Clojurians Log v2

For those of us less literate in business taxes -- what's the overall impact of that?

My first take would be: therefore in practice software development would effectively cost more for companies, so their incentives shift in the direction of doing less of it. Does that seem right?

Yep. Here's a practical example https://news.ycombinator.com/item?id=35614968

Ooof. The amortization confuses me a bit; that sounds like it would mean (going with the example you just linked) that each year you can deduct 1/5 of this year's salaries, 1/5 of last year's, etc, so that in practice it still adds up the same except for the first four year's of a company's life (which would mean it would hit startups really hard but not pre-existing companies). Am I misunderstanding that?

I don't know that much, but it makes sense and is aligned with the overall sentiment that this especially affects bootstrapped or unprofitable companies

Here's an article on it, which I find easier to understand: https://www.cnbc.com/2023/04/18/software-firms-face-huge-tax-bills-that-threaten-tech-startup-survival.html

I wonder if the rule is different if you hire contractors vs employees

As someone generally in favor of closing tax loopholes that primarily benefit wealthy business owners, I think the R&D deduction is a bit of a scam. It lets you claim deductions on things that aren't actually novel, as long as those things are novel in the context of an individual business- it's kinda broad enough for "consulting stackoverflow" to be considered "R&D". The fact that the software industry in the US coasted on a tax loophole for so long is probably another indication of the fact that it was in an unsustainable speculative bubble, and the check has now come due.

I think it goes in the opposite direction - US cos are now forced to categorize software dev as R&D (no exceptions) so that there's profit to be taxed Say I'm a business owner, I made 100K in sales and my only dev hire costed me 100k. I literally have no money after this operation. Then I should be taxed on the 100K sales? i.e. how does it make sense to tax an unprofitable (/ barely profitable) operation?

I'm not a tax lawyer, but I don't really think that example is realistic or accurately reflects how the taxes and deductions would work

To me it makes sense if you squint 🙂 it's commonly known that VC-funded startups have run on an unprofitable business model, intentionally. (Specific examples: selling stuff for less than its real cost. Think Uber, DoorDash, etc) It hadn't been about exploiting loopholes, it's simply VC logic 🦄

Ok, I'm actually still fully on board with taxing VC-subsidized monopolistic business strategies out of existence

That includes simple bootstrapped software businesses, sadly And either way, if hundreds of thousands of devs got laid off, it's not like we're winning massively by killing one of the most common categories of employer in the last decade

> As someone generally in favor of closing tax loopholes that primarily benefit wealthy business owners, I think the R&D deduction is a bit of a scam. I can see this argument (would have to think about it more to decide whether I agreed), but whether it's true or not, it seems like doing a ton of unnecessary damage to suddenly and unexpectedly remove the deduction, rather than phasing it out gradually. It might bring in some extra tax income short-term, but I suspect that's more than offset if it destroys a lot of businesses that would have survived if you'd done it gradually. And for all its flaws, I think the US tech industry as a whole is clearly a significant driver of global innovation.

We've heard the "tax cuts create jobs" (and its inverse, "this industry won't survive without tax breaks") argument many times over the past 50 years in the US. The evidence for the claim is https://www.sciencedirect.com/science/article/pii/S0014292122000885. I don't think there's any particular reason to believe the software industry is special.

That may be, but even if it is, I still think it does a lot of unnecessary damage to remove this suddenly and unexpectedly.

> We've heard the "tax cuts create jobs" (and its inverse, "this industry won't survive without tax breaks") argument many times over the past 50 years in the US. The evidence for the claim is https://www.sciencedirect.com/science/article/pii/S0014292122000885. It doesn't seem like rocket science to me, if I'm taxed more, I have less money to spend directly into the economy around me In the end companies aren't much different from an individual - they handle a finite resource (money) to be spent rationally.

> if I'm taxed more, I have less money to spend directly into the economy around me This would have been a valid argument if tax money was immediately destroyed as soon as it was paid and if company owners didn't send a significant portion of their profits to Cayman islands and other tax heavens. You have some control over how taxes are spent (I agree it should be more though) and for the most part it's used -perhaps not in the US, but see how it works around the world- for public infrastructure and other ways that actually directly benefit everyday people. Can you say the same about private profits? > In the end companies aren't much different from an individual Some of these companies are larger than entire countries. That's where the problem is, you can't treat them as if they're family businesses/individuals or even start-ups. (Don't get me started on their "rationality"...)

We could argue on this all day, not sure if it would be much fruitful activity 😇 Suffice to say that taxes fund many inefficient or undesired apparatuses (like healthcare that doesn't work, costly IT, overall corruption, war)

We could argue on this all day, not sure if it would be much fruitful activityI agree, especially since probably neither of us is going to change their opinions based on a conversation on the internet. I'm just providing an alternative to the "invisible hand of the market"/"market that autoregulates" fairytale that someone who reads this might think you're suggesting. All I'm saying is it's a matter of interpretation. There's no such thing as objective politics and that includes the economy. You have to pick a side. > Suffice to say that taxes fund many inefficient or undesired apparatuses (like healthcare that doesn't work, costly IT, overall corruption, war) So the private sector doesn't have all of that too? I mean if you're going to criticise the public sector at least mention drawbacks that are exclusive to it (or significantly worse - and some proof is also required, of course - no need to do so now obviously, we're not debating, I just do not accept the argument that these are unique characteristics of the public sector)

https://www.bloomberg.com/news/features/2022-10-06/even-after-100-billion-self-driving-cars-are-going-nowhere You could build a lot of mass transit- something that has actually been proven to work - with the money that has been spent chasing the dubious 'innovation' of driverless vehicles. Call me risk averse, but when it comes to basic infrastructure I think 'innovation' is highly overrated. I prefer infrastructure that is a safe bet, because that's how people can actually rely upon it. Given that what prompted this discussion is tax-advantaged R&D credits for software development, I think it's a particularly salient example.

I think there’s a misunderstanding here, this is not about “tax-advantaged R&D credits for software development.” This is about reclassifying what normally would be a simple business expense (paying an employee) as R&D that must be amortized. This isn’t about tax breaks or credits at all, it’s the opposite of that.

@joshmiller do you have a source for that? I still don't feel like I have a very clear understanding of this issue, but eg US Chamber of Commerce https://www.uschamber.com/taxes/congress-should-restore-immediate-r-d-expensing-for-u-s-businesses-heres-why, > Fill me in: For nearly 70 years, businesses have been able to immediately deduct 100% of their research and development (R&D) expenses, which can include costs associated with the development, testing, and improvement of products and services. Which sure sounds like it's about a tax credit.

Or https://technical.ly/civic-news/section-174-small-software-companies-taxes-explainer/, > ...software companies spend a ton on R&E — salaries included. Under the 70-year-old code, companies could deduct that work, which would lower their taxable profit. Now, they can’t in the same way. Without those deductions, their taxable amount is significantly higher, and so are their taxes.

Right, I think the issue is that you have to classify your software developers as R&D and amortize them over five years. So previously you could just skip out on the R&D tax credit accounting and just account for your devs like they were janitors or HR or sales or whatever.

Got it. So you're saying (just repeating back to make sure I'm understanding you): Previous situation: • You could treat programmer salaries as ordinary salaries, or • You could write them off as R&D. New situation: • You must treat them as R&D, and rather than writing them off per year, you must amortize over five years. Am I understanding you correctly?

I believe that’s the case (I am definitely not a tax lawyer). So previously, some companies used a special R&D tax treatment for their programmers and some just paid them like employees. But now we are in a place where all programmers are tax-disadvantaged compared to other employees.