Hacker News Reader

Comment by Majromax | Hacker News Reader

> In what world is revenue taxed before expenses.

All of them, for capital expenditures.

If I buy a widget-maker for $100,000 and use it to make a profit of $50k/yr on widget sales (net of staff and materials), then I don't have a $50k loss in my first year and $50k in profits thereafter.

Instead, the cost of the machinery must be amortized (depreciated) over several years, with a five-year period being typical but not universal. In the latter case, even though I had a $100k cash outlay for the machinery, I'd still record a tax-time profit of $30k for the year ($50k operational net revenue less $100k/5 years).

Is software an operational or a capital expense? There are arguments for each approach, and reasonable governments might decide the issue differently.

View on HN

I think the main difference is:

1) You can't just go get a loan for "a software" like you can "a widget maker." Most businesses with these large capital assets get loans on them and then it works out nicely as you pay back the loan on the asset while you depreciate it.

2) This would be like the law saying "anything you do in the business of making widgets at all is now a capital outlay" which is obviously ridiculous. It's not that they said "if you buy expensive tools to make software now you have to capitalize them", it's written that any expense at all in service to software development is something now capitalized.

Not that you agree with what's been done and I appreciate your example, but I think it does give a good contrast to see the differences.

Man, this sounds pretty apocalyptic to me, but maybe I'm misunderstanding it entirely

Let's say someone bootstraps a company under the current laws. They deposit $200k into a corporate bank account. In 2023 they pay themselves $50k and make no revenue. In 2024 they pull in $60k in revenue and pay themselves $50k again. For tax purposes, they'd have $60k - ($10k from year 1) - ($10k from year 2) = $40k in profit to pay corporate taxes on?

I don’t actually know how it works for paying yourself. But if you were paying someone else, in 2024 they would get 10k carried over from 2023 and $5k from 2024. You only get 10% the first year. I am not an accountant and this is not tax advice :-)

If you are paying only yourself you are probably a disregarded entity for tax purposes and you don't get to write off your salary anyway (before 2022 or after).

In theory you could treat your one man startup as a C corp, but that would make very little tax sense, regardless of these changes. Also if it's your own 200k, you don't pay tax on it because you've put it in the bank and then taking it back, even in a C corp: you pay tax on the revenue from others.

The problem seems to arise for purely bootstrapped companies with contractors that have no startup capital. This is quite rare i think, because you'd probably start incurring expenses for a couple of years before you earn any revenue, expenses that you can then amortize once the revenue appears. If you are a small company but not a startup, then your software expenses are probably not R&E, they are ordinary section 162 expenses.

It's a law in the opposite direction nevertheless impeding innovation (i wonder the intent!), because it adds complexity for the tiny poorly funded businesses

Thanks dude. This is a good reminder that I need to talk to an accountant before I start messing around with tax-incurring stuff

Reply on news.ycombinator.com