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> It's not enough. I was geared up to start a business this year; this, specifically, has put the brakes on it.

I've read a little about this, but not a lot. How has this put sufficient drag on starting a business that it's impractical to go from zero to one? Is there an aspect of the business model that's particularly impacted?

Your salary costs for all programming and other development can only be written off over a five year period instead of the year you incur them. That means if you are breaking even normally with 1MM of developer costs, the government will tax you as though you made 800k. Because it says 80% of the code they write is a long term investment and therefore needs to be written off over time like a company car or a drill press.

For mature companies, it all evens out, because you write off the costs over 5 years and it's just a blip. You can just borrow that money as a corporate bond, creating a real but manageable cost. For growing companies, it's forcing you to set aside money now (in the form of a tax deduction) you won't get back until year 5. So your burn rate is going up. And, unlike a mature company where the cost decreases over time (by year 5 it was a one time blip), that's only to the degree your salary costs have been stable for five years. Every time you scale up engineering staff, it puts you more in the hole for another five years.

It’s not five years. It’s whatever the useful lifespan of the software. Web dev we usually did 2 years since that was the average lifespan of a web page.

For public companies, they are incentivized to amortize over longer period because it hides expenses and can boost earnings that boosts stock price.

TCJA actually says 5 years for domestic research and 15 for foreign.

Talking about software development which can be classified r&d for tax credits but it can also be capitalized like any other assets.

This pdf has handy chart to determine how to determine software development should be treat for accounting purposes. Grant Thornton is the external auditor for many large companies.

ttps://www.grantthornton.com/content/dam/grantthornton/website/assets/content-page-files/audit/pdfs/2020/accounting-software-costs/accounting-software-costs.pdf

No. TCJA requires all software development costs to be treated as r&d, and capitalized over 5 years (or 15 years). Guidance from pre-2022 no longer applies.

https://www.grantthornton.com/insights/alerts/tax/2023/flash...

My reading of this document is that certain software development activity (e.g., “corrective maintenance to debug, diagnose, and fix programming errors”) is not SRE.

This seems to contradict your statement that “all software development costs [are] to be treated as r&d,” but my experience is that you know what you’re talking about. What am I missing here?

I would suggest reading notice 2023-63. That provision is very limited, and may not be available to you at all depending on the software you're developing, and/or the stage of the development that those steps occur in.

For example, for a new feature: if you plan (SRE), design the interface (SRE), write the feature (SRE), run it through QA (SRE), and then discover a bug and correct it -- that's still SRE.

If you put the software into prod, then discover a bug, then fix it (without improving performance or adding any functionality), then it might not be SRE.

But if you sell software, and you sell or install a release to a customer, and they (or you, under a support contract) discover a bug and fix it... but then you include the fix in your next release, probably SRE.

Or, if you put the software into prod, discover it breaks with a large data set, and you fix it by improving the performance of that section of code, probably SRE.

The expenses falling under that provision aren't going to make a significant change to the impact of TCJA on software development.

Third to last paragraph: if I sell software, a third party bug bounty type guy finds an exploit, notifies me, I patch the vuln, and release the patch as a hot fix: you figure all of that is SRE, probably?

(Disclaimer: not seeking tax advice or legal advice, we’re just two dudes casually discussing section 174 like normal people do all the time).

That notice was a helpful read. I think what I may have been missing was section 5 of Rev. Proc. 2000-50, whereunder non-SRE software dev was also afforded some similar protection. I’ll read that after work but I’d still love you to answer the foregoing.

I re-read the section of the notice that scenario would apply to, and I actually think its pretty clear that is not SRE. Correcting defects discovered after the software is put into production, or discovered in released version of software, and not considered SRE. See section 5.03(5)(b) of the notice. Pre-release bug fixes are still SRE though.

Definitely ask your CPA though. I'm not an accountant.

> 26 US Code Section 174, paragraph D - Treatment upon disposition, retirement, or abandonment

  If any property with respect to which specified research or experimental
  expenditures are paid or incurred is disposed, retired, or abandoned
  during the period during which such expenditures are allowed as an amortization
  deduction under this section, no deduction shall be allowed with respect to
  such expenditures on account of such disposition, retirement, or abandonment
  and such amortization deduction shall continue with respect to such expenditures.

This means something different than adrr is asking about. The IRS has depreciation schedules for different asset classes. For example, trucks are 5 years; real estate is 39 years; but you can under some circumstances use an Alternative Depreciation Schedule (ADS).. the depreciation schedule should match the usable lifetime of the asset.

But if the typical lifetime is 5 years, but you use an ADS of 2 years... you are not disposing or abandoning the asset if you keep it for 2 years. 2 years is the expected life time of the asset, and at the end of year 2, the asset has a value of $0.

If you depreciate over 5 years, but then on year 2 decide you don't need the asset anymore, then you'll dispose of it. The asset is valued at 3/5ths of the original price. The paragraph you're quoting applies to this scenario.

ADS doesn't apply here though, because TCJA requires 5 years for domestic and 15 years for foreign research.

I don’t get. It doesn’t say five years.

Zero to one is considered “R&D” and that’s what this entire thing is about.

I am aware of that part, yeah. It's a shitty change, one hundred percent, and I'm glad to see folks like Wyden trying to unwind it. At the same time, I've owned small software businesses before, and I've started/not started new ones based on whether I thought it would work out. Where I am unclear is what sorts of business plans, on day zero, would be suddenly nonviable when it was viable before, so suddenly overwhelmingly difficult, as to cause such discouragement.

Is there a good chance of recategorization pushing a very marginal business off the cliff? Sure--that Twitter thread, where there are enough details to read in, has a lot of examples of marginal businesses having trouble (mostly because of not being able to plan in the change, which really sucks). But you don't have that on day zero, and going in with the aim to be that very marginal business is probably not the best of ideas. It's not a day-zero problem, and I am struggling to see where a small business with a business plan that was previously worth executing on is now not worth it because of this change.

It fundamentally changes the cost structure and investment risk profile of business plans without changing anything about the intrinsic economics of the business by requiring much more capital to achieve the same outcome. A perfectly reasonable business plan can suddenly become non-viable if there is a huge new overhead to doing business. Suddenly needing to pay $1M to the IRS on "profit" for a company that is barely making money is rather large change to the financial assumptions that make the business viable.

Affected small businesses suddenly need to increase revenue or cut costs by 20% just to keep their business solvent. Most small businesses do not have the structural elasticity or capital reserves to absorb that, nor do many business plans. In the very long term it notionally all evens out but most small businesses don't survive that long and these large new costs of doing business will reduce the survival rate even further.

imagine in year 1 you grossed 100k, spent 200k on salaries, but the new irs rules say you owe taxes on 60k of profits.

To slightly simplify: it forces startups to pay taxes on profits that only exist on paper, with cash that is now much more scarce

> imagine in year 1 you grossed 100k, spent 200k on salaries, but the new irs rules say you owe taxes on 60k of profits.

For a clearer picture on this it’s helpful to include the actual tax amount. With a corporate rate of 21%, the tax would be about $12K.

Now that’s not zero, but it better shows the actual cost born in year one under this plan.

The later years are important as well. As profits continue to flow in, the rest of the cost can be deducted from it. So it doesn’t disappear.

Though you do lose a bit from the nature of present nominal being inherently worth more than future nominal amount. With todays higher rates, that’s an even larger factor.

Right, this is exactly why I'm confused about the all-is-lost framing of this. $12K isn't nothing. It's a pretty shitty thing to have drop on you and I think it should revert. But if you're starting a software business that isn't a solo shop--so you have hundreds of thousands of dollars in payroll--I would expect a $12K difference to not be the needle-mover between "start a business" and "don't"; we're not talking a hot dog stand here.

I understand where you’re coming from but the thing to understand is: most startups are incredibly marginal to begin with. If you tilt the field such that the entire distribution is now ~5-6% lower expected value for any given outcome, you can easily wipe out 80%+ of the startups that might’ve been “worth trying” but don’t make any sense now on a risk-adjusted basis. The entire asset class can become unfundable because the same money taking the same level of risk simply generates more returns elsewhere

Are we talking "startups" or "small businesses" here? I could see this blowing up startups for sure, but the conversation was about small businesses and I'm not sure I see the connection there. In my conception of the universe, you're not rolling out multiple hundreds of thousands of salary when you're hanging out your small-business shingle. You might grow to it, but that'll be over a long period of time.

Not quite. Plenty of startups pull 6-7 figures. We did 6 figure revenue on year 1 of our dev agency startup in past.

I assume you meant "plenty of small businesses". On what margin?

Having to amortize salaries mean that a freshly starting company has to include any salaries paid as (software devs salaries)4/5(corporate tax rate) extra thing to budget - if they don't have access to necessary reserves up front, it might be enough to turn a marginal business out from starting at all.

What does the delay in [0] mean for the stories in the twitter thread? Would they be able to get their tax payment + penalty back? Or would this delay only affect the 2023-2025 tax years?

>It's not enough. I was geared up to start a business this year; this, specifically, has put the brakes on it.

Bro what? Were you starting the business specifically to get these deductions? (I’m genuinely curious, sounds like a fun regulatory arbitrage.)

Taking a 30% hit on business income is a significant thing.

Tech startups are usually “let’s take a gamble” not “let’s pencil in 30% tax deductions.” I’m all for not paying taxes but it’s not typically part of the calculus before starting something.

Which is why so many are having issues. Having to come up with a 30-60k per engineer on top of your expected salary burn rate can have serious impacts to a startup runway.