Salaries are not generally considered “capital” - HR wording aside, you do not own your employees. It’s an immediate expense that may, or may not, produce something of value.

The IRS is using a theory of value where software (1) is a capital asset (okay, sure), (2) has a six-year deprecation schedule (uhhh why not 5 like everything else?), and (3) is valued at the exact cost of all inputs to it, including salaries (uh oh).

This is unlike how capital assets are valued for any other industry! And it has the effect that hiring a second lawyer is “cheaper” (for five years anyway) than hiring a second developer.

If you're ripping off a competitor, sure, the salaries of your engineers roughly translates to the value of the resulting capital asset. But the most valuable work that software engineers do is the stuff that has never been done before. The salaries of your developers and designers and your product managers go first towards figuring out what a valuable capital asset would look like. Only after that can you start investing in the actual asset.

The same is true for all true R&D, which is why historically the government has tried to provide protections for R&D work to incentivize people to not just churn out the safe bet over and over again. Patents fall into this category, but software patents are (rightly) hard to come by. Through 2022, the risk of software development was offset by the ability to expense the costs and avoid a tax bill, and this was good policy if your aim is to encourage innovation.

The capital asset theory could still work if there were some way to appraise the value of the actual asset you created. But absent such a way, this thinking is deeply flawed for all but the most shovelware of jobs.

I don't think that framing really tells us much, because there could be many reasons not to release that code that don't indicate it's an asset, such as (A) worries it might have still-relevant security issues, (B) costs of scrubbing other information like employee PII, or (C) the code is too useless to be worth the effort.

If the goal is to measure retained value, I'd ask how much a competitor would pay to acquire your 5-year-old code (for direct use, not for hacking you) without feeling cheated afterwards.

I think companies view it as a trade secret. Whether or not that particular app is making money, regardless of how old it is, they don't want to release the code.

Even if true, a small fraction of engineering time on a project is actually developing that asset. The rest is maintenance and support. The tax code does allow for this distinction, but only if you track hours associated with each kind of work, which basically no one does. And even if they tried, it's difficult because that line is blurry. Tasks are rarely 100% one or the other. Ever fixed a bug by refactoring to make something better? Which kind of engineering is that? Can you justify that to the IRS accountant auditing you?

you could test this by looking for MIT licensed code on github?

Not when it comes to capital assets. The full cost of a large capital asset is generally not allowed to be treated as an expense for tax purposes.

It's technically correct that tax is levied on "net income", but that's an accounting term which means something different from "money_in - money_out" when there are capital assets.

One justification for this is, although you spent the cost, you received equivalent value in the form of the asset itself.

This means if it costs $100k in salary to make software this year, and you get $30k in income from the software this year, your bank balance will lose $70k (which is expected) and you'll have negative income in the ordinary way of thinking, but you'll be charged income tax (which is new) despite losing money, as if you gained (almost) $30k instead of losing $70k.

Your tax accounts will show an increase in net assets, despite the decrease in your bank balance, because they will show the software as being "worth" (almost) $100k, regardless of what it's really worth right now.

This is particularly hard if you're a small company or (non-VC-funded) startup that's already stretching to cover the cost of speculative software development. Being charged income tax even while you're losing money developing software (in the ordinary way of thinking about money) is what's new in the tax code. It makes it harder than before to do speculative developments, making some kinds of development non-viable that were viable before.

Have you read section 174? It forces software to be classified as R&D and then use a weird 6 year amortization (10-20-20-20-20-10) for the salary.

Corporate taxes are indeed levied on net income after expenses. Trading money for capital assets is not considered expense.

If you start the year with 0$ in your bank. After the end of the year you have made $200k in revenue. However you "spent" $200k on software salaries. However, because these are software costs, they must be depreciated over 5 years, so only 20% of that $200k software cost can be applied as depreciation cost which is considered an expense. So your net income for this year is $200k revenue - $20k depreciation expense = $180k. Your 15% tax on this is $27k.

So you made $200k and spent all of it on software, so your bank account is 0, but you owe $27k in taxes.

Correct but the point is that the salaries of the developers are not treated as an expense to net out, they are treated as an asset that depreciates over some period of time. (Even though some "developer" work might be day to day maintenance, rather than building a new feature.)