Forgive the naive question, but is this different than other payrolled employees? So for normal employees you get the deduct the year it's paid, but for some reason for software developers you have to amortize it?
Theoretically it’s the same with any asset you pay someone to make.
If you pay someone to make a chair, you don’t deduct the salary. Instead you create an asset valued at what you paid to build it, then depreciate it over time.
The arguement for this is that it would be inconsistent to do otherwise. After all, why should buying a chair from someone else be different than paying an employee to do it?
It’s worth noting that this change brings the USA in line with international financial reporting standards, so it’s not like it’s some crazy unique idea or anything.
> Theoretically it’s the same with any asset you pay someone to make.
No, it's not.
Sec. 174 explicitly and specifically refers only to software development.
Also, this:
> If you pay someone to make a chair, you don’t deduct the salary. Instead you create an asset valued at what you paid to build it, then depreciate it over time.
is also incorrect. For most tax filers, and for most things, under current law, you have a choice whether to deduct the expense in the year in which it incurred or to amortize it.
If you pay an employee to make a chair, you 100% deduct their salary, immediately. The chair is only a capital expense if you buy it from a company that sells chairs. The company selling the chairs isn't forced to amortize the salaries of their carpenters, so implying that it's normal for companies to be forced to amortize the salaries of their software engineers is, in the most generous possible interpretation, a gross misunderstanding of the law.
> this change brings the USA in line with international financial reporting standards
Which ones?
If you pay people to make 1000 chairs that are just sitting there, do you really think that you don’t have an asset on your books at all? This is called Inventory. It’s certainly an asset.
And an asset doesn’t come into existence out of nowhere. It comes into existence because you paid money for it. And the money you pay for it is indeed the persons salary.
Now sure, it’s possible to get away with not doing this, but it’s not correct by accounting standards to do so.
As for which standards, International Financial Reporting Standard (IFRS)
What other country in the world doesn't allow you to deduct the full salary you pay your employees in one year? I've never heard of this.
>If you pay someone to make a chair, you don’t deduct the salary.
If they make the chair. What if they only draw up blueprints for a chair that isn't manufactured? What if the chair is never manufactured, or won't be manufactured for two years? Until the software is licensed and installed at a customer site, how is this at all like making a chair?
> The arguement for this is that it would be inconsistent to do otherwise. After all, why should buying a chair from someone else be different than paying an employee to do it?
Probably exposing how little I know of accounting... If you buy a chair you have to track it and deduct it over the course of X years?! It's not just an expense the year you bought it?
Most of the time you can decide what you want to do. There are exceptions but for most capital expenses (which salary is not despite what proponents of this change would argue), you can choose to either deduct all of it or amortize it. It also depends how you categorize expenses.
A $100 chair is unlikely to get amortized, but a $100 chair as part of $450k office remodel might.
> It’s worth noting that this change brings the USA in line with international financial reporting standards, so it’s not like it’s some crazy unique idea or anything.
Can you be more specific?
"Other payroll employees" is doing a lot of lifting.
The question is really, payroll is made up of builders, vs nonbuilders.
Are devs different from other builders? The dirty secret is that they are not.
Ford engineers, P&G food researchers, and architect salaries are capitalized just like Software development costs.
But, in the case of software development, only those builders are getting a nice subsidy.
A world where we treat all workers as expenses is not likely since it means the end of US GAAP. So, we must treat all builders like builders . There shouldn't be special favors for some any specific builder group.
>But, in the case of software development, only those builders are getting a nice subsidy.
This is why I can't support re-implementing Section 174. Software engineers are now being treated in the tax code like everybody else, and they don't like that change.
>Ford engineers, P&G food researchers, and architect salaries are capitalized just like Software development costs.
I'd say the majority of the posters on this thread who are answering questions (as opposed to asking questions) believe this is not the case. What is a good source for learning more about which categories of employee salaries are amortized? Besides becoming a CPA.
You can easily check that architects follow the same rules. When they work towards creating a new building their salaries are amortized
I wonder if most of the people in this thread should then change their minds on this topic, since the #1 reason seems to be that software development is being singled out.
The logic outlined in other posts is that this is because software is seen as an asset that nets dividend. As such, like with houses you can’t deduct all the costs at once because you keep extracting value out of it.
I’m not sure whether I understand why that now applies only to software and not other things.
Those arguments fall short when considering the fact that that the construction company deducted the wages of the workers that built the house. The software development firm is the builder not the home owner.
If you’re building software to use or sell to other people you are definitely the owner.
If you’re a body shop lending out devs to build software for other people, that would be different