[bunnie]

I keep seeing an objection in this thread along the lines of "what make software so special that it deserves a tax deduction".

Correct me if I'm wrong, but if a company hires someone to say, mine coal or brew beer, the expense of those employees is an expense any company can claim a full tax deduction on. If you're a line chef or wait tables, your salary is tax deductible to the restaurant.

So it's not that we are asking for R&D to be treated "specially" and get a deduction that other companies don't have. The problem is that R&D salary expense is being singled out as producing an asset (e.g. IP), and thus being classified in the same category as other assets, like, brewing equipment, a mining excavator, or a pizza oven. Simply put, Section 174 argues to classify people in the same category as things because ... 'these people's work outputs may have long-term value, kind of like things'(?).

Allowing Sec 174 to stand is a slippery slope to classifying more and more everyday Americans' salaries into this category. One could argue in the future, for example, that those who design cars or operate machines to produce tooling dies, should not have their labor treated as regular expenses, but instead as capital assets because their labor output is captured in assets, just as Sec 174 treats the labor of software developers as assets. Everyday people should be concerned by this because if the rule stands, it could be extended to you, too.

For those objecting to the equal treatment of R&D employees as all other employees in America of all stripes and vocations, keep in mind that software people have to pay personal taxes on the income, just like everyone else. Section 174 doesn't have anything to do with personal income taxes: we all pay income taxes fair and square. The question is whether there is a double-tax on software labor, paid at the corporate level (and in all likelihood, your salary is currently a tax deduction for your company, unless you write software or do R&D).

I think the assumption that we are asking for "special treatment" is driving some confusion and grass-roots objection to the movement here, so I wanted to highlight that we are just asking for everyday people who work software and other R&D jobs to be treated just like every other American who works a day job.

[edits for clarity]

[rayiner]

> Correct me if I'm wrong, but if a company hires someone to say, mine coal or brew beer, the expense of those employees is an expense any company can claim a full tax deduction on. If you're a line chef or wait tables, your salary is tax deductible to the restaurant.

The question is: are you getting the value of that work in the same tax year, or is it creating an asset that creates value over time? If you hire a guy to brew a batch of beer, you’re getting the value with that batch of beer. Once you sell that beer, the value is gone.

But if a brewery hires someone to build a fermentation system, then that person’s salary cost must be allocated to capital expenses that must be depreciated over time.

There’s a good argument that most software development is creating an asset that pays off over time. If you hire someone to upgrade the payroll software, you’ll get the value of that in future tax years.

[thayne]

But in that case, once the fermentation system is built, the brewery no longer needs that employee.

A better analogy is a brewery hires someone who builds a fermentation system, then continues to operate, maintain, repair, and improve the system over time. Some of the employee's time is spent on work that could probably considered R&D, some of it is on work that is clearly operation, and some isn't clearly one or the other. So how do you determine how much of the worker's salary is R&D vs operational expense? You can try and estimate some percentage, but that breakdown is at best an educated guess, and having to try and figure that out just adds pointless friction.

But that still isn't a great analogy, because in that case the fermentation system isn't the product, the beer is. So for a company that sells software, it would be more like if it wasn't a company that sold brew, but a company that rented out or sold its brewing equipment to other companies that made beer.

Also, the same argument about creating value that pays off over time could be said about most employees. An accountant could find a more efficient way to keep the books that pays off over years; the CEO could create a strategy that pays off over years; customer service staff could create a reputation for high quality customer service that pays off over years; etc.

And then, even if you assume that an engineer's salary is entirely R&D, then the only reason I can see to want that salary taxed at a higher rate is if you want to disincentivize R&D. R&D is already a large expense now in the hopes of a payoff later, and by increasing the tax burden now, you are making that upfront cost even higher.

[hosh]

The difference between a fermentation system and software is that right now, software changes fast enough that five years is a long time.

While there are software that are still in use from five years ago, there are plenty of obsolete software no one is still using made five years ago.

[iczero]

Software engineering is not just about building new things. I'd propose that by far the majority of the time of software engineers is spent on maintenance, bug fixing, minor incremental improvements, etc. Almost all software is either sold directly as a service or as a product with a servicing agreement.

> most software development is creating an asset that pays off over time

This is a fantasy.

[MichaelZuo]

Yeah this is the most plausible interpretation.

Software engineers being taxed similar to brewery design engineers seems reasonable, not the person literally brewing each batch of beer.

[kelnos]

If I hire a bunch of people to build me an apartment building, I deduct the full cost of their salaries in the year I pay them, even though once they build the apartment building, I get the value of that work over the following years.

How is that any different from hiring a bunch of people to write some software, that I then get the value of over the following years?

[anon946]

How are other kinds of engineers such as automotive engineers treated at companies like Ford, or aerospace engineers such as at Boeing?

[Plasmoid2000ad]

This wasn't my first impression of this, but the more I heard this dicussed the more I'm forming an opinion that there might be some intentional parts of this that while maybe not being good, make sense from a certain narrow perspective.

My assumption is, if tax folks in the US were looking Jealously at US companies with large Multinational presence declaring a lot of their profits abroad. They might have noticed that some of them have large dev presence in US, but through complex accounting, IP transfers, licensing and other actions are able to claim that majority of the value is generated outside of the US.

If a company had, say, 100k software devs, 50k in the US, and 50k scattered across other countries, but claimed the value of it's software was primarily in Puerto Rico and Ireland... In that case, I'd expect questions around the 50k devs in the US.

Is software dev the only activity where this is possible - no, but is currently by the far the largest and the largest growth industry.

[rbultje]

If the issue is with general tax compliance of large multinationals, then congress should have done something about that. This tax rule has hit small software businesses particularly badly, so much so that it'll practically strengthen the quasi-monopoly of established players.

[echelon]

Unfortunately by trying to "fix" this, they've caused massive US software developer layoffs. So even less tax revenues. And an even weaker economy.

[LorenPechtel]

There is some sense to this: It's a stealth tax increase done for budgetary reasons.

Since we tried to go to a pay-as-you-go model on bills the tax code has turned into an absolute shambles as the congresscritters look at how to tweak things to "produce" (look at the IRA withdrawals--it produced nothing, just moved some money forward one year while creating a trap that many have fallen into) the desired revenue to cover whatever the bill costs without "increasing taxes."

[kgwgk]

> One could argue in the future, for example, that those who operate machines to produce tooling dies, should not have their labor treated as regular expenses, but instead as capital assets because their labor output is captured in assets,

In the future? That's how it works!

> just as Sec 174 treats the labor of software developers as assets.

[I was wrong about the following. I misread the text - and the submission title.] That's not what 174 does.

[bunnie]

Fair enough, that was not the best example.

But I'd also observe that since business owners have to capitalize the wages of the machine operators producing injection molds, then there is an advantage to outsource the whole operation.

Comparing a procurement manager and a CNC operator [the person running the milling machine making a mold] paid the same amount, the CNC operator has a bigger negative impact on the businesses' bottom line, because the business can't expense most of the CNC operator's wages in the current tax year, whereas the procurement manager is generally accepted as fully deductible expense.

Of course, the labor that went into making the mold is effectively built into the acquisition price of the mold, so you haven't gotten rid of it by outsourcing it.

But, by building it into the price of an outsourced mold, one can delay the purchase of the mold to next year to improve the P&L this year, but you can't similarly delay the wages of the tooling operator to a later date.

So, when a CFO is looking for a way to improve the P&L in a given calendar year, there's an incentive to cut operators who build factories, tools, and other assets that have to be amortized, and replace them with more flexible outsource options.

Of course, part of the reason mold making left the US is wages are lower outside the US. But I'd say the current situation with software engineers is a datapoint that demonstrates the impact of expensable versus amortizeable labor on employee retention. It could be that if the tax code is not fixed, the same "CFO logic" would lead to more and more software being outsourced over time, as management is an immediate expense, but software engineers are not.

I suppose one can then argue, why should software engineers get special treatment compared to tooling operators; but then I would counter-argue that perhaps tooling operators should have gotten better treatment so we could have retained more of them in the US.

[procaryote]

source?

[kiba]

Taxes on income or capital inherently reduce income and capital. Ditto for sale taxes, which reduces transaction volume.

This is bad for the economy and ultimately reduce our tax base.

About the only thing that doesn't happen is for non-reproducible privileges such as land, intellectual properties, the electromagnetic spectrum, etc.

[happymellon]

Taxes reduces taxes?

So are you saying that 0% rate taxes would capture the most tax?

[markhahn]

I'm heartened to see this downvoted, since it's basically tax-trolling.

Yes, there are people who think tax==bad. Most people (and for a century or so) have understood that taxes are ultimately spent, and normally with a "multiplier". That is, on something which actually stimulates further economic activity.

Corporate profit, OTOH, normally just satisfies the rent-seeking economy, which is not productive in any natural definition. For instance, dividends and stock buybacks. Yes, some corporate profit feeds entrepreneurship, but that's simply not a large fraction of the corporate economy.

[nathan_douglas]

Henry George was right!