[jsherwani]

For folks that don't know the background on this, here's a layperson summary:

- A business is usually taxed on its profits: you deduct your revenue from the cost of producing that revenue, and the delta is what you are taxed on.

- In software businesses, this usually means if you spend $1M in software development to develop a web app, and it makes $1.1M in that year, you'd get taxed on the $100K profits.

- However, a few years ago, the IRS stopped allowing the $1M to be deducted in the year it was incurred. Instead, the $1M was to be amortized over 5 years, so now the business can only count $200K as the deductible expense for that year. So now it's going to be taxed on "profits" of $900K. Assuming the tax rate is 20%, that means the business owes $180K in taxes, even though it has a total of $100K in the bank after the actual expenses were paid. So it would have to either borrow to pay taxes or raise venture capital, meaning that VC-funded companies would be advantaged over bootstrapped ones!

- The letter's goal is to bring things back to how they were (and how they are for all other businesses): let businesses deduct their actual expenses from their actual revenue, and tax that actual profit.

I am neither a lawyer nor an accountant, this is just my understanding of this issue.

Edit: Switched the tax rate to 20%. The logic is still the same.

[tossandthrow]

While this does convey the idea, the premise is also biased.

> even though it has a total of $100K in the bank after the actual expenses were paid.

People running a business can perfectly understand the concept of liquidity. And yes, just because you transform money to something else, then it doesn't mean that you should not be taxed on it.

The extreme example is a company that buys gold on the last trading day of the year - now there is no profit! On the first day they sell the gold again and does tax eviction.

The core question is to what extend software constitutes an asset or consumption.

(Personally, I do not believe that software constitutes an asset in any meaningful way, but a practical tradeoff could be that software is a 10% asset)

[ashwinsundar]

I think you are conflating "software engineers" with "software". A business that pays a software engineer doesn't automatically receive working software in return, especially not in the first year. It doesn't seem fair to assume that paying a dev $200k means that the business received an asset (some code) worth $200k in return, and thus can be taxed on it as if it were an asset producing $200k in profits a year.

[abeppu]

> The core question is to what extend software constitutes an asset or consumption.

Isn't part of the problem with our industry that, even it is an asset, its value can be hard to determine even for a long time after you've written it, and it may be pretty weakly related to how much you paid to build it?

- you might have spent a lot on developers last year but next year you find out that you're the new Quibi and no one wants to use your product

- you might have had a small, tight team and what you built turns out to be hugely valuable (like instagram or whatsapp)

- ... and to the degree that the software is part of a valuable business, how do you really assign value to the software as versus the go-to-market plan, the partnership/distribution agreements, etc that helped make the business succeed?

[usefulcat]

> The extreme example is a company that buys gold on the last trading day of the year - now there is no profit! On the first day they sell the gold again and does tax eviction.

In this example, it seems like you're assuming that the revenue from the sale of the gold would not be taxable, but I don't see why that should or would be the case.

ETA: also, gold is far, far more fungible than any particular software

[teeray]

> The core question is to what extend software constitutes an asset

Maybe we can finally deduct all that technical debt.

[pfannkuchen]

Doesn’t that just defer the tax until later?

[bryanlarsen]

AFAICT, that $450K is refundable and transferable. IOW, if you make $0 in year two and have expenses of $0 in year two, you'd get a tax refund of $100K because $200K of your expenses from year one would be applied to year 2.

And it's transferable -- if your company fails, there are companies out there that will buy the rump of your company to realize the unrealized tax refunds.

Which is why it's usually fairly straightforward to get a factor loan to pay those $450K in taxes -- it's backed by an asset.

Factor loans are usually expensive with a high interest rate. Because you can get a factor loan, the taxes are not going to immediately bankrupt the company in the short term, but the high interest rates are going to hurt in the long term.

Not a lawyer nor an accountant. Not even an American.

[mediaman]

NOLs are generally not transferrable in the US (they used to be, but now the benefit can only be used if the acquirer of the 'rump' continues the existing operating business).

[zajio1am]

> Assuming the tax rate is 50%

Which is not(?). According to https://en.wikipedia.org/wiki/Corporate_tax_in_the_United_St... , federal corporate income tax rate is 21%, + additional <10% for state level, not sure about local level.

[rbultje]

One of the reasons small businesses have been hit so hard with this is because for then (when incorporated as LLCs), their tax rate is 37% + state + local. I live in NYC and my LLC has a combined tax rate of 50%.

[jll29]

That's a great explanation, thanks a lot for sharing it.

Some big tech companies affected have laid off teams around the world, perhaps in order to mitigate the numbers looking bad to investors; so in a way, this adversely affected tech employees globally.

Every country should have such a rule for software businesses, which is an industry where all the cost has to be upfronted, so that bootstrapping is facilitated. There are plenty of smaller markets where the VC model is not the most appropriate funding instrument.

[hwillis]

> a few years ago, the IRS stopped allowing the $1M to be deducted

It was Trump's 2017 Tax Cuts and Jobs Act, which amended IRS code.

[cjbgkagh]

It wasn't intended to stick, it's a bad idea that was intentionally bad in order to make it easier to reverse.

[gertlex]

> > a few years ago, the IRS stopped allowing the $1M to be deducted

> It was Trump's 2017 Tax Cuts and Jobs Act, which amended IRS code.

And took effect in 2022 (per what I've read elsewhere, and other comments on this post; could be off by a year)

(just clarifying that the effect was "a few years ago", but I agree that it's important to know the origin of it, which you were pointing out)

[readthenotes1]

Why do you assume a 50% tax rate in the United States when it is only 21%?

[quietbritishjim]

I think they meant "assume" like a mathematician, i.e., pretend it is this simple value to make all the calculations easier to understand.

But it's still useful to know the real rate is 21%, thanks.

[jsherwani]

In California, the maximum personal income tax rate is effectively closer to 50%, which is where my mind went, but you're right, it's different for companies.

In my example, the tax rate isn't the point though, it was used just to illustrate the math.

The main point is that it makes no sense to require amortization of software development expenses. The idea that this letter is an attempt to restore rationality in the tax code.

[cjbgkagh]

State, city, property, social security tax, other fees and levies that should really be classified as taxes. The total tax burden can really add up.