Tell HN: Help restore the tax deduction for software dev in the US (Section 174)

- 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 50%, that means the business owes $450K 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.

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?

It would be more instructive to imagine how much a fresh (non-criminal) competitor would pay to acquire your 5-year-old code without feeling cheated afterwards.

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.

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.

Eg

1m salary costs 100k other costs 1.1m revenue 0 profit 0 tax

Anything else doesn’t make sense to me

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.

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.

* 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.*

https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim...

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.

Keep good paying jobs in the USA. If we need immigrant labor, give them Green Cards instead of precarity.

This was phrased a bit confusingly, at least to me. Can you explain?

Uh oh!

> give them Green Cards instead of precarity

Oh, right, yes! :D You had me for a minute.

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

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.

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.

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.

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.

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.

I remember he did an anti-SOPA thing on HN which, IIRC, involved some kind of banner at the top of the frontpage. It's probably saved at archive.org somewhere.

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.

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.

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.

You might be more familiar with the term "salary and benefits".

> why should it be tax deductible?

Business expenses are tax deductible.

(And thanks— I can't believe I missed that!)

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.