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United States Technology

US Tech Innovation Dreams Soured By Changed R&D Tax Laws (theregister.com) 35

Posted by BeauHD from the forced-amortization dept.
Brandon Vigliarolo reports via The Register: A US federal tax change that took effect in 2022 thanks to a time-triggered portion of the Trump-era Tax Cuts and Jobs Act may leave entrepreneurs with massive tax bills. Section 174 of the US tax code -- prior to the passage of the 2017 TCJA -- allowed companies to handle the tax bill of their specified research or experimental (SRE) budgets in one of two ways: Either capitalized and amortized over the course of five years, or written off annually. Of the many things covered by SRE, most crucially for our purposes is "any amount paid or incurred in connection with the development of any software," which includes developer salaries.

The TCJA included a post-dated change to Section 174 that took effect on January 1, 2022 that would no longer allow companies to automatically expense any SRE costs on an annual basis. Going forward they'd all have to be amortized over five years -- a potential budgetary disaster for companies that haven't been doing so in the past. As pointed out by Gergely Orosz of The Pragmatic Engineer, a theoretical company with $1m in revenue and $1m of software developer salary costs could have claimed it had no taxable profit in 2021. The required SRE amortization rate of 10 percent would mean the org had $900k in profit in 2022 -- and a six-figure tax bill coming due the following year. This isn't theoretical -- Orosz said that he recently spoke to several engineers and entrepreneurs who've been surprised with massive tax bills that have led to layoffs, reduced hiring, and left some companies in financial distress.

House of Representatives member Ron Estes (R-KS), who last year sponsored a bill to restore Section 174 to its pre-TCJA option to expense or amortize, likewise said an a late-2023 op-ed that the changes have led to R&D at US companies -- not just in the tech sector -- shrinking considerably. "Since amortization took effect, the growth rate of R&D spending has slowed dramatically from 6.6 percent on average over the previous five years to less than one-half of 1 percent over the last 12 months," Estes said. "The [R&D] sector is down by more than 14,000 jobs." [...] That, and the Section 174 changes make the US far less enticing as a place to open a business or do R&D, and the only one with such forced amortization in the world. Not much is being done to fix the TCJA problem with Section 174. The Estes bill, along with a related bill introduced in the Senate in March 2023, have not undergone a committee hearing since their introduction. The White House hasn't mentioned anything about Section 174.

Meanwhile, the IRS released a notice (PDF) reminding tax payers about Section 174's changes.
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US Tech Innovation Dreams Soured By Changed R&D Tax Laws More

US Tech Innovation Dreams Soured By Changed R&D Tax Laws

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  • Funny accounting (Score:2, Insightful)

    by FeelGood314 ( 2516288 )
    Suppose you have a company that made 1m in revenue and had no expenses. I would expect that company to pay tax on the 1m. Now imagine that company had 1m in revenue, no expenses and bought a 1m asset. You still made a 1m profit, you just chose to reinvest all of it. You still owe 1m in taxes. You can't immediately write off the software as worthless.
    • you'd pay the tax on the asset over time via depreciation

    • Re: (Score:2)

      by doug141 ( 863552 )

      I think you meant to say "you would owe taxes on 1m," not "owe 1m in taxes." More importantly, what you you suggest a nation do about tax cheating corporations that make 1m in profit, and in order to pay no taxes on it they create a subsidiary in a tax-free jurisdiction, have the subsidiary produce a bogus product or service which they sell to the corporation for 1m, shifting all the profit to the tax-free jurisdiction with just a little paperwork?

    • Re: (Score:2)

      by butlerm ( 3112 )

      Anything that you do amortization wise for corporate taxation does not bring in more revenue for the government, it just discourages investment by having companies pay artificial tax bills up front. That might make sense for something that is financed over decades like a major construction project, but it is a disaster for research and development.

    • Suppose that you make $1m in revenue selling burgers, and then you buy $1m worth of meat to make more burgers. You won't owe taxes, since the meat is part of your costs for making and selling those burgers.

      Suppose that instead of buying meat, you buy a burger-making factory which costs $10m and lasts ten years. Same deal, you're allowed to subtract $1m per year for ten years from your revenue, or $10m immediately, to account for the cost of making burgers with the machine and having to eventually replace it

  • For the software shop that historically broke even, they should be claiming that they are providing services rather than selling software. It is highly likely that the software they are selling is highly configured to match one or two customers.

  • This seemed like it mostly dealt with people outsourcing R&D.

    If you have engineers doing stuff on staff, this doesn't affect you(from what I found)

  • but they can't claim it all in the same year...

    " Going forward they'd all have to be amortized over five years -- a potential budgetary disaster for companies that haven't been doing so in the past."

    So if a company had a good accountant, that paid attention to the planned change in the tax law, they would have been ready for this.

  • They've had 5 years to prepare (Score:2, Funny)

    by Anonymous Coward

    If they aren't prepared, then that's just too bad. Perhaps their accountants are overpaid.

  • "I'm sorry, I can't hear you over trying to snipe political points." - US Congress
  • I wasn't aware that the industry had those anymore. I thought we were using AI for that.
  • I've ever seen in a law and it was also a time bomb. It has numerous provisions that were designed to expire in the middle of Trump's second term so that Republicans could use them as bargaining chips or just plain to hurt the economy after handing it over to the Democrats

    I really wish we could stop dancing this Charleston. Every few years the Americans put the Republicans in charge and they massively deregulate and cut taxes on the wealthy while ignoring the national debt that they themselves are rackin

  • Funny that the soap bubble here on /. cries about the "rich" until it hits the tech world and then ... but orange man bad!

  • This has to be for companies that contract their software development out. Employee salaries are deductible for companies, so if the costs were for software developers employed by the company they'd be deducted from revenue before taxes were calculated and the scenario given would result in 0 tax liability.

  • Tax breaks for well-off is theft from the rest of us.
  • This silliness, too, would be corrected by King Kackle's flat tax: All income taxed at the same percentage, and no more deductions, ever. Amazon would not be able to dodge taxes for years, for example.

  • Most established companies have been doing SRE things for many years, so whether the the SRE expense is immediately deductible or done so over several years shouldn't matter. It's like a 4-year vesting schedule for RSUs. Only the new employees are penalized by the multi-year vesting schedule. For employees who have been receiving the benefit for many years, it doesn't matter.

    I guess if the SRE budget is wildly variable from year to year, that might make a difference. Maybe that's the real gripe, that th

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