What is a software dev expense and why should it be tax deductible?
In any other company, employee salaries are counted as an operating expense against revenue, much like raw materials, utility bills, etc.
If you sell $100 of goods and you have $100 of expenses, you have $0 net income and owe no taxes as a company- you've made no money!
Because software salaries are counted as research and development, and 174 forces you to amortize the expense over five years, you are now in a much harder position:
You sell $100 worth of software and have $100 of developer salaries. You haven't made any money, and you have $0 in your bank account. The government compels you to not expense more than $20 of those salaries, and taxes the remaining $80 of revenue. You are now bankrupt.
I signed the petition but I wanted to offer an some background for an alternate POV (that I think I mostly disagree with).
You have $600k in the bank. You hire 4 people to build a house. The materials for the house cost $200k and the 4 people cost $400k. Total expenses $600k and you now have $0 in your bank. You can deduct $600k in expenses, but!, you now have a house worth $$$$. You have to pay taxes on this house as it's an asset and worth $$$$. Your total worth is not $0 (your bank account). It's $0 + the house.
Change house to software. You created something new. The government is claiming that something, software or house, is worth $$$$
I see the point. I have no idea how to value software. I guess the gov might say, to find the value, delete the software, how much would it cost for you to replace it (as one idea)
Similarly with other expenses. You have $200k. You hire office workers at $95k each to do some work and buy two $5k PCs for them to use. At the end of the year you have $0 in the bank. The law sees it as you have $0 in the bank + two $5k computers. You owe taxes on that $10k (the 2 computers). For these, you're allowed to deprecate them 5 years. So you own taxes on $8k.
Note: this issue of equipment being deprecated has killed lots of small businesses, mostly because they are new and unaware (been there (T_T)). If you buy $100k of equipment (furniture deprecates over 7 years), you budgeted $1m for the year with $0 left over (making a product that takes 2-3 years to finish) but you've got to pay taxes on ~80% of the $100k of equipment even though you thought you'd made no money.
Many business opt to lease computers (and furniture?). This way they don't own it so it's not an asset and they can expense 100%. Unfortunately if you're a new startup no one will lease to you as you have no credit history (been there (T_T))
Under the new rules, on the ~3yr software project (like a game) with $1m per year budget, after the first year you'd owe taxes on $1m because you could not deduct any salary expenses. All of your employees are doing software dev by the definitions of the new tax law.
I don't think it is reasonable to use employee salaries as the measure of market value. Companies buy and sell other companies based on performance, not cost to build.
Employees are an operating expense.
Because employee salaries are normally deductible as an expense for companies which generally pay taxes on something resembling profit rather than something resembling revenue. The issue is they are classifying software development as a research activity so the salary has to be amortized over five years with 20% of the expense applying in each of the five years.
When a company that earns $150k/yr and hires a software engineer who costs $100k/yr, that company should be able to deduct that salary in full.
The way it works today they must amortize it, taking only 20% per year. So they’d owe taxes on $130k of $150k, instead of the more rational $50k of $150k.
This effort is to restore rationality.
Why was the change made to amortize the tax?
To bypass the filibuster.
To pass a bill the normal way, you need 60% of the Senate to agree. But certain kinds of bills can be passed through "reconciliation" which only needs a simple majority. Such bills must be "budget neutral" as assessed by the CBO. So legislators throw in hacks like Section 174 in order to game the system and offset other provisions they actually want.
Here's more information on the Reconciliation Process for anyone interested.
PDF: https://www.congress.gov/crs_external_products/R/PDF/R48444/...
> What is a software dev expense
You might be more familiar with the term "salary and benefits".
> why should it be tax deductible?
Business expenses are tax deductible.
Disclaimer: I’m not an expert, just vaguely interested.
My understanding is that previously, software dev salaries would be counted as a business expense in the year they are paid. Now they are amortized over X years on the tax paperwork. As a result, a lot of software companies suddenly show relatively high income, and have a large increase in their tax burden. This is especially hard for startups that were “on the edge” of making it. If the salaries go back to being an expense in the year the salary is paid, the tax burden will decrease again, because apparent company income will be less.