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cameroncairns | 1 year ago

Not a practitioner, just a startup cofounder affected by these changes.. not legal or tax advice. You can read the applicable text here:

https://www.law.cornell.edu/uscode/text/26/174

Section 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.

```

That being said... it's complicated: https://www.thomsonreuters.com/en-us/posts/tax-and-accountin...

We've heard a mix of advice from various tax professionals on what should be classified as R&D or not. The messaging gets expecially mixed since the R&D tax credit is often handled by a 3rd party that specializes in it. The company specializing in the tax credit may be incentivized to classify as much of your activity as R&D as they can, since they are usually paid a percentage of the total credits they are able to claim for your company.

It certainly complicates running a software company. My cofounder and I need to look at the amortization schedule before making any engineering hire as we basically need to consider their salary nearly 100% R&D. I imagine it's even more complicated for founders with overseas teams.

It would certainly be easier for us to do business if Section 174 was revised :)

discuss

order

singleshot_|1 year ago

Super post, thank you.

As to software “development,” when you finish your software and publish it and get customer installs, then what happens? More software development? Or is ongoing operation/bug fixes still R&D under (c)(3)? I think your average software person has a strong belief about the answer to this question but having read some of the code&reg in the area, I share your opinion that this section needs more detail.

cameroncairns|1 year ago

Pretty sure any updates to the software count as additional R&D. Just running software you've already created doesn't count though. Something interesting we were asked was how much of our cloud costs involved developing software vs running existing software to determine if those costs must also be amortized over 5 years.