Other than it’s nice not to have your profession taxed, what is the argument that software development shouldn’t be taxed as opposed to all sorts of other white collar work?
I posted a short explanation here [0] on the thread the other day, but the even shorter explanation is that "software development shouldn't be taxed" is not an accurate description of what repealing the change to Section 174 would do. This discussion has nothing to do with what work gets taxed (all profit is taxed no matter the industry) and everything to do with what counts as "profit".
The Section 174 changes altered the accounting method that software development companies must use for calculating their profit for tax purposes. Starting in 2022 software dev must be treated not as an expense but as an investment in an asset, such that you're now required to amortize the expense over 5 years instead of deducting it from your revenue the year you spent the money.
The gigantic problem with this change is that without the ability to expense software development expenses as expenses, a new software startup can very easily be considered profitable in their first year because only 10% of their software development-related expenses get to be counted as expenses.
And note that, contrary to what you say, most white-collar work is not treated this way, and software is further singled out from other R&D-type work in that it is the only type of work that is explicitly called out in the section as being required to be marked as R&D. So we're not asking for software to be treated specially, we're asking why it suddenly changed in 2022 to be treated specially in an extremely negative way.
Software is a special kind of white-collar work which promises to simultaneously provide a sense of entitlement as well as an equal measure of frustration.
Lately (since 1971?), the balance has tilted over to the other side, so I welcomed any move to restore it :)
> other white collar work
Some examples of white collar work that builds long-lived assets but where the work isn't required to be amortized over long periods of time:
- marketing collateral development, unless it is done by engineers
- development of standard legal documents like contracts
- development of HR policy
- development of financial processes & associated reporting, unless done by engineers
- art development (e.g. for packaging and other collateral)
- building customer lists, unless it is done through software by engineers
- developing service offerings (e.g. Costco membership)
Software is not fundamentally different than any of these other white-collar assets that are used to build companies, except that it typically requires more ongoing maintenance.
Maintenance and bug-fixes seem to be outside the R&D rules, so that expense would be 100% deductible in the year charged.
Almost all work is tax deductible. This isn't just for software developers and employees still pay taxes. The issue is software development is being classified as research which is one of the few areas where salaries aren't directly deductible but instead need to be deducted in pieces over five years.
> Almost all work is tax deductible
What really? How does this work.
Proft = income - expense.
When you pay people to get work done for a business, that paid work is an expense.
You can deduct expenses from your income to calculate your profits.
IIRC the problem is that software development is not being classified as an operating expense, now, but rather a "research" capital expense, and the deductions then have to be amortized over a number of years.
You're confusing corporate vs personal taxes. The salaries businesses pay are meant to be deductible business expenses. The business only pays taxes over the profit after these expenses are deducted from their revenue. The person receiving the salary still owes personal taxes over the income.
Company earns $X revenue.
Company pays staff $Y in compensation to earn that revenue.
Company pays other expenses of $Z.
Company does not owe tax on $X, but rather on something closer to $X - $Y - $Z.
That's not the issue. What people are asking for is for software to be treated like every other profession.
That's how it should be, and that's also how it actually was until relatively recently. A new law went into effect that treats software differently. I believe Congress was looking for an easy way to generate extra tax revenue by tapping into the wealth of rich tech giants. Whatever the intent, the workers ended up being the ones who suffer because now hiring people has worse tax consequences than it used to.
So all that people want is to undo that, to take away that special rule that applies only to software, and put it back like it was.
The UK has (had) a tax credit for "Research and Development", intended to be a tax break for genuine R&D, but of course everyone lumped all software development into.
The UK eventually put out guidance that business as usual development isn't really "research and development", but afaik there hasn't been a serious crackdown on the practice.
It seems kind of absurd to pretend that most work that developers do is pioneering the profession.
R&D tax breaks make sense, both to encourage genuine research but also to prevent brain-drain.
Not taxing (or tax credits / refunds ) for line-of-business software isn't really excusable.
It's bad that the law in the US has been changed in a cliff-edge way though.
I've dealt with this at a previous employer (where we did try to be reasonably honest and submitted things that had some R&D element, I can imagine a less principled approach). The concept of it seems sensible, in practice you end up justifying why something is R&D to essentially non-technical people, probably at some consultancy who can then repeat a moderately garbled version of your description to HMRC who presumably just approve in most cases because they also don't have the expertise to truly assess the subject matter (and let's face it, we'd all struggle, even if we believe we're expert software engineers, how do you assess whether work on a mortgage issuing product for a bank is truly R&D if you have no familiarity with the domain).
I've been questioned on whether systems I had a hand in would qualify for the R&D credits. Someone not particularly close to it had thought it might, but I explained to our external assessors that it didn't and they agreed with that.
This isn't changing if it is taxed or not. It is merely about if the tax should be paid in the year the work was done, or spread over the 5 years after the work was done.
> This isn't changing if it is taxed or not.
This is untrue. The rule is not about taxation, but deductions/expenses. If your expenses cover most revenue, you owe little in taxes. With this rule, a particular type of expense (software engineering salaries) is no longer deductible from revenue to calculate taxable income over which taxes are owed. So you might previously owe no taxes, but now you do. The deduction might carry over to the next few years and eventually (after 6 years) you will reach the same point - assuming your salaries don't go up and your business doesn't grow. The remainder in deductions will be returned after the business stops employing software engineers. I'm not sure why anyone would want the tax code to incentivize a business outcome that all of us would consider failure.
It's not a matter of whether it's taxed. It's a matter of how the costs are expensed. If I invest a $1m in software development now, I'm not making any profit yet. I may not make a profit. It's a question over whether I need to pay taxes on potential future profit now.
The proposal isn’t that it not be taxed. Rather that software dev be taxed like an expense, which is easy to track and rationalize, as compared to a capital improvement which is much harder to do so.
The exact law is a bit more nuanced than a "tax deduction for software engineering", but I'm guessing OP put it that way because it makes for a snappier title on a SWE heavy forum like this one. I would check one of the threads that OP posted for more specific information on how the tax code changed a few years ago.