Tell HN: Help restore the tax deduction for software dev in the US (Section 174)
HN has had many discussions about this, including The time bomb in the tax code that's fueling mass tech layoffs - https://news.ycombinator.com/item?id=44180533 - (927 comments) a few days ago. Other threads are listed at https://news.ycombinator.com/item?id=44203869.
There's currently a major effort to get this change reversed. One of the people working on it is YC's Luther Lowe (https://news.ycombinator.com/user?id=itsluther). Luther has been organizing YC alumni to urge lawmakers to support this reversal. I asked him if we could do that on Hacker News too. He said yes—hence this thread :)
If you're a US taxpayer and if you agree that software dev expenses should be deductible like they used to be, please sign this letter to the relevant committee members: https://docs.google.com/forms/d/1DkRGeef2e_tU2xf3TyEyd2JLlmZ....
(If you're not a US person, please don't sign the letter, since lawmakers will only listen to feedback from taxpayers and we don't want to dilute the signal.)
I'm sure not everyone here agrees with us—HN is a big community, there's no total agreement on anything—but this issue has as close to a community consensus as HN gets, so I think it makes sense to add our voices too.
Luther will be around to answer questions and hopefully HN can contribute to getting this done!
Normally, when you have expenses, you deduct them off your revenue to find your taxable profit. If you have $1 million in sales, and $900k in costs, you have $100k in profit, and the government taxes you on that profit.
Section 174 says you can't do this for software engineers. If you pay a software engineer, that's not "really" an "expense", regardless of the fact that you paid them.
What you've actually done, Congress said, is bought a capital good, like a machine. And for calculating tax owed, you have to depreciate that over several years (5 in this case).
Depreciating means that if you pay an engineer $200k in a year, in tax-world you only had $40k of real expense that year, even though you paid them $200k.
So the effect is that it makes engineers much more expensive, because normally when a company hires an engineer, like they spend on any other expense, they can at least think "well, they will reduce our profit, which reduces our tax obligation," but in this case software engineers are special and aren't deductible in the same way.
In the case of the $200k engineer, you deduct the first $40k in the first year, then you can expense another $40k from that first year in the second year, the third $40k in the third year, and so on through the fifth year. So eventually you get to expense the entire first year of the engineer's pay, but only after five years.
The effect is that companies wind up using their scarce capital to loan the federal government money for five years, and so engineers become a heavy financial burden. If a company hires too many engineers, they will owe the federal government income tax even in years in which they were unprofitable.
These rules, by the way, don't apply to other personnel costs. If you hire an HR person or a corporate executive, you expense them in the year you paid them. It's a special rule for software engineers.
It was passed by Congress during the first Trump administration in order to offset the costs of other corporate tax rate cuts, due to budgeting rules.
This actually understates the issue slightly. The amortization is calculated from the midpoint of the first tax year, so actually you only take 10% in the first year. Meaning it takes six years to get back to square one. In your example, you would only capitalize $20k in the first year, $40k for the subsequent four years, and then another $20k in the final year.
This [1] is the only definition the code actually give.
> (3) Software development
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
1. https://www.law.cornell.edu/uscode/text/26/174
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Is a test or QA engineer considered a software engineer?
Is an FPGA or ASIC engineer still considered a software engineer if they are writing in HDLs?
Is a systems engineer, electrical engineer, or mechanical engineer considered a software engineer because they use MATLAB, etc and use programming to do their design work?
Is a sysadmin, DB admin, or other IT staff considered a software engineer because they write software as part of their job?
What about a quantitative analyst, data scientist, accountant, actuary, or any of the other maths and analysis adjacent job roles that regularly use some level of programming to do their job (and therefore write software)?
What about HR, etc who use excel documents? Excel is fundamentally just a graphical array programming language (and the design of spreadsheet tools is heavily inspired directly from APL). Is anyone who uses excel or builds/maintains spreadsheets considered a software engineer?
Like software engineering is such a broad field and programming bleeds into every part of modern business at this point.
It starts on page 23.
Plenty of analysis online by tax firms but I'll quote from this one: https://insightplus.bakermckenzie.com/bm/attachment_dw.actio...
> Generally, activities treated as software development for section 174 purposes include, but are not limited to, the following.
• planning the development of the computer software
• designing the computer software
• building a model of the computer software
• writing source code and converting it to machine-readable code
• testing the computer software (up to the point that a taxpayer places the computer software into service or determines that the computer software is ready for sale or licensing to others)
• producing product master(s), if the taxpayer develops the computer software for sale or licensing to others.
> Activities that are not treated as software development vis-à-vis software developed by a taxpayer for use in its trade or business are as follows:
• training employees and other stakeholders that will use the computer software
• maintenance activities after the taxpayer places the computer software into service
• data conversion activities, except for activities to develop computer software that facilitate access to existing data or data conversion
• installing the computer software and other activities relating to placing the computer software into service
This is the part that I think makes this whole jig of treating software development like a purely capitalizable expense so nuts.
I previously worked at a public company that wanted software developers to treat as much work as possible as CapEx - it makes you look more profitable than you actually are, which is bad for taxes but good for your stock price. Developers hated it. The problem with it is that with modern web based software, CI/CD, A/B testing, etc. that the line between "new software" (i.e. CapEx) and "maint" (i.e. OpEx) is so blurred as to be pointless. E.g. many times I'd be fixing a bug (technically OpEx) but that would often lead to some new features ideas, or ways to structure the software to make it easier to add new features (technically CapEx). Software is fundamentally different from capital expenditures in other areas, and assuming a 5 year straightline depreciation schedule for software is laughably absurd.
What other sort of capital expenditure has you do releases every day, or requires 24/7 monitoring? I would argue that the business of software has changed so drastically over the past 20 or so years that it makes much more sense just to categorize it as OpEx by default (for both tax and GAAP purposes), and only have it be capitalized as CapEx for very small and specific reasons.
Quite a lot of them actually. If I spend $$$$ setting up a car factory with a big production line, I'm going to have people monitoring it 24/7. If I build an airport, I'm going to have air traffic controllers working 24/7. And so on.
Of course, the air traffic controllers didn't build the runway, and the construction crew don't direct air traffic, so the whole situation is much less ambiguous.
> Of course, the air traffic controllers didn't build the runway, and the construction crew don't direct air traffic, so the whole situation is much less ambiguous.
That is precisely why those salaries are NOT capex
And no one thinks it was sensible.
The only reason it exists is for political games by Trump 1.
Now imagine all the nonsense that’s gonna go into the much bigger Trump 2 tax cut bill.
ex: linking excel spreadsheets or setting up excel to ingest data from a sharepoint or network drive would still fall under the definiton of software developer
> • maintenance activities after the taxpayer places the computer software into service
So a sysadmin or a DB admin writing scripts or a DB admin writing queries and adding new reports would be considered software development
It just seems way too easy for arbitrary employees to get pulled in under this definition because it just fundamentally misunderstands how widespread programming is.
If that's considered maintenance activities then would maintaining a software codebase not be considered maintenance activities then?
The real issue is the auditors will flag it.
I may be way, way wrong though.
If it leads to a new release, then its software dev. Meaning anything more than a minor patch is going to count.
The issue is that this is a lot of unnecessary complexity for orgs that aren't doing that kind of work.
Probably a broad enough definition to net the US Government the greatest tax revenue possible for the effort to enact this.
The folks advocating for this could care less about the deficit, but they need to act like they care.
So basically the same situation that we have with bullshit speed limits everywhere.
Republican defunding of the IRS is literally insane: reform by cutting enforcement.
- It rewards people who cheat on their taxes.
- It costs the government more money that it saves, because IRS investment is net revenue positive.
But then, the modern Republican party seems more concerned with being the party of 'law(s I agree with) and order (for people who aren't me).'
Most of the blatant tax fraud is much lower down the economic ladder because below a certain threshold recovery doesn’t justify the cost and people know this. The amount you can get away with is far below the threshold where it would be worth the risk for wealthy parties. The best ROI for auditors in many of these cases is to make regular object lessons at random to discourage it rather than systematically prosecute it.
AFAIK, the increased spending at the IRS did not lead to concomitant offsetting recoveries. This is a predictable outcome, the amount of enforcement activity has been pretty finely tuned for decades to optimize ROI. Most of the recoveries come from changing focuses on compliance to areas that haven’t seen much enforcement activity in many years. Fighting entropy basically.
If you assume that most large recoveries are from sloppiness rather than systematic tax fraud, it changes what is going to be an effective strategy.
AFAIK, all the data shows exactly the opposite.
https://news.harvard.edu/gazette/story/2023/07/turns-out-irs...
https://www.irs.gov/pub/irs-pdf/p5901.pdf
(There are many more studies from various outside organizations, as well as other non-partisan government bodies outside the IRS concluding similarly)
IRS enforcement has diminishing returns because the IRS starts with the small minority of people who are very obviously cheating on their taxes. Those people get audited and the IRS very easily recovers money from them. If you want to audit more people than that, you have to audit people who are less likely to be cheating. The more people you want to audit, the lower the collections rate gets.
But if you're averaging in the recovery rate from the people who are so obviously cheating, you can get quite far down the road past a marginal benefit before the average becomes a negative number.
Meanwhile, even that isn't considering the indirect costs. The IRS spends $1 and recovers $2, but audits are much cheaper than the IRS than they are for taxpayers. So the IRS spends $1 and the taxpayers (many of whom did nothing wrong, because we're talking about averages here) have to pay $5, in order for the IRS to recover $2. That's quite bad -- $6 is being spent in order to recover $2, but it's being reported as a $1 net gain.
And it's worse than that, because those $6 aren't just money, it's actual spending -- human labor hours that couldn't be allocated to something else -- so what you're losing isn't the cost of that labor, it's the value of that labor. Someone was being paid $1 to create $2 in value but now instead of doing that they have to spend that time on an audit, so the $6 in cost is actually $12 in lost value.
Not accounting for things like this makes it seem like we should be spending a lot more resources on something with diminishing returns and large hidden costs.
Who pays taxes when it's well known that the IRS doesn't audit and follow up on tax cheats?
Especially, if all it takes to further dissuade them is engineering complex wealth structures and keeping tax lawyers on retainer.
And maybe as a Bonus what do you make of the smaller (relative) taxrate the bigger fish (companies/wealthier individuals) pay?
And then cut by 20% by the current adminstration [0].
I'd phrase the question of auditing lower income filers vs higher income filers differently -- do you think people with higher incomes should feel safer about cheating on their taxes?
Because average recoveries do scale with income [1]; unsurprisingly, it seems wealthy people commit tax fraud too [2].
While catching the low-hanging fruit (and therefore better ROI) is one goal, it needs to be balanced with ensuring there are similar levels of compliance (or penalties where it's lacking) in higher income payers.
[0] https://taxpolicycenter.org/taxvox/cuts-spending-and-staff-d...
[1] https://www.nytimes.com/2025/06/05/upshot/tax-audits-wealthy...
[2] https://www.irs.gov/newsroom/irs-launches-new-effort-aimed-a... https://www.irs.gov/newsroom/irs-tops-1-billion-in-past-due-... https://www.foxbusiness.com/politics/yellen-touts-irs-enforc...
This really only hurts the competition, who is completely unprofitable in every sense of the word. And all for what? Left-shifting the collection of a 21% income tax by a couple years? I think many of us would’ve done terrible things in 2021 to only have an effective tax rate of 21%. The government mugged Peter the payroll tax man to pay Paul the corpo tax man, but they disemboweled Peter in the process, and most of the money had to be disposed of as a biohazard.
I don’t believe Section 174 was an honest attempt to manage the deficit. I think Zuck, the PayPal Mafia, and the blood-boy cabal bribed some Congresscritters to kill off what remained of their competition.
What's with the craze for finding conspirational incentives?
There's a repeatable pattern where commenters hallucinate an unreasonable incentive for everything.
Motivations are difficult to discern (see courtrooms), and it is a modern vice to try and analyse incentives, but too often the cause-and-effect imaginations are not even reasonable guesses, but are just pure fiction.
My best guess (based off word choices made) is that we all love to create new stories/narratives, that fit into our personal tribal stories.
I don’t think it’s such a huge leap that a policy with such unanimous opposition was put in place by the select few special interests who benefit from it. It helps (or doesn’t help?) when they all got together for that photo op at the inauguration.
Believing in fake moon landings requires believing in a level of competence I don't think exists in large organizations, but the same applies to believing there is no corruption or backroom deals, which are exposed all the time and seemingly rarely punished.
I can’t believe you’re trying to claim the high ground in rationalism here and have no clue how bad it is.
What about HR, etc who use excel documents?
IF they are using it rather than developing it, no. If they put in 5 hours a week writing code, yes for those 5 hours. This isn't hard.
OR they need to maintain a set of activity codes and a timesheet outlining how many hours (or partial hours) each week are spent on what types of tasks.
It's unnecessary complexity if you want to be in actual compliance with the tax code vs just guessing whether XYZ task is on one side of the line vs the other and hoping it doesn't come back to bite you later.
For me that sounds like everyone and everything in a company that develops software of any kind, including low-/no-code stuff, accounting, HR, travel costs, massages. Like who is not "in connection with the development of any software" in a company that develops software? Without further definitions this is even worse then just software engineering costs.
Of course not. The Glorious Leader is rescuing the american hardware sector.
R&D is amortized, COGS is not.
That means, in the given example above, you are able to deduct $180k that first year instead of $900k.
That gives you a profit, from a tax perspective, of $820k.
But you only have $100k of actual dollars.
Good luck paying your taxes!
But if we more realistically assume it's 3 software folks at 200k, then the taxable profit is 580k (100 profit + 3*(200k salary - 40k ammortized))
Today I am cash flow neutral at 5m revenue, but with this I'm paying taxes on 800k "profits", which don't exist anywhere but on paper. But I have to pay the taxes in real dollars.
So you pay taxes on 800k profits, but then each subsequent year you reduce you profit by 200k, even though you don't have 200k leaving the door.
If 1M eng salaries was your stable state, then after several years you're... going to have 1M in costs to subtract from your profit! The stable state is the same!
I'm not going to argue about the capex change being "good", I do think it's worth highlighting that for large enough companies you're now looking at a different flavor of tax flow. Amortizing your costs over 5-10 years is something people like doing for other costs after all.
> But you only have $100k of actual dollars.
> Good luck paying your taxes!
a lot of people here are conflating "taxable income" and "the amount owed in taxes" for some reason.
if I earn $100/year, and I can deduct $50 of that, my tax bill is not $50. It is some percentage of $50, usually a low number for businesses. (Amazon regularly pays $0/year in taxes.)
depending on the tax rates and the locality of that business, the amount owed on tax is going to be anywhere from $0 to $50, and it is going to heavily favor the low end of that spectrum. I don't think any business pays 100% of its taxable income in taxes unless they have been heavily fined.
$100k is likely far more than enough to pay the tax on $820k of taxable income for a business. It could be enough to pay that tax bill 10 times over, it's hard to say.
my point is that taxable income != tax owed.
So generally you're going to pay at least 21% or $170k for those "profits."
They *were* able to, because they *were* able to offset the cost of developers instead of having to amortize it out over 5 years.
It’s not that low. Federal corporate tax rate is 21%. So you would be on the hook for $10 in taxes.
The value of software could be based on something more realistic, like a percentage of actual revenue, but I suppose tech giants would be against that.
Software clearly has material value. For software that is built, not bought, the company building it clearly values it exactly enough to pay the salaries of the software developers building it. What other estimate of its material value is better than the one that the company purchasing it is demonstrably willing to pay?
If you’re doing new drug discovery at a bio-lab, treating all your failures as depreciating “assets” seems bonkers. The same seems true of much software development where the work product ends up thrown away.
I understand the pain for small companies and it's a strain on cash flow, but for larger companies with "real" revenue streams and profitability is this that much worse?
The cynical thing might be that this helps out big corps by preventing smaller corps from spending their way to success.
I would imagine software that is thrown away should be similar?
In fact, sometimes when you dispose of an asset, you get more for the scrape than you have left in depreciation- and you have to take that difference as a profit.
A significant percentage of algorithm and foundational computer science R&D in software is now protected exclusively via trade secrets. There are no other practical options. This wasn’t always the case but all other forms of protection have steadily eroded over the last couple decades.
Weaponizing the tax code because you have an ideological aversion to trade secrets doesn’t seem fair to me.
* It makes sense to tax capital assets as such.
* If companies do R&D and think the results are valuable enough to be kept secret, then obviously they're an asset.
* Depreciation is because real-world assets actually require ongoing maintenance or become worthless over time, but information does not.
* Finite-term IP grants (e.g. copyrights/patents) do become worthless over time, so a depreciation schedule makes sense.
* Trade secrets never expire, so it doesn't make sense to depreciate them. If they never get out, they remain an asset forever. So their development shouldn't be deductible. If they do get out, the company could release all of their (now presumably useless) info on it then for the deduction from their development.
The point about finding trade secrets to be dubious is that it seems natural to tax them as an everlasting capital asset (since that's what they are), and I don't see why we wouldn't do that since society doesn't eventually get the benefit of that knowledge, so incentivizing it runs counter to the purpose of IP law. Why would a knowledge economy provide a tax deduction for developing knowledge we don't eventually get?
It's a question of whether it is a capital expense that is required to be amortized over 5 or 15 years, or a regular expense that can be deducted in the year in which it is incurred.
A vanishingly small percentage of software is sold.
Even in the absence of the Trump tax rule, a software company values the software they are building a lot more in financial terms than the cost of building it. Any project where value=cost should be cut, when the value is taking into account the value it brings to the rest of the company.
This is the entire point of the business, after all: take labor, land, and capital and make something that's worth a lot more to the world than the sum of the components.
I'm not sure if depreciation is the same concept as we call amortización in my country: capital that counts as investment instead of expenses because you're expected to keep extracting value from it over the years, so you can't get a deduction for the whole expense when you first pay for it.
If that's what this is about, it's absurd not for the reason you say (salaries are not a bad proxy for value, since you expect the profit will be greater) but because you'll probably keep paying for maintenance and evolving the software.
In practice software machines need constant tending and operation by engineers in order to keep them pumping out money.
In the context of live software systems, a lot of software engineering - even engineering that involves innovation and creative research and problem solving - is done in service of making the machine continue to operate; it is operational expense.
It’s like: Buying some filing cabinets is clearly a capital expenditure. But paying an office administrator to come up with and keep modifying the filing system you use in those filing cabinets to make sure it continues to serve your business is not capital investment, it’s business operational costs.
In your analogy, when a company constructs and sells a building, labor costs are deductible as part of the cost of goods sold. Only the profit—when the finished product is sold—is taxable. But under the new Section 174 rules, software R&D labor is treated like the purchase of a capital asset, even though the company is leasing a service, not selling a final, tangible product.
The flaw? Software isn’t a static, finished asset you walk away from. It’s a living system. One update might fix a bug, introduce a feature, and improve long-term architecture all at once. Is it maintenance? Innovation? Infrastructure? The answer is usually “all of the above.” So how does anyone report that cleanly on a tax form? What’s the IRS’s standard test for sorting that out?
Before TCJA, some companies may have stretched R&D definitions to claim Section 41 credits. But after the TCJA change, the incentive flipped. Now, companies are penalized for doing real R&D—the very thing we should be encouraging. Startups are now paying painfully high tax bills simply for building something they cannot lease out en masse yet.
We should want to incentivize invention, not suppress it. We need more startups, not fewer. Software—especially with generative AI—is one of the few options for us left that can create new markets, expand GDP, and drive compounding national growth. The upside is limitless. This is hammering our economy and it’s strangling startups at the exact moment we need them most.
Congress, do the right thing; restore the rules we had pre-TCJA.
Timeline:
- 1981: Section 41 introduced — provides tax credits for qualified R&D activities.
- Pre-2018: Under Section 174, R&D expenses (including software) were fully deductible; Section 41 credits could be claimed.
- 2017 (Dec): TCJA passed by the 115th Congress and signed by President Trump; Section 174 expenses to be amortized over 5 years starting in 2022.
- 2022: Amortization rule takes effect. Companies must now capitalize and amortize R&D expenses.
- 2025: Section 174 amortization remains in effect; Section 41 credits still exist but now come with a steep tradeoff.
That's because it's not "a payroll". When a payrolled resource builds a combustion engine that powers the office where the rest of the payrolled resources work every day and that engine lasts 15 years, then its a very clearly a capital expense and an asset.
We all do this at the conclusion of every successful job interview. And performance review. And budget review. IMO it's a reasonable floor on the value engineers produce: if you produced an asset worth less than your salary you should be concerned for your career.
This whole discussion is sort of orthogonal to the real point, though. The state (or the IRS, or Congress, or whatever) has decided that for some reason, if Jim gets paid $100k his boss can deduct $100k in expenses, but if Jane gets paid $100k her boss can only deduct $20k, because she's typing different things into a different box the computer.
This is a categorically stupid thing to assert. It's a stupid thing to say and it's a stupid thing to believe. Payroll is an immediate cost, paying for the development of software is not remotely the same thing as purchasing a capital asset, and this is exactly what we get when we keep electing nonagenarian plutocrats to office year after year, decade after decade, who think the internet is a series of tubes.
Well, that's what I had in mind, but the concept is why agile focuses on shipping early and often. Well, mostly it's to get in more feedback iterations, but engineer hours are not immune to time-value of money analysis.
> This is a categorically stupid thing to assert. It's a stupid thing to say and it's a stupid thing to believe. Payroll is an immediate cost, paying for the development of software is not remotely the same thing as purchasing a capital asset
But it's also not like paying a janitor to clean toilets and empty wastebins where we know there's no residual value accruing to the employer. Companies do buy and sell intellectual property in the form of copyrighted code, and in the form of patents. Heck, ARM basically makes a living licensing out the cores it designs.
This obviously isn't perfect and the disparate impact has unintended consequences that could make things worse overall, but the accusations against the senate are a non-sequitor given the power of the purse lies in the House.
This is an incomplete description. The ordinary rule depends on the nature of the expenditure. If your expense is for building an asset that generates recurring revenue—including paying people to build such an asset—then you cannot immediately deduct that expense. Instead, you must depreciate it over the lifetime of the asset.
The issue here is that software development is sometimes genuine R&D and other times more like building an income producing asset. E.g. if you spend money building infrastructure software to move bits from one place to another, that’s more like a factory building a conveyer belt than it is like investing in fundamental pharmaceutical research.
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.
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.
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.
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.
> this change brings the USA in line with international financial reporting standards
Which ones?
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)
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.
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?
A $100 chair is unlikely to get amortized, but a $100 chair as part of $450k office remodel might.
Can you be more specific?
I’m not sure whether I understand why that now applies only to software and not other things.
If you’re a body shop lending out devs to build software for other people, that would be different
The argument on HN is always just complaining that it’s unfavorable to devs; but it’s perfectly reasonable with regards to actual tax principles.
Software engineers hired to build product are not exclusively building a finished product, and are increasingly necessary as part of the expense of operating that product long term. Industry trends have gone towards combining and blending developement, security, operations, and design.
This is handled in existing tax law; building or improving a capital asset is amortized, repairing or maintaining it is expensed. It can be a pain in the butt, this is why accounting is not a trivial profession.
We could (and I think should) treat software the same. Some software engineer work is absolutely creating a capital asset. Some is absolutely high-priced janitor work. It makes sense to allow for both with your tax code.
Before Sec 174, s/w development costs were subject to a choice: amortization as if they were a capital expense, or regular deduction as a normal operating expense. Companies could decide which category to put costs into depending on the nature of the work (and presumably to suit their own interests).
Sec 174 removes that option. Or rather, it narrows it significantly. You must be absolutely confident that you paid developer X for ONLY maintainance work before deducting their salary.
After 5 years of constant expenses, the deductions match the costs. If expenses diminish, deductions exceed costs.
-> this is bad (in the short term) for companies that are growing.
It takes 5 years to fill the pipeline, so even if the steady state would be fine, getting to that state might be impossible.
No! Any company (with software development expenses) for the first 5 years after Sec 174 went into effect!
But I agree that much of the outrage seems due to a confusion that 80% of the deduction is lost completely (vs deferred).
There is no rational basis for this tax change it was a vindictive attack on blue states in the first Trump admin and an attack on California and SV in particular along with the SALT tax changes.
15 years in the case of foreign developers.
I'm not sure it's helpful to simplify quite that much, doesn't this usually depend on whether we're talking about operating expenses (typically rent, utilities, salaries, supplies) or capital expenditures (typically buildings, land, intangibles...)?
For software that used to be an option.
Sec 174 removes the option.
This is a mess.
Presumably the value for tax purposes is based on the cost because the cost is harder to manipulate for something like software. Like some big box stores argue under the "dark store" theory they should be valued for much less because they have restrictive covenants banning competitors from using the property if sold, or that vacant property should be used as comparables.
Sorry if this sounds naive—I'm genuinely struggling to understand why the labor of software engineers would be treated differently from other kinds of work. It seems logical that either all labor costs should count as costs, or none should. If different types of jobs are treated differently, what's the reasoning behind that?
If you hire someone to clean your office, you are not creating an asset so it is expensed
Building software is generally creating a long lived asset
In the meantime, the parent comment says "Depreciating means that if you pay an engineer $200k in a year, in tax-world you only had $40k of real expense that year, even though you paid them $200k." and then "So the effect is that it makes engineers much more expensive". This seems to also imply that capitalized expense is worse for tech companies?
In the case of Sec 174, not can but must.
When you buy an office chair you capitalize the asset on your books.
The chair manufacturer in turn pays wages to a person to construct the chair. Those wages are not capitalized, the manufacturer deducts them fully when they are incurred.
The main issue is that “software manufacturers” must now depreciate those same wages over 5 years. Which is unique and does not pass a basic common sense sniff test.
Trump wanted a large tax cut. To make the numbers look better (notably the CBO reporting), Congress looked for ways to increase revenues. For whatever reason, they settled on software development, and devised Sec 174 to generate tax on 80% of s/w developer salaries in the first year it went into effect.
Why s/w development? I have seen no indication of the reasons for this; I suspect it was perceived as a "rich field" and thus suitable for this sort of treatment. Also, somewhat more fairly, s/w developers do tend to produce semi-durable assets that in some ways are like capital goods.
I wonder if some influential ones pushed for the change figuring it would carve their moat a little deeper.
so is congress the slave of trump? not clear what is going on here. are the legislature and executive branches not independent?
I am not sure how this can be a serious question right now, in 2025.
However, in 2017 the capitulation of power and authority by Congress was less obvious. What was still true was that the Republicans who controlled Congress and the President all wanted a large tax cut for higher income Americans, and were thus aligned on the goal. Since the President doesn't actually write legislation, this alignment was all that was needed to push the bill through.
it was a serious question.
I did know that the republicans are in the majority in both the lower and upper houses, after the recent US election.
but was not sure if that was the only factor involved.
I am not from the US. just an interested observer.
hence my question.
1) the Republican majority in both the house and senate are entirely on board with all of the Trump administration's actions, and thus have no reason to pass legislation or act in any way separately from the executive branch.
2) the Republican majority in both the house and senate are craven and terrified of the MAGA base that Trump commands, and in many cases in the house, are very much connected to it, so much so that they will do nothing to stand up to the executive branch even when it has crossed lines that have not been crossed before in many different areas.
Take your pick.
" H.R.1990 - American Innovation and R&D Competitiveness Act of 2025 "
https://www.congress.gov/bill/119th-congress/house-bill/1990...
> A bipartisan bill reintroduced in Congress last month could offer long-awaited relief to small tech companies hit hardest by an obscure federal tax change — one that many founders say is threatening their survival.
> Industry groups from the Small Software Business Alliance to the National Venture Capital Association and TECNA are backing the bill, which sits in committee. Over 100 House members have signed on. The bill would reverse the changes not just going forward, but also retroactively.
https://technical.ly/startups/r-d-tax-change-reversal-startu...
> On May 13, the House Ways and Means Committee passed “The One, Big Beautiful Bill.” This bill includes several provisions that, if enacted, will be important to businesses claiming research and development incentives:
> The bill would suspend the current amortization requirement for domestic R&D expenses and allow companies to fully deduct domestic research costs in the year incurred for tax years beginning January 1, 2025 and ending December 31, 2029.
https://www.crowell.com/en/insights/client-alerts/house-comm...
> The OBBBA suspends required capitalization of domestic research and experimental expenditures for amounts paid or incurred in taxable years beginning after December 31, 2024, and before January 1, 2030. Under the OBBBA, at the taxpayer’s election, such expenditures can be: deducted as paid or incurred under new Section 174A(a),
https://www.skadden.com/insights/publications/2025/05/the-on...
The total amount spent will ultimately be expensed, whether immediately or over five years. The sole impact is on the time value of money, which I don't believe warrants the current scale of developer dismissals.
Also, the claim that taxes are levied even during a deficit seems incorrect. While I'm not familiar with US tax law, it's typically possible to carry forward losses.
For example, if a developer is hired for five years at $100 annually, the expensed amount in the fifth year would still be $100, even after any legal changes.
If I pay for ... pretty much anything whatsoever ... I cannot write it off my personal income tax here in Canada. Not housing, not food. Medical expenses will come off the bottom not off the top.
Yes, corps get all kinds of tax breaks, whereas individuals don't.
So why do we need to give these large, very profitable companies another tax cut?
Or maybe we should be asking, what of the 2017 tax cuts are they willing to give up to pay for this change?
Remember that after a few years, none of this matters. You might be paying $200k in salary to an engineer and can only deduct $40k, but you're also making deductions "earned" in previous years?
Basically, I reject the argument that this change is responsible for layoffs. It is not. And changing it won't lead to a hiring binge. Layoffs exist to suppress wages in these largest employers.
Maybe we should allow a 100% software development tax deduction if the company hasn't fired more than 1-2% of its workforce in the last calendar year. Or maybe only if the workforce is unionized.
This whole thing is so anti-worker. It doesn't have to be this way.
https://americansfortaxfairness.org/ways-means-trump-tax-law... Quote: Corporations have traditionally been allowed to deduct all of their research expenses in the year incurred, even though a lot of research pays off slowly so its costs should similarly be written off over time. Adopting this position, and as a way to partially pay for its big corporate-rate cut, the Trump-GOP tax law decreed that starting in 2022 companies would have to write off research and experimentation expenses gradually: over five years for domestic research, 15 years for foreign. This requirement to “amortize” the expense over time reduces the value of the deduction, increasing corporations’ taxable income and requiring them to pay more in income taxes upfront. The Ways & Means legislation proposes to retroactively reverse this provision.
For example: your average AAA game will likely produce the vast majority of its value inside the first year upon its release.
At the extreme opposite end you have things like enterprise software using subscriptions, whereby the software continues to produce value year over year, but you're generally also paying developers' salaries to maintain and enhance the softare year over year. That, too, makes little sense in spreading out salaries as a cost over 5 years.
I can't really think of any cases where a piece of software is sold as shrinkwrap software, requires no ongoing maintenance/updates, and is expected to continue earning revenue for many years afterward. That just isn't the industry we live in.
There's also a ship-of-theseus problem here. How much change has to happen to a codebase before it's not the same software anymore?
Actual honest valuation of software is something that requires actual evidence.
Software returns have extremely high variance. From a lot, to none, to high negative (For projects that don't complete, or worse, deploy to negative effect.)
Only now if those people you have to pay to keep them running are software developers, you have to act like the money you’re spending on them is helping make new value, not merely paying interest on technical debt. Fun!
https://www.taxnotes.com/research/federal/other-documents/tr...
what happens if an engineer leaves after the first year, or at any other time?
what happens to the calculations then?
Unfortunately it won't make a difference because the vast majority of Americans simply do not care. So very few people will be putting pressure on their representatives, and nothing will change.
And then what happens after five years if they are still around?
Not dumb at all! In the second year, you get to deduct ⅕th of the previous year’s salary and ⅕th of the current year’s salary; likewise, in the third year you get to deduct ⅕th of the first year’s salary, ⅕th of the second year’s salary and ⅕th of the third year’s salary.
The key thing is that in the fifth and following years, a business would deduct a fifth of each of the previous five year’s engineering payrolls. This is not great for a growing business, but it’s murder on a startup trying to grow from zero.
You’re forgoing returns on .1 * salary * tax rate for 5 years, .2 * salary * tax rate for 4 years… for every software dev in the company.
If I paid salary of 100k, and invested 100k. Then I made 0 profit regardless, actually I would have a loss of 100k?
I guess the difference comes in if I made 200k, so I would have a profit of 100k.
Not sure how it affects the pnl, but is it fair to say it doesn't affect total tax, just distributes it more evenly across years?
But if you are correct that is supremely dumb, especially in place like US.
> (3) Software development
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
Strictly speaking every single one of those jobs falls under that role. If you "develop" any software, which arguably includes even making or maintaining excel spreadsheets (as excel is a graphical array lang inspired by APL), then you seem to fall under this umbrella.
Q: Isn't this about whether you're doing "R&D" or not?
We may need to argue about the word "development", but in any case, do you have a reference for that?
https://www.thomsonreuters.com/en-us/posts/tax-and-accountin...
"In the United States, to help spawn innovation as part of the Economic Recovery and Tax Act of 1981, the Research & Experimentation Tax Credit was introduced. Although it was initially supposed to last three years as a specific incentive to encourage companies to invest in R&D, Congress recognized its value in helping businesses create more products and services.
However, it was quickly realized that this tax code made calculations for R&D complicated, especially for small businesses, which led the government to create other iterations of tax codes in order to help clarify the situation. However, not until 2017 and the enactment of Section 174 of the TCJA has there been such a comprehensive change to R&D accounting.
Indeed, before the TCJA’s enactment, businesses deducted the total amount of R&D expenditures as an expense in the taxable year. Beginning in 2022, all costs related to R&D must now be amortized over five years for US-based companies or 15 years for non-US companies."
I'm struggling to understand why we think R&D expenditure - including software development - should not be amortised?
For example, if you're a first-year startup and you make a software product with $1 million in revenue but pay $900,000 in software dev salaries, and the tax rate is 25%, without amoritization you pay (1,000,000-900,000)*0.25 = $25,000 in tax and make a profit, but with 5-year amoritization you pay (1,000,000-900,000/5)*0.25 = $205,000 in tax and take a loss.
But since established companies aren't affected as much, they are advantaged by the amoritization rule.
year 1: company deducts $40k: 1/5 of the salary for year 1.
year 2: company deducts $80k: 1/5 of the salary for year 2, and 1/5 of the salary of year 1.
year 3: company deducts $120k: 1/5 of the salary for year 3, 1/5 of the salary for year 2, and 1/5 of the salary for year 1.
year 4: company deducts $160k: 1/5 of the salary for year 4, 1/5 of the salary for year 3, 1/5 of the salary for year 2, and 1/5 for year 1.
year 5: company deducts $200k: 1/5 of each of my 5 years of employment. I leave the company after year 5. Year 1 of my employment is fully deducted.
year 6: company deducts $160k: 1/5 of years 5, 4, 3, and 2. Year 2 of my employment is fully deducted.
year 7: company deducts $120k: 1/5 of years 5, 4, and 3. Year 3 of my employment is fully deducted.
year 8: company deducts $80k: 1/5 of years 5 & 4. Year 4 of my employment is fully deducted.
year 9: company deducts $40k: 1/5 of year 5. Year 5 of my employment is fully deducted.
what is the corporate tax rate? It's not 100%, so you're deducting a fraction developer's salary from your income, right, you're not saving that much on your tax bill each year. you're paying tax on the income you used to pay the developer.
I dunno man. In a world where places like Amazon pay $0 in income tax each year, I kinda feel like companies should be paying more taxes. companies get all kinds of deductions that employees don't get themselves, and will never get. businesses have a whole heap of unfair advantages already.
I'm sure the capitalists among you will want me dead for saying this, but: pay your fair share. I don't care what the law says, pay enough that no one can say that you're a lamprey on society, please.
The questions of this legislation, though, are different:
Should we incentivize companies to hire corporate executives instead of engineers?
Should we favor trillion dollar companies over startups? (It is much cheaper for Amazon to loan money to the government than three people starting a new venture from scratch, so this favors concentration.)
If you agree that we should discourage hiring engineers in favor of management, that concentration is good, and that low corporate tax rates are good, then this legislation is perfect.
I say that it's good if you believe in low corporate tax rates because this legislation was passed to pay for overall corporate tax cuts, which primarily benefits the largest companies. Amazon actually pays $11.3 billion in income taxes a year (not zero), so on net, even though they have a lot of software engineers, they benefit from this legislation, because they effectively traded having to float money to the government in exchange for lower tax rates.
Big companies care about tax rates more than liquidity, because their borrowing rates are cheap, whereas small companies care more about liquidity (they effectively cannot borrow, or it is very expensive) and their profits are low. So this effectively subsidizes big companies at the cost of small companies.
Maybe they felt like software companies were too heavily incentivized by the tax code to invest in unproven, unsustainable businesses and would structure their businesses in a way that meant they’d never end up paying taxes.
Startups would blow a bunch of money on R&D for unprofitable moonshot ideas for a few years then the company would fail most of the time, with the government missing out tax revenue where workers could have been allocated to more profitable ventures.
Still, I think that the more cynical take is more likely (big companies lobbying to make it more difficult for small companies to disrupt their businesses)
This punishes small businesses and new businesses more than any large org because it massively increases the cost of operating for the first few years.
And importantly it just doesn't do so consistently.
Orgs should have a higher tax burden. This just doesn't do that, instead this is punishing orgs for trying to do new things and rewarding existing momentum (i.e. the large corporations that already have a profitable revenue stream and a long trail of employment history).
that depends entirely on how much the business is taxed. every $1 deducted from taxable income is NOT $1 saved in that business' tax payment. It's much more like $0.10-$0.30 saved in taxes.
The only businesses this hurts are small or young businesses that have yet to develop an established product and reliably revenue stream.
For them in the best case scenario they make so little that they can't even deduct but otherwise this means taxes being paid pulling away from the runway that a young business has before it builds up a stable income stream.
And I'm not making this up. We are about to get cash flow neutral in our company, and this law will literally kill us and make 20 US citizens unemployed.
It’s a rare thing these days: a law everyone can hate, regardless of ideology. You don’t have to be a Laffer curve believer to recognize that you can design tax schemes that would destroy competition and/or cause excessive deadweight loss. After all, if all taxes were created equal, we could just replace them with a money printer.
Hopefully it doesn’t take three years to reach a consensus on these moronic tariffs, which are far more destructive to the overall economy.
Edit: Looks like Amazon did indeed pay 15B+ federal taxes in 2024 (excluding sales tax etc)
https://www.macrotrends.net/stocks/charts/AMZN/amazon/total-...
https://en.wikipedia.org/wiki/Corporate_tax_in_the_United_St...
> I'm sure the capitalists among you will want me dead for saying this, but: pay your fair share.
Is the equivalent of a finance person saying to a developer "can't you just hire more developers and we can build our product faster". In other words, it's not that simple.
The phrase “fair share” is political, which is to say meaningless. The people who have earnestly invoked this phrase in my experience have resisted requests to define the term and have sometimes launched personal attacks for daring to raise the question. Will you break this streak? What in concrete terms is Amazon’s fair share? Your fair share? If they differ materially, why?
I’m a capitalist and therefore wish zero ill toward you. Cronyists, authoritarians, and collectivists may want to abuse you, and that is a contemptible way to treat one’s fellow humans. Both parties to a free exchange benefit. Both sides can win because it is not a zero-sum game. As a matter of fact, you are advocating for a game that your side cannot possibly win. Consider that Amazon has enormous incentive to hire the very tippy-top best accountants and tax attorneys to find every crack in the tax code that middling staffers and nepo hires can barely scribble. It does create some benefit to society in the form of the incomes that these highly paid tax pros generate, the comforts it affords them, and the downstream jobs demand for those comforts creates. But in the big picture, it’s adversarial rather than constructive. Certainly we can come up with a more peaceful and constructive arrangement.
21%
> It's not 100%, so you're deducting a fraction developer's salary from your income, right, you're not saving that much on your tax bill each year. you're paying tax on the income you used to pay the developer.
Which is a problem if you don’t have the money to pay the tax.
Let’s combine your and the parent’s examples: 1 principal engineer @ $300,000/year; 3 engineers @ $200,000/year = $900,000/year. $1,000,000 in sales.
year 1: Company makes $1,000,000 and pays $900,000 to engineers for a $100,000 cash profit; it deducts $180,000 from $1,000,000 for a $820,000 paper profit, and owes $172,200 in taxes. Since $172,000 > $100,000, it has a $72,000 cash loss for the year. There is not year 2.
Or maybe it raises enough capital to have a cash cushion. A similar thing happens in year 2: it makes $1,000,000 and pays $900,000 to the engineers for a $100,000 annual cash profit, deducts $360,000 from $1,000,000 for a $640,000 paper profit and owes $134,400 in taxes, still more than the cash profit. The cumulative cash losses are now $106,400.
Once again in year 3 it makes $1,000,000 and pays $900,000 to the engineers for a $100,000 annual cash profit, deducts $540,000 from $1,000,000 for a $460,000 paper profit and owes $96,600 in taxes. Hey, it doesn’t owe more than it made in taxes! On the other hand, its cumulative cash losses are now $103,000. Three years, three million in revenue, 2.7 million in expenses but it’s in the hole by $103,000, still more than its annual profit.
In year 4 it makes $1,000,000 and pays $900,000 to the engineers for a $100,000 annual cash profit, deducts $720,000 from $1,000,000 for a $280,000 paper profit and a $58,800 tax bill. It still has a cumulative $61,800 cash loss.
In year 5 it makes $1,000,000 and pays $900,000 for a $100,000 annual cash profit, deducts $900,000 from $1,000,000 for a $100,000 paper profit and a $21,000 tax bill. Good news, the company now has a cumulative cash gain! At the end of five years and $5,000,000 in sales the capital owners have made … $17,200. The engineers made $4,500,000 and the government made $483,000.
In year 6 it makes $1,000,000 and pays nothing (this is very unrealistic, because in the real world every product requires maintenance …) for a $1,000,000 cash profit, deducts $720,000 from $1,000,000 for a $280,000 paper profit and a $58,800 tax bill. People complain that it’s only paying a 5.88% tax rate, ignoring the years of amortised losses. But hey, after $6,000,000 in sales the owners finally have $958,400. They take it as a dividend and it gets taxed at the top marginal rate, so they pay an additional $354,608 in taxes.
In the real world, of course, sales may or may not cover salaries, sales may increase or decrease from year to year, markets may change and so forth.
> I don't care what the law says, pay enough that no one can say that you're a lamprey on society, please.
That’s an impossible target. Any random person can say, unreasonably, that someone else is a ‘lamprey on society.’
But I do wonder what the effect on smaller shops would be.
"What they've actually done, congress said, is bought a capital good, like a machine."
Replace "like a machine" with "like software"
We should not implement horrific legislation just because we agree with a single provision. Calling your representatives is the right path, but you MUST be explicit that you do not support the current bill being brought forth that addresses this.
Here are a few pieces for context, if you're not informed about what's in this bill: https://thehill.com/opinion/finance/5339440-the-big-beautifu... https://archive.is/No4o9
Please, I beseech my fellow Americans, do not vocalize any support for this bill. We'll correct the ills of the 2017 administration in time, but this is not the way to do that.
How? We have - at times - had democrats in charge since 2017 and they did nothing to resolve this either. We appear to be waiting for flying pigs.
If you want a better answer, tell me who our friends are in Congress this decade, and how much it matters. From what I see, the answers are "few" and "little." The Americans who don't blame us for giving Trump the country blame us for not giving him enough of a platform. The appearance of demanding favor on our part at such a moment seems unwise, but that moment does sufficiently explain why we find ourselves facing the aforementioned paucity of well-wishers.
This is bullshit. The carveout already exists and it's designed to attack software engineering specifically.
Its penny-wise and pound-foolish.
No comments yet
https://ssballiance.org/about/engage/
And Michelle Hansen was an early organizer https://x.com/mjwhansen
If you work at all in energy, the Clean Energy Business Network is also proactive in fighting for change. A couple of years ago they put me touch with Ron Wyden's staff. The Democrats are almost universally opposed to what was added to Section 174.
https://www.cebn.org/media_resources/house-republicans-advan...
Fight this thing - it is terrible. Not just for software but any innovative business in the USA.
This is an annoyance to rich tech companies. This entire thread is propaganda to brainwash us into thinking helping big tech is a win for small software devs.
Big Ag did this to small farms. Now big tech is doing it to us.
Do not give these tech lobbyists the weapons to crush small developers by acting like they have our best interests at heart.
For every developer I hire I pay tax on 90% of their wages in year 1.
So, if I hire a 200k a year developer, I have an increased tax liability of 180k. That works out to paying about $75k ~ $85k. So my 200k developer becomes an 285k developer.
Now, eventually I could regain that cost, or I could do like I know of a few companies and commit tax fraud by not correctly reporting my expenses.
BTW even as a partner I am hit by this - to correctly file my taxes I have to report my retirement savings as development revenue and pay tax on what is supposed to be tax free.
Pretty cool.
If you make software in year one and then sell it in year two, stop pretending you didn't create an asset. We aren't special snowflakes. We dont deserve welfare.
If that’s correct, then the section means software developers are actually special snowflakes treated differently by the tax code
If you want to argue against the current tax code, point out that currently companies do not have to amortize the pay of executives even though arguably their work fortifies the company's ability to make a profit in future years like the work of software developers does.
Same as a financial analyst implementing new processes and spreadsheets to better control money spending.
One can argue that most white collar worker is investing in future profit. Sales people nurturing long sales cycles, lobbyists, content marketing, SEO.
Why are software developers (and merge lawyers) snowflakes among all those types?
In other words, maybe it is a bad idea to treat people (employees in this case) like property even in our tax code? (I'm personally OK with software's being treated like property.)
Personally, I think we should either eliminate the corporate income tax (and increase capital gains taxes correspondingly), or allow for all capital spending to be written off fully on day one. Your position of treating capital spending on software differently makes no sense to me.
All this does for large companies is that it might cause them to layoff developers.
For a small software company it can threaten our existence.
My current favorite theory as to why there hasn't been more of an outcry is that many companies ignored the rule change (either out of ignorance or as an alternative to going out of business), and are forced to remain silent.
How does that even work? You’re saying many companies committed tax fraud by ignoring the law change and continued to deduct software developer salaries as they had in the past?
I find that hard to believe.
It snuck up on a LOT of people, including CPAs, and represented tax bills for businesses that were multiples of the previous year's tax bill, and sometimes _multiples_ of their actual cash profit.
It's also so counter-intuitive that you can't deduct software dev salaries, that many people still don't believe it works the way the law says it works. If you read the comments here and in other threads where this has been mentioned, on Hacker News or elsewhere, years into this fiasco, you'll see widespread doubt and misunderstanding. Many people equate this to the same R&D rules for the older tax _credit_ or will argue that it can't possibly work the way the articles say it works. People don't magically begin to understand section 174 just because they run a business, and it's not in their financial interest _TO_ understand how it works. Many can't afford to.
The traditional capital asset treatment applied to software leaves a lot to be desired. Some software is a capital asset, but much just isn’t. Or at least should be considered to depreciate rapidly.
The IRS is using a theory of value where software (1) is a capital asset (okay, sure), (2) has a six-year deprecation schedule (uhhh why not 5 like everything else?), and (3) is valued at the exact cost of all inputs to it, including salaries (uh oh).
This is unlike how capital assets are valued for any other industry! And it has the effect that hiring a second lawyer is “cheaper” (for five years anyway) than hiring a second developer.
Thanks, that really gets at the heart of the issue.
Are any other business processes and elements — e.g. accounting mechanisms, print design, sales funnels — valued this way?
An other issue is competitiveness with other jurisdictions that don't have these tax laws, but even if that were normalized there are jurisdictions that are far lower tax in general regardless of the classification.
Is your dismay that it's unfair compared to other industries or that the policy doesn't reflect reality that software is a capital asset that has a lifetime longer than 6 years for many companies?
Using salaries as a proxy for value of the asset encourages only the safest shovelware bets, discouraging risk taking lest your asset be taxed at substantially higher than it's worth.
Avoiding that risk-adverse dynamic is why Section 174 was written the way it was since the 50s to encourage R&D, and it's paid off in spades.
This is neither the current situation nor even a theoretical possibility.
Isn't that the whole point of all sorts of tax strategies, for instance Buy, Borrow, Die?
https://www.forbes.com/sites/davidrae/2022/07/14/how-the-ric...
Well, that framing is just wrong. The companies are paying taxes over what those employees created, not over the employees. Does the company own the software?
> The IRS is using a theory of value where...
Notice that all of your 3 points are exactly like any other kind of capital.
Most countries exclude salaries from the income calculation because it has good practical consequences (both on making accounting cheaper and on incentivizing companies to hire), not because of any theoretical problem.
If the goal is to measure retained value, I'd ask how much a competitor would pay to acquire your 5-year-old code (for direct use, not for hacking you) without feeling cheated afterwards.
The same is true for all true R&D, which is why historically the government has tried to provide protections for R&D work to incentivize people to not just churn out the safe bet over and over again. Patents fall into this category, but software patents are (rightly) hard to come by. Through 2022, the risk of software development was offset by the ability to expense the costs and avoid a tax bill, and this was good policy if your aim is to encourage innovation.
The capital asset theory could still work if there were some way to appraise the value of the actual asset you created. But absent such a way, this thinking is deeply flawed for all but the most shovelware of jobs.
I don't think this comes close to being true. It would make ripping off a competitor pointless.
It's technically correct that tax is levied on "net income", but that's an accounting term which means something different from "money_in - money_out" when there are capital assets.
One justification for this is, although you spent the cost, you received equivalent value in the form of the asset itself.
This means if it costs $100k in salary to make software this year, and you get $30k in income from the software this year, your bank balance will lose $70k (which is expected) and you'll have negative income in the ordinary way of thinking, but you'll be charged income tax (which is new) despite losing money, as if you gained (almost) $30k instead of losing $70k.
Your tax accounts will show an increase in net assets, despite the decrease in your bank balance, because they will show the software as being "worth" (almost) $100k, regardless of what it's really worth right now.
This is particularly hard if you're a small company or (non-VC-funded) startup that's already stretching to cover the cost of speculative software development. Being charged income tax even while you're losing money developing software (in the ordinary way of thinking about money) is what's new in the tax code. It makes it harder than before to do speculative developments, making some kinds of development non-viable that were viable before.
If you start the year with 0$ in your bank. After the end of the year you have made $200k in revenue. However you "spent" $200k on software salaries. However, because these are software costs, they must be depreciated over 5 years, so only 20% of that $200k software cost can be applied as depreciation cost which is considered an expense. So your net income for this year is $200k revenue - $20k depreciation expense = $180k. Your 15% tax on this is $27k.
So you made $200k and spent all of it on software, so your bank account is 0, but you owe $27k in taxes.
(Of course an asset that generates $200k/year is actually worth far more than $200k, so in that case 20% depreciation seems even more absurd)
I'm all for it, just curious as the law has existed for 8 years and been in effect for 3. Seemingly little interest from anyone in the tech world to put lobbying behind reversing it until this point.
What changed?
Just because Hacker News doesn't care doesn't mean it hasn't been a big focus of small business lobbying since before it came into effect.
The actual reason it hasn't been repealed is politics: It makes the CBO budget deficit look much worse. It seems as though neither party wants the optics.
- A business is usually taxed on its profits: you deduct your revenue from the cost of producing that revenue, and the delta is what you are taxed on.
- In software businesses, this usually means if you spend $1M in software development to develop a web app, and it makes $1.1M in that year, you'd get taxed on the $100K profits.
- However, a few years ago, the IRS stopped allowing the $1M to be deducted in the year it was incurred. Instead, the $1M was to be amortized over 5 years, so now the business can only count $200K as the deductible expense for that year. So now it's going to be taxed on "profits" of $900K. Assuming the tax rate is 20%, that means the business owes $180K in taxes, even though it has a total of $100K in the bank after the actual expenses were paid. So it would have to either borrow to pay taxes or raise venture capital, meaning that VC-funded companies would be advantaged over bootstrapped ones!
- The letter's goal is to bring things back to how they were (and how they are for all other businesses): let businesses deduct their actual expenses from their actual revenue, and tax that actual profit.
I am neither a lawyer nor an accountant, this is just my understanding of this issue.
Edit: Switched the tax rate to 20%. The logic is still the same.
> even though it has a total of $100K in the bank after the actual expenses were paid.
People running a business can perfectly understand the concept of liquidity. And yes, just because you transform money to something else, then it doesn't mean that you should not be taxed on it.
The extreme example is a company that buys gold on the last trading day of the year - now there is no profit! On the first day they sell the gold again and does tax eviction.
The core question is to what extend software constitutes an asset or consumption.
(Personally, I do not believe that software constitutes an asset in any meaningful way, but a practical tradeoff could be that software is a 10% asset)
Btw,this is how it is done in many construction projects also. Like bridges, budings, etc.
Software is more like a blueprint for a building, it's not the building itself. How much is a blueprint worth? If 100 architects spent a year on it, does that mean the blueprint is worth 100 x salaries? It might actually be worth nothing, if the blueprint asks the construction team to do something impossible.
Software is even worse though, because at least with construction, there are known physical models and real-world constraints (like physics) that decide whether a design can or cannot be implemented. A piece of software written today might be entirely unimplementable and worth nothing, but a breakthrough elsewhere in 5 years might make it extremely valuable at that time
I don't know how to tax this.
But I can identify the issue: You can channel your revenue into a non-taxible assets that you can bring into the next accounting period tax free.
Regardless of this is stocks, bonds, gold, unsold inventory, or IP, that is not fair.
I would hope for someone to device something that is fair and easy to understand. And then I would hope for them to get it through to the politicians.
In this example, it seems like you're assuming that the revenue from the sale of the gold would not be taxable, but I don't see why that should or would be the case.
ETA: also, gold is far, far more fungible than any particular software
Isn't part of the problem with our industry that, even it is an asset, its value can be hard to determine even for a long time after you've written it, and it may be pretty weakly related to how much you paid to build it?
- you might have spent a lot on developers last year but next year you find out that you're the new Quibi and no one wants to use your product
- you might have had a small, tight team and what you built turns out to be hugely valuable (like instagram or whatsapp)
- ... and to the degree that the software is part of a valuable business, how do you really assign value to the software as versus the go-to-market plan, the partnership/distribution agreements, etc that helped make the business succeed?
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Maybe we can finally deduct all that technical debt.
And it's transferable -- if your company fails, there are companies out there that will buy the rump of your company to realize the unrealized tax refunds.
Which is why it's usually fairly straightforward to get a factor loan to pay those $450K in taxes -- it's backed by an asset.
Factor loans are usually expensive with a high interest rate. Because you can get a factor loan, the taxes are not going to immediately bankrupt the company in the short term, but the high interest rates are going to hurt in the long term.
Not a lawyer nor an accountant. Not even an American.
Which is not(?). According to https://en.wikipedia.org/wiki/Corporate_tax_in_the_United_St... , federal corporate income tax rate is 21%, + additional <10% for state level, not sure about local level.
Some big tech companies affected have laid off teams around the world, perhaps in order to mitigate the numbers looking bad to investors; so in a way, this adversely affected tech employees globally.
Every country should have such a rule for software businesses, which is an industry where all the cost has to be upfronted, so that bootstrapping is facilitated. There are plenty of smaller markets where the VC model is not the most appropriate funding instrument.
It was Trump's 2017 Tax Cuts and Jobs Act, which amended IRS code.
If you want to pass something using only 50% of our representatives you have to pay for it with something else to balance the change. 60% of the vote and you don’t care what the Congressional budget office says. The primary software development hubs are not Republican leaning. The same reason SALT was changed. Voting matters.
You need a 60% vote or you need to take away someone else’s pie. Medicaid/medicare/social security are current contenders based on Republican planning.
The bigger issue is Republican voting districts gain less from putting it back in place. Most software devs are on the coasts and Denver.
In politics it may seem like a good idea to create these time bombs because they can't imagine them going off but sometimes they do and here we are. The pied-piper strategy with the basket of deplorables was supposed to make it easier for Hillary to win 2016 but she didn't so we got the bomb going off instead.
To put it in domestic terms:
* [January 1st] "Honey, I want to rent a Ferrari, I did the math and it fits if it's just one month! Pleeeeeease?"
* [February 1st] "Oh, that? It's the Ferrari rental-fee for the next month, don't worry, it's an existing expense, it's already part of our regular budget, so clearly we've proven we can afford it. We'll just have to cut back on insulin for the kids."
[0] https://www.americanprogress.org/article/senate-republicans-...
All congressional bills receive an estimate of their budget impact over the next ten years. Whatever happens after ten years doesn't count.
The politics are that a bill should have no budget impact within that ten-year window. As an uncharitable stylized example, you'd propose to start paying random subsidies to constituents immediately in the amount of $200M / year, forever. 8 years out, you also plan to raise taxes on somebody else, someone who would never vote for you in a million years, in the amount of $1B / year, which may or may not fade out after two years. This is a bill with no budget impact.
It doesn't matter, to you, whether that spike in collections for years 9-10 actually happens or not. If you failed at targeting it exclusively to people you hate, you might prefer that it doesn't.
> It was Trump's 2017 Tax Cuts and Jobs Act, which amended IRS code.
And took effect in 2022 (per what I've read elsewhere, and other comments on this post; could be off by a year)
(just clarifying that the effect was "a few years ago", but I agree that it's important to know the origin of it, which you were pointing out)
But it's still useful to know the real rate is 21%, thanks.
In my example, the tax rate isn't the point though, it was used just to illustrate the math.
The main point is that it makes no sense to require amortization of software development expenses. The idea that this letter is an attempt to restore rationality in the tax code.
Appreciate YC and folks like @itsluther pushing this forward. This isn’t just a tax issue—it’s about keeping innovation and talent thriving in the US. Let’s get it done.
https://5calls.org/why-calling-works/
You don't need to use that site - the point is that if you want to have the loudest voice, make some calls.
Golly. Is this a problem? Hasn't this been solved already? Do they want to solve it? How much do they want to solve it, in terms of United States Dollars?
This is now easy for many HNers to build, with the hard parts now done by free off-the-shelf components.
The customer could have those email tallies even faster than the phone staffer tallies, for the timely read on constituents that the 5calls.org Web page suggests.
And then they can manually or semi-manually review the emails later, for nuance and genuine responses. But they got the important tallies immediately, on their live dashboard and timely alerts.
(But keep those human staffers answering phone calls, since I'd guess that AI on phone there would alienate the very engaged voters who still make phone calls.)
And then what? (asking honestly lol for anyone who's done this before)
There are two possible motivations for the impending change. One is the argument that deducting 100% of developer labor isn't ideal because developers create IP whose value can compound as an asset, rather than the labor being 'consumed' in production as with manufacturing (where any long-term benefit after the initial sale goes to the consumer). The other is that it's a legislative stick designed to herd a powerful investor/donor lobby into supporting budget legislation in exchange for turning the favorable tax treatment faucet back on.
You can see the older HN threads, people were shocked, and it comes up perennially, with calls to restore favorable tax treatment that incentivizes vs punishes business growth. Same pattern in social media responses to news articles.
I'd brace for some rather heavy sarcasm on social media for anyone brave enough to tread those waters.
I ask simply "If I have $1m of revenue and $1m of expenses that is entirely software dev salaries, what do you think my profit is for that year? How much should I be taxed on that?"
https://www.house.gov/representatives/find-your-representati...
https://www.senate.gov/senators/senators-contact.htm
https://ssballiance.org/
She has also spoken about it on podcasts: https://www.youtube.com/watch?app=desktop&v=oF-xsDd1A4o
I guess another way to ask is, does this mean that if you keep someone for 5 years and don't change my wages, is their yearly salary effectively fully deductible? If so, does that create incentives to try to keep employees longer-term in order to make them more cost-efficient?
The situation would be that employers want to keep employees for at least 5 years, but providing them with raises as an incentive to stay is also more expensive than it was previously.
Seems like a bit of a mess.
How does this work in other countries?
For a stable company that has a constant revenue stream and an established body of workers there's no much of a difference: instead of paying all tax for current year salary you pay 6 chunks of tax for 6 different years of salaries - which would be about the same amount.
For early companies things can be pretty tough. You may earn, say 100k in a year one and pay your employee 100k. Your company now has 0 in the bank, but for the taxation purposes the taxable amount is like (100k - 10% of 100k = 90k), at 20% corporate tax that would mean that the company has 0 in the bank but owes the government $18k in taxes. It's much harder to start a software business in this kind of environment.
Some startups do it to window-dress their balance sheet, though. But making it compulsory is absurd.
What 174 does is make software a capital expense with no choice in how it gets depreciated over time. It's like having to expense the electricians wages during factory construction over 5 years.
If you work at $CORP for 1 year (or 1 minute), $CORP gets to deduct the 1/5th of what they paid you for all 5 years, whether you still work there or not.
IE, is this really an anti-competition law, designed to protect entrenched tech industry players and prevent up-starts from, well, starting?
Whether this is malicious or intentional or just incompetent or something I honestly don't know.
Donald Trump's deeds and behaviour is just about the only place where I find myself unable to apply Hanlon's Razor.
It seems like an inevitable outcome of this is elaborate system-gaming to mitigate how much employees fall under S174…
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That being said, I do think there's a little sloppiness in what is categorized as "R&D" in the software development. Is code maintenance R&D? Bug fixes? Performance improvements? Is it a "capital asset" no longer under R&D once it hits production? This aspect has always seemed too gray given how much money is at stake in taxes.
But again, this complexity is an advantage for more established firms with legal departments and the infrastructure in place to document everything in order to handle audits. Which, in my view, is a form of regulatory capture; this presentation of symptoms of regulatory capture is pretty common.
One potential argument I can see is that maybe this balances out since presumably the more established firms would have less "R&D" as a fraction of expenses to deduct in the first place?
Edited to fix some typos and clarity.
A one-off shell script has an asset value of zero after its single use but still counts as a long-term capital asset for tax purposes.
Like you said, this is a pretty weird characterization of software. I guess it would make sense to lawmakers who have no idea how it works. Combine that with the fact the lobbyists pushing this are 99% representing big tech and you start to get a picture of how this happens.
Warning- brain dump not directly related to topic, read at your own risk. Lol @ software never wearing out. I wonder how that works with something like Microsoft windows licenses(as opposed to something like 365 which has new "features" every year)? I'm actually asking, how do you amortize an "asset" that you are admitting only lasts a year? I know SaaS on consumer side is categorized as opex.
Does this capital-asset view of software have any effect on the attractiveness of SaaS going forward? I know we were talking about the development side of things not the consumption side, but it seems like this capital/asset perspective conflicts with the reality of how software is often sold. SaaS is partially justified as the cost of 'maintaining' the software (in addition to support and new features). The fact that maintenance is required belies the perspective that it's a capital asset. Coming full circle, this must require the vendor/developer demarcate programmer effort between feature vs. maintenance & support. If anyone has a sythensis of all of this or reference it would be appreciated
I'm not following this. Factories, ships, stamping presses all require lots of maintenance and up keep.
Yeah devs spend their time fixing bugs, but a large percentage of those bugs are the result of the software needing to work under new conditions or with new version of dependencies.
That fundamentally different than a tractor breaking down from wear and tear while doing the exact same thing it's always done.
TeX
https://web.archive.org/web/20190428184722/https://texfaq.or...
A) Irrelevant since it's not being run by a for-profit corporation, the kind that would care about these tax bills.
B) It's a bit of a cheat. TeX itself may be approaching an asymptote, but scientists writing papers in TeX do not use it directly or on its own. White it has created a reference upon which to build it has also externalized all that research and development into the thousands of accompanying packages which do keep receiving new features and need updating just to stand still.
Consider a different situation, a business pays employees to build a residential home for $275k total, the land is worth zero in this simple example. Currently they can deduct $10k a year for 27.5 years to depreciate the home, even though they paid $275k up front. Allowing the business to deduct the entire $275k at once, only recovering the difference when the depreciated asset is sold is basically a tax free loan at the expense of all other taxpayers.
To be fair there are many situations where the government wants to incentivize spending in certain areas. Certain types of businesses can avoid depreciation and deduct full expenses, like for farm equipment and heavy duty vehicles, previously most R&D. Or where accelerated or bonus depreciation is used because most of the income is in the first few years. Like a taxi follows a 5 year double depreciation schedule, in the first year a $25k taxi would depreciate $10k, then $6k the next year, there are many examples that are on a shorter schedule.
Keeping a 5 year straight line depreciation on R&D benefits large established businesses and burdens startups, this is primarily a political decision and not economic. Another issue is that not all R&D spending results in a valuable asset with a usable life
Those construction workers will build the building (= the product) on top of the land that you acquired (another asset) which means you are assets become the land itself and the building. Land and building will have their own asset value (purchase price or evaluation) that will be used for over X years.
As far as I understand as an European watching this from abroad, they are trying to evaluate the value of the asset (= code, the product) of a startup by using development costs as a proxy.
Land value is generally not a deductible expense at all, and as such it is not depreciated. Some related costs like property tax, insurance, mortgage interest are deductible when paid though
They’re literally aren’t any. Treating payroll expenses as depreciating assets is insane, and that’s why it isn’t done in any other context— not in the US or anywhere else in the world.
That sounds like a biased explanation, but it’s genuinely the truth: it was stuck in the Trump’s tax bill to help it evade budget balancing rules, but was designed to be so stupid that a future Congress would “surely” repeal it, after the TCJA had passed successfully. This sort of horse-trading happens all the time with budgets, but for whatever reason, this provision was never undone.
With software companies, developing software (like Microsoft Windows) allows you to profit from that software over the next 5 years. Matching profits with expenses makes rational sense.
Frequenty, politicians use the tax code to implement popular social policy. This way they can reward things and groups they want to, and still be able to say "we aren't giving subsidies, we aren't giving people cash, we are simply giving tax deductions and tax credits" These sorts of programs are, across the board, more distorting of the economy and make the tax code incomprehensibly more complex. But matching expenses against profits? makes perfect sense.
you should be able to choose if you'd like to do immediate accounting or amortized accounting.
people on this site complaining about lobbyists, regulatory capture etc, up and down the page, but wanting their own industry favored is a great illustration of the problems we face.
What kinds of workers who produce IP?
What kinds of workers who build equipment retained by the company (not quickly sold)?
And how are taxes for those employee expenses currently handled?
Curious how this is assessed of you could share?
e.g. from a few days ago:
https://news.ycombinator.com/item?id=44208063
https://news.ycombinator.com/item?id=44208875
https://news.ycombinator.com/item?id=44207240
https://news.ycombinator.com/item?id=44205579
https://news.ycombinator.com/item?id=44205479
https://news.ycombinator.com/item?id=44204864
https://news.ycombinator.com/item?id=44204808
https://news.ycombinator.com/item?id=44188578
I realize listing a few examples doesn't prove anything, but when I've skim these threads, I see lots of comments like that and few counterarguments. Hence my impression.
It figures out who your reps are and sends them a pre-filled note based on what matters to you (you can edit/customize it before it sends). Includes a call script too if you're up for calling...
https://secure.legisletter.org/campaign/cmbpf5js80000l70d5fn...
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure
I don't see why that would not apply to software developed for bug fixes or maintenance.
You can deduct internal tools, training, maintenance, data conversion activities, installation, distribution, marketing, promotion, etc.
So it's definitely worth it to use an issue tracker to tie your engineer's commits to bugs and categorize their bugs as either feature development or one of these activities.
Depending how aggressive you want to get, if a LLM builds a feature that you beta launch and the engineer fixes the LLM's mistakes to get it working you can probably argue that is correcting errors or defects in software that isn't adding new functionality and thus deductible.
Eg
1m salary costs 100k other costs 1.1m revenue 0 profit 0 tax
Anything else doesn’t make sense to me
This change aligns (to a closer extent than before) Tax accounting with GAAP accounting. Let’s say the tax code returns to pre-2017. Would the same people seeking this change seek a change to GAAP? No, because it would hurt their profitability.
See https://exactera.com/resources/what-one-big-beautiful-bill-a... for details. I will warn you, though, that the provisions are complicated enough that it is hard to read the article.
The problem is that we don't know whether this will get fixed in that time frame. Also that big bill introduces its own problems. A future Congress with debt financing problems may not realistically have the freedom to revert terms such as this one.
I am looking for US-based founders who want to make the leap and move to EU. We're doing an incubator like no other, in Brussels at the heart of the EU capital. 15 startups, 6 months hybrid program, only US-based founders. Here in Belgium, software dev is taxed for correctly, and there's a 0% capital gains tax which is super attractive for startup founders.
Everyone in the Fall 2025 cohort gets a 25% share of our take on any exits. That means by joining the incubator, you invest in 14 other startups by founders who are as crazy as you.
This was created right here on HN, in a "Who is Hiring" job post, with feedback from the ensuing community. I'm looking for a few more founders to apply before July 1st.
Deadline to apply July 1st. https://sevenseed.eu
And if you aren't interested in making a startup but just want to move, email me, I will help you get a job in EU.
You're not really taking a financial gamble .
Also I think it's worth mentioning that, software engineers are people who are paid salaries, while farm equipment is not.
A more accurate comparison would be if instead of buying a finished tractor you hired a couple of handymen to come build you one from scratch. It may or may not work at all. It might end up costing you 10x or 20x or more what you would have paid for an off-the-shelf solution (so valuing it at the labor cost is a ridiculous thing to do. Who in the market is going to buy a custom-built tractor at 20x the market rate?)
Keep good paying jobs in the USA. If we need immigrant labor, give them Green Cards instead of precarity.
This is counter-intuitive but absolutely the right answer. Giving immigrant employees full bargaining power will murder H1B mills. And no waiting periods in precarious limbo either. If you want an immigrant worker, they automatically get all bargaining power as an American and then you make your decision based on the market forces.
I'm all for giving more people a faster path to a green card if they want it.
But should a person really have to get permanent resident status to have a decent job here? If someone wants to work for a few years in the tech industry in the US but expects that they may want to go back to their home country (or another country), and if they and their employer pay the appropriate taxes, what's wrong with that? Similarly, if I as an American citizen wanted to work abroad for some period without having pre-decided to become a permanent resident ... why is that harmful?
It does not deter expats, it protects them from exploitation and abuse by employers.
If green cards are easier to get, then the people that want them, and who you seem interested in protecting from abuse and exploitation can choose to apply for them -- great! It would have this effect even if you don't require every employee to have a permanent residence rights.
If you create the requirement where only someone with permanent resident status can be hired, but you don't make green cards actually easier to get, then you've just put in some protectionist/nativist barrier.
But if someone doesn't necessarily want to be a permanent resident, but does meet some other work visa, and an employer wants to hire them, you're just creating an extra bureaucratic obstacle for them, and claiming that it's for their benefit.
If an employer wants someone to work in Country A, then they should be hiring domestically first; if they cannot find someone in Country A and want to hire someone from Country B, then that job is necessary enough that a Permanent Residency permit should be a non-issue for the employer and employee alike.
It really is that simple. If a job cannot be done on domestic wages then it’s not a job that needs doing in the first place.
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This was phrased a bit confusingly, at least to me. Can you explain?
The idea is to reduce offshoring as a means of dodging tax liability for multinational firms. If they want the tax cut here, they gotta pay up everywhere else they do business.
Ah I see. You mean if the effective tax rate for a worker in some country is 20% but the effective rate in the US would have been 30% they have to pay the difference in the US? Interesting idea but if the salaries overseas are much lower, how much revenue will that extra 10% raise anyway? More likely the worker would fall into a lower US tax bracket.
I wouldn't mind seeing something like that for corporate profits actually.
The math has only shifted even more favorably for extracting even more unreasonable concessions too.
Or do you think there is a sudden lack of Indian H1B applicants? Or that tech workers suddenly have more political power than they previously did?
* Foreign workers in the USA have more earning potential under such a compromise, allowing them to send more money home or bring family members abroad
* Foreign workers abroad see less exploitation and have more impact on domestic policies and industry
* Domestic workers see a slowing or reversal of outsourcing, increasing wages and job prospects
* Corporate leaders hold off another over-centralization of power by another hostile state, retaining agency and profits for themselves.
“The math” is not the be-all-end-all of things, for if it were we would have never lowered taxes as low as we did, enacted debilitatingly unsustainable defined-benefits programs like many pensions and Social Security, or handed out corporate subsidies as if money was free. “The math” paints a clear outcome of the current path that harms the collective peoples of multiple countries just so a handful of monied-classes can reap most of the rewards for themselves.
Stop relying solely on short-term data with limited constraints, or big data patterns absent context. Do some critical thinking and path predictions, and these sorts of answers become pretty glaringly obvious, as does the ability for a unique compromise to head things off now instead of a full-on hostile protectionist agenda if this is left unresolved.
Or, frankly, that if the people who are not currently in charge were put in charge, something different would be happening.
It seems rather silly, frankly.
Uh oh!
> give them Green Cards instead of precarity
Oh, right, yes! :D You had me for a minute.
Outsourcing and exploitative visas are a negative feedback loop that shrinks the actual economy vis a vis stagnant or decreasing wages and higher employment precarity. To have a healthy domestic economy, domestic employment must be prioritized.
If there should be tax discounts to make it attractive to develop software is the political decision.
The number one problem for startup employees is that the AMT tax makes it impossible to exercise options in a company that is doing well. YC is showing us that they will fight for changes to the tax code when it benefits their bottom line directly, but are silent when it comes to helping startup employees hold onto equity that they have earned.
Think carefully before joining a YC startup as an employee.
YC was founded more than 20 years ago, and I don't recall any lobbying on the issue of employee tax treatment. If they do care about this they are being super quiet about it.
I dont want software development to become the oil and gas industry.
More specifically, if software devs aren't creating capital assets, then what exactly is being bought during an acquisition? Don't we tell ourselves our work is building an asset that can be reused and sold. The operational aspect of our job still seems to be treated as opex.
Our entire industry is built on the belief our software is an asset. This feels like big tech wiggling for a tax break but disguised as some grass roots effort to help small tech.
I am strongly against this as the ethics feel very wrong. Our industry doesn't need tax welfare.
The oil and gas industry, and the tobacco industry et al., lobbied (and lobby) for things which they know were (and are) doing harm. This isn't the case here, IMO.
Code is not an asset in all (I would even argue most) cases - proven by companies which open source the vast majority of their code and live from service contracts or certain addons to it, and basically pay developers to commit to open source software.
Often they buy market- or mindshare. There is no way in hell e.g. Akamai wouldn't have been able to bootstrap "Linode 2". I'm unable to see the secret sauce why OpenAI couldn't have created their own VS Code fork instead of buying Windsurf. But why do that if you can acquire their existent customers / market share? Additionally, the term "acquihire" didn't plop into existence with no precedent.
Being able to immediately get a full deductible for salary, which in many (western) countries is the norm for virtually all businesses, does not strike me as particularly immoral. It's a normal office job, developers do not create gold out of thin air.
Big tech isn't even the most affected by this change, they (often) have obscene margins - small software companies do not.
One problem with the change being appealed is software engineers have become more expensive to carry and that has contributed to layoffs. Unfortunately there appears no logical reason software activities are taxed differently than other things you might hire a skilled worker for. When one goes looking for a logical and direct motivation for the change it’s tough to find. This special tax treatment is a one-off, and engineers earn high salaries - so is it possible this change was to fund some other tax cut? The optics aren’t good, at least.
Finally and more importantly, this change impacts risky ventures & startups most of all since larger tax bills may be incurred even on failed ventures. When you look where economic growth is coming from, the lion’s share is in tech. Higher costs and layoffs discourage experimentation and discourage the development of a broad range of capability in an organization by way of carrying large teams of engineers. It thus jeopardizes the current most promising sector in the US economy. Yes, tech is also having an “are we the baddies” moment - but layoffs and higher costs for startups are a separate issue that dominates here.
If you want even further proof just look at how this is activating the HN community. Comments are through the roof. This issue warrants more than a default response.
From the legislation:
“ Section 174(c)(2) provides that the required § 174 method does not apply to any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (including oil and gas).”
Is there an explanation how software developers creating software for oil and gas companies are different than for any other industry?
Or can we assume that the oil and gas industry managed to (yet again!) have its lobbyists where it mattered?
Both of these problems are rampant. I’ve seen entire shops with underpaid foreign workers and mass layoffs with workers replaced with offshore and nearshore firms.
That said, here's my perspective on 174 (which should be reverted to full deduction on the year the expense is incurred).
You do not have to amortize 100% of your engineering costs. Not even close.
Here's the key:
How does this work?You are going to design a new robot arm.
In January, you spend $100K to "remove uncertainty". In rough strokes, this means discovering all the things you don't know and need to know for this robot arm to become a product. This amount will be amortized over five years under 174.
Now, with uncertainty removed, you spend an additional $1.1MM from January until December for engineering implementation. No uncertainty being removed. Just building a product. This is 100% deductible that tax year.
Analogy: You want to build a new brick wall with specific properties. You spend $100K to develop a new type of brick and $1.1MM to build the wall using that brick. The $100K is amortized, the $1.1MM is deductible in one shot.
BTW, at year 6 the amortization schedule reaches steady-state and you are amortizing the full $100K every year. In other words, the impact of 174, if treated intelligently, is the time value of money until steady state is reached for the engineering costs incurred to remove uncertainty.
https://www.law.cornell.edu/cfr/text/26/1.174-2
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
i.e. it needs to be amortized. That's the part that people find most objectionable -- software development is special-cased for unfavorable tax treatment that does not apply to other fields.
[1] https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim...
All I am saying in my prior comment is that clever treatment of your engineering costs can improve tax outcomes. We have done just this --under the guidance of our tax attorneys-- and have had no problems at all.
Of course, a company that is a pure software enterprise and not multi-disciplinary, like us, is, well screwed.
Keep in mind that at year 6 you are effectively deducting your full R&D costs, even for a pure software company. The real cost is the TVM due to the phase shift, at year six you reach steady state (assuming steady costs).
If you are a pure software company (no hardware or other activities) your options are rather limited.
Also, as I said in other posts, at year six you reach steady-state and are amortizing the full amount every year. Example:
Not ideal, of course, but if you are not a "flash in the pan" company, at year 6 it feels like this rule doesn't exist, other words, you are amortizing the full $1MM every year. The TVM on the deductions you could not take until steady-state is reached is part of the hit you take. The other is taxes on profits from operations during the early years.Most companies don't have profits rise exponentially during the first few years, so it might not be too bad. Also, there are many ways to mitigate this. For example, section 179, which allows businesses to deduct the full purchase price of qualifying equipment and software in the year it's put into service, rather than depreciating it over several years. In other words, instead of paying taxes on your profits, use that money to buy GPU's computers, tools or whatever you might need. Easy.
A tax attorney is essential if you want to minimize tax liabilities intelligently and within the bounds of the law.
But, yes, 174 needs to go back to full annual deductions.
Edit: not sure why the downvote, it's an honest question. I'm not arguing anything.
Understandably there's an everyone for themselves aspect here, but that makes these kinds of call to actions a bit hollow to me.
pg used to do this kind of thing on HN from time to time, especially on internet freedom issues, so this is a bit of return-to-roots for the site. SOPA is the one I remember but there were others.
This tax treatment can increase the cost of a dev by 5-15% which leads to less hiring and a looser job market. Which will impact us even if we're not looking for work because most companies look at market rates when deciding raises.
I don't doubt there's an impact here, but it's not because they have a real interest in any other topics that concern me and hiring, H1B and so on.
1. Lots of groups want to pay less tax to suit them. Just because it benefits us doesn't make the lobbying logical.
2. We call ourselves builders. But you presumably can't claim the cost of building your house against income tax. So why is out building different.
3. Come on; be honest: software development was always the loophole. You have coders building next year's features and you are saying that is a legitimate expense against this year's profit. You couldn't have made profit this year without a half implemented unreleased AI sparkle?
I really think the law is silly from a practical point of view but it's good insofar that other countries' silicon valleys need a chance ;)
I remember he did an anti-SOPA thing on HN which involved some kind of banner at the top of the frontpage. It's probably saved at archive.org somewhere.
Freedom - an essential public good - is much different than using HN for lobbying for tax policy that favors YC.
You know that doing this is a big change. Why not be straightforward about it - including whose idea it is, what the parameters are, what the new policy is, etc.? If you feel you can't or feel hesitant, then you know something is wrong.
It changes the nature of HN in my mind, to something manipulative - not unlike other social media, and not unlike the trend in other businesses who embrace manipulation to greater and greater degrees.
We each have a personal responsibility to the world, as adults, to stand up for essential values. If we don't, in each of our communities, workplaces, and homes, who will? We are the only ones here; we aren't kids (not that you said we are, but to clarify the point) who can destroy things and leave it to the adults; nobody else will come in and save us.
> getting back to HN's roots
You can see a lot of companies and politicians using that - find some historical precedent and claim that is the 'roots'. There are many more roots then that.
It's expressly the intention of democracies to hear from constituents (and conversely: groups of constituents). That we happen to call that feedback loop "lobbying", and that the term carries some societal baggage from corporations using/abusing it is unfortunate, but shouldn't be an indictment of what is otherwise a democratic function.
Some group FOO with a shared ill should be able to convene about it and petition congress about it.
"You have $1M in engineering expenses annually. So now instead of deducting $1M per year. Now you can only deduct $200K in that tax year. And then amortize it over 5 years"
But we all know this isn’t a vacuum. The US tax code is massive, corporate tax reduced over decades.
You are telling me this single paragraph in the US tax code is directly causing massive layoffs? Or is this single paragraph in the US tax code used as a scapegoat to initiate layoffs and then used to pump P&L and thus still approve C-level executive bonuses?
These big companies have access to massive accounting firms and they can’t work their fucking magic on a single paragraph of text? I call bullshit on big tech.
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.
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.
Employees are an operating expense.
You might be more familiar with the term "salary and benefits".
> why should it be tax deductible?
Business expenses are tax deductible.
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.
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.
PDF: https://www.congress.gov/crs_external_products/R/PDF/R48444/...
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.
in practice, the slippery slope argument is that this will entrench big-money players, which i don't support, because they'll be the only ones who can afford this. i also fear that it'll lead to an irresponsible adoption of "virtual coders" because it's cheaper than paying juniors.
kind of a rock and a hard place for me.
(And thanks— I can't believe I missed that!)
Dang, you’re one of the bad ones.
"The main issue to me is now every political issue that isn't raised here makes HN complicit in its success/failure. Once HN starts down this path it can only continue and accelerate or else face accusations of support/opposition through silence."
H1B rules around changing jobs means that even if the employee joins at a market-level salary when they come to the US, they tent to stay at the same company much longer and can be exploited. The new company has to go through a lengthy paperwork process to allow the visa holder to switch jobs. Also, since the tech world tends to use things like stock options / RSUs / monetary bonuses for large parts of compensation package and those do not count towards "salary" you may have a situation where an h1b holder on paper seems to be paid fairly but in practice get only about 40-50% of what their peers get.
If they were allowed to change jobs freely they would be able to negotiate their compensation fairly. The companies would be less intensified to hire H1Bs to save money and would also consider local talent for same positions. Everybody would win: both H1B visa holders and their families and American workers, too. The only losers would be consulting firms (not a huge loss, to be honest, most of their employees are overseas anyway, so the can absorb the cost) and BigTech (they have enough money, anyway).
There are other problems for H1B holders, like getting a green card is something their employer, and not them, can do - another area for abuse. And then some nationalities have to wait much longer to go through this process then others (essentially, the US migration service says that the country has too many people from India and Pakistan already, thank you very much), and there are other issues I don't recall.
I'd say most of foreign devs in the US are actually L-1 that is actually worse because L-1 prohibits the dev from changing jobs unless the dev gets a new visa.
So, that said: H-1B shouldn't exist for software. The point of it is to fill jobs that cannot be filled by an American for some reason; a condition that doesn't exist in software development. Hire immigrants as software engineers, fine. But find a way to do it that isn't bullshit.
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.
[0] https://news.ycombinator.com/item?id=44204565
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.
What really? How does this work.
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.
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 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 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.
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.
Software is being singled out
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Business taxes as a whole are stupid and a convoluted mess, just let businesses make as much money as possible and roll with it.
It would be much more efficient to tax consumption at a flat rate, and give a variable rebate for elderly/children/whatever.