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Comment by lifeisstillgood | Hacker News Reader

I’m not sure I fully understand the problem here

1. I start “Facebook for dogs” It’s gonna be massive. For the first year me and five guys code away in the garage and I use my savings / credit card / family trust fund to pay them 100k each. Expenses are 500k, revenue is, amazingly, 1.5M and taxes owed is 500k.

At this point turning round and saying the development was R&D, and claiming 500k of tax breaks is just (to me) ripping off the American Taxpayer.

And I’m not even an American Taxpayer.

If the revenue was zero would anyone suggest that the taxpayer give me 500k to help ? (Ok I would because I like free money but most people won’t)

Or am I missing something?

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Everything you just said but imagine revenue is $500K, and you spent $500K on salaries for the team.

You can only expense $100K of the salary costs this year, so even though you're break-even, you pay taxes on $400K in income.

Or, even worse, imagine revenue is $250K, and you spent $500K on salaries for the team.

You can only expense $100K of the salary costs this year, you're already -$250K on the year, and now you're paying taxes on $400K in income. You're destroyed.

VC-backed startups aren't designed to get profitable quickly, and I don't see that as a problem for the American taxpayer, and nobody is saying the taxpayer is giving money or helping. A business losing money should not have to pay taxes on income, as if it's not losing money.

the idea is that normal business expense are deductible.

in this case, your taxable income is $1.0M, and cash flow is $500k ($1.5M - $500k salaries - $500k taxes).

now you have to amoritize it over 5 years. so your taxable income is $1.4M ($1.5-500k*20%), taxes are 700k, and cash flow is $300k.

Uncle Sam just reduced your cash flows by 40% by a simple tax change. You eventually make up the difference, but for fast growing tech companies, that's a large shift in current flows and significantly changes their investment strategy.

See my example here for where it ends up biting you: https://news.ycombinator.com/item?id=44180533#44204246

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