country.
The IRS provided incrementally helpful guidance on the types of costs that must be capitalized in September. The capitalization requirements are generally more restrictive than GAAP where only ~30% of costs are capitalized for book purposes at many companies. There are some types of software development that are outside the scope of 174 though such as UI changes that don't add new capabilities.
This makes no sense and impacts a lot of early stage software projects.
In many cases for bootstrap ones it makes them not financially viable - 100%+ effective tax rate would do that if you optimize for early profitability.
Even for VC backed ones, those taxes just eat into your runway. I know a bunch of companies that opt for some weird international setup to try and avoid the effects but it’s really not what you should do in early days…
[+] [-] notamy|2 years ago|reply
[+] [-] jodacola|2 years ago|reply
There is a minor win that was just advanced in the House yesterday[0] to delay US onshore amortization through 2025 via The Tax Relief for American Families and Workers Act of 2024[1]. It doesn't touch offshore amortization.
It's not enough. I was geared up to start a business this year; this, specifically, has put the brakes on it. I've written as much to my congressional representatives. I'm doing research into what it would take to incorporate in another country, and the implications therein, if it comes to that.
I'm going to sign up to https://ssballiance.org/, as telesilla recommended.
Let's beat the drum together, folks.
[0] https://www.voanews.com/a/7448071.html
[1] https://www.finance.senate.gov/imo/media/doc/the_tax_relief_...
edit: formatting
[+] [-] eropple|2 years ago|reply
I've read a little about this, but not a lot. How has this put sufficient drag on starting a business that it's impractical to go from zero to one? Is there an aspect of the business model that's particularly impacted?
[+] [-] unknown|2 years ago|reply
[deleted]
[+] [-] lizhang|2 years ago|reply
[deleted]
[+] [-] lulznews|2 years ago|reply
Bro what? Were you starting the business specifically to get these deductions? (I’m genuinely curious, sounds like a fun regulatory arbitrage.)
[+] [-] telesilla|2 years ago|reply
https://ssballiance.org/
Michele Hansen is doing an incredible job here and should be recognized for it. Latest news was sent yesterday:
Republicans and Democrats finally struck a tax deal that includes a partial fix for Section 174. It includes expanding the Child Tax Credit, a key Democratic priority, with a handful of business tax issues where were Republican priorities...
Not sure if there is a public copy of that email, but the core info is on the site, it has a list of ways to get your representative's attention and a script to follow. Please call.
[+] [-] addicted|2 years ago|reply
That’s a bit too “must make it seem bipartisan” when there is a clear partisan direction.
Even when this fix is passed, it will be voted for unanimously by Democrats and only a small fraction of Republicans will vote for it.
Explain again to me how that makes it a Republican priority as opposed to a priority of the endangered species that is the Pro Business Republicans?
[+] [-] mjwhansen|2 years ago|reply
[+] [-] michaelbuckbee|2 years ago|reply
[+] [-] Dalewyn|2 years ago|reply
Going on a tangent here, but I always hated this idea of reading off a script to try and lobby politicians. If I were the politician, I would ignore all such communiques as indoctrinated spam.
[+] [-] kolanos|2 years ago|reply
[+] [-] troft|2 years ago|reply
[deleted]
[+] [-] BenFranklin100|2 years ago|reply
Here’s a simplified example of this works: Let’s say you’re a four person software dev startup. Everybody is making, say, $125K to get by. That’s $500K in salary expense which normally you can write off as expenses against revenue/funding. For this example, let’s say somehow you also generated $500K in revenue/funding, i.e. you just broke even.
Currently, you would (of course) owe zero taxes. Under the new tax rules, you couldn’t write off those R&D salaries as expenses, only amortize them over 5 years. That is, your salary expenses for this year is only ~ $100K, and this you made a $400K ‘profit’ (!!) on which you owe taxes ($100K).
[+] [-] kleinsch|2 years ago|reply
https://blog.pragmaticengineer.com/section-174/
[+] [-] User23|2 years ago|reply
The government has been funding itself instead with “continuing resolutions” which pretty much just continue spending as the prior year modulo marginal changes. Incidentally this is why federal deficits have exploded since 2010: the financial crisis “one time” trillion dollar stimulus has been continued every year since.
[+] [-] osigurdson|2 years ago|reply
>> lots of devs in Switzerland starts to make a lot more sense, especially now.
This seems contradictory.
[+] [-] slotrans|2 years ago|reply
Change your employees job titles and/or tax classifications if you have to. Whatever it takes to say "these are salaries, not R&D".
If you're big enough they'll notice, but for a 10-person company the risk of a bad audit beats certain bankruptcy.
[+] [-] VohuMana|2 years ago|reply
I assume this will be the same in the US, software R&D is now some other title with less taxes. When the small companies do it the IRS isn’t going to care but then big ones will do it and the tax law cat and mouse game will continue.
[+] [-] tchock23|2 years ago|reply
(Note: not recommending to do that, but guessing that is a natural byproduct of an unfair tax code).
[+] [-] jayd16|2 years ago|reply
[+] [-] gumby|2 years ago|reply
Now though I happen to think accelerating it is a good idea, everybody thinks their particular loophole is a good idea. To say that removing the special treatment is a policy mistake is a reasonable position to take, though opponents have a reasonable position as well (as I said I'm in favor of the special benefit). But to call this change unfair is, IMHO, unreasonable.
It's also bogus to plead ignorance as the twitter poster did: "as they'd never had to amortize software development before, and didn't think of the work they do as R&D." Their accountants sure did, because otherwise it would not have qualified for the R&D exemption. And their accountant would have to tell them what to do to make it qualify.
[+] [-] cj|2 years ago|reply
I guess one downside would be not qualifying for the R&D tax credit.
The majority of software engineering is the equivalent of janitorial work… keeping servers online, fixing bugs, maintaining services, upgrading and refactoring code, etc.
It’s difficult for me to tell how much of this issue is just people making a fuss about the literal interpretation of the tax code compared to how it will, in practice, impact their business.
Nearly all accountants try to operate in the gray, in that accountants know how to tweak the numbers just enough to not get in big trouble with the IRS but enough that the business can slide through various loopholes. I have a feeling most accountants would just say “reclassify your engineers as maintenance workers, COGS” as a solution.
[+] [-] a-dub|2 years ago|reply
[+] [-] cplusplusfellow|2 years ago|reply
What's more absurd than life itself is that you can deduct 100% of a 6000GVWR truck which you financed for 7 years, but my engineers salaries aren't deductible because I'm "building some product" so that's "development".
I mean give me a freaking break.
[+] [-] mensetmanusman|2 years ago|reply
Major materials innovations are discovered here, but the only nations that want to actually invest and build upon them are currently in Asia.
The argument was that the US wants to transition away from building things towards building software which is more profitable, and then this...
This is what happens when a monoculture of business/law/finance-thinking takes over political leadership.
[+] [-] raphman|2 years ago|reply
https://twitter.com/GergelyOrosz/status/1735030983173230944
https://newsletter.pragmaticengineer.com/p/the-pulse-75
[+] [-] mjwhansen|2 years ago|reply
[+] [-] the_mitsuhiko|2 years ago|reply
[+] [-] jdjskiaka|2 years ago|reply
> Given that this also greatly punishes outsourcing
Anyone help me understand these more? My understanding was that instead of deducting the costs of paying software devs the year it happened, it will be spread over 5 years. Which leads to a bigger tax bill now, and benefits bigger companies with deeper pockets as opposed to smaller businesses which have to raise moneny to pay taxes (or lower costs, potentially lower hiring). This should also push companies towards outsourcing, since not all places have similar laws? Is my understanding wrong?
[+] [-] tinyhouse|2 years ago|reply
Update: Now thinking about it, it doesn't matter if an employee leaves, since the company will expense their salary portions that they haven't expensed yet in their future tax bills.
[+] [-] Klonoar|2 years ago|reply
[+] [-] dang|2 years ago|reply
Section 174 removed in new Senate tax agreement - https://news.ycombinator.com/item?id=39013863 - Jan 2024 (3 comments)
Ask HN: IRS section 174 – cause of layoffs? - https://news.ycombinator.com/item?id=38957651 - Jan 2024 (21 comments)
Will US companies hire fewer engineers due to Section 174? - https://news.ycombinator.com/item?id=38931860 - Jan 2024 (38 comments)
Will US companies hire fewer engineers due to Section 174? - https://news.ycombinator.com/item?id=38870429 - Jan 2024 (19 comments)
IRS tax code change in Section 174: R&D is an expense - https://news.ycombinator.com/item?id=38642461 - Dec 2023 (23 comments)
Guidance on Amortization of Research or Exp. Expenditures Under Section 174 [pdf] - https://news.ycombinator.com/item?id=38637540 - Dec 2023 (2 comments)
Tell HN: People laid off in my company due to IRS Section 174 changes - https://news.ycombinator.com/item?id=38633668 - Dec 2023 (6 comments)
Tell HN: Submit comments to IRS re tax treatment of software dev expenses - https://news.ycombinator.com/item?id=38120388 - Nov 2023 (227 comments)
Tell HN: New IRS guidance on software development for Section 174 amortization - https://news.ycombinator.com/item?id=37494601 - Sept 2023 (3 comments)
Software firms across US facing tax bills that threaten survival - https://news.ycombinator.com/item?id=35614313 - April 2023 (985 comments)
Ask HN: How are you handling Section 174 changes for bootstrapped companies? - https://news.ycombinator.com/item?id=34627712 - Feb 2023 (187 comments)
[+] [-] itsoktocry|2 years ago|reply
This seems a tad overblown? "brave", "free intel"? Why would we need to hear the same thing from thousands of small businesses? This stuff is all over the industry, but employees are oblivious unless their company is explicitly interviewed?
It's a bad law, but I'm not sure what is interesting about this Tweet.
[+] [-] ryanwaggoner|2 years ago|reply
[+] [-] wait_a_minute|2 years ago|reply
[+] [-] unknown|2 years ago|reply
[deleted]
[+] [-] gavinhoward|2 years ago|reply
With an S Corp, you have to pay yourself a salary, and if your work is primarily software development, Section 174 might hit you. (IANAL or accountant. Talk to one of them.)
[+] [-] mjwhansen|2 years ago|reply
[+] [-] pavlov|2 years ago|reply
https://www.theregister.com/2024/01/12/us_tax_research/
This change was actually part of the Trump tax cuts in 2017. It was delayed by five years as an accounting trick to make the bill look better at the time: the tax cuts’ projected long-term impact on the deficit didn’t look quite so bad when they tacked on a bunch of tax increases that would take effect in the distant future of 2022 (and with the assumption that this could of course be repealed if Republicans stayed in power).
Why target software companies? I guess because their owners look more like Democratic voters than, say, real estate investors who benefit from massive tax breaks that remain untouchable.
[+] [-] EdwardDiego|2 years ago|reply
[+] [-] nullc|2 years ago|reply
So why just software and not all fields that produce durable intellectual property?
[+] [-] Steven-Clarke|2 years ago|reply
There are options and advantages to operating outside the US. US timezone, a USD economy and a territorial tax system makes it easy to operate from my home country.
interview on this topic: https://www.youtube.com/watch?v=BzUAJzKb8bA
[+] [-] EdwardDiego|2 years ago|reply
[+] [-] thinkerswell|2 years ago|reply
[+] [-] jrdnh|2 years ago|reply
https://www.irs.gov/pub/irs-drop/n-23-63.pdf
[+] [-] Fawlty|2 years ago|reply
In many cases for bootstrap ones it makes them not financially viable - 100%+ effective tax rate would do that if you optimize for early profitability.
Even for VC backed ones, those taxes just eat into your runway. I know a bunch of companies that opt for some weird international setup to try and avoid the effects but it’s really not what you should do in early days…
[+] [-] minton|2 years ago|reply
[+] [-] agwa|2 years ago|reply
This is regardless of whether you classify the costs as R&D for the purpose of claiming a tax credit under Section 163.
[+] [-] hobofan|2 years ago|reply