The most important bits:
* Subsection (a) requires amortizing "Specified research or experimental expenditures" over 5 years (paragraph (2)) instead of deducting them (paragraph (1))
* Paragraph (c)(3) is a Special Rule that requires that all software development expenses be counted as a "research or experimental expenditure".
That's it. All software expenses must be treated as research and experimental expenses, and no research and experimental expense can be deducted instead of amortized. Ergo, all software expenses must be amortized over 5 years.
I strongly recommend reading the section before forming an opinion. It really is quite unambiguous and is unambiguously bad for anyone who builds software and especially for companies that aren't yet thoroughly established in their space (i.e. startups).
Also note that this makes Software a special case of R&D. It's the only form of R&D that Section 174 requires you to categorize as such and therefore amortize.
It had a huge impact on my personally, I'm a small R&D shop and basically I have had to end all risky long-term research projects.
In addition to the research costs, I'd also have to pay taxes on the research costs mostly up-front. Significantly, if the project doesn't work out, I'm still out of pocket for the tax money. It's a penalty for taking a risk, and it kneecaps American innovators in a globally competitive technology race.
The rules are even worse than the article notes because it double-dings open source developers. See Section 6.4 of https://www.irs.gov/pub/irs-drop/n-23-63.pdf. The relevant bit is here:
> "However, even if the research provider does not bear financial risk under the terms of the contract with the research recipient, if the research provider has a right to use any resulting SRE product ... costs paid or incurred by the research provider that are incident to the SRE activities performed by the research provider under the contract are SRE expenditures of the research provider for which no deduction is allowed ..."
The rule as written means contractors who write Windows drivers could deduct their expenses (as they would have no residual rights to a closed-source work product), but contractors who write Linux drivers may not (as they would have some rights to open-source Linux drivers).
That’s how it works for every business! If Jim Bean builds a distillation facility it has to amortize the investment in that over time. If the distillation facility doesn’t pan out, then it doesn’t get a refund for the taxes paid.
In general, costs for running a business (buying inventory) are immediately deductible, while establishing new business (building factories) has to be amortized, since the factory can be used for several years.
In software, the line is a bit more blurry - coding creates new IP (research), but is also required to keep many software companies running (maintenance) by e.g. fixing bugs and updating infrastructure. Here, the IRS has decided that all software development counts as research.
This would kinda make sense if you could hire programmers for a single year to develop software, fire them and then sell the software for 5 years, but I think that's rarely the case.
The people this tax code change hurts are those doing basic research. In the context of semiconductors, that would be a company like ASML (except they are Dutch, so they can happily continue their research practices) who took a decades-long bet to build their EUV steppers.
In the case of basic research, one could be spending millions of dollars on hardware prototypes when you know it can't produce any salable product. There's no upside profit to amortize expenses against: it's like building a distillery that you know can't produce a single drop of salable bourbon because you're working out a radical new distillation technique.
In summary: in basic hardware research, one could be spending millions of dollars to put a whole system together just so you can learn how it fails. It's a true "expense", with no path to amortization.
Now, in addition to making the right technical decisions, the tax law changes force the R&D teams to also consider how to amortize their experiments over many years. You now have have pressure from management to do things like stage prototypes and expenses in the right tax year so the company can continue to show a profit for the shareholders. You could argue that the lessons learned are perhaps IP that have "goodwill" value, but now you're opening a can of worms trying to price a fair market value on a negative result, and you're now having senior research staff spend more time arguing with accountants than directing research. You also have to get to that negative result within a tax year - which effectively penalizes any research project that takes more than 12 months to complete.
Same-year 100% deduction of R&D expenses is simple and it reflects the actual nature of basic research risk. Yes, it allows companies to convert short-term windfalls into long-term research gains by converting taxable profits into research projects, but I'd argue that's not actually a bad social policy.
I think US is probably unique among developed nations in having a tax code that punishes basic research; other countries at least allow it to be deducted. Some even allow super-deductions (e.g. you can deduct $2 for every $1 of R&D expense) or the research is explicitly subsidized through grants.
The argument for special treatment of research is that pioneers put their careers on the line to discover new things, so the rest of us can live in risk-free comfort; so, as a collective we give them some reward for taking that risk.
I suppose the counter-argument is that research incentives and subsidies are socialist "market manipulation" and violate the "free market" principle, and thus America is justified in sanctioning and trade warring with the rest of the world that is socializing basic research costs. That's an opinion one is entitled to hold, but we'll have to agree to disagree on that opinion.
But if a company starts extracting oil from a field they have to pay heavy taxes on that oil.
[1]: https://www.offshorenorge.no/om-oss/nyheter/2019/01/leterefu...
Is it just me or are you conflating two orthogonal things?
An open-source Windows driver would have the same issue, no? And a closed-source proprietary Linux driver privately written for some company wouldn't have this issue either, right?
I think it's fair to use Windows and Linux as stand-ins for closed vs open source because it's a very accessible example. And knowing the technicalities clearly doesn't undermine the argument.
We're talking about businesses here that would struggle with these tax rules. Which I guess is, mainly, contractors or startups. How common is it for them to write open-source drivers vs. closed-source ones? I would've imagined the majority of drivers in such cases are closed-source, on every platform. But I would find it interesting to hear if things are somehow different on Linux.
I'm surprised if so, because usually these sorts of licenses only apply if you're redistributing the code, not if you're just using it privately.
The Grandparent's point about that "it double-dings open source developers" is still correct and poignant even with this clarification.
I feel like I'm missing what subset of people this is, exactly. We're talking about businesses here that would struggle with these tax rules. Which I guess is, mainly, contractors or startups. How common is it for such businesses to release their software as open-source, vs. as closed-source? I would've (naively) expected most paid OSS developers to be funded by large organizations/businesses that have plenty of money to fund them, not small businesses/contractors that would be severely impacted by this law. Is this actually a large set of people?
https://www.igalia.com/ https://github.com/fossjobs/fossjobs/wiki/resources
The problem goes with the license, not with the OS.
The problem is that the license assigned says that anyone is free to use the code. Anyone is a set of people that includes the contributor, which then triggers the interpretation that the research is incrementally in the contributor's benefit and thus disqualified from preferential tax treatment.
You'd need a custom license where everyone in the world could use the results except for the contributor, and then like, a source control system that hides the source files from the contributor's view of the repository.
Should every other member of that set, i.e. everyone minus contributor, also amortize their software development expenses because they have a hypothetical, non-exercised right to use some (i.e. all) open-source "R&D" software... somewhere? Or should the tax liability be invoked starting on the date of first use of any open-source code?
If some code is upstreamed to Linux kernel or userspace, should this obligate every Linux distro consumer to amortize their Linux software development expenses?
There must be _some_ legal boundary for dispersal of the tax obligation with respect to open-source code, since it self-evidently cannot be intended to apply to the entire universe of businesses and union of all OSS development. If necessary, a court case can establish this distinction.
How would that work?
> You'd need a custom license where everyone in the world could use the results except for the contributor
That one is incompatible with copyright laws in many countries outside USA.
How so? You can't sign away your interest in a copywrighted work?
> You'd need a custom license where everyone in the world could use the results except for the contributor
> That one is incompatible with copyright laws in many countries outside USA.
Does authorship confer usage rights?
Have the shell company write code. (Or more risky pay your company to write code as a work for higher.)
Devolve the shell contributing its assets to OSS.
Take a X$ loss in that year.
Argue that it is perfectly legal to the IRS.
Or have your shell company operating out of any other country.
It makes software temporarily 16.7% more expensive in year one if you’re operating a profitable company, but you do eventually get to deduct that over time. Pay 8% on a 4 year loan and that drops to ~4%.
As has been said repeatedly in this thread, this change is purely a boon for existing big tech companies that now have even less to worry about from startups. It takes a startup 5 years before they'll be playing on an even field with big tech.
> if you’re operating a profitable company
You keep saying this across this thread, and keep ignoring that Section 174 has now redefined "profitable" for tax purposes to include companies who:
* Are in year 1 with no history of expenses to draw on.
* Have spent <900% of their year 1 revenue on software development expenses.
i.e., a startup that earns $1mil and spent $8mil in software dev expenses is only able to deduct 10% * 8mil = $800k of expenses, which means that as far as the government is concerned they made a profit of $200k and owe taxes on that on top of their already-net-loss of $7mil.
You can keep ignoring this fact, but ignoring it doesn't help your case. If you want to argue that this is fine and dandy you need to explain why the above math doesn't prevent new companies from competing on fair terms with big tech.
The article also blames it for 2022 mass layups at existing big tech companies with cash reserves.
That seems like a big stretch compared to the "oops we over-hired in 2021" theory, especially if it's net-advantageous for big tech vs up and comers.
It's possible for two things to be true at once. The new rules can be moderately bad for big companies and cause them to do layoffs and also cause them to be catastrophically bad for startups, giving incumbent big tech companies another relative advantage over them.
This is also ignoring the short-term vs. long-term effects. In the first year the incumbent companies are in the same boat as the new ones because they already deducted all their R&D expenses from the previous year when they were still allowed to, so they get a minimal deduction this year and have no advantage. But five years from now, they'll have five years worth of R&D they're still amortizing -- notably, this means the government is no longer getting more revenue from them in the current year than they would otherwise, since their average R&D expense and their average amortized deduction are now equal -- whereas the startup has no historical R&D to deduct and is put at a disadvantage.
Because generating an asset IE software isn’t a pure loss that’s why you’re doing it in the first place. Companies with a cash flow problem are different than companies which an actual loss.
> i.e., a startup that earns $1mil and spent $8mil in software dev expenses is only able to deduct 10% * 8mil = $800k of expenses, which means that as far as the government is concerned they made a profit of $200k and owe taxes on that on top of their already-net-loss of $7mil.
That assumes 100% of expenses are software development related. But the numbers are imaginary so using your example taxes are 21% of 200k, so 7 million in losses = 7.042 million in losses. A 1/2 of 1% increase, the sky is fucking falling.
Further a competent account would likely want you to carry the majority of those expenses to the future. Given the option many companies voluntarily did so because it made financial sense. You can only carry 80% of losses forward a likely future issue, but these expenses don’t fall under that category.
The problem here is that the losses are often in time or future liabilities but the government expects to be paid in cash. Your developers were mostly working for stock options or some other deferred compensation, which may cost you tomorrow but tomorrow you'll have more revenue. Where are you getting the cash to pay the government right now?
Tell me you're not an experienced software engineer without telling me you're not an experienced software engineer.
Code is a liability, not an asset.
So you have no idea what that phrase means. If you don’t think code is an asset don’t write it.
O wait obviously that’s not what code is a liability means. Code is a liability in the same way roads or buildings are a liability, they incur an ongoing cost, but removing the US highway system would be just as idiotic as a startup deleting their source repository from a misunderstood idea.
More importantly valueless code stops being a liability because you can abandon it. Calling it a liability implies it has value.
This is kind of missing the issue though.
Suppose you pay a million dollars this year to develop something that will also cost a million dollars a year to maintain, but is worth over a million dollars a year, so you do it anyway.
So this year you spend a million dollars, make $1.1M, have a profit of $100k. Next year you'll spend a million dollars, make $1.1M, have a profit of $100k. But if you don't do the maintenance, it ceases to comply with changing regulatory requirements and not only has to be shut down but causes you to incur criminal penalties, or develops public security vulnerabilities and then criminals break in and destroy your business and cause you to be sued into bankruptcy by your customers.
In other words, the code creates an obligation that offsets the value of the asset. These two things can easily cancel out so that the total value is ~0 -- or even negative in ways that don't allow you to walk away, e.g. because you entered into a contract to supply this thing for a defined price but underestimated the maintenance cost.
But now the government is telling you that you have something worth most of a million dollars even though it's not worth a dime without putting another million dollars into it -- and even then it still wouldn't be worth two million dollars.
The reason you continue to do it is that the continued development made you $100k this year, not because what you had left at the end of the year that would be worth something without further investment.
I love this example! It perfectly illustrates a case where the government intentionally subsidizes a liability that no sane company would take on without government funding. Well said.
So we're agreed that the government should incentivize R&D with a favorable tax code that makes it not completely insane to take on the risk of doing something new.
LOL, try again liabilities like buildings don’t need incentives. Software that is only barely worth maintaining isn’t worth subsidizing, highly valuable software needs no incentives.
If anything you’re making a solid argument government should discourage the creation of software so only the most valuable software is created and maintained. Except the optimum economic efficiency as so often happens occurs without government incentives.
For those around when this went into effect many business owners were surprised. Our accountants told us they seriously thought congress would fix this before it went into effect.
And then it suddenly was an actual tax change.
Like so many Trump actions: "oops".
I can’t believe this still exists, and no one has changed it. We truly are governed by morons
this was done to fuel their tax cuts to a small group of a certain people.
you can see all of the sponsors here: https://www.congress.gov/bill/115th-congress/house-bill/1/co...
as we are seeing now on a number of issues, sure things can be rolled back, but that doesn't mean a return to normal.
Yes, you can kick over a bee hive, then pick it up and set it back upright, but you are not going to put all the bees back in immediately. There are long term consequences.
When I got to bed, my heart was beating so hard that it kept my wife awake.
https://www.congress.gov/bill/115th-congress/house-bill/1/co...
This is actually a really common intention in laws like this. Get the tax cuts during your term, and then kick the can down the road so your successor's term is marred by the bad law. If your successor wants to fix it, they need to pass a different tax to recoup the costs, and incur the publicity of "raising taxes".
You’re operating cashflow decides the health of your business, not your accounting profits, not anything else.
Only the operating cashflow and whether that grows as your startup/business grows decides whether your business lives or dies, everything else is for investors, mommy and daddy for final report card.
A business operator’s #1 focus is Operating Cashflow and this tax insanity law hurts cashflow tremendously for american service businesses who need to compete with all other major economies who dont have such an insane law.
As I understand accounting, this means that reported profits would be higher, and therefore incur more corporate income tax liability. Cash flow isn't effected besides tax.
A startup isn't likely to be making a profit yet, under either accounting rule. Is there a benefit to reporting a larger loss?
My first thought is that this effects Google and suchlike, not startups. But... assuming steady state "r&d" expenditure... it's not that much. Everything gets deducted within 5 years anyway.
So... maybe this hinders more modestly profitable, and fast growing companies most. Those that can't afford to carry 5 years worth of paper profits as easily.
Otoh... I am curious about how the difference between r&d expenses and operational ones are determined irl.
This should be quantifiable. How much extra assets are software companies actually booking?
It seems questionable that this "silent killer" had actually affected employment so much.
As an example, A two person software startup; both drawing a salary, each making $100,000 per year. Each doing things related to software development.
Startup brings in 200,000K in revenue.
Under pre Section 174 changes, the profit is zero. Both salaries are expensible in the year they were incurred.
Post Section 174, the profit is now $160,000 each year. Now they pay taxes on $160,000, even though they literally have no money left over because revenues equaled expenditures.
At 25% tax rate, that’s $40,000 in taxes, for a business that made literally no money.
That’s why this is so devastating to small software businesses; unless you’re highly profitable and have cash reserves, this change hits hard.
Although for a startup it might be least bad, because for their first few years, their revenue might well be closer to zero; they tend to burn money, sometimes for quite a while.
Revenue: $200,000 Expenses: -$200,000 Assets: $200,000
Net income: $200,000
You’re allowed to say ‘ah, but over the year the value of that $200,000 asset actually fell by 1/5’:
Asset depreciation: -$40,000
So your net income is now $160,000
You owe taxes on that income.
How does it work when a company uses salaried employees to build a structure. Are the salaried employees not deductible at all?
https://www.irs.gov/pub/irs-drop/n-23-63.pdf
To answer your question, the following are software development activities that are capitalizable (and instead of quoting the notice itself, I’m quoting from a better written blog post by accountants:
https://www.cohnreznick.com/insights/additional-guidance-irs...
> Section 4.03(1) of the Notice clarifies that labor costs – including those for contract employees and independent contractors – related to those who perform, supervise, or directly support SRE activities are considered Section 174 expenditures. All elements of compensation are to be included with the exception of severance, which is excludable and deducted by taxpayers in the period paid or incurred. SRE-related labor costs expenses included in the Notice expenses related to pension costs and stock-based compensation.
Section 4.03(1)(e) provides guidance pertaining to certain costs related to operation and management (i.e., rent, utilities, etc.) activities. Specifically, in addition to items such as rent, utilities, and insurance, expenditures such as taxes (i.e., property), repairs and maintenance, and security are now considered SREs subject to Section 174.
So what software development activities don’t count as “Specified Research Expenditures” (SRE)”?
> Training of employees in the use of the software
>Maintenance activities after the software is placed into service that do not constitute upgrades or enhancements (i.e., corrective maintenance to debug, diagnose, and fix programming errors)
> Data conversion activities (except activities to develop computer software that facilitates access to existing data or data conversion)
> Installation and other activities related to placing the software into service
> Marketing and promotional activities
> Distribution activities
> Customer support
If you’re a startup and you have a software developer doing the above activities as well as SRE work, then in order to expense the SRE parts of their job you either have to estimate (and be able to defend) the estimations, or your employee needs to track their time for each type of activity they do.
Clearly if two software engineers build a product that brings in $10M, and each pay themselves $5M, it doesn't seem so outrageous that the can't really claim they're running "a business that made literally no money." Clearly in this second example the problem is that the engineers are paying themselves way too high given the return on their efforts.
What this means is that software engineers will be required to bring in more value to justify their high pay. In your example, it simply means that a software engineer that brings in $100,000 of value to the company, probably shouldn't be paid $100,000.
This seems entirely reasonable to me, and doubly so when I consider how many large corporate teams (who I think will ultimately be impacted more than startups) has huge numbers of highly paid engineers not doing all that much.
In most startups I've worked in it was pretty common for engineers to be delivering multiples of their cost in value, and in every big company I've worked in, it was very common to be delivering fractions of one's cost in value.
So with your suggested tactic the engineers get $2.55 million each. The rest, $4.5 million, is tax.
If those 2 engineers paid themselves $0, and instead paid the $10 million as dividends, they'd get 4.25 million each, and only 1.5 million would be paid as tax.
(Yes, this is a simplification, both situations are artificial and in both cases there'd be other taxes to pay, however, they'd be similar in both cases)
They have the $200k they pulled from their startup, far more than what most people earn. If you make enough to pay yourself $100k then you make enough to pay taxes.
Which is what's happening.
It makes it substantially more cashflow intensive to build a new software business, which entrenches incumbents and reduces competition. It favors companies who have the cash to wait for the full 5-year depreciation cycle, i.e. the opposite of most bootstrapped startups.
Quick example:
$10,000 revenue
$8,000 paid to software developer
$1,000 paid to AWS
leaves $1000 in profit.
You received $10,000 into your business account, but spent 8000+1000 = $9000. Your business account has a balance of $1000 at the end of the year.
Section 174 means you can only deduct 1/10th of the $8000 in the first year, $800. Your total deductible business expenses for the year will be 800+1000 = $1800.
Your taxable profit for the year is 10000-1800 = $8,200. If your effective tax rate is 25% (generously low), you owe $2,050 in taxes.
You pay your $2,050 tax payment and your business account is overdrafted by $1,050. You need to add $1,050 from your personal funds to the business to cover the shortfall.
Your business was cash flow negative for the year. This makes it extremely difficult to bootstrap a software company.
I don't think these two are unrelated.
I also don't understand the objection. It's not like anyone's getting away from taxes due to this rule. This is about a temporary exemption from company income tax IF AND ONLY IF companies have someone pay income tax on that money (and only up to the point where that keeps makes sense). This "exemption" lets you not add 15%-20% tax on top of 40-55% income tax just to try a new business as a company.
If you give the company more money to use to cover its tax bill, then that further increases the company’s taxable income.
For established profitable software companies there was a cliff edge in 2022 when this change kicked in. Staff costs for previous years had already been fully expensed while only 20% of the current year's costs could be deducted.
Second, any sudden increase in research expenditures is now discouraged. This could make companies less nimble.
For unprofitable startups it could cause issues during a phase of very high revenue growth. They could suddenly be liable to pay corporation tax in spite of the fact that they are not profitable in any reasonable sense of the word. It would smooth out later, but that may be too late for some.
What I do not believe for a second is that this is causing major job losses. Companies like Microsoft or Meta do not reduce research or software development just because there is a temporary tax hit. It could be an extra incentive for an efficiency drive I guess.
So I guess my most question is "how this work irl?"
Say a new startup raises money and hires 20 people. Pays $5m in salaries, office space and such. All 20 people are developing a software product. Are 100% of this startups expenses amorotized?
Then they sell the product. They receive $2m in revenue. What does the P&L look like.
If their revenue was $2m, that would leave them with $1m (or $1.5m) of taxable profits unless that was eaten by other costs.
It doesn't have to be a problem, but if revenue grows fast and they go on another hiring spree in the following year then it could become a problem.
That said, if revenue grows so fast, it seems likely that they would have huge marketing and sales costs that could be expensed immediately. So maybe this isn't really a problem for many startups. I'm not sure.
In another year the initial shock will stabilize, but any growth now has a 5-year tax hit attached. And even Facebook doesn’t want to pay that if it doesn’t have to.
So previously, some 20% of all revenue would be owned as corporate income tax, and startups would deduct it all as they're spending much more on R&D than they owe in corporate income tax. But with this tax change, the deduction would be much lower (80% lower IIUC).
Simplified 2021 example before 174:
100k Revenue
100k Software Dev Costs
No profit or tax
100k Revenue
100k Software Dev Costs
90k "profit"
18.9k taxes
Accountants: If I am wrong about the above, please correct me
That can't be right. It definitely isn't in my country.
If own a car dealership, and I sell a car for $50,000 that I bought from the manufacturer for $40,000, surely I would pay tax on the $10,000 profit? The tax on the the full $50,000 revenue might exceed my profit!
lots of retaurants went out of business overnight.
However, there are many benefits overall. For one, it completely kills off the various convoluted schemes to avoid classifying something that is obviously a profit as such (by shuffling things around subsidiaries etc, for example). See also: Hollywood accounting.
This hurts small companies (like mine) that were priced out of the US developer market.
I'm curious if contract work is really exempt, would look like a major loophole to me.
It's impossible (yes, I'm being absolute) to hire an employee who lives in or outside the US who is not a citizen or doesn't have a green card. All employees must have an SSN and go through i9 verification, which requires in person verification of legal ability to work in the US.
The foreign developers I'm talking about are not US citizens and do not have green cards.
Their work is subject to 15 year amortization per section 174. Period.
The change is very simple. And the predictable impact of the change is very clear.
It shouldn’t impact large companies that are already profitable. But it’s devastating for software companies that are not profitable yet.
And that’s without even getting into the philosophical issues with it.
Everyone assumed it was a traditional accounting hack. But given the timing and the reinitialization, it's clearly political, not economic.
The code is a strategic time-bomb designed to cause a high-profile economic downturn during a presidential election cycle, specifically when the following president is a Democrat and Republicans have a house majority.
It was used to harm Biden's economy, and it will happen again in 2030 if the next president is a Democrat. While deferred, it will be spun as a major Trump "economic achievement" for the midterms, because companies will be able to afford to hire again.
The tech industry is merely high-profile fodder for extreme politics. It really is that petty.
Generally, in tax bills they try to keep them "neutral" where any tax cuts or tax breaks are coupled with tax increases elsewhere BUT they tend to report the 10-year affect for whatever reason. This bill provided a ~30% cut in corporate tax on profits, with a delayed increase in tax cost on Software R&D pushed to the next term.
If the next party wants to reverse it, they'd have to find the money with an increase in tax - directly undoing it would be a ~50% increase in corporate tax rate, which (I guess?) would be a tough sell politically. Meanwhile, the tax code on software engineering sounds too niche to expend political capital on.
Either way, its another example of how corporate America is trading long-term growth (R&D, product development) for short term gain (lower taxes today).
With Republicans usually being dominant in a number of states, if Democrats have a Senate majority, it is usually both narrow and dependent on a very small number of Democratic and/or Dem-leading moderate independent Senators from Republican-majority states who vote with the party on leadership, but are soft (or firmly opposed to the progressive preference) on a number of issues important to progressives.
If the US were approximately an equal democracy, this might be less of an issue.
How? Evenly divided voters and representatives are the issue. Each side can barely afford to lose 10% or so during votes
The issue being discussed in the Senate is not a symmetric issue resulting from near balance in support between the parties.
If it doesn’t change, I suspect the party will split.
Equal to what?
Trump himself admitted it's better for Republicans when fewer people vote.
This thread is talking about the Senate. The senate isn't gerrymandered. Both senators are state-wide races.
If you want to view it that way, you can view the senate as "pre-gerrymandered". But the last time that was an option was in 1959, and both of those are just "the entire area the US owned, but wasn't a state yet. To get senate gerrymandering, you have to go back to 1912 and the admission of New Mexico/Arizona.
That is quite explicitly the history of the US Senate (and House), FWIW.
The Connecticut Compromise was reached to give low-populations states outsized legislative power in the senate. This is the main reason the senate exists.
Building on that, the 3/5th compromise was reached as part of this to give slave states outsized legislative power in the house.
The state of Maine used to be part of Massachusetts, but it was later set up as an independent state in order to increase the number of anti-slavery states in the senate (the Missouri compromise).
And thinking about it more, though I haven't seen if there are studies on it: there are probably manpower/fundraising effects from gerrymandering.
If you're able to protect your political power in one area that probably better enables you to amass resources to use in the area you can't gerrymander.
But all that said, both parties practice gerrymandering and I don't think there's strong evidence of a significant advantage over a major party from current gerrymandering at the national level.
[1] https://da.lib.kobe-u.ac.jp/da/kernel/90008864/90008864.pdf
[2] https://electionlab.mit.edu/articles/gerrymandering-turnout-...
[3] https://stateline.org/2022/05/20/check-your-polling-place-re...
https://www.brennancenter.org/our-work/analysis-opinion/how-...
Second, your solution was in place in the 1800s and was referred to as the spoils system. It led to bad outcomes and was rightfully abandoned. Your beef is with the fact that educated people tend to choose policies that you don't like (assuming your 90/10 split, which is still wild). You/the GOP have three options. First is to recognize that the policies pursued do not attract people which education (which I consider a red flag). Second is to re-adopt the spoils system despite it being illegal, and frankly just sort of dumb since when the other side is in power you suffee, but at least then you never need to think deeply about making policy for the whole country instead of a subset of supporters. Third, you/the GOP self-own via tearing up all the intellectual capital and international good will built up over the decades without a replacement, massively reducing American influence on the world in all dimensions.
We all know which party is fighting tooth and nail against that on practically every issue that affects it.
My prior is based on experience. Most of the civilian govies are centrist, "I just want to grill" types.
Elections are run by Republicans as well as Democrats. In fact several of the key locations that Trump claimed were stealing the election from him were basically locations where the Republican party had a lock on the administration of the election. As I remind people often, when they talk about someone stealing the election, that's not a hypothetical "someone," that's Betty three houses down that has the nice flower garden and organizes the bake sale at church every month.
https://www.brennancenter.org/our-work/analysis-opinion/how-...
If you ask me "should corporations pay more taxes?" I will say, yes. Famously so does Warren Buffet, is he also a progressive?
If you ask me, "hey should we gut tax incentives for R&D spending in the USA?" I will say, uhhh no? probably a bad choice?
In other words, they have a popular agenda, but are political morons that are going to eventually wonder why they can’t break out of solidly blue districts.
There is nothing against the group you mention except that it might be the group that most fights against progress toward equality.
That just means that the marginalized become an anchor preventing progress. We can’t have nice things until we solve the problems of the bottom quantile—which we never will.
If progressives had been in charge, America and everything it created wouldn’t exist. They never would have allowed us to displace the Indian tribes so the land could be put to better use.
And that’s the difference. Progressives view it as important that we progress all groups and that challenge is fundamental to society, whereas you view them as an anchor.
Was the end of slavery a progressive or regressive move?
It's a 10% tax cut for big corporate America, with some economic poison for blue states in the future.
https://en.wikipedia.org/wiki/Filibuster_in_the_United_State...
Given the history of prior presidents winning 2 consecutive terms, it seems like Trump could have reasonably expected a 2022/2023 tax change to be his problem.
Prices haven't gone down at all nor will bringing manufacturing to the US do this (likely causing them to go up) but his approval rating is 50%
Interesting, that hasn't been my experience.
I live in a very red part of the country and most people I know are Trump supporters, including some family members have been very MAGA since 2016.
I've been hearing more and more complaints over missed promises: no Epstein files, raising budgets, RFK is starting to water down his promises, no end to the Ukraine or Gaza wars, etc.
I couldn't get inside their head to say why. My read on them is largely that the complaints are legitimate frustrations though. This isn't exactly a part of the country where voters are somewhat evenly split and Trump supports would need to save face or smooth over interpersonal friction by giving a nod to the idea that he may not deliver.
I based my argument on the poll averages as shown below, most are high 40s similar to the past few months. I would think if people were upset about missed promises it would be reflected in these. It's been ~5 months.
You might say people are giving him a chance to implement a plan or that some action would take time therefore they are willing to give a thumbs up for now, hence the polls. The reason I discounted this is because I'm not aware of any plan or current actions by Trump that would reduce prices. The trade wars will either increase prices due to tariffs or increase prices if products are made in the US.*1
I believe you but maybe float a question to your neighbors - "If prices don't come down would you vote Democrat in 2027?"
https://www.realclearpolling.com/polls/approval/donald-trump...
> I believe you but maybe float a question to your neighbors - "If prices don't come down would you vote Democrat in 2027?"
The fact that you're assuming people should align with one party or the other is the problem.
Who gives a shit what letter is next to a candidates name? What matters is what the candidate stands for, what matters to them, and whether you believe they'll stuck to their guns when the political machine that is DC fights back.
Trump is blaming Biden for the obvious outcome of Trump's tarrif nonsense. What do you think Trump would have done?
How often do you hear any one politician claim the glory of a situation that they had nothing to do with? And when was the last time you actually heard a politician own their failing or apologize?
I don't think this is a reasonable or informed take. It's quite obvious that the tarrif lunacy is single handedly causing an economic downturn. Trump himself has downplayed the relevance of this downturn with inane comments over how tarrifs would also be painful to the US economy. If you see a politician like Trump claiming both that tarrifs will be painful to the US and that the economic pain caused by Trump's tarrifs is blamed on whoever was there before him, you need to be massively disingenuous or naive to claim that "politicians always blame both sides". There is nothing normal about Trump's actions.
If you'd like to say my claim is uninformed that's fine, but I ask again for examples when a politician directly owned their failure or apologized for it.
That's the problem with your false dichotomy: Trump already admitted tarrifs create economic problems.
https://fortune.com/2025/02/02/trump-tariffs-americans-some-...
Trump blaming predecessors for the problems created by his tarrifs policy goes way beyond your run-of-the-mill predecessor blaming. Trump is simultaneously warning his tarrifs policy will cause economic damage and that the economic damage created by his policies were caused by someone else.
In 2024 two bills (merged later) went through the Republican controlled House with a bipartisan vote (350+ for) [1] then the Democrat controlled Senate [2] with another bipartisan vote (79-18, attached to an Israeli funding bill) basically following whatTrump wanted.
Late 2024 - Trump then offered to save the service when the Public turned against the ban and used it as a campaign item.
2025 - His supporters were all over Tiktok praising him, including the CEO of Tiktok when he put a pause on the required sale. He's also extended the deadline multiple times now.
----------------------------
Republicans might start using this tactic more now that it's been shown to work. It's similar to the "Fuck the next admin" tax bill that he put in his first term.
[1] https://www.reuters.com/technology/us-house-vote-force-byted... [2] https://apnews.com/article/tiktok-ban-congress-bill-1c48466d...
Are there any parties running in a track record of functional government?
So by your logic New York is a better governed state than Florida? Net internal migration would seem to disagree.
Yes, New York is significantly more successful than Florida in almost every way: Better education, better healthcare, longer life expectancy, less pollution, lower crime, more productivity, higher wages, more amenities, better transportation infrastructure, less poverty, happier residents, and so on.
I'm surprised that things like the job market wouldn't come into play, for example.
> A focus on good schools, low crime, and low taxes, instead of a focus on economic redistribution.
That's also interesting. I wouldn't have rolled that up to quality of governance, but I could see why you would. To me that falls more into a sign of long standing culture, I could see a place with existing policies that match now having a terrible administration in charge.
I was just giving an example—people moving within the U.S. make the same choice. When I was growing up, Virginia was like Florida is today: a red state with a booming economy, low taxes, and a good business climate. Why did AOL start in the farmland of Loudon County instead of the farmland of eastern PG County (which is closer to DC)?
> That's also interesting. I wouldn't have rolled that up to quality of governance, but I could see why you would.
It’s a cultural trait that strongly affects governance. The government can focus its energies on making things better for middle class people and businesses, as Virginia long did, or it can focus on poor people and minorities, as Maryland long did. And the resulting differences in governance are quite apparent. Virginia has better schools, ore employment, and has grown faster than Maryland over the last 50 years.
Maryland is a deep-blue state. Virginia is about as red as Pennsylvania.
What about Detroit?
And Detroit... well, I guess now that they've bulldozed all the abandoned buildings it looks less like a post apocalyptic hellscape and more just abandoned. An improvement I suppose.
Heck, they ignored the water crisis for twenty years, and what they’re doing now for aquifer replenishment is still less than what makes sense.
I say they are easily addressed because simply reverting to California’s policies from ~ 1975 would greatly improve the current situation.
The water crisis is a difficult problem because water rights are complicated and central valley farmers are an influential political group very focused on short-term preservation of water access and not as concerned with long-term sustainability.
> easily solvable housing, education, transportation and mental health crises
I submit that these are much less "easily solvable" than you claim. (What have you personally done to work on these problems, if they are so "easy"?) Legislators don't get to wave a magic wand, but need support of a wide variety of stakeholders who have contradictory demands and expectations (some of which are fairly unrealistic, but anyway..).
Education for example has competing goals of local funding vs. inter-city equity. Should the wealthiest towns get to spend arbitrarily much local property tax money on their own children's public schools while the poorer town next door is running out of toilet paper, or should the state try to equalize funding between schools to give every child the best opportunity? There's not really a "correct" answer to this, and every possible choice has some serious disadvantages.
Public opinion can change daily, and external events can appear with no warning. These things can make a prior path of action vanish, or even make it madness to pursue.
If you try to plan everything long term, I bet you hit a lot of disappoint as a politician. If you only see today, then you're not fighting for things that are now not possible.
I imagine one would be far less stressed as a result. And maybe more popular than otherwise.
A chaotic politican whose mind is changed by the last person they spoke with won't do well facing serious long term problems.
It gets worse if the only things they consistently stand for is their own power, personal wealth, their sycophants, and their grade-school-level (mis)understanding of complex matters.
Why?
I also have to assume that anyone interested in slapping their name in big gold letters on as many buildings as possible is interested in the perception of legacy.
I'm not saying it's the actual story, but the timeline does track.
[0] Page 60, Sec 1306(e) sets the date: https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf
My argument is simple: Occam’s Razor
The Republicans in congress put the provision in solely as a gimmick to get past the CBO.
Frankly I don’t think legislators in either party are competent enough to have foreseen the consequences and even if they had been they wouldn’t have put a bomb like this in that would be more likely than not to backfire and affect them.
I just think that too often people interpret incompetence as malice, especially nowadays when things are so polarized that it’s fashionable to hate people who differ with one’s political opinions.
Yikes. Does that apply to outsourcing?
https://www.congress.gov/bill/115th-congress/house-bill/1/co...
I think the purpose of the change was to "increase revenue":
> Requiring that certain research or experimental expenditures be amortized over a five-year period or longer, starting in 2023, would increase revenues by $109 billion over the period from 2023 to 2027.
https://www.congress.gov/congressional-report/115th-congress...
Yes, but in a specific way: they were trying to offset the tax cuts they wanted so they could pass it via the reconciliation process and avoid the Senate filibuster. They didn't actually care about this revenue and the assumption from most people was that the specific carve-out would disappear in some future bill.
It's a specific tax, on a particular class of better educated workers in specific jobs.
Edit : sorry I just realised you meant the tax law is short. The article itself is very annoyingly written
Software firms across US facing tax bills that threaten survival (924 points, 981 comments) April 18, 2023 https://news.ycombinator.com/item?id=35614313
Ask HN: How are you handling Section 174 changes for bootstrapped companies? (298 points, 187 comments) Feb 2, 2023 https://news.ycombinator.com/item?id=34627712
Why the big tech firms that suddenly laid off a bunch of people the instant they started looking at their 2022 tax bill didn't tell everyone explicitly that that's what was happening I can't say, but it's not like this has been happening in secret.
Obviously interest rates also play a role, and probably a larger one. But this is objectively a very very bad contributing factor, far worse than the impact of coding LLMs.
Those companies have R&D for a reason. A company _wants_ to make things, right? If this is impacting their ability to make things, wouldn't it be in a company's best interest to advocate openly against the tax code, rather than be silent about the reason, fire their staff, and just not make things?
It doesn't make sense to me how so many people are aware of this to the point that many many companies are all doing the same thing for the same reason, but seemingly nobody was talking about it before this post. That doesn't make a lot of sense to me.
It's like this: Company wants to do R&D, they have a budget, they do math that says they can afford to pay X number of R&D workers with Y budget.
Government changes tax laws in unexpected way, that changes the math so that Y budget only can support X-A R&D workers because the "A" goes to taxes now.
Also important to note, the tech R&D space is a very small part of the overall economy. We exist in a little thought bubble here on HN.
If these companies don't know about this change, then why would we believe this change is causing it.
In the US, it remains the case that programmers salaries must be treated as an expense (i.e., cannot be amortized) when calculating the company's income statement, balance sheet, etc. Not following that rule will get the accounting firm signing off on those financial reports in trouble (with the SEC, the Public Company Accounting Oversight Board, and maybe even the Justice Department if the purpose of the violation was to defraud investors).
It's completely unimportant. Nobody is getting fooled "on paper" by amortized salaries.
I’ve seen it used in UK listed companies to massage the profit numbers and make divisions of the company seem more profitable than they are
From what I've read, not for software fixes to ongoing products, but for new products and I can't remember for new feature work. Also if you contract for someone else I heard you can still write off expenses without amortization.
Not "anyone". Anyone in America.
Here's some food for thought:
* Global financial crises: Banks were paying (bribing) ratings agencies to rate junk bonds AAA.
* Savings & loan crisis: widespread fraud & insider abuse.
* Bernie Madoff: Ran the largest Ponzi scheme ever, with an estimated fraud total of $65B raking in $17.5B in invested cash.
* Enron: straight up accounting fraud sprinkled with intentionally causing brownouts in California to pad their pockets with a side bonus of making Gov Davis unpopular & get him recalled (Enron was closely aligned with the Bush administration).
* Nixon straight up using psy-ops against Democrats & finally trying to burgal the DNC offices.
In terms of stats, the FBI does a few hundred bribery and corruption cases annually. Are they good at catching white collar crime? Well such crimes regularly take more than 5 years to investigate.
And hell, some things that are basically lying and cheating are straight up legal. Usury is legal with minimal to no regulation of payday loans. Pyramid schemes are legal as long as you call it multi-level marketing.
The list goes on and on.
But I think of it like trying to estimate the size of an iceberg by observing the tip. Just because you know a little bit doesn’t mean you actually know about the scale. And there’s every reason to believe it’s quite extensive given how easily money flows from corrupt countries through USD and US persons and companies (eg the major bank that’s constantly getting fined for laundering terrorist and drug cartel money - either they’re the only ones and they’re making a killing providing this service anyway or they’re the only ones anyone is bothering to investigate, but that business is clearly lucrative to continue to engage in).
As you state, the size of the iceberg cannot be understood by what we can easially observe. While there is corruption in the US, it isn't really much worse than other places that are not known for corruption - though understand that the US has a lot higher population and so it might seem that way. (though often those other places are just hiding truth)
I thought you were being sarcastic here at first because, good lord, there is plenty of corruption here in the US (though those doing it used to care more about hiding it). The US, especially in its current state, is certainly not a place I'd describe with "almost no lying or cheating". I do understand that Russia is on another level, though, given the open assassinations and doing things like what was done to Navalny.
You've never been in Russia. There is no clear law abiding business there. That opens a lot of opportunities for those with some power. Corruption is one of them, selective punishment is another. I'm sure in most 3d world situation is not better, but they at least don't have laws to cheat and bribing isn't a crime.
The funny thing, is that people not from America say that there IS corruption, but at least it happens in the open. I think OP is saying the same.
How is that corruption?
A good definition from AI "Is when government officials misuse their power for personal gain or to benefit their friends or associates"
See for example Trump’s shenanigans, which are done in plain sight for all to see, but with few if any repercussions (a very brief selection: having foreign dignitaries stay at his hotel in DC while he’s in office; having the Secret Service stay at his resorts when he goes golfing; scamming the public with his family’s meme coins; etc)
https://en.wikipedia.org/wiki/Corruption_Perceptions_Index#2...
Are you living in an alternate world?
The amount of daily activities in the US that just work 99.999999% of the time that would have a corruption aspect in some other countries is mind boggling.
The closest analogy I can come up with is imagine if every money transaction involved cash tipping the parties involved. And that’s just the beginning.
I'd say we're slightly behind western Europe as far as rule of law goes, not really sure about the advanced east (Japan, Korea), and miles ahead of just about everywhere else (eastern Europe, Russia, Africa, China, etc). Yes, even with Trump in office, though he really makes me worry.
This is not slightly behind Western Europe. This is miles behind any developed country. China may be corrupt, but Xi Jinping hasn’t yet sold beans or cars via press conference.
It's not perfect, but you could do so, so much worse.
Being better than others really isn't the only thing that matters.
prior to this rule change, what you pay your programmers is just a deductible expense, so you owe taxes (in this very simplified example with no other expenses etc. etc.) on just $50k.
after the rule change, you can deduct only $50k of the labor cost (in this year), so now you owe tax on $250k.
there is a very good chance you do not have the cash available to make this payment.
of course, after 5 years, things all balance out and are effectively "back to normal". but you have to get through those 5 years first.
Consider some sort of logistics company. They might pay 250K for their hardware (e.g. vehicles), 50K in expenses, get 300K in revenue. Theyll be taxed the same as the startup building up their IT assets.
Sure, for heavily capitalized startups that are losing money, the rule change is not an issue. But for companies that manage to get to profitable status soon, even if it is only a small profit, the rule change can be devastating. A quick search for past HN articles about this will provide lots of example links to follow.
Each and every startup will have a year 0 where they're spending more than they earn, and under the new Section 174 they will only get to deduct 10% of their employee's salaries that year. In year two they get to deduct 20% of year 1's salaries and 10% of year 2's salaries, which is still 30% of what the established players will be able to deduct. By year 4, if they make it that far (which most startups don't) they'll finally be at 90% of a full deduction.
Add to that the fact that startups also by definition have a much higher rate of growth than established companies and you'll find that a startup almost definitionally will be paying substantially more in taxes as long as it remains a startup, because they only get to deduct an average of the last 5 years of expenses from this year's revenue in order to calculate this year's profit. That's fine when your last five years are more or less similar to this one, but it's terrible when you've been growing.
The net effect of this change can only be to disincentive startups and cement big, slow established players.
A big part of why America is as rich as it is in 2025 is Big Tech. If laws and regulations had prevented that industry from taking off by stifling the now-giants back when they were starting up, you may have been more equal today (you’d have fewer billionaires), but there would also have been a lot less wealth to go around, even for the working class
E.g. If a whiskey maker pays to build a distillation system, it can’t deduct that cost immediately. Because that’s a capital asset that generates recurring revenue. Software is properly treated the same way.
Further, software is the only type of R&D explicitly called out as required to count as R&D. Which means it should be taken as a given that most other industries are finding ways to count their R&D as anything else, while we've been intentionally given the short straw for some reason by having our specific field be the only one identified by name so as to leave no wiggle room. I'd say that definitely counts as being a special case. The section is even labeled "Special Rules".
The new rules would apply from 2025 to Dec 31, 2029:
https://www.crowell.com/en/insights/client-alerts/house-comm...
174 is so small it can't go through both chambers on its own so it needs to get attached a larger bill like OBBA.
It's unfortunate because it appears both sides want this repealed to allow immediate amortization of domestic R&D expenses.
Well, yes, but then everyone doesn't really want it, do they? Someone wants something else, and wants that something else enough that it is worth jeopardizing the supposedly universal goal for it.
If you've ever negotiated, I bet you've done the same thing of jeopardizing something you want in order to get something else you want. If you never do that, you'll make a lot of deals where you're riding the edge of just barely acceptable and the other person is taking advantage of you. But in this case, with a standalone law, doing it gets pretty rude and we'd be better off if nobody did it.
There's a minimum size for laws?
Code reviews for 1000 lines of code: LGTM
Omnibus bill packages get the same LGTM treatment where legislators don’t even read the whole thing.
Politicians were patriotic like you hope them now to be, they were worried about the rise of communism and were extremely attentive and focused and unified to making sure capitalism and free market works for the masses, that everyday westerners are enriched and have better social and health outcomes than their communist counterparts.
It did succeed to the point that Boris Yeltsin after dissolution of USSR was dumbfounded by just looking at american grocery stores that are affordable for public in comparison to the Empty shelves back at home [0]
However after the end of cold war they gave up on bipartisan, or helping society as “one nation” in almost every major western democracy. They filed every major new infrastructure build with red tape, red tape, bureaucratic nightmare. They made the economy as a pingpong ball to intentionally sabotage it for the incoming rival presidency/prime ministers, while benefiting themselves with unsustainable debt. They gave up all public infrastructure like highspeed rail, cheap transportation like Greyhound Buses across american cities, cheap housing, good housing.They gutted our manufacturing and industries, outsourced all our jobs with no better ones for those without jobs to replace them.
Now everything’s going to shit, and they wonder why people are starting to vote in populists and authoritarians, they were sold a great and good ideal of men and women, parliamentarians working together united to deliver the public with better outcomes for everyone in a democracy. Yet now they see them busy with personal enrichment, ideological wars, petty infighting, inaction on key issues.
And then they wonder why people are voting in and then tolerating objectively authoritarian dictators sometimes evil sometimes good who promise to steamroll changes as a monarch/dictator, just in hopes that they just ignore the democratic chaos and finally deliver the public something (even though often they also just personally enrich themselves or make the problems worse) we lost our prosperity, authoritarians promised us prosperity if we give away our freedoms now most of us are going to lose both at current trajectory. All because of petty infighting and laziness and lack of patriotism among politicians.
European and American society will need another cold war of ideologies with them on one side to actually defend and work for common citizens again, they wont do it until then, they’ll only do the bareminimum while continuing their petty fights and lectures as “leaders”.
[0](https://thefederalist.com/2019/11/13/how-a-russians-grocery-...)
We have been very close to record-low unemployment last year and the real median household income is higher than ever
Go look at the debt levels of an average american, and realise that greater than a majority of americans dont even have $500 saved for emergencies in their account.
The unemployment rate is a sham that doesnt even count underemployment and it cleverly masks and removes people who were looking for a job, gave up hope and now are no longer looking for a job.
Adjust that medium household income statistics for purchasing power in usa across last 40 yrs, you’ll realise wages are same or have declined in real value term’s when the total wealth in country has skyrocketed.
Look there is nothing wrong with others enjoying their life but if the majority doesnt feel like they have safe equal and sustainable life sooner or later they give up on the existing system, at that point a country risks a lot of instability.
Unemployment rate has been cleverly gamed and distorted as a statistics in every major country from china to europe to usa, you name it.
Look at the median household income in terms of debt servicing, mortgage servicing, final disposable income, net wealth/assets of average income
If you make the same or lets even say a bit more money/income than mom and pop’s gen but you pay 50% of your income in housing rent or mortgage in major cities compared to only 10% back in previous gen’s times how is that better ?
And college fees have skyrocketed by 6-7x in real money terms while wages have not, thats an expensive thing too for a lot of kids.
Pensions are not a thing.
Im not saying america is completely broken, america is awesome and is equipped to do much better than most developed economies and especially compared to europe in future.
But we must admit there are problems that are fomenting troubles that can end up blowing over if we as a society dont start rapidly fixing it.
That's why I said "real median household income". Real income in economics means PPP corrected and is up a lot. See: https://fred.stlouisfed.org/series/MEHOINUSA672N
I wholeheartedly agree on the housing issue though. The cause there isn't with top politicians or some evil cabal limiting housing but it's a local problem caused by elections of NIMBY candidates and local community having too much input on permitting while only a small group of mostly of older and wealthier NIMBYs show up to those meetings.
Even when a massive security funding bill was put forth the years after 9/11 to provide additional funding to NY, US ports, and other national security areas they had to pad the bill with funding to protect areas that wouldn't likely be targeted just to get support.
https://www.heritage.org/homeland-security/report/the-specte... (Yes it's insane that I'm linking to these horrible people)
That means even with a bill that is vital to US security, could be wrapped in patriotism, and at a time when NYers had sympathy from the rest of the country representatives were still selfish as fuck.
Arguably, that's the whole of politics: why should I give you something if you don't give me something?
The people involved are, generally, not deep thinkers, aren't aren't thinking much beyond their direct short-term advantage. The system selects against that.
It's even worse if you're a Republican. If a bill comes up for one specific item that would increase government spending but not in your state what are you going to tell local Republican voters?
Other attempts that come to mind: 1. Tax Relief for American Families and Workers Act of 2024 (H.R. 7024) 2. American Innovation and R&D Competitiveness Act of 2025 (H.R. 1990)
This article is informative: https://www.cebn.org/media_resources/section-174-sign-on-let...
I think the outliers are far more consequential than the averages in this case.
* or whatever the threshold is
Thinking about it, the US government is going exactly the same way of the Roman republic.
We're gonna conquer and annex Egypt? What an awesome time to be alive!
Just a reminder that Congress, even now, can rapidly act on a laser focus when it is sufficiently motivated.
In the US, 170 million people use TikTok. TikTok's US revenue reached $10 billion in 2024. US adult users spend an average of 53.8 minutes per day on TikTok. In 2024, TikTok was downloaded 875.67 million times.
(This data is going to include estimates. I am not going to quibble about the estimates, but whichever credible data source you choose will support the position that TikTok is not a niche outlet only used by a small segment of Americans.
Also, this data does not explore the number of Americans who earn a living by posting to the platform. Not interested in a values discussion about this, but banning the platform would suddenly cut off some Americans' income.)
Not a direct comparison, but CBS generally pulls ~5 million viewers during prime time programming. It's entirely likely that more people watch TikTok regularly than watch any TV network. For better or worse, TikTok is a very popular media outlet in the US.
This is "targeted" in the sense that it's targeted at essentially half of Americans and "tech" in the sense that every media uses tech.
It was higher profile because Congress decided it should be higher profile.
I saw let Trump’s ugly bill die and then a small fix up to the tax code could be this. Should be able to pass.
And I’m tired of pretending like we aren’t going to be beneficiaries
Every Congress increases the debt, we can acknowledge that the cuts they picked are going to wreck the lower class especially with the medicaid, we can acknowledge that it won’t meet its goals of cuts
but are you guys just scared to acknowledge its going to super charge things that you are a beneficiary of too? so busy saying it just benefits billionaires as if we’re trying to avoid guillotines. not gonna happen and many people here are going to try to take advantage of new programs
Regardless of whether it benefits our industry or socioeconomic status, it'd be incredibly shortsighted to just do all of that at the expense of the lower classes.
Congress can always pass anything else at any speed. This slow motion filibuster thing is a choice, and the powerlessness of doing anything about that choice just means everyone else should have a single they care about too to correct the laws and riders that shouldn’t have passed.
Really? You can’t think of anything you wouldn’t support in order to get this thing that benefits you?
wont be in a reconciliation bill
wont be supported by the courts
and the rest of my observation about how Congress can deal with and has dealt with riders after the fact still stands
I'm fine admitting that I would benefit greatly from this bill. I also hope to heaven it doesn't pass because an additional trillion dollars to suit me sounds asinine. I don't need help.
And yet only one party campaigns on fiscal responsibility, debt concerns, and reduced spending
So now it seems its like a pseudo tariff against any other freelancers and producers for software outside of US.
A bankrupt company can still sell their computers. Selling you code, lol -- code is more of a liability really :)
I am nitpicking but since a microscope or a computer is a tangible asset, the correct term is depreciation. Amortization applies to intangible assets.
I have a few friends who specialize in it with 2 ongoing contracts for splitting off pieces of software.
It's important to consider that lawmakers (who are not well informed or downright stupid) might think code has intrinsic value because of media married with a lack of real-world experience.
This was a Blue Ribbon School 1992-1993 yup. https://www.ed.gov/sites/ed/files/programs/nclbbrs/list-2003...
What is that? Software sold by companies that have HQ in the US? Or software created by someone in the US? Because if it is only the first, good riddance.
Didn't AAPL, GOOG and FB all create products _before_ they had any taxable income? Would this change have had any actual impact on their foundings?
Most likely neither: It is its massive trade deficit, the one it strangely wants to get rid of now, that has allowed US consumers to consume more than they produce (i.e. you can take something with no real expectation of having to give anything back in return). Which, as it relates to tech, has enabled offering services for what is effectively free to dominate the market. Nobody else in the world can compete with that.
> Didn't AAPL, GOOG and FB all create products _before_ they had any taxable income?
Wouldn't you say they had no taxable income because of it? If Facebook brought in $100,000, and paid $100,000 to developers, then there would be no taxable income under normal regimes. But if the developers were not tax deductible, then that $100,000 in revenue would be taxable, even though the bank account is empty. This isn't nearly so simple, but it has changed the calculus in a similar way. The business models of old no longer work because of it.
It applies to things like configuring your internal tools too. Good luck at audit time.
I don't have an answer for you. But I support your intrigue.
DARPA was working on Project LifeLog starting in 2003, was to be "an ontology-based (sub)system that captures, stores, and makes accessible the flow of one person's experience in and interactions with the world in order to support a broad spectrum of associates/assistants and other system capabilities". The objective of the LifeLog concept was "to be able to trace the 'threads' of an individual's life in terms of events, states, and relationships", and it has the ability to "take in all of a subject's experience, from phone numbers dialed and e-mail messages viewed to every breath taken, step made and place gone".
The program, at least officially and publicly, was cancelled on February 4th, 2004, the exact same day that Facebook was founded.
https://en.m.wikipedia.org/wiki/DARPA_LifeLog
https://en.m.wikipedia.org/wiki/Facebook
You can call it a coincidence if you want, I just tend to be very skeptical of "coincidences" where massive, powerful, unaccountable, immoral, unethical institutions like the US intelligence community get exactly what they want at the expense of our civil liberties.
[0]: https://medium.com/insurge-intelligence/how-the-cia-made-goo...
This is frustratingly accurate. Through a zero sum political lens it'd be a handout to "big tech," so many politicians argue for keeping this on the books, but in reality S174 deeply affects small companies, new companies, boutique agencies, and individuals who want to consult or start smaller operations. I worked for a ~20 person shop that was gutted by this tax code change. It completely changed the affordability of talent.
Given the choice, Amazon would rather spend 100% of its profits on itself than allow any of its profits to be paid out in taxes. Section 174 was implemented without a minimum tax on corporate profits before voluntary deductions such as research. Therefore, it’s exploitable and all companies ought to hire and fire staff to ensure their profits show as 0%.
This tax code defect is now closed by accident, but could have been done much more intelligently than it was. Oh well.
(EDIT: My first sentence is potentially confusing when I reread it later. To restate: section 174 was defective as implemented due to the uncapped 100% deduction, but the concept of a significant research exemption is still excellent. Just need to close the effective 0% corporate tax rate loophole.)
What this change effectively did was make software developers significantly more expensive, without increasing the amount those developers get paid.
Either way, the total cost of employment is higher for the employer than the after-tax income of the employee.
If corporations were able to operate in a high trust fashion and actually take responsinility for their tax burden properly, instead of trying to shirk it, then this policing wouldnt be needed, but we dont live in that world
Now, there are other tax schemes that aren't based on how much an employee is paid, but that is a completely different matter.
And FWIW sales/vat tax is somewhat similar. It doesn't matter if the buyer or the seller pays the tax, either has the same effect on the total amount paid.
In the US, software is one of the few remaining ways to achieve the American dream. I came to this country to work hard and earn money.
EU has better societal benefits than the US (access to healthcare, education, mandated vacation time (often starting at 3-4 weeks).
The vast majority of people care about living a life without suffering. In the US this is only reserved for the rich it seems.
I think you're referring to Nordic countries which consistently rank as the happiest countries and also have relatively high tax rates (4 of 5 Nordic countries rank in the top 11 tax rates globally. Norway has oil.) The high taxes that "make everybody poorer" also fund extensive social services that contribute to happiness.
However, this conversation is about making (a class of) workers poorer by using tax policy that puts downward pressure on their salaries. Tax revenues will stay the same, so social services will not be increased. Economic inequality increases because the workers became poorer, the C-Suite and Board Members don't.
Yes it sucks for developers, but does it make any difference for any other employee? Why does Joe’s plumbing have to pay those taxes, but Jane’s AdTech company doesn’t?
Sure, there are benefits to investing in R&D in general, and tech has fueled a lot of growth, so incentivizing it has likely paid off for the whole economy. But will that forever be true? Maybe?
Why do I, the hardworking tax payer, have to subsidize Joe Plumber, who already has a big house with a pool?
But with the change, the cost of R&D employees is now only partially deductible (right now, you can eventually deduct the full amount over the course of several years), and software development has to be considered R&D.
And why is this bad, exactly? Money will be spent and will go back into the economy. Amazon will have to use the funds to build new offices, datacenters, do research, whatever.
And even if execs give themselves $10^11 USD in bonuses, they will be taxed as personal income, at even higher rates than corporate income.
I’m not sure what the answer is. The former is likely to drive some innovation, which I’m sure varies by company. Where the latter could also unlock innovation by giving the bottom-quartile of earners a chance to improve their situation.
Growth has its own problems of course (I don't want to estimate the health impact of Coca Cola), but it's a prerequisite of a country not falling behind others.
Yes. Also, the salary will not go _only_ to highly-educated people. For example, if Amazon decides to build a new distribution center, it will employ blue-collar workers to build it, not software engineers.
> Or is it better for the money to go back into the economy through taxes, then disbursing the benefits to lower-income benefit programs?
No.
> I’m not sure what the answer is.
The answer is pretty clear: invest money into the private sector, rather than divert it into the Federal budget. Private actors are more efficient at allocating funds than the government.
I'm not against social spending, it's a necessary evil for any real state. Pure libertarianism leads to dystopian outcomes. But it should be understood that it's a very real artificial inefficiency that is imposed on the economy.
There are also situations where additional social spending is necessary, but they are VERY easy to detect: when your interest rate is near zero.
State spending is not a panacea.
If you want a static economy that supports gradual decline (preferably with a mineral-based income stream), then a lot of state spending is fine.
"on itself"???
You mean it would rather spend its profits on hiring more developers than sit on it? That sounds great, doesn't it?
The deal is that you can delay taxes by reinvesting (and either make the government more money at the end or lose it all if you were a fool, but you gain nothing by losing it all) but you cannot skip them when it comes to taking the profit out. The entire point of it was to promote investment into businesses which has kind of been a crucial factor in international competitiveness since the Industrial Revolution. Remember the fall of US Steel? That happened because they didn't reinvest.
Imagine you are BigCarCo, you make cars. The salary for your factory workers that build cars to be sold is an expense, incurred in that year, to be matched against the revenues earned by selling those cars. But the cost to build the factory needs to be amortized over the lifetime of the factory - and that's true whether you buy a factory from BigFactoryCo or hire a bunch of people to build it.
Now, I'd argue that a) most software dev work is closer to the factory worker than the factory builder and b) the lifetime for most software is less than 5 years, but the idea that some cost of developing software should be amortizable is pretty reasonable.
Mostly developing software is about automating things that are expensive and slow to do manually. So, to stick with the factory analogy, it makes the factory a bit better and more efficient. If you stop doing that because it is too expensive, you fall behind with your factory.
Of course the whole issue in the US is that it outsourced much of what happens in factories to China and software has become one of the main things the country runs on.
Should they be able to expense all of those items that provide value for multiple years in a single year?
Does software development provide value exclusively in the year it's done? Or over multiple years?
The only possible justification for the Section 174 R&D changes is that employees working in R&D theoretically are producing something which does have a resale value, so there's a small tax dodge enabled by direct-expensing your R&D costs but then ending up with an infinitely-copyable asset that came out of it.
If that's what you're saying, then I'd reply to that argument by saying that paying humans to design new things has historically been a business strategy that the government has wanted to incentivize in a way that buying and holding physical assets has not been. I've seen no justification for the government deciding that from 2022 on we should actively discourage R&D, it just seems to be a mistake.
Same as if they sell the software, either as a copy or ownership.
But not being able to take salary as a business expense seems like as thing that would happen if software in and of itself has value, which is largely does not.
To me it seems like a thing that just wouldn't happen. Forget software.
Say you own a McDonald's, and as part of your operations you have some people on staff to take orders, prepare food, and clean the bathrooms. Why are their wages not a deductible business expense?
If the answer is "they are, don't be stupid", then... what exactly was the R&D tax break?
Removing a specific tax exemption to create a level playing field isn’t discouraging R&D.
That’s the thing, every year such exemptions exist the US taxpayers are handing out money. Just because we subsidize say EV’s or Corn doesn’t mean that’s the baseline forever more.
If the end result of removing this exemption is that there is less R&D done in the US, then yes, empirically, removing the exemption discourages R&D. Assuming the mass layoffs were indeed fueled by the removal of this exemption (I don't know if the article is correct or not), then it is reasonable to assert that it is true that removing the exemption has reduced the amount of R&D done.
Or, you could also say that the "default state" is some low level of R&D, and the tax exemption encouraged and incentivized more of it.
Either way you slice it, though, the status quo prior to 2022 was some level of encouraged/incentivized R&D. That status quo changed to encourage/incentivize less R&D, and companies have followed these lack of incentives and have fired a lot of their R&D staff. Is that a good thing for the US? I can't see how it could be.
Not clearing a road means fewer people use it, but you not going out with a shovel to clear a public roads isn’t you discouraging their use nor is you canceling your plans to clear said roads.
Having zero subsidies is the default situation.
If Amazon delivered you a TV yesterday that doesn’t suddenly become the default where you can expect another one today and every day after that.
The US government does a new budget every year, making every year a new ballgame.
And my point about there being no natural state of subsidies is more important.
So if your argument is some subsidy will probably happen next year sure, but individual subsidies change over time. No specific subsidy is the default.
For any specific situation the default is no subsidy.
With millions of situations some of them are not going to be at the default.
In 500 years will some specific things be subsidized? Vs in 500 years will something be subsidized?
Restaurants weren't competing with R&D-heavy corporations in any way. R&D-heavy corporations competed with each other, on a level playing field where all of them can build new stuff without having to pay taxes on negative income in their early years.
The only change this has made is un-level the playing field in favor of old, established corporations that already have the revenue streams in place to fund their new R&D projects.
Taxpayers who end up with the bill and every company is competing for workers, office space, etc. Incentives across decades shift what people study, what business get created, etc. R&D sounds great abstractly, but it’s not some panacea where unlimited funding results in pure gains.
The economy is generally more efficient without central planning, and dumping money into anything that can be classified as R&D is simply inefficient.
My company is all-remote and none of us would work for a company that isn't doing R&D. Most of an entire profession now has to be amortized over 5 years.
> The economy is generally more efficient without central planning
The old tax code isn't "central planning", it just had the very reasonable property that the government wouldn't force you to pay taxes on a loss.
This scenario [0] is now possible. It wasn't before. That is a catastrophic level of stupidity, and you can't justify it with invisible-hand nonsense.
So you’d just be unemployed for the rest of your lives? That’s a possible edge case not worth adjusting the tax code for, but it seems unlikely.
> wouldn't force you to pay taxes on a loss.
R&D is an investment, you only pay taxes if the rest of the company is profitable.
If your company is spending 1M / year on R&D and not adding 800k in long term value then in theory you’d be correct. But at that point you either aren’t doing R&D, or are doing such a poor job of it that the government shouldn’t be encouraging that activity.
As a practical measure it’s really not. The transition is difficult for existing companies, but a future startup is going to be minimally impacted.
Year 0 you’re unlikely to have any profits, future years you have multiple years of R&D to offset with.
But let’s assume the worst case. Taxes are 21% of profits and at minimum deduction 20% of R&D so the theoretical maximum distribution is 0.8 * 0.21 = 16.8% increase in R&D expenses if profits = R&D year 0. But that maximum case is only year 0, you’d be able to fund R&D with those same profits and easily be profitable after that.
If profits where say 40% of R&D in year 0 you’d have to pay 16.8% of 40% so an increase is only 6.72% hardly likely to tank the business if it’s already generating that kind of income year 0, and again after that point you’ll deduct for multiple years.
More realistic numbers are going to be really low multiples here, more importantly they represent significant investments not operating expenses.
You're only unlikely to have no profits if you have no revenue. And you only get to break even 5 years in, which most startups will never reach.
In practice what is likely going to happen is that we'll see more and more startups deliberately avoid revenue in the early days. More and more free tiers followed by rug pulls when revenue actually becomes an asset rather than a liability.
There is no unplanned economy, only different outcomes from better or worse plans. And I'm having a hard time imagining a worse plan than one that intentionally disincentivizes businesses from adopting a sustainable business model early in their lifetime.
It’s much easier to have revenue than profits, set the price lower and suddenly zero profit. Some company avoiding profits because of the 21% tax on profit like that would be mathematically dumb.
> There is no unplanned economy, only different outcomes from better or worse plans. And I'm having a hard time imagining a worse plan than one that intentionally disincentivizes businesses from adopting a sustainable business model early in their lifetime.
There’s zero advantage to avoiding revenue or profit here. You’re tilting at windmills.
You simply need less investor money for R&D when other parts of the company are profitable. As to central panning, the mistake you just made is mitigated when many people are all independently making plans. Governments always need to get it right, the market is fine if some people get it right and therefore can reinvest in their success.
When the non R&D portion of the business is profitable they should start paying taxes. Assuming a company isn’t miss classifying operations as R&D it shouldn’t be a major issue.
This will of course discourage “riskier” startups and dampen innovation and give more power to profitable incumbents who will have less incentive to innovate. (Perhaps the result of this looks like Europe?)
You’re only paying taxes if the business is profitable ignoring investments like R&D spending.
Section 174 specifically made those R&D costs “ignorable” from a tax standpoint. When it ended R&D costs could no longer be used to offset income.
As to my other point, the highest risk category of startup has zero customers for years they also have zero revenue, zero profit, and zero taxes to pay here. On the 5th year they can deduct R&D from each of those years making the net effect on them minimal vs a startup with profits on year 0.
Big fat "citation needed" there. I know you chose the term "central planning" to try to invoke the communism boogeyman, but overall, free markets do not exist, and have never existed. Governments constantly use various levers (taxation being one of them) to encourage or discourage certain kinds of business activity. This is nothing new, and I find it laughable to suggest that this kind of thing should be done away with entirely.
Markets operate on revealed preferences, which is just a massive advantage in terms of giving people what they want. There’s definitely a role for governments in economies around information asymmetry, safety, etc, but allocation of resources specifically doesn’t work well.
§ 1.263A-1.a.3.A indicates that it's in scope: Real property and tangible personal property produced by the taxpayer
§ 1.263A-1.e.2 specifies that Direct Costs are subject to capitalization: Producers. Producers must capitalize direct material costs and direct labor costs.
(I'm just a taxpayer, not a tax lawyer or even an EA or CPA.)
What tax code references or treasury regulations did you find to support your belief that construction labor can be expensed in the year performed?
Under GAAP, construction labor is not immediately deductible as an expense in the year it is incurred if it relates to the construction of a long-term asset (like a building). Instead, it is capitalized as part of the asset's cost and then expensed over time through depreciation. Only labor costs not tied to asset creation (e.g., routine maintenance) are expensed as incurred.
Construction labor is generally not deductible as an expense in the year incurred if it is related to the construction or improvement of a capital asset (like a building). Instead, under the U.S. tax code (IRC §263A), these costs must usually be capitalized and recovered through depreciation over time. Exceptions may apply for certain small taxpayers or repairs.
If software lasted longer than 18 months or was otherwise tangible, this could also make sense.
Imagine a restaurant spends money on employees to build 100 tables, 500 chairs, etc. Those tangible goods would be capital assets, so the labor costs of building them would also be capitalized.
This change to the tax code is just bringing the tax treatment of software development in line with how every other industry is treated. IOW, it was closing a loophole. A very valuable loophole, whose beneficiaries used it to get filthy rich, and bragged about how their industry was so much more valuable than everything else, even though a lot of that value was due to the exception software was getting in the tax code.
Notably, in the current version of the budget as of 6/6, the loophole is temporarily coming back, though given the Musk-Trump feud, it's very possible it will get pulled again to try to mollify the hardline deficit caucus.
Labor that operates the business day-to-day would be an expense, labor that creates a capital asset is more complicated.
I happen to think most employee time in software dev is more on the day-to-day operation side, and should be expensed, but I can see an argument that some should (or could) be amortized.
The difference of course is that you'll have a truck or oven that can be sold. If you could count the full value in the first year then you could sell and buy one each year to reduce your taxes without actually changing anything.
Thus if we want to go that route for software the salary of the R&D employees should be counted against the value of the software they created (As in, the value were it to be sold wholesale to another company). The time spent by the employees is not an asset, once you pay the employees for their time it's gone even if they generated nothing of value. The actual value is that of the software, but that's obviously not easily assigned a value.
Sure, you can only deduct a certain percentage of the asset's value as an expense each year, but your cash expenditures to pay for it are also spread over a multi year period.
“if we aren’t rich then no one else will be”
I do not like many things in BBB, but I am glad to know there is at least something in there that I can be glad for.
If the other party allows these cuts to expire, why wouldn't you blame that party?
The better question is why the tech industry seemed to forget that the first Trump administration was terrible...
Temporarily, for 5 years.
Now Trump second round fixes it, but expires in next (presumably) Democrat administration.
> tl;dr on Section 174, Research & Experimentation costs went from being fully deductible in the year incurred to being deductible over a 5 year period.
Larger tax bills and a tightening on what roles/activities are deductible as R&E are likely what OP is pointing at with his comment.
To the best of my non-inside baseball research, Section 174 changes were simply one part of a package of revenue generating measures to offset the large tax cuts from the broader tax act they were a part of.
The changes came from The Tax Cuts & Jobs Act of 2017 that was introduced to the House of Representatives by Congressman Kevin Brady (R) Texas. The bill passed both houses of Congress along party lines. Then President Trump signed the bill into law. Section 174 changes did not take effect until 2021.
https://news.ycombinator.com/threads?id=heymijo&next=4332098...
Before this change, tax for software development was calculated against:
* Profit = Revenue - Expenses
And software developer salaries fell neatly into Expenses unless you were looking for an R&D tax credit.
After this change, tax for software development is calculated against this new equation:
* Profit = Revenue - (1/5 * YearlyExpenses[-1]) - (1/5 * YearlyExpenses[-2]) - (1/5 * YearlyExpenses[-3]) - (1/5 * YearlyExpenses[-4]) - (1/5 * YearlyExpenses[-5])
Which means that if you are in Year 1 of operation, your values for YearlyExpenses[-2:-5] are all 0 and you only get to deduct 1/5 of your actual operating costs for the year from your "profit". So you can be in the hole but still owe taxes on your "profit" for the year because what you spent money on was classified as R&D.
Why should money spent on software _development_ not have to be deprecated over time like other money spent on _development_?
I get that it sucks from a cash flow standpoint but the same is going to be true of other R&D expenses. It's just that we're more exposed to this specific R&D expenditure and not others.
> Originally enacted in 1954, Sec. 174 has historically allowed taxpayers to deduct SRE expenditures in the year incurred. Its original aim was to level the playing field for small businesses, those without dedicated research teams, that may be unable to deduct product development expenses under Sec. 162 because the costs were not ordinary and necessary expenses paid or incurred in carrying on a trade or business
Straight-up, any deviation in the tax code for a special group is always a subsidy.
Now, after this change, software is a special group singled out, a deviation in the tax code specially carved out for us to make our field specifically the exceptional one with no wiggle room. No other type of development is named in Section 174 to explicitly require companies to amortize.
So who is that subsidizing now?
Uh sure, with this change software would subsidize other R&D. Prior to the change anybody not eligible for Section 174 was subsidizing Section 174 recipients.
Subsidizing R&D is probably a good idea but let's call a spade a spade here. Additionally, subsidizing small business is good policy because they're by the numbers job creators while large businesses are job destroyers.
And, as a sibling points out (and as I pointed out in a comment at the top level), software is in this regime singled out from all other possible R&D expenses, making it particularly vulnerable. A skilled accountant/lawyer can probably turn big chunks of other R&D expenses into something that doesn't fall under 174. No amount of skill can do that for software, because we're singled out.
Small business owners are very impacted by the R&D schedule.
It's clearly not enough to cover all of the expenses that are required to generate your "revenue", but it's a gesture in that direction.
It is sort of between the two in my view and is highly dependant on what the software engineer does each day.
Are they fixing a bug, helping a customer, refactoring? I think that is operational.
Are they building out a new feature? That is capital. But it is not quite like buying equipment because it adds no value to the books. So depreciation seems off.
But the same issue applies to other roles. Is a sales persons day trying to land a sale, or trying to develop the business.
It all comes down to "intangible assets" and whether you are making them.
I think it is easier to just say if you are paying someone to work then you can deduct. There must be better ways to claw it back.
The whole reason for most business to exist is to use operations (operational costs) as a lever to increase the growth and intangible value of the business.
Consider a contractor in a software maintainer role; accounting for this as capex makes zero sense.
It’s a fudge to make projections look better to allow congress to pass a budget neutral reconciliation bill with the intent that congress would remove the fudge before the consequences triggered.
Governments in general are pushing for capital gains tax normalization where instead of requiring a taxation event the capital gains tax would be levied yearly. In such a scenario the only difference remaining would stem from the difference taxation rates.
You’re alluding to wealth taxes, right?
Because taxing unrealised gains are wealth taxes.
Or maybe I’ve misunderstood?
No, wealth taxes are a tax on retained wealth (a stock). Taxing unrealized gains is a tax on income (a flow), it just changes the point at which taxation attaches from a realization event to the actual gain.
Yes, you have. You have an asset of greater value which you can leverage in a number of ways without liquidating it and "realizing" the gains. That's a real gain, with real value.
> you could be taxed over and over again
Only if you make new unrealized gains.
> and if the stick drops or hits zero then what?
Then you have a negative unrealized gain, or, equivalently, an unrealized loss. If you are taxing unrealized gains instead of taxing gains when realized, then the natural assumption would be, just as is done with taxing gains at realization, that negative unrealized gains are either offset against current income or against future unrealized gains, and so effectively create (considered on their own) negative (current or future) taxes. The simplest form of this is to offset only against future gains, by the simple mechanism that when gains are recognized for tax purposes, they adjust the basis value of the asset, and when unrealized losses occur, they don't effect the basis value at all, so you don't have a taxable unrealized gain again until the market value exceeds the basis value established at the prior peak.
More complex versions would allow you to offset some or all of the unrealized loss from the prior basis value against current income of other forms, but the amount of that offset would reduce the basis value of the asset.
Most laypeople grossly conflate notional and real value. Taxing notional value massively inflates the adverse impact of tax incidence on expected returns relative to people’s casual intuition based on the relative tax rates for realized and unrealized gains.
A tax on unrealized gains is in effect a way of laundering a steep tax rate so that it looks “small” and therefore reasonable to the unsophisticated.
No, its an actual thing, measurable by some mechanism. Otherwise, this would be a non-discussion, as taxing it would be impossible, not a possible thing that we can argue about the merits of.
> The notional value is often not remotely realizable.
Whether it is or is not immediately realizable is immaterial to the desirability of taxing it; it may be material to designing the forms of taxation that should be acceptable. E.g., if the difficulty of realizing the value is, across the tax base, likely to making collecting the tax in cash or equivalents difficult, it would argue for permitting a fallback option for the tax to be collected in-kind, e.g., by the taxing jurisdiction acquiring a proportional interest in the asset equal to the share of the value of the asset represented by the taxes not paid by other means.
> A tax on unrealized gains is in effect a way of laundering a steep tax rate so that it looks “small” and therefore reasonable to the unsophisticated.
If you allow carry forwarded losses, even just by the simple method of adjusting basis values, and include taxes on realized gains (and carry forward, offsetting against current income with perhaps a negative net, etc., for realized losses), then taxing unrealized gains is identical to taxing realized gains if the gains are eventually realized, but simply avoids the ability to find maneuvers to benefit from leveraging the value of the asset without paying taxes by avoiding realization. It doesn't make a "steep" tax rate look small, it makes the tax rate look like exactly what it actually is, unlike taxing only realized gains, which makes an effectively non-existent tax on capital gains look like something more, when people can benefit from assets without realizing the gains.
Being difficult to assess value is a problem they’ll make you pay an accountant for and punish you if you get it wrong, it’s not going to stop them.
Even in the case of real estate, a large amount of value is locked up in extremely non-liquid markets. You might get a vaguely representative market-clearing transaction once per decade, with high price volatility that makes it nearly impossible to predict what the next market clearing transaction will look like. I’ve owned assets in these types of non-liquid markets; differences in subjective valuations can vary by an order of magnitude and there is no evidence from the market to support any of those values.
If you only include extremely liquid markets for tax purposes in order to make valuations vaguely plausible, assets will be made non-liquid such that they are excluded from consideration. Ultimately this is why taxes on unrealized gains have been a challenging proposition in practice. We have no way to accurately model realizable value for the majority of assets and current simple approaches produce extremely wrong estimates a substantial percentage of the time.
Of course this is a prediction of something that hasn’t happened before but looking at the chess prices move this does appear to be an intended destination.
tl;dr: Many assets have no meaningfully assessable fair market value. These are investments with extremely long and indefinite time horizons before the asset value can be assessed in a reasonable way. You can look at it as a peculiar type of risk capital portfolio with an extraordinarily long time horizon.
The unrealized values are a fiction. There is significant value in treating values as unknowable when they are, in fact, unknowable. Forcing people to make up a fake valuation creates a lot of adverse incentives.
Then instead of taxing the gains, you'd accept the government nationalizing the assets by eminent domain and paying fair compensation that was significantly less than the "fictional" unrealized value?
Or if someone unlawfully deprived you of the asset, you'd accept as restitution or seek as civil damages for the loss something significantly less than the "fictional" value?
Or, when it was no longer an excuse to avoid fair taxation, would that "fiction" suddenly be a lot more real to you?
It’s much easier to do because there is no disputing the assessment since the person implicitly agrees to the valuation. And it allows people to forgo realizing any benefit from the unrealized value at all to avoid taxation.
Say take x% of the top of the money lent to someone who uses their unrealized gain to secure a loan. Make the money paid count against any tax they owe if they sell the asset later.
Take the value of the asset assessed by the bank and the price paid for the asset to find the total value that is unrealized gain.
Divide that by the total value to get percent of collateral that is unrealized gain. Multiply that by the loan value. Then multiply that by the tax percentage.
All you need is for banks to report secured loans to the IRS and it’s easy.
But if those skyrocket in price from tax, they'll be more subtle about convincing banks they're good for the money and pay a slightly higher rate for unsecured loans.
Or maybe they'll just treat the asset securing the loan as having the pre-gains price. Get the bank to agree it's worth at least what you paid, with no further analysis.
If you try to plug those loopholes you lose the "much easier to do because there is no disputing the assessment since the person implicitly agrees to the valuation" factor.
That’s no different than if the asset had no unrealized gain at all.
>they’ll be more subtle
It only takes a small rise in interest rates before it’s cheaper to pay the tax—assuming the tax isn’t outrageous.
Unsecured are much riskier because of the way unsecured creditors are treated in bankruptcy, so they already have higher interest rates.
It would be very easy to tweak bankruptcy laws to make unsecured loans over a certain amount a bit riskier to increase the delta even more.
We also already have regulations governing how banks assess creditworthiness, and the percent of their capital they can lend unsecured based on risk. As well as the amount of unsecured loans they can make to signal individual. If necessary tweak those values.
Another easy way is to add a surcharge to large unsecured loans where the loan amount exceeds the taxpayer’s assets based on acquisition price by some large margin.
None of those impact implicitly agreeing to the valuation and they are all pretty easy to do.
It lets you get loans based on 100% of your pre-gain money with zero taxes paid, which I think is too generous. You wouldn't do that if it was actually all your money. It mostly fits the idea of only taxing the "used" money, but not entirely, and I don't really favor that idea in the first place.
> It only takes a small rise in interest rates before it’s cheaper to pay the tax—assuming the tax isn’t outrageous.
15% tax is pretty big. And if we put capital gains back in line with income tax it would be double that.
> Unsecured are much riskier because of the way unsecured creditors are treated in bankruptcy, so they already have higher interest rates.
If the unsecured loans only go up to 90% of the post-gain asset value, that's not much riskier, is it?
> We also already have regulations governing how banks assess creditworthiness, and the percent of their capital they can lend unsecured based on risk. As well as the amount of unsecured loans they can make to signal individual. If necessary tweak those values.
Yeah okay we could stop unsecured loans from happening. That seems awkward though.
> Another easy way is to add a surcharge to large unsecured loans where the loan amount exceeds the taxpayer’s assets based on acquisition price by some large margin.
I don't like this one at all.
You already paid taxes on the money you used to buy the asset. You aren’t using any part of the unrealized gain.
>You wouldn’t do that if it was actually all your money.
People take out loans secured by assets that haven’t appreciated all the time, they even put up assets that haven’t appreciated depreciated as collateral.
>only to yo to 90% of the post—gain asset value
Unsecured creditors come last in bankruptcy. They routinely end up taking pennies on the dollar. That’s the extra risk of making an unsecured loan vs a secured loan and the reason interest rates on unsecured loans are generally somewhere around 20% higher.
It would be very easy to some tweaks to bankruptcy law to increase the difference.
>stop unsecured loans from happening
We don’t have to stop them, but I think stopping unsecured loans over some large value would be a lot less problematic than taxing unrealized gains.
>15% tax is pretty big
It shouldn’t be the same rate as capital gains. You’re not getting the same value as if you’d sold the asset because you have to pay back the money with interest.
Even at 15% you only need to get the delta between a secured and unsecured loan to 3 points before the additional interest costs more than the tax.
>I don’t like this one at all
Well I mean if you don’t like it at all.
Are you oblivious to the extensive litigation that occurs in cases like eminent domain because there are substantial differences of opinion on even the notional value, never mind the realizable value?
Notional valuations are fiction, everywhere and at all times. Treating them as some kind of objective reality is just enabling a lot of abuse and motivated reasoning.
Since this is done on annual buckets it's very common to try to move items in both columns between years to minimize tax.
It is if the only thing your company does is create software. No operations, no sales, no physical assets to purchase sell or manage.
I used to work at a small startup, and most of our spending went toward engineers’ salaries. If we had to amortize that over several years back then, I don’t think we would’ve made it.
It’s surprising how a single line in the tax code can quietly make it harder for small teams to hire. Makes me wonder how many other policies are silently shaping things behind the scenes.
This provision can and does lead companies to owe significantly more in taxes than they make.
The only reason it hasn't been bigger news, is because most companies are pretending it doesn't exist and just sweeping it under the rug, hoping it will get fixed before enforcement gets serious.
Why pretend that it doesn’t exist? Why not vocally lobby for a change in the tax code?
There is very little pressure on elected officials because big cos can afford it and it bankrupts their tiny future disruptors.
Why would you let it be fixed?
For example, rising interest rates I'm sure also independently contributed. I would be interested to if anyone has gotten a sense of exactly how much this has contributed.
AFAIK it was also affecting more freelancers outside of US since amortisation is 15 years. For EU citizen IMHO this is equivalent of US putting tariffs on outside world. I wish EU at least try to fight back and revenge on US Tech by increasing taxes or also making all US tech bought by EU companies to be 15 years amortised so they have taste of their medicine.
Also, finally programmers with the right to live and work in the US catch a break: salaries for US-based programmers can be amortized over only 5 years as opposed to the 15 years of non-US programmers.
It has effectively become a lot more expensive and difficult to employ a programmer. Once this change went into effect we started to see hundreds of thousands of layoffs.
Then tech executives started aggressively talking up how you could use AI to write code instead of having humans write it.
Now of course reducing headcount and the associated expenses and replacing them with a bot sounds tempting to executives no matter what. But it sounds REALLY tempting when you've been on a hiring freeze since 2022 due to the fact that you can no longer deduct employee salaries in the year you pay them out.
Bear in mind that both Republicans and Democrats say they want to fix this and haven't done so due simply to gridlock and government incompetence.
I think most software businesses are taking a wait and see approach. Don't hire until this thing gets fixed. In the meantime, double down as hard as you can on automating those programmer jobs out of existence, in case the law never gets fixed.
Section 174 is the root cause.
Can someone explain this? What taxes do unprofitable US businesses owe that this would be deducted against?
In 2024, your business has $1m in revenue and has $2m in expenses. 100% of these expenses are R&D salaries (engineers you hire.)
Your company loses $1m/year. (You brought in $1m and spent $2m.)
Under the old rules, you'd owe no tax because you were unprofitable.
After Sec 174, what the IRS now says is:
You had revenues of $1m. But you only had $400k in expenses (because you now have to spread that $2m in R&D expense over 5 years).
So actually you had a profit of $600k! And you owe tax on that $600k profit (~$120k)
So you now have an additional $120k tax expense, making your business even more cash-flow negative.
.
Amusingly, if you're pre-revenue, none of this matters (you have no income at all, so it doesn't matter what your expenses are.) You get hardest hit by this change when you have some revenue and when you do a fair bit of R&D.
That is surely wrong? Just because those salaries are for R&D?
I could understand if there was some additional tax break for R&D which was being removed. I can't see how basic operating costs cease to be expenses.
Buying a truck is an expense, as is buying gas for the truck. But the former you have to amortize over x years, the latter you can expense immediately.
The law used to be "employee salaries for software are like buying gas" and now it's "employee salaries for software are like buying a truck".
The rationale behind amortization isn't exactly the idea that the asset can be sold, it's that the asset is producing revenue over multiple years. For software, the asset is the codebase.
Let's say you hire a single software dev, for one year, and they write Excel++, which you can sell for the next ten years. It would be entirely appropriate to amortize the cost of creating that software over those ten years, based on the matching principle (a fundamental idea of accounting, matching expenses with revenue).
The issue in the real world is that's not how the software industry actually works, 99% of the time.
What would be a more appropriate model from accounting perspective?
You must have misphrased what you intended to say. If what you wrote was true, a software company's most valuable asset would be the specific programmers in its employ. If true, average tenure of a programmer would be way longer than 1.5->2 years as companies worked really, really hard to keep their most valuable assets from walking out the door into the doors of another company just to get reasonable pay increases.
Perhaps your opinion is influenced by doing post-collapse-sales of a whole bunch of software houses that built just plain bad software? I can't see why else you'd be selling "software IP" independently of the rest of the business.
Anyway. Given that information, how should you have phrased what you wanted to say?
On the other hand, I've worked almost exclusively on software R&D for decades and seen the loss of a single person effectively end a project even when the software was essentially finished. Software R&D is about developing abstract knowledge, concrete implementation code is just a useful byproduct of that since R&D is typically motivated by a specific novel requirement.
If the software IP that results from R&D is not core to your business or a competitive risk, there is money to be made by licensing it. I've licensed this type of IP to big tech companies a number of times. If you are not actually doing software R&D, you are unlikely to be in a position where this is a possibility.
In almost every IP sale and licensing deal for software R&D I've seen, the value of any code is almost entirely conditional on retaining the services of person(s) that designed and wrote it. The entire "acquihire" phenomenon is an explicit admission of this. This is true even when the code is in a mostly finished form. Companies are buying capability, not revenue, so the code can't be a black box to their engineers. Companies usually spend more to acquire people with the code knowledge than the actual code.
The practical reality is that it is difficult to reverse engineer abstract knowledge from a concrete implementation. No one wants your code per se, they want to adapt your code to a different application that requires having a deep understanding of the domain the code represents -- they don't know what they don't know.
If you are just grinding out software that could be vibe coded then there is minimal asset value being created in the software artifacts. Anyone else would be better off reimplementing it themselves.
So yes, almost all of the value of code produced by software R&D vests in the people that wrote it. This is evident across many software IP transactions.
So, what you're saying is one or more of the following:
1) The work of most programmers should not be considered R&D, and shouldn't be covered by tax schemes intended for R&D.
2) Most "software IP" in the industry is not the result of R&D.
3) You've rarely been involved in the sale of non-R&D "software IP". (Do recall that your original statement was "As anyone that has ever sold software IP knows, most of the value is vested in the person that wrote the code, not the code itself.")
if anything, the amortization should match copyrights or patent lengths
The salaries are of course expenses, but they are exactly offset by the value of the IP created by the R&D activities.
It's a bit as if you spent money on buying some materials. As long as the material doesn't degrade, the cash is gone but the value is the same and therefore won't reduce your taxes.
If that IP is amortized over a single year, it does not contribute to taxation, but it does if it is amortized over a longer period.
If your employee expenses remained constant, then by year 5 you would be deducting $2m from your revenue since you'd be accumulating the deductions from the previous four years.
So in steady state it wouldn't necessarily be a big problem. But for a startup which is hiring many new employees and whose revenue is growing it's a huge problem.
>That is surely wrong? Just because those salaries are for R&D?
The same would be true if you hired a bunch of scientists/engineers and got them to do R&D.
In the UK, business gets taxed on profit, which is what is left from revenue after subtracting costs.
Otherwise I'm quite amazed that salaries can be carried forward as future expenses.
I know of at least two Western European countries where you don't have to do that. Don't worry, we pay enough taxes either way ;)
Sorry for the noise :(
The relevant paragraph from Section 174:
> (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.
how about "business process mechanization"?
Or is it "using software"?
A person typing an essay with a word processor in doing more work than many of the users tweaking no code software.
The nature of the tweak involved probably determines the classification of the effort, but for tax purposes and R&D expense amortization, it is a percentage of time basis.
If the executive tweaks the code once, the percentage is so small it won't count as far as anyone cares.
If 20% of the executive's time is tweaking the tool, then odds are the company cannot expense 20% of the executive's salary and instead must claim that portion as R&D over five years.
Back before 174, I worked for a company that did claim R&D but only for one of the projects I worked on. As such, I had to be careful filling out my timesheet because they wanted an accurate accounting of what was salary expense and what was R&D.
Classifying them as non R&D doesn’t help saving taxes again.
Say you would have been exactly not-profitable ($0) if you could expense all of your R&D as in the old system, therefore avoiding tax. Now with the new rules you may be on-paper profitable because you can only deduct 20% of the R&D as an expense this year. The remaining 80% of that expense tips you over, becomes profit, and that's taxable.
An unprofitable business doesn't pay income taxes. Businesses are taxed on their net income (i.e., profit).
People are railing against this as the cause of tech's recent underperformance, but it was a non-factor for the vast majority of tech companies, because most tech companies aren't profitable and wouldn't have paid taxes anyway.
Over long time scales (and big company revenue streams), this is sort of a wash. I think this hurts startups a bit more due to the long timescales involved which eats up much needed cash in the short term.
It's effectively 6 years too. You only get to depreciate 10% in 1st year. This might have killed my company if it was around during first years.
See my comments on the previous discussion (Nov 2023) here: https://news.ycombinator.com/item?id=38145630
If your payroll is quickly growing You experience the problem on all payroll growth.
If your payroll is decreasing, you get a tax benefit. Your outgoing cash is less, but you are getting deductions from prior year expenses.
Additionally, having to wait 4 additional years to deduct that 80% is a huge drain on capital.
Combine this with higher interest rates and the effect is essentially pouring sand into the gears of the tech industry.
Also, the 10+ years before the layoffs started tech companies were on a hiring binge. Much of big tech was hiring to keep people off the market and off their competitors payrolls (this is from friends of friends in FANG HR departments). These were high paying jobs, too.
All of which make hiring engineers unattractive
This has been a slow moving disaster for years now and people have repeatedly tried to raise the alarm.
Just crickets and layoffs.
Also this line of argument rests on the idea that the downturn is exclusive to Section 174, but it is not. Raising interest rates across the world are a major factor.
1) Accounting rules are to match revenue with the expenses responsible for them, which I think is a good principle. If your workers make something now that provides revenue for 5 years, it makes sense to spread that expense over 5 years too. In many cases, you would want to do that as a business, makes it more clear how your business is profitable vs not.
2) Decisions whether to "build vs buy" a capital asset should not have massive tax implications. If I buy CoolSoftwareProduct from someone and resell it for the next 5 years, I'd have to amortize that. Should be similar if I hire a coder to write CoolSoftwareProduct instead.
(This doesn't mean that "salaries should always be amortized" is the right answer, of course, I think it's a very silly law)
After that, we can nitpick: should the development costs of new software be encouraged the same as maintenance costs of existing software. If you want to encourage startups, then yes they should. If you want to discourage startups or very temporarily increase tax collection, then no.
lol
Discouraging starting new businesses would be unconstitutional. All freedom in the US is derived from being able to participate in controlling capital.
The employer makes less profit due to salaries, but they won't "lose less" or make more money due to salaries.
Under that argument, the government would have a direct incentive to dictate how businesses do business to maximize taxable revenue.
Doesn't this just amortize out to be roughly the same amount of deduction over the long term?
All the big companies mentioned should be relatively unaffected over an N>5 year time period. Also this was something that's been in the works for years so their accountants should have been planning for it so it wasn't a financial shock (and company financials seem to indicate no such shock).
But more importantly, the article claims it was used as a tax shield to grow.
"Basically, as long as spending counted as R&D, companies could report losses to investors while owing almost nothing to the IRS."
"Once those same expenses had to be spread out, or amortized, over multiple years, the tax shield vanished. Companies that were still burning cash suddenly looked profitable on paper, triggering real tax bills on imaginary gains."
1: https://www.investopedia.com/terms/t/timevalueofmoney.asp
I get that this is bad for the VC monopoly bucks scene, but they were already down for the most part. If the changes are as the article alleges than all these big tech companies that are posting huge layoffs should mostly be fine because it's not a serious change from status quo for them.
It hurt small businesses that were slightly profitable. No one else. VC shops aren’t profitable anyway, so no taxes to pay. Microsoft took a 4 or 5 billion dollar write off, but they can literally write a 5 billion dollar check.
The issue is that the IRS wants you to pay them today on profits and cash that literally don’t exist. You make $1M in revenue and pay 5 developers 200k/year? You have no money left at the end of the year, but you pay taxes as if you profited about 900k.
When we asked our accountants what they were seeing from other companies, the answer was “mortgage their house.” That assumes they had enough equity to mortgage.
This tax change just made it worse.
With steady enough employment numbers, sure. Google has a weird one-time cost where they get hit with extra taxes at 80%, 60%, 40% and 20% of their employee's salaries for five-years and then it's all balanced. You can turn the money Google needs to borrow (or not invest) at some interest rate into a known number.
Any startup that is cash poor and especially one that is growing struggles. In year 3 you get to write off 20% of year 1's salaries, 20% of year 2's salaries and 20% of year 3's salaries.
Yes, but if your business is not yet profitable, having to pay tax on money you don't actually have in the bank (because expenses exceeded revenue during the year) will cut into your runway, perhaps to the point that your company might not exist in five years... or even two or three.
Most companies in question don't fit these criteria. They are either large public companies subject to the reactions of the market to quarterly earnings, or small private startups that have limited cash (a runway of far less than 5 years) and are facing a perfect storm of a historic rise in the cost of capital coinciding with this change.
In either case, their cost of labor just went up by a lot and will continue to cause layoffs, labor market shrinkage, and diminished ability to develop new products.
It’s a pretty bad article general and to blame the law change on this is all kinds of disingenuous: “It’s no coincidence that Meta announced its ‘Year of Efficiency’ immediately after.”
None of this adds up. You're saying, the legislators were trying to cheat and because it's a "common tactic" that kind of cheating is somehow good, but it's bad when the cheating doesn't go through?
On the other hand, being a common tactic implies that the possibility of it remaining in the books was well understood, and the declared "expectations" carry zero weight as evidence, even less than zero when coming from politicians.
Legislation like that has far reaching consequences and pretend "surprise" just confirms the intent behind it. It's only prudent to assume that we have a common tactic case of throwing sheet at the wall to see for how long it'll stick. If there's no backlash the "tactic" will remain there forever.
As another example of the same common tactic, consider the fact that all popular browsers have been used as Trojan horses into the users' local networks for like forever. At some point back in 2015 somebody objected so the browser makers started talking about fixing the problem but then stopped talking without fixing it because public opinion moved on to other areas affected by abundant sticky materials... Thus, that particular sheet remained on the wall for another 10 years and counting, and the story may repeat itself again.
It's not cheating, it's playing by different rules to get most of what you want/need done and then sometimes those that played and gambled were intending to, or hoped to, make the changes later that require rules. Their hope is that 60+ Senators would be onboard for those changes because they (those that gambled and pushed the budget bill thru) managed to get what they wanted at the expense of #$%#ing something up that most others would then be willing to fix/address.
Changes to Section 174 happen rarely and are not a “common tactic.” Changes to tax policy in general are common, especially in the reconciliation process. They can have unforeseen side effects. As well as side effects that are foreseen but considered more acceptable than other side effects.
Not quite the sentiment you intended.
I don't think GP made any kind of value judgment either way; they were just stating how things seem to usually work.
First you have to make a profit (tax is on profits). Secondly, what this does is to limit your software development expenses for tax purposes in the current year because the development cost is seen as a capital cost that will be amortized over five years opposed to operating expenditure in the same year.
If you are a startup and not make profits, then the loss will be less in the current year, but either way, your tax liability is the same: $ 0.
So software development is moved from opex to capex.
A simple example to illustrate:
Say you had 100k revenue and 1 software developer you pay 100k per year.
Under the new law, you can only deduct 20k of the developer’s salary, so your profit is 80k, which you have to pay taxes on.
However, you have $0 in the bank because you earned 100k and paid out 100k in salary.
See how that is problematic?
A very simple example:
Revenue: $ 1 000 All other cost except software: $ 500 Software cost: $ 100
Net profit (if software is allowed as opex): $400
Tax on $400 (@30%): $120
Net profit after tax: $280
However, if it is capex(amortized over 5 years):
Revenue: $ 1 000 Other cost (except software): $500 Software cost: $ 100
Net profit before tax: $ 400
Important: But now for tax purposes you can only deduct $20 this year as a cost ($100 amortized over 5 years)
So now you have to add back $80 to net profit for tax purposes: $480
Tax (@30%): $ 144
Net profit after tax: $400 - $144 = $256
So the difference is $280 - $256 = $24
Just a few notes:
1. I assume tax rate at 30%, it can be something else, principle stay the same
2. That all other expenses are tax deductible
But just as an accounting note: R&D expense has nothing to do with the company having revenues for an existing product, which already is allowed to deduct cost of goods sold, selling and admin expense. It is a cost related to future business and in that regard, it is not crazy to say it should be amortized. That in the past this did not happen, or that accelerated depreciation for other assets is in the IRS code is a function of the government wanting to effectively subsidize business investment.
https://pro.bloombergtax.com/insights/federal-tax/rd-tax-cre...
https://tax.thomsonreuters.com/news/the-future-of-rd-expensi...
Doesn't that make software engineers one of the few employees with much worse tax treatment?
That's fundamentally different from regular software development outside of agencies where there is no direct relationship. Software development is closer to an investment than an expense.
Amortization sucks in general, yes, because the money is gone and it doesn't affect your taxes to the same amount, but that's not different for any company doing manufacturing or anyone needing specialized tools or vehicles that cost significant amounts.
What if the chef invents a new signature dish that makes your restaurant famous for the next 10 years?
For chains like McDonalds where they actually research and develop ways to make pink slime look like a burger, maybe? But do you call them chefs?
* Hiring a company to do software development is completely deductible or is still considered R&D? And there isn't any difference in regard to where the company is located?
* That company who performs the software development however, they have to pay the taxes since they are doing the development... so they are just going to raise their rates then correct? Or since they are providing a service to the company and it is work for hire does it not count?
* All other R&D expenses are still deductions including hardware development? Where is the line drawn? If you are doing the software side for a hardware product, that would be hardware correct?
* For founders, you would just take a dispersement instead of taking a salary if you are developing software? Or is that irrelevant?
What really changed things was the end of ZIRP [1] and even then it was opportunistic. Labor costs are a massive cost for tech companies. They have continually tried to suppress wages. In the 2000s, it was the anti-poaching agreement between Steve Jobs, Eric Schmidt and others. In the 2010s, high growth ahnd zero interest meant labor costs continued to balloon.
But then Covid came along and was a massive opportunity. A few companies may have needed to do layoffs but that created the opportunity for everyone else. Big Tech just went full Corporate America with a page straight out of Jack Welch: fire the bottom 5-10% every year. Call it "layoffs". It's a direct pay decrease for those who remain (who get assigned the work). Those are still there won't be asking for raises because they're now afraid of their jobs.
Very little of this was ever necessary. None of the big tech companies ever came close to making a loss. They've remaining insanely profitable, in total and on a per-worker basis. At different times Google's per-worker profit has approached or exceeded $1 million.
The other factor is these companies eventually reached their size limits where antitrust stopped them making any more significant acquisitions.
Consider the timing: this change came in 2017. Where were the mass layoffs in 2018? 2019?
Also, the 2017 tax cuts contained a massive tax holiday for the repatriation of foreign profits.
Mass layoffs are simply wage suppression. It's the end state for any company that can't keep growing the way the market demands: eventually it comes down to cutting costs to make those quarterly profit targets. And in that, they sow the seeds of their own demise.
[1]: https://en.wikipedia.org/wiki/Zero_interest-rate_policy
The bill passed in 2017, but the changes to R&D didn't kick in until 2022.
Plenty of "big tech" already did it. Microsoft could not be more famous for stack ranking dating back to the 90s. Amazon have long had that kind of culture too.
Big tech companies are both doing mass layoffs AND hiring. How does this fit the narrative that the tax change is at least in part responsible? The new hires still have the same deduction issue, right? So what impact does this really have?
Think of it this way: if this passes, will the layoffs end? Or reduce? Absolutely not. All this does is give line the pockets of shareholders. That's it.
I'm a big fan of tying certain benefits to NOT doing layoffs. This can include:
1. You get this deduction only if you've fired fewer than 1% of your workforce in the last calendar year;
2. You don't get to sponsor for an H1B if you've conducted ANY layoffs in the last calendar year; and
3. The tax deduction only applies to unionized workers.
And while we're at it, let's roll back this ridiculous tax structure where IP can be "sold" to a subsidiary in Ireland and then royalties paid.
I'm wondering, if such a movement doesn't doesn't exist already, do I need to start it myself?
- Bribe the right people
I hate to provide such a cynical and lazy response but we've got until midterms (maybe) before you really have a shot at 'democratically' influencing the system. For the time being you'll have to work with the mafia that's currently running things and outbid whoever wanted this to happen in the first place.
America's balance sheet distribution (not income) breakdown:
8.5% $1M+
1.6% $10M+
0.003% $100M+
0.00026% $1B+
Big Beautiful Bill R&D Tax: Will tech go on a hiring spree again? - https://news.ycombinator.com/item?id=44028106 - May 2025 (19 comments)
The Consequences of Limiting the Tax Deductibility of R&D - https://news.ycombinator.com/item?id=43639202 - April 2025 (64 comments)
House restores immediate R&D deduction in new tax bill - https://news.ycombinator.com/item?id=39212650 - Feb 2024 (8 comments)
Ask HN: Best country to run a boostrapped startup from? (After Section 174) - https://news.ycombinator.com/item?id=39098371 - Jan 2024 (31 comments)
US tech innovation dreams soured by changed R&D tax laws - https://news.ycombinator.com/item?id=38988129 - 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 (37 comments)
Will US companies hire fewer engineers due to Section 174? - https://news.ycombinator.com/item?id=38870429 - Jan 2024 (20 comments)
IRS tax code change in Section 174: R&D is an expense - https://news.ycombinator.com/item?id=38642461 - Dec 2023 (23 comments)
New tax rules on R&D expenses may lead to layoffs for devs - https://news.ycombinator.com/item?id=38636866 - Dec 2023 (7 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 (225 comments)
Software firms across US facing tax bills that threaten survival - https://news.ycombinator.com/item?id=35614313 - April 2023 (981 comments)
Ask HN: How are you handling Section 174 changes for bootstrapped companies? - https://news.ycombinator.com/item?id=34627712 - Feb 2023 (187 comments)
https://hn.algolia.com/?dateRange=all&page=0&prefix=true&que...
Hasn't Ben Thompson of Stratechery spoken about this a number of times? I'm aware of this 'feature' and I'm not even in the USA, let alone a COO at a private-equity-backed yada yada.
The company has to pay money upfront (as salary) and then gets it back later.
Query any search engine for "are US income taxes direct or indirect taxes"
Every one will tell you that they are direct taxes. This is false. The supreme court has exclusively held that income taxes have always been indirect taxes (excises specifically, read about what an excise is in any authoritative source on tax law) in a constitutional sense. (See Brushaber v Union Pacific RR Co. 1916, Moore v U.S. 2024)
The sixteenth amendment did not give congress the power to directly tax citizens (or domestic corporations) and the complexity of the tax code is an attempt to obfuscate this fact, but the code is not inscrutable, it has rules.
Unsure of why this matters? Look up the difference between direct and indirect taxes in US law. None of these deductions matter unless you are a foreign corporation. I have tried commenting about this in other income tax related threads (this is my alt account), but people here don't like the idea that there is government propaganda in the US, or that most people are wrong and blindly accept the socialization about taxation without verifying what the law says.
I realize this is a disturbing truth to accept, not least because it involves accepting that most people who have been prosecuted for income tax crimes are only guilty of ignorance of the true legal purpose of the forms they signed. You can easily verify that most accountants and tax attorneys do not know what they are talking about by asking them this simple question about direct vs indirect taxation.
This is not legal advice, it is a wakeup call.
The masses are in a persistent state of slumber, so they will never wake up. Depressing but true.
This would be a no go for startups though.
Deciding whether labor is a capital or operating expense and deciding how to depreciate it if capital is also not a subsidy.
Dealing with Section 174 amortization in those first one to three years is a real headache (and your tax bill ends up higher than if it didn’t apply). Once your startup survives that the first few years of doing Section 174, things do get easier... but, sadly, most don't make it that far.
EU provides a large pool of experienced developers seeking new opportunities on salaries well below SV. Why pay 500K for a burnt out "rockstar" who spends more time on twitter than doing actual work when you can hire highly skilled people in Eastern-EU (or even in Berlin).
Section 174 seems unlikely to progress unless attached to broader legislation.
> "More promising is the Tax Relief for American Families and Workers Act of 2024 (H.R. 7024), which proposes restoring immediate expensing for U.S.-based R&D investments through the end of 2025. " -- https://www.pwc.com/us/en/services/tax/library/tax-committee...
If I could start anywhere in the World, Switzerland would be above all the war-torn and crime-ridden places, but business-wise it's no good for a tech startup.
Are you telling me that this law affects these tech companies so much and they just let it stand?
I find this improbable.
You do not have to amortize 100% of your engineering costs. Not even close.
Here's the key:
Development costs incurred to remove uncertainty are amortized.
All other costs are deductible during the tax year where they are incurred.
You are going to design a new robot arm.
In January, you spend $100K to "remove uncertainty". In rough strokes, this means discovering all the things you don't know and need to know for this robot arm to become a product. This amount will be amortized over five years under 174.
Now, with uncertainty removed, you spend an additional $1.1MM from January until December for engineering implementation. No uncertainty being removed. Just building a product. This is 100% deductible that tax year.
Analogy: You want to build a new brick wall with specific properties. You spend $100K to develop a new type of brick and $1.1MM to build the wall using that brick. The $100K is amortized, the $1.1MM is deductible in one shot.
BTW, at year 6 the amortization schedule reaches steady-state and you are amortizing the full $100K every year. In other words, the impact of 174, if treated intelligently, is the time value of money until steady state is reached for the engineering costs incurred to remove uncertainty.
That said, I hope the BBB repeals this.
Some people will point out that AI will fix this, no it won't:
1) The real cost is higher than anything you'd pay for a person an there is not likely any real change there.
2) AI will be lies like Actual Indians that won't scale
3) Here's the kicker: If AI does succeed, now these multi-billion dollar firms will have to compete with multi-billion dollar single person businesses, that eat their lunch
Its a race to the bottom right? That means you need to invest in the business and all these layoffs are exactly not that, and will leave companies unprepared for the next 10 years.
Remind me in 2035.
> And so, on schedule in 2022, the change to Section 174 went into effect. Companies filed their 2022 tax returns under the new rules in early 2023. And suddenly, R&D wasn’t a full, immediate write-off anymore. The tax benefits of salaries for engineers, product and project managers, data scientists, and even some user experience and marketing staff — all of which had previously reduced taxable income in year one — now had to be spread out over five- or 15-year periods.
i.e. some humans get the same tax treatment as humanoid robots, while LLMs ("AI") are always deductible as op-ex, regardless of function.
Draft 2025 spending bill in Congress would revert Section 174 changes for 2026-2029.
Why aren't the All In podcast bros ragging on Sacks about this!?
As it stands, this is an end to innovative startups in the US. Unless bankrolled by very deep pockets. The type of pockets who typically prefer the status quo and are not particularly interested in cost-efficient innovation.
Trump is just getting started. By the time he is finished, your economy will be shot to pieces. The US dollar will no longer be the reserve currency for global trade.
So it’s a tax break for tech companies and the problem is that Trump got rid of the tax break?
What happened to making companies “pay their fair share”?
I have such cognitive dissonance, I am constantly hearing about how Trump is evil because he wants to give tax breaks to companies. Now the problem is that he’s NOT giving tax breaks.
It’s almost like no matter what Trump does the news will cover it negatively.
The games industry, while hugely profitable and bigger than TV, movies, and music combined, laid off tens of thousands of people. It's unmitigated greed is all it is.
According to the article, as long as the tech workers contribute to improving or creating a product (be it games or apps), they count as R&D cost.
This sort of thing appears to be self-reported; I don't know if it ever gets audited. I don't know if big tech lies or creatively interprets what counts and that has contributed to the issue. But this article sort of over-represents what qualifies as R&D for US tax purposes.
https://larsco.com/blog/section-174-updates-navigating-the-i...
The rule says if you pay someone $200k to develop software: then you now have a $200k asset that then devalues to value of $0 over 5 years (starting midyear). That's just plain weird.
For our example a depreciation table might look like:
Year, %Amortized, Amount
2025 10% $20,000
2026 20% $40,000
2027 20% $40,000
2028 20% $40,000
2029 20% $40,000
2030 10% $20,000
Understanding accounting and taxes are two absolutely essential skills if you ever wish to be a founder (and useful anyways).
Finding a solution to dealing with the valuation of assets is difficult. The historical solution of depreciation is broken for software, intellectual property and goodwill. In theory, taxes on dividends and capital gains taxation already deal with the issue (company taxation at x% kinda ends up at $0 because the shareholder pays y% and claims back the x% through imputation).
And remember that salaries are properly taxed.
If it turns out it's not useful, we could then allow companies publish the source and release it into the public domain to immediately "destroy" the asset (the copyright) and claim their deduction. So failed r&d projects would be deductible right away as long as the public gets them, and ones that result in a useful asset get depreciated based on how long they actually last, which is currently potentially multiple lifetimes.
Amortizing development cost over the useful life of the software is maybe a reasonable thing to do (I don't think it is, but let's for a minute say I agree), but determining "useful life" is not simple.
Software built by a business is a trade secret independent of its copyrightability. Even after the expiry of copyright a business can continue to exploit it as a proprietary asset.
Which, I think is an overlooked part of this. They must constantly have gotten feedback that people were lying to them.
I bet they were classified as R&D for accounting purposes. Product development largely falls into R&D - it doesn't matter what the product being developed is for.
Every job I had at a megacorp was classified as R&D, and I know because I had to track hours against such.
It's not just that. Section 174 now explicitly calls out Software as always being an R&D expense:
> (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.
Even though it sounds unintuitive, that activity is considered R&D for tax purposes.
There is no justification for "cost cutting" when it hurts the larger economy. If the company were losing money, that would be different, but these mass layoffs are all from firms that make obscene, enviable levels of profit. It's greed.
There is no justification for "cost cutting" when it hurts the larger economy.
It is not good for the economy to have people doing work that doesn't produce value.
This is a political statement, not an economic one. What is or isn't good for the economy is up to the goals of that economy. In Japan, for example, they've more or less adopted the opposite principle as an important plank in their political system. Or perhaps it would be better to say that they've adopted the idea that people having jobs is more important than those jobs having a direct connection to some measure of productivity.
But they were making high profits for decades, and being greedy for decades. Then there were a lot of layoffs. What changed ?
But it's not "greed": it's the end of zero interest rate policies.
Wrote software, like, you know, "developed" it?
This is an artificial subsidy. That’s not how the tax code treats other types of investments that generate recurring income.
1. I start “Facebook for dogs” It’s gonna be massive. For the first year me and five guys code away in the garage and I use my savings / credit card / family trust fund to pay them 100k each. Expenses are 500k, revenue is, amazingly, 1.5M and taxes owed is 500k.
At this point turning round and saying the development was R&D, and claiming 500k of tax breaks is just (to me) ripping off the American Taxpayer.
And I’m not even an American Taxpayer.
If the revenue was zero would anyone suggest that the taxpayer give me 500k to help ? (Ok I would because I like free money but most people won’t)
Or am I missing something?
You can only expense $100K of the salary costs this year, so even though you're break-even, you pay taxes on $400K in income.
Or, even worse, imagine revenue is $250K, and you spent $500K on salaries for the team.
You can only expense $100K of the salary costs this year, you're already -$250K on the year, and now you're paying taxes on $400K in income. You're destroyed.
VC-backed startups aren't designed to get profitable quickly, and I don't see that as a problem for the American taxpayer, and nobody is saying the taxpayer is giving money or helping. A business losing money should not have to pay taxes on income, as if it's not losing money.
in this case, your taxable income is $1.0M, and cash flow is $500k ($1.5M - $500k salaries - $500k taxes).
now you have to amoritize it over 5 years. so your taxable income is $1.4M ($1.5-500k*20%), taxes are 700k, and cash flow is $300k.
Uncle Sam just reduced your cash flows by 40% by a simple tax change. You eventually make up the difference, but for fast growing tech companies, that's a large shift in current flows and significantly changes their investment strategy.