I keep seeing an objection in this thread along the lines of "what make software so special that it deserves a tax deduction".
Correct me if I'm wrong, but if a company hires someone to say, mine coal or brew beer, the expense of those employees is an expense any company can claim a full tax deduction on. If you're a line chef or wait tables, your salary is tax deductible to the restaurant.
So it's not that we are asking for R&D to be treated "specially" and get a deduction that other companies don't have. The problem is that R&D salary expense is being singled out as producing an asset (e.g. IP), and thus being classified in the same category as other assets, like, brewing equipment, a mining excavator, or a pizza oven. Simply put, Section 174 argues to classify people in the same category as things because ... 'these people's work outputs may have long-term value, kind of like things'(?).
Allowing Sec 174 to stand is a slippery slope to classifying more and more everyday Americans' salaries into this category. One could argue in the future, for example, that those who design cars or operate machines to produce tooling dies, should not have their labor treated as regular expenses, but instead as capital assets because their labor output is captured in assets, just as Sec 174 treats the labor of software developers as assets. Everyday people should be concerned by this because if the rule stands, it could be extended to you, too.
For those objecting to the equal treatment of R&D employees as all other employees in America of all stripes and vocations, keep in mind that software people have to pay personal taxes on the income, just like everyone else. Section 174 doesn't have anything to do with personal income taxes: we all pay income taxes fair and square. The question is whether there is a double-tax on software labor, paid at the corporate level (and in all likelihood, your salary is currently a tax deduction for your company, unless you write software or do R&D).
I think the assumption that we are asking for "special treatment" is driving some confusion and grass-roots objection to the movement here, so I wanted to highlight that we are just asking for everyday people who work software and other R&D jobs to be treated just like every other American who works a day job.
[edits for clarity]
> Correct me if I'm wrong, but if a company hires someone to say, mine coal or brew beer, the expense of those employees is an expense any company can claim a full tax deduction on. If you're a line chef or wait tables, your salary is tax deductible to the restaurant.
The question is: are you getting the value of that work in the same tax year, or is it creating an asset that creates value over time? If you hire a guy to brew a batch of beer, you’re getting the value with that batch of beer. Once you sell that beer, the value is gone.
But if a brewery hires someone to build a fermentation system, then that person’s salary cost must be allocated to capital expenses that must be depreciated over time.
There’s a good argument that most software development is creating an asset that pays off over time. If you hire someone to upgrade the payroll software, you’ll get the value of that in future tax years.
But in that case, once the fermentation system is built, the brewery no longer needs that employee.
A better analogy is a brewery hires someone who builds a fermentation system, then continues to operate, maintain, repair, and improve the system over time. Some of the employee's time is spent on work that could probably considered R&D, some of it is on work that is clearly operation, and some isn't clearly one or the other. So how do you determine how much of the worker's salary is R&D vs operational expense? You can try and estimate some percentage, but that breakdown is at best an educated guess, and having to try and figure that out just adds pointless friction.
But that still isn't a great analogy, because in that case the fermentation system isn't the product, the beer is. So for a company that sells software, it would be more like if it wasn't a company that sold brew, but a company that rented out or sold its brewing equipment to other companies that made beer.
Also, the same argument about creating value that pays off over time could be said about most employees. An accountant could find a more efficient way to keep the books that pays off over years; the CEO could create a strategy that pays off over years; customer service staff could create a reputation for high quality customer service that pays off over years; etc.
And then, even if you assume that an engineer's salary is entirely R&D, then the only reason I can see to want that salary taxed at a higher rate is if you want to disincentivize R&D. R&D is already a large expense now in the hopes of a payoff later, and by increasing the tax burden now, you are making that upfront cost even higher.
How about actors? They produce a thing (content) that is sold for a prolonged period of time. Copyright is what, 20 years?
How would Disney feel if the salary paid to the cast of the Avengers was no longer an expense in that year, but amortized over the entire copyright period of the film.
That’s how it used to be until a special rule was introduced allowing only $15m (or maybe $20m) to be expensed instead of capitalized.
Doesn’t change much for the Avengers films which have production costs around $500m. Disney still has to capitalize 97% of the cost. $15m doesn’t cover a single star’s salary.
How does a chef get categorized? They develop recipes which have future value but also do a lot of ephemeral work product.
I think the issue is this fantasy that a software develop only produces long term IP. Or how is it different from an executive who is developing strategy and market positions that have future value?
Maybe it would make sense if we could distinguish such work products as a fraction of their total output, tracked as actual inventory that accountants have to assign value and track capital gains on?
I think the fantasy is that software is mostly like inventing the transistor. Most software is CRUD apps that are more akin to a company’s profit-generating physical infrastructure.
Repair and maintenance costs can be either operational expenses or capital expenses: https://www.nashadvisory.com.au/resource-centre/repairs-and-...
For example, if you pay for someone to maintain the brewery plant to keep it working in its current condition, that’s an operational expense that could immediately be deducted. But if the work is on upgrades and improvements, that’s ordinarily would be a capital expense that must be capitalized and depreciated. A bookkeeping strategy isn’t.
Your other examples are off the mark, because the question is whether the investment produces an income-producing asset. Software generally is such an asset. The question of what’s an operational expense versus what’s a capital expense isn’t always clear cut, and is the kind of thing where accountants and tax lawyers have to make judgment calls.
Both cases are tax-deductible, what matters is not whether it's operational or capital, because for example building up inventory would make an operational expense a capital expense, but whether you then sell or rent/lease/use yourself/... what's maintained or repaired (then it's COGS) or you use it yourself (then it needs to be amortized)
The tax code has been optimized by the rich over the past century to extract profits out of industrial firms and that's where the difference comes from. $100 used to, say, produce a car or a cake that you then sell is immediately and fully deductible from tax because otherwise industrial companies just outright can't survive. Hell, you get to claim back/not pay any VAT and/or sales tax you paid for anything related to them. One way to see it is that these rules are designed to get money to the (existing, "old-money") rich, so when investors don't get money, the government doesn't get money.
If it's equipment for the company to use itself, then it has to be amortized, or more to the point, it means industrial companies can't do what Amazon did: use 100% of their free tax flow to grow "tax-free*" instead having to give that money to the government and investors (15-35% to government 65-85% to the rich, sorry, investors), so they can use it for their own ends.
I'm not judging one to be good or bad, just attempting to frame this correctly. I should perhaps point out, as a last point, that this is a massive difference between the US and European countries. In Europe, investors and governments try to have their cake and eat it too: there's tax due (amortization rules, or worse) on new company creation, on company growth, except of course, for the companies of the rich: you can grow financial capital in companies without paying a cent, money, shares, obligations, ..., just nothing else. That's yet another connection to the rich, to investors. New employees, new buildings, ... are double taxed, only money isn't. In Europe, there have only ever been exceptional cases where it was otherwise. In the US "tax-free" new company creation has been the norm for all of history except since Trump changed this rule.
* between quotes because they still have to pay income tax on any wages, sales tax on any purchases, ... it is very far from tax-free, but such companies wouldn't pay a dime to investors. If they did that would make it very hard to create new companies (which is what this regulation does). Amazon's great accomplishment is not AWS or anything like that but 2 financial accomplishments: first, avoid sales tax, second, avoid paying anything to investors. Whatever business Amazon is in is nothing but a tool for that financial engineering.
The difference between a fermentation system and software is that right now, software changes fast enough that five years is a long time.
While there are software that are still in use from five years ago, there are plenty of obsolete software no one is still using made five years ago.
The tax code accounts for that by providing different depreciation schedules for different kinds of assets. For software the catch-all depreciation schedule is 3 years: https://www.irs.gov/publications/p946.
Is 3 years reasonable?
If we are making say, a point-of-sale software rolled out in a fast food franchise (let’s take Chick-fil-A since they have edge Kubernetes deployments), is it reasonable that we won’t add features to that software in 3 years? Perhaps.
What about bug fixes? Is that expense or should we expect time spent on bug fixes to also be depreciated in 3 years?
What about configuration? Does configuring that POS for new menu items count as software development, and therefore needs to be depreciated over the next 3 years?
Chick-fil-A has edge Kubernetes. Does the install and implementation itself counts as “R&D”? If we argue that configuration can be expensed, then would writing manifests be depreciable or not? What if we use “infrastucture as code” tools such as Chef?
What about say, excel sheets and macros? Or forget macros — just basic use of a spreadsheet. Some manager add in a summation to a column to compute totals. Very basic stuff. Is that software development? If it is, would that be depreciated over 3-years?
If we argue that this is normal use of excel and should not be depreciated, then why wouldn’t my normal use of a compiler and editor also count as normal use and should not be depreciated?
Whether it is 5 years or 3 years, the point is that unlike physical capital goods, software changes very fast, even if the underlying hardware wasn’t changing that fast. It is not always that expert designers build them — software can also be written in a way where end users modify them. We also use software to make software, and can rapidly change our tooling in a way that we cannot with physical capital equipment.
I see the merit in categorizing software as capital, from an economic theory point of view, but software also has its own dynamic that is distinct from physical capital equipment. A tax code that does not acknowledge that can bring more overall harms to the society.
Software engineering is not just about building new things. I'd propose that by far the majority of the time of software engineers is spent on maintenance, bug fixing, minor incremental improvements, etc. Almost all software is either sold directly as a service or as a product with a servicing agreement.
> most software development is creating an asset that pays off over time
This is a fantasy.
Yeah this is the most plausible interpretation.
Software engineers being taxed similar to brewery design engineers seems reasonable, not the person literally brewing each batch of beer.
What about oncall? What about fixing bugs, or KLO, or security patches, or devops, or tweaking feature flags, or dealing with customers?
If you're 100% allocated to a greenfield project that's behind closed doors until 2027, sure. But it doesn't seem like most software engineers are in that bucket. If anything, the industry has been consistently moving further away from that, with more agile methods, tighter feedback loops, etc.
Right, many software jobs are more like being a janitor or repairman. Or even more of a personal assistant or retail worker who is providing ephemeral service to another participant in the whole organization.
Though put that way, it seems hard to rationalize high salaries for software roles where this tax deduction would apply. Granted, supply-and-demand, but still.
Why? Just because it's mostly maintenance doesn't mean it isn't a high skill job.
Good point. One could say a doctor is the same job as a mechanic, but that doesn't capture the whole story.
I don't understand the reasoning behind this, however. Why depreciate anything over multiple years vs just deducting it in the current year? Does it not all come out to the same amount to the IRS in the end?
The usual thinking is that a business wants an asset’s upfront expense spread over the years that asset earns income to reduce taxable profit in future years. In other words, the IRS receives more upfront but less total in the end.
The problem is that R&D and software development behave more like recurring annual expenses, not upfront investments in something like a building or industrial equipment. Small VC-funded startups may not exist long enough to reap the long-term benefits of depreciation.
> In other words, the IRS receives more upfront but less total in the end.
Assuming positive inflation, the IRS receives more total, because the taxes they get paid now are worth more than the same amount of dollars they give back in later years. And if the company goes out of business, the IRS never has to give those taxes back.
> In other words, the IRS receives more upfront but less total in the end.
How so?
this change was a timebomb used for CBO engineering purposes: to make a particular budget appear to have a specific delayed deficit behavior.
The tax code strives to minimize distortions (except insofar as they are deliberately introduced). That is, it seeks to minimize how much the existence of the income tax changes people’s economic conduct.
To minimize distortion, the income tax must accurately compute “income”—the actual increase in wealth. Depreciation is part of that. To compute income, the net increase in wealth, you need to subtract costs from revenue. When you buy an asset, your wealth doesn’t immediately increase or decrease—it simply changes form (from cash to an asset). The actual cost is the depreciation on the asset, which occurs over time.
Say you buy a delivery vehicle for $50,000. In the first year, you make $100,000 in revenue and have $20,000 in operating expenses. What’s your income after one year—the actual change in wealth? You have $80,000 in cash after operating expenses, plus a vehicle that you can sell for maybe $40,000. So you have $100,000+$40,000 in cash and assets in minus $20,000+$50,000 in cash and assets out, for a $70,000 increase in wealth.
Calculated another way, you have $100,000 in revenue-$20,000 in operating expenses-$10,000 in depreciation = $70,000 in income. Now, over say 5 years, you’ll depreciate the full $50,000 cost, and the total dollar amount the IRS gets will be the same. But it will get more taxes in the first year, which due to the time value of money is worth more than getting the money in subsequent years.
For clear, fixed assets this is a quite reasonable approach, although in some categories the depreciation rate isn't an accurate model of reality.
The problem is those of us who deal with code only rarely are actually just building a vehicle. It's an ongoing activity that more resembles maintenance than the outright purchase of an asset.
Look at how much software is going to a subscription model. That only makes sense if there is ongoing improvement to the software.
If I hire a bunch of people to build me an apartment building, I deduct the full cost of their salaries in the year I pay them, even though once they build the apartment building, I get the value of that work over the following years.
How is that any different from hiring a bunch of people to write some software, that I then get the value of over the following years?
> If I hire a bunch of people to build me an apartment building, I deduct the full cost of their salaries in the year I pay them
That’s not how it works in general (there are exceptions though): https://www.law.cornell.edu/cfr/text/26/1.263A-1
How are other kinds of engineers such as automotive engineers treated at companies like Ford, or aerospace engineers such as at Boeing?
This wasn't my first impression of this, but the more I heard this dicussed the more I'm forming an opinion that there might be some intentional parts of this that while maybe not being good, make sense from a certain narrow perspective.
My assumption is, if tax folks in the US were looking Jealously at US companies with large Multinational presence declaring a lot of their profits abroad. They might have noticed that some of them have large dev presence in US, but through complex accounting, IP transfers, licensing and other actions are able to claim that majority of the value is generated outside of the US.
If a company had, say, 100k software devs, 50k in the US, and 50k scattered across other countries, but claimed the value of it's software was primarily in Puerto Rico and Ireland... In that case, I'd expect questions around the 50k devs in the US.
Is software dev the only activity where this is possible - no, but is currently by the far the largest and the largest growth industry.
If the issue is with general tax compliance of large multinationals, then congress should have done something about that. This tax rule has hit small software businesses particularly badly, so much so that it'll practically strengthen the quasi-monopoly of established players.
> strengthen the quasi-monopoly of established players.
When are we going to break the majors up already? Google should be like seven different companies. YouTube is bigger than Netflix for Christ's sake.
Demand antitrust enforcement!
There's so much value pent up and wasted in Google today that it'll be worth more as divisible parts. They're practically giving half of the value away for free and wasting it on implementing the same thing four times before cancelling it.
And Apple and Amazon...
These giants are basically stifling the US startup ecosystem and putting a valuation cap on innovation. They're also ripping apart other industries by moving in and undercutting costs with subsidized offerings detached from the underlying economics. They're like invasive species destroying the ecosystem, eating up everything, completely immune to competition. And if that's not reason enough for you, they're putting massive wage pressure on our profession.
Small business software has largely been offshoring their development teams for years anyway.
For a long while now, every small US-based company I look at hiring engineers have their teams in South America or Eastern Europe.
Unfortunately by trying to "fix" this, they've caused massive US software developer layoffs. So even less tax revenues. And an even weaker economy.
Has this tax change been mentioned in any earnings calls as a reason for layoffs. Perhaps if that evidence could be found it would bolster the argument being made here. Didn't someone have all earnings call transcripts in a large database - perhaps an AI can find evidence of this?
While this modification may contribute to layoffs, the general declining economy is the real culprit — the layoffs started long before the tax code change.
There is some sense to this: It's a stealth tax increase done for budgetary reasons.
Since we tried to go to a pay-as-you-go model on bills the tax code has turned into an absolute shambles as the congresscritters look at how to tweak things to "produce" (look at the IRA withdrawals--it produced nothing, just moved some money forward one year while creating a trap that many have fallen into) the desired revenue to cover whatever the bill costs without "increasing taxes."
> One could argue in the future, for example, that those who operate machines to produce tooling dies, should not have their labor treated as regular expenses, but instead as capital assets because their labor output is captured in assets,
In the future? That's how it works!
> just as Sec 174 treats the labor of software developers as assets.
[I was wrong about the following. I misread the text - and the submission title.] That's not what 174 does.
Fair enough, that was not the best example.
But I'd also observe that since business owners have to capitalize the wages of the machine operators producing injection molds, then there is an advantage to outsource the whole operation.
Comparing a procurement manager and a CNC operator [the person running the milling machine making a mold] paid the same amount, the CNC operator has a bigger negative impact on the businesses' bottom line, because the business can't expense most of the CNC operator's wages in the current tax year, whereas the procurement manager is generally accepted as fully deductible expense.
Of course, the labor that went into making the mold is effectively built into the acquisition price of the mold, so you haven't gotten rid of it by outsourcing it.
But, by building it into the price of an outsourced mold, one can delay the purchase of the mold to next year to improve the P&L this year, but you can't similarly delay the wages of the tooling operator to a later date.
So, when a CFO is looking for a way to improve the P&L in a given calendar year, there's an incentive to cut operators who build factories, tools, and other assets that have to be amortized, and replace them with more flexible outsource options.
Of course, part of the reason mold making left the US is wages are lower outside the US. But I'd say the current situation with software engineers is a datapoint that demonstrates the impact of expensable versus amortizeable labor on employee retention. It could be that if the tax code is not fixed, the same "CFO logic" would lead to more and more software being outsourced over time, as management is an immediate expense, but software engineers are not.
I suppose one can then argue, why should software engineers get special treatment compared to tooling operators; but then I would counter-argue that perhaps tooling operators should have gotten better treatment so we could have retained more of them in the US.
>as management is an expense, but software engineers are not.
is manager of AI agents (especially when they become more productive and capable than people) going to be a manager or software engineer?
IF they are a manager, then they are managing people. Are you paying appropriate salaries and benefits to your AI agents? Does HR have them in the system?
...no, not a manager.
Aircraft are also more productive and capable than people in specific activities, and useless wastes of money in others.
>IF they are a manager, then they are managing people.
Not really. For example for L1, a visa for managers and executives, managing people isn't a hard requirement, instead it may be "employee’s ability to manage an essential function of the organization at a high level, without direct supervision of others", and thus project managers and architects and even senior engineers make the cut.
Handling capable AI agents would seem to fit if those AI agents perform "an essential function of the organization" and you manage them "at a high level, without direct supervision of others".
source?
https://www.law.cornell.edu/cfr/text/26/1.263(a)-2
Example 4. Acquisition or production cost. D purchases and produces jigs, dies, molds, and patterns for use in the manufacture of D's products. Assume that each of these items is a unit of property as determined under § 1.263(a)-3(e) and is not a material and supply under § 1.162-3(c)(1). D is required to capitalize under paragraph (d)(1) of this section the amounts paid to acquire and produce the jigs, dies, molds, and patterns.
which applies for the part of the work producing a tangible asset; it was an option for software development before. Now all software is considered such an asset, which is a huge change and distinct from how other labor works
You asked for a source for https://news.ycombinator.com/item?id=44233155
I thought it was for the first paragraph.
But I was wrong about 174, maybe you meant that.
Taxes on income or capital inherently reduce income and capital. Ditto for sale taxes, which reduces transaction volume.
This is bad for the economy and ultimately reduce our tax base.
About the only thing that doesn't happen is for non-reproducible privileges such as land, intellectual properties, the electromagnetic spectrum, etc.
Taxes reduces taxes?
So are you saying that 0% rate taxes would capture the most tax?
> Taxes reduces taxes?
Yes. It’s a second-order effect. Imagine if there were a 100% tax: the government would probably get no taxes, because there would be no economy.
> So are you saying that 0% rate taxes would capture the most tax?
No. There’s a sweet spot. Everyone argues about where it is, but obviously 0% and 100% tax rates would both be problems.
It all depends on where you apply the taxes.
If you tax inputs but not outputs, then a 100% tax rate increases the cost of goods and services but does not necessarily kill the business.
If you tax income, then a 100% tax rate kills all income. However, income taxes are usually progressively, so a 100% marginal tax rate places a cap on income, but income below that can exist.
If you tax profit, a 100% tax rate leads to shifting profits to reinvestment and salaries and benefits.
> If you tax profit, a 100% tax rate leads to shifting profits to reinvestment and salaries and benefits.
There wouldn't be any money to reinvest into salaries and benefits, because capital would not be deployed on a risky, potentially money-losing venture without the possibility of profit.
There are taxes on things which generally don't have this kind of effect on supply such as land, because land is an inelastic supply because it cannot be destroyed.
However if the tax is too high then it would cause land abandonment.
Notice I note categories where it is fine to levy taxes without seeing a reduction in supply.
If you tax the usage of the electranetic spectrum too much, you would get no usage but the electromagnetic spectrum would still be there.
Not all taxes are in income or capital. Some are e.g. on consumption (gas, cigarettes, carbon, etc). There’s an argument that in place of corporate income taxes, we should let companies reinvest freely (or pay dividends), and then recoup the taxes elsewhere. The Planet Money podcast has a classic episode about this and other aspects of a presidential platform most economists could agree on.
I'm heartened to see this downvoted, since it's basically tax-trolling.
Yes, there are people who think tax==bad. Most people (and for a century or so) have understood that taxes are ultimately spent, and normally with a "multiplier". That is, on something which actually stimulates further economic activity.
Corporate profit, OTOH, normally just satisfies the rent-seeking economy, which is not productive in any natural definition. For instance, dividends and stock buybacks. Yes, some corporate profit feeds entrepreneurship, but that's simply not a large fraction of the corporate economy.
It's simply pointing out that taxation of economic activity is detrimental to the state, not that taxes are evil. This should be avoided as much as possible unless truly necessary.
The state can still tax in two ways, taxes on undesirable negative extremity such as products that give you long cancer, and unreproducible privileges. I listed those examples. There may be ground for taxing extreme wealth but I want to see extreme inequality fixed first.
I am not even disputing that the government spending encourages economic activity, but we should at least not shoot ourselves in the foot only to heal the foot with another hand.
I am advocating for the interest of the state.