If the goal is to measure retained value, I'd ask how much a competitor would pay to acquire your 5-year-old code (for direct use, not for hacking you) without feeling cheated afterwards.

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.

The same is true for all true R&D, which is why historically the government has tried to provide protections for R&D work to incentivize people to not just churn out the safe bet over and over again. Patents fall into this category, but software patents are (rightly) hard to come by. Through 2022, the risk of software development was offset by the ability to expense the costs and avoid a tax bill, and this was good policy if your aim is to encourage innovation.

The capital asset theory could still work if there were some way to appraise the value of the actual asset you created. But absent such a way, this thinking is deeply flawed for all but the most shovelware of jobs.

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.

It's technically correct that tax is levied on "net income", but that's an accounting term which means something different from "money_in - money_out" when there are capital assets.

One justification for this is, although you spent the cost, you received equivalent value in the form of the asset itself.

This means if it costs $100k in salary to make software this year, and you get $30k in income from the software this year, your bank balance will lose $70k (which is expected) and you'll have negative income in the ordinary way of thinking, but you'll be charged income tax (which is new) despite losing money, as if you gained (almost) $30k instead of losing $70k.

Your tax accounts will show an increase in net assets, despite the decrease in your bank balance, because they will show the software as being "worth" (almost) $100k, regardless of what it's really worth right now.

This is particularly hard if you're a small company or (non-VC-funded) startup that's already stretching to cover the cost of speculative software development. Being charged income tax even while you're losing money developing software (in the ordinary way of thinking about money) is what's new in the tax code. It makes it harder than before to do speculative developments, making some kinds of development non-viable that were viable before.

This is untrue. The rule is not about taxation, but deductions/expenses. If your expenses cover most revenue, you owe little in taxes. With this rule, a particular type of expense (software engineering salaries) is no longer deductible from revenue to calculate taxable income over which taxes are owed. So you might previously owe no taxes, but now you do. The deduction might carry over to the next few years and eventually (after 6 years) you will reach the same point - assuming your salaries don't go up and your business doesn't grow. The remainder in deductions will be returned after the business stops employing software engineers. I'm not sure why anyone would want the tax code to incentivize a business outcome that all of us would consider failure.

What really? How does this work.

You have $600k in the bank. You hire 4 people to build a house. The materials for the house cost $200k and the 4 people cost $400k. Total expenses $600k and you now have $0 in your bank. You can deduct $600k in expenses, but!, you now have a house worth $$$$. You have to pay taxes on this house as it's an asset and worth $$$$. Your total worth is not $0 (your bank account). It's $0 + the house.

Change house to software. You created something new. The government is claiming that something, software or house, is worth $$$$

I see the point. I have no idea how to value software. I guess the gov might say, to find the value, delete the software, how much would it cost for you to replace it (as one idea)

Similarly with other expenses. You have $200k. You hire office workers at $95k each to do some work and buy two $5k PCs for them to use. At the end of the year you have $0 in the bank. The law sees it as you have $0 in the bank + two $5k computers. You owe taxes on that $10k (the 2 computers). For these, you're allowed to deprecate them 5 years. So you own taxes on $8k.

Note: this issue of equipment being deprecated has killed lots of small businesses, mostly because they are new and unaware (been there (T_T)). If you buy $100k of equipment (furniture deprecates over 7 years), you budgeted $1m for the year with $0 left over (making a product that takes 2-3 years to finish) but you've got to pay taxes on ~80% of the $100k of equipment even though you thought you'd made no money.

Many business opt to lease computers (and furniture?). This way they don't own it so it's not an asset and they can expense 100%. Unfortunately if you're a new startup no one will lease to you as you have no credit history (been there (T_T))

Under the new rules, on the ~3yr software project (like a game) with $1m per year budget, after the first year you'd owe taxes on $1m because you could not deduct any salary expenses. All of your employees are doing software dev by the definitions of the new tax law.

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.

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.

H1B rules around changing jobs means that even if the employee joins at a market-level salary when they come to the US, they tent to stay at the same company much longer and can be exploited. The new company has to go through a lengthy paperwork process to allow the visa holder to switch jobs. Also, since the tech world tends to use things like stock options / RSUs / monetary bonuses for large parts of compensation package and those do not count towards "salary" you may have a situation where an h1b holder on paper seems to be paid fairly but in practice get only about 40-50% of what their peers get.

If they were allowed to change jobs freely they would be able to negotiate their compensation fairly. The companies would be less intensified to hire H1Bs to save money and would also consider local talent for same positions. Everybody would win: both H1B visa holders and their families and American workers, too. The only losers would be consulting firms (not a huge loss, to be honest, most of their employees are overseas anyway, so the can absorb the cost) and BigTech (they have enough money, anyway).

There are other problems for H1B holders, like getting a green card is something their employer, and not them, can do - another area for abuse. And then some nationalities have to wait much longer to go through this process then others (essentially, the US migration service says that the country has too many people from India and Pakistan already, thank you very much), and there are other issues I don't recall.

The idea is to reduce offshoring as a means of dodging tax liability for multinational firms. If they want the tax cut here, they gotta pay up everywhere else they do business.

Outsourcing and exploitative visas are a negative feedback loop that shrinks the actual economy vis a vis stagnant or decreasing wages and higher employment precarity. To have a healthy domestic economy, domestic employment must be prioritized.

It does not deter expats, it protects them from exploitation and abuse by employers.

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.

All I am saying in my prior comment is that clever treatment of your engineering costs can improve tax outcomes. We have done just this --under the guidance of our tax attorneys-- and have had no problems at all.

Of course, a company that is a pure software enterprise and not multi-disciplinary, like us, is, well screwed.

Keep in mind that at year 6 you are effectively deducting your full R&D costs, even for a pure software company. The real cost is the TVM due to the phase shift, at year six you reach steady state (assuming steady costs).

If you are a pure software company (no hardware or other activities) your options are rather limited.

Also, as I said in other posts, at year six you reach steady-state and are amortizing the full amount every year. Example:

                         amortization for each year
             R&D         year 1   year 2   year 3   year 4   year 5     year 6
  year 1     1,000,000  100,000  200,000  200,000  200,000  200,000    100,000
  year 2     1,000,000           100,000  200,000  200,000  200,000    200,000
  year 3     1,000,000                    100,000  200,000  200,000    200,000
  year 4     1,000,000                             100,000  200,000    200,000
  year 5     1,000,000                                      100,000    200,000
  year 6     1,000,000                                                 100,000 
                              
  total amortization:   100,000  300,000  500,000  700,000  900,000  1,000,000 
  

Most companies don't have profits rise exponentially during the first few years, so it might not be too bad. Also, there are many ways to mitigate this. For example, section 179, which allows businesses to deduct the full purchase price of qualifying equipment and software in the year it's put into service, rather than depreciating it over several years. In other words, instead of paying taxes on your profits, use that money to buy GPU's computers, tools or whatever you might need. Easy.

A tax attorney is essential if you want to minimize tax liabilities intelligently and within the bounds of the law.

But, yes, 174 needs to go back to full annual deductions.

Freedom - an essential public good - is much different than using HN for lobbying for tax policy that favors YC.

You know that doing this is a big change. Why not be straightforward about it - including whose idea it is, what the parameters are, what the new policy is, etc.? If you feel you can't or feel hesitant, then you know something is wrong.

It changes the nature of HN in my mind, to something manipulative - not unlike other social media, and not unlike the trend in other businesses who embrace manipulation to greater and greater degrees.

> getting back to HN's roots

You can see a lot of companies and politicians using that - find some historical precedent and claim that is the 'roots'. There are many more roots then that.

I don't doubt there's an impact here, but it's not because they have a real interest in any other topics that concern me and hiring, H1B and so on.

Software clearly has material value. For software that is built, not bought, the company building it clearly values it exactly enough to pay the salaries of the software developers building it. What other estimate of its material value is better than the one that the company purchasing it is demonstrably willing to pay?

I'm not sure if depreciation is the same concept as we call amortización in my country: capital that counts as investment instead of expenses because you're expected to keep extracting value from it over the years, so you can't get a deduction for the whole expense when you first pay for it.

If that's what this is about, it's absurd not for the reason you say (salaries are not a bad proxy for value, since you expect the profit will be greater) but because you'll probably keep paying for maintenance and evolving the software.

We all do this at the conclusion of every successful job interview. And performance review. And budget review. IMO it's a reasonable floor on the value engineers produce: if you produced an asset worth less than your salary you should be concerned for your career.

That's because it's not "a payroll". When a payrolled resource builds a combustion engine that powers the office where the rest of the payrolled resources work every day and that engine lasts 15 years, then its a very clearly a capital expense and an asset.

Probably a broad enough definition to net the US Government the greatest tax revenue possible for the effort to enact this.

Of course not. The Glorious Leader is rescuing the american hardware sector.

It starts on page 23.

Plenty of analysis online by tax firms but I'll quote from this one: https://insightplus.bakermckenzie.com/bm/attachment_dw.actio...

> Generally, activities treated as software development for section 174 purposes include, but are not limited to, the following.

• planning the development of the computer software

• designing the computer software

• building a model of the computer software

• writing source code and converting it to machine-readable code

• testing the computer software (up to the point that a taxpayer places the computer software into service or determines that the computer software is ready for sale or licensing to others)

• producing product master(s), if the taxpayer develops the computer software for sale or licensing to others.

> Activities that are not treated as software development vis-à-vis software developed by a taxpayer for use in its trade or business are as follows:

• training employees and other stakeholders that will use the computer software

• maintenance activities after the taxpayer places the computer software into service

• data conversion activities, except for activities to develop computer software that facilitate access to existing data or data conversion

• installing the computer software and other activities relating to placing the computer software into service

What about HR, etc who use excel documents?

IF they are using it rather than developing it, no. If they put in 5 hours a week writing code, yes for those 5 hours. This isn't hard.

For me that sounds like everyone and everything in a company that develops software of any kind, including low-/no-code stuff, accounting, HR, travel costs, massages. Like who is not "in connection with the development of any software" in a company that develops software? Without further definitions this is even worse then just software engineering costs.

R&D is amortized, COGS is not.

> (3) Software development

> 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.

Strictly speaking every single one of those jobs falls under that role. If you "develop" any software, which arguably includes even making or maintaining excel spreadsheets (as excel is a graphical array lang inspired by APL), then you seem to fall under this umbrella.

But if we more realistically assume it's 3 software folks at 200k, then the taxable profit is 580k (100 profit + 3*(200k salary - 40k ammortized))

> But you only have $100k of actual dollars.

> Good luck paying your taxes!

a lot of people here are conflating "taxable income" and "the amount owed in taxes" for some reason.

if I earn $100/year, and I can deduct $50 of that, my tax bill is not $50. It is some percentage of $50, usually a low number for businesses. (Amazon regularly pays $0/year in taxes.)

depending on the tax rates and the locality of that business, the amount owed on tax is going to be anywhere from $0 to $50, and it is going to heavily favor the low end of that spectrum. I don't think any business pays 100% of its taxable income in taxes unless they have been heavily fined.

$100k is likely far more than enough to pay the tax on $820k of taxable income for a business. It could be enough to pay that tax bill 10 times over, it's hard to say.

my point is that taxable income != tax owed.

Unfortunately it won't make a difference because the vast majority of Americans simply do not care. So very few people will be putting pressure on their representatives, and nothing will change.

https://americansfortaxfairness.org/ways-means-trump-tax-law... Quote: Corporations have traditionally been allowed to deduct all of their research expenses in the year incurred, even though a lot of research pays off slowly so its costs should similarly be written off over time. Adopting this position, and as a way to partially pay for its big corporate-rate cut, the Trump-GOP tax law decreed that starting in 2022 companies would have to write off research and experimentation expenses gradually: over five years for domestic research, 15 years for foreign. This requirement to “amortize” the expense over time reduces the value of the deduction, increasing corporations’ taxable income and requiring them to pay more in income taxes upfront. The Ways & Means legislation proposes to retroactively reverse this provision.

Not dumb at all! In the second year, you get to deduct ⅕th of the previous year’s salary and ⅕th of the current year’s salary; likewise, in the third year you get to deduct ⅕th of the first year’s salary, ⅕th of the second year’s salary and ⅕th of the third year’s salary.

The key thing is that in the fifth and following years, a business would deduct a fifth of each of the previous five year’s engineering payrolls. This is not great for a growing business, but it’s murder on a startup trying to grow from zero.

This punishes small businesses and new businesses more than any large org because it massively increases the cost of operating for the first few years.

And importantly it just doesn't do so consistently.

Orgs should have a higher tax burden. This just doesn't do that, instead this is punishing orgs for trying to do new things and rewarding existing momentum (i.e. the large corporations that already have a profitable revenue stream and a long trail of employment history).

The questions of this legislation, though, are different:

Should we incentivize companies to hire corporate executives instead of engineers?

Should we favor trillion dollar companies over startups? (It is much cheaper for Amazon to loan money to the government than three people starting a new venture from scratch, so this favors concentration.)

If you agree that we should discourage hiring engineers in favor of management, that concentration is good, and that low corporate tax rates are good, then this legislation is perfect.

I say that it's good if you believe in low corporate tax rates because this legislation was passed to pay for overall corporate tax cuts, which primarily benefits the largest companies. Amazon actually pays $11.3 billion in income taxes a year (not zero), so on net, even though they have a lot of software engineers, they benefit from this legislation, because they effectively traded having to float money to the government in exchange for lower tax rates.

Big companies care about tax rates more than liquidity, because their borrowing rates are cheap, whereas small companies care more about liquidity (they effectively cannot borrow, or it is very expensive) and their profits are low. So this effectively subsidizes big companies at the cost of small companies.

Edit: Looks like Amazon did indeed pay 15B+ federal taxes in 2024 (excluding sales tax etc)

The phrase “fair share” is political, which is to say meaningless. The people who have earnestly invoked this phrase in my experience have resisted requests to define the term and have sometimes launched personal attacks for daring to raise the question. Will you break this streak? What in concrete terms is Amazon’s fair share? Your fair share? If they differ materially, why?

I’m a capitalist and therefore wish zero ill toward you. Cronyists, authoritarians, and collectivists may want to abuse you, and that is a contemptible way to treat one’s fellow humans. Both parties to a free exchange benefit. Both sides can win because it is not a zero-sum game. As a matter of fact, you are advocating for a game that your side cannot possibly win. Consider that Amazon has enormous incentive to hire the very tippy-top best accountants and tax attorneys to find every crack in the tax code that middling staffers and nepo hires can barely scribble. It does create some benefit to society in the form of the incomes that these highly paid tax pros generate, the comforts it affords them, and the downstream jobs demand for those comforts creates. But in the big picture, it’s adversarial rather than constructive. Certainly we can come up with a more peaceful and constructive arrangement.

21%

> It's not 100%, so you're deducting a fraction developer's salary from your income, right, you're not saving that much on your tax bill each year. you're paying tax on the income you used to pay the developer.

Which is a problem if you don’t have the money to pay the tax.

Let’s combine your and the parent’s examples: 1 principal engineer @ $300,000/year; 3 engineers @ $200,000/year = $900,000/year. $1,000,000 in sales.

year 1: Company makes $1,000,000 and pays $900,000 to engineers for a $100,000 cash profit; it deducts $180,000 from $1,000,000 for a $820,000 paper profit, and owes $172,200 in taxes. Since $172,000 > $100,000, it has a $72,000 cash loss for the year. There is not year 2.

Or maybe it raises enough capital to have a cash cushion. A similar thing happens in year 2: it makes $1,000,000 and pays $900,000 to the engineers for a $100,000 annual cash profit, deducts $360,000 from $1,000,000 for a $640,000 paper profit and owes $134,400 in taxes, still more than the cash profit. The cumulative cash losses are now $106,400.

Once again in year 3 it makes $1,000,000 and pays $900,000 to the engineers for a $100,000 annual cash profit, deducts $540,000 from $1,000,000 for a $460,000 paper profit and owes $96,600 in taxes. Hey, it doesn’t owe more than it made in taxes! On the other hand, its cumulative cash losses are now $103,000. Three years, three million in revenue, 2.7 million in expenses but it’s in the hole by $103,000, still more than its annual profit.

In year 4 it makes $1,000,000 and pays $900,000 to the engineers for a $100,000 annual cash profit, deducts $720,000 from $1,000,000 for a $280,000 paper profit and a $58,800 tax bill. It still has a cumulative $61,800 cash loss.

In year 5 it makes $1,000,000 and pays $900,000 for a $100,000 annual cash profit, deducts $900,000 from $1,000,000 for a $100,000 paper profit and a $21,000 tax bill. Good news, the company now has a cumulative cash gain! At the end of five years and $5,000,000 in sales the capital owners have made … $17,200. The engineers made $4,500,000 and the government made $483,000.

In year 6 it makes $1,000,000 and pays nothing (this is very unrealistic, because in the real world every product requires maintenance …) for a $1,000,000 cash profit, deducts $720,000 from $1,000,000 for a $280,000 paper profit and a $58,800 tax bill. People complain that it’s only paying a 5.88% tax rate, ignoring the years of amortised losses. But hey, after $6,000,000 in sales the owners finally have $958,400. They take it as a dividend and it gets taxed at the top marginal rate, so they pay an additional $354,608 in taxes.

In the real world, of course, sales may or may not cover salaries, sales may increase or decrease from year to year, markets may change and so forth.

> I don't care what the law says, pay enough that no one can say that you're a lamprey on society, please.

That’s an impossible target. Any random person can say, unreasonably, that someone else is a ‘lamprey on society.’

I’m not sure whether I understand why that now applies only to software and not other things.

If you pay someone to make a chair, you don’t deduct the salary. Instead you create an asset valued at what you paid to build it, then depreciate it over time.

The arguement for this is that it would be inconsistent to do otherwise. After all, why should buying a chair from someone else be different than paying an employee to do it?

It’s worth noting that this change brings the USA in line with international financial reporting standards, so it’s not like it’s some crazy unique idea or anything.

It takes 5 years to fill the pipeline, so even if the steady state would be fine, getting to that state might be impossible.

There is no rational basis for this tax change it was a vindictive attack on blue states in the first Trump admin and an attack on California and SV in particular along with the SALT tax changes.

But I agree that much of the outrage seems due to a confusion that 80% of the deduction is lost completely (vs deferred).

If you hire someone to clean your office, you are not creating an asset so it is expensed

Building software is generally creating a long lived asset

Trump wanted a large tax cut. To make the numbers look better (notably the CBO reporting), Congress looked for ways to increase revenues. For whatever reason, they settled on software development, and devised Sec 174 to generate tax on 80% of s/w developer salaries in the first year it went into effect.

Why s/w development? I have seen no indication of the reasons for this; I suspect it was perceived as a "rich field" and thus suitable for this sort of treatment. Also, somewhat more fairly, s/w developers do tend to produce semi-durable assets that in some ways are like capital goods.

Software engineers hired to build product are not exclusively building a finished product, and are increasingly necessary as part of the expense of operating that product long term. Industry trends have gone towards combining and blending developement, security, operations, and design.

But it's still useful to know the real rate is 21%, thanks.

In my example, the tax rate isn't the point though, it was used just to illustrate the math.

The main point is that it makes no sense to require amortization of software development expenses. The idea that this letter is an attempt to restore rationality in the tax code.

> It was Trump's 2017 Tax Cuts and Jobs Act, which amended IRS code.

And took effect in 2022 (per what I've read elsewhere, and other comments on this post; could be off by a year)

(just clarifying that the effect was "a few years ago", but I agree that it's important to know the origin of it, which you were pointing out)

Maybe we can finally deduct all that technical debt.

Isn't part of the problem with our industry that, even it is an asset, its value can be hard to determine even for a long time after you've written it, and it may be pretty weakly related to how much you paid to build it?

- you might have spent a lot on developers last year but next year you find out that you're the new Quibi and no one wants to use your product

- you might have had a small, tight team and what you built turns out to be hugely valuable (like instagram or whatsapp)

- ... and to the degree that the software is part of a valuable business, how do you really assign value to the software as versus the go-to-market plan, the partnership/distribution agreements, etc that helped make the business succeed?

In this example, it seems like you're assuming that the revenue from the sale of the gold would not be taxable, but I don't see why that should or would be the case.

ETA: also, gold is far, far more fungible than any particular software

You can deduct internal tools, training, maintenance, data conversion activities, installation, distribution, marketing, promotion, etc.

So it's definitely worth it to use an issue tracker to tie your engineer's commits to bugs and categorize their bugs as either feature development or one of these activities.

Depending how aggressive you want to get, if a LLM builds a feature that you beta launch and the engineer fixes the LLM's mistakes to get it working you can probably argue that is correcting errors or defects in software that isn't adding new functionality and thus deductible.

A one-off shell script has an asset value of zero after its single use but still counts as a long-term capital asset for tax purposes.

Like you said, this is a pretty weird characterization of software. I guess it would make sense to lawmakers who have no idea how it works. Combine that with the fact the lobbyists pushing this are 99% representing big tech and you start to get a picture of how this happens.

Warning- brain dump not directly related to topic, read at your own risk. Lol @ software never wearing out. I wonder how that works with something like Microsoft windows licenses(as opposed to something like 365 which has new "features" every year)? I'm actually asking, how do you amortize an "asset" that you are admitting only lasts a year? I know SaaS on consumer side is categorized as opex.

Does this capital-asset view of software have any effect on the attractiveness of SaaS going forward? I know we were talking about the development side of things not the consumption side, but it seems like this capital/asset perspective conflicts with the reality of how software is often sold. SaaS is partially justified as the cost of 'maintaining' the software (in addition to support and new features). The fact that maintenance is required belies the perspective that it's a capital asset. Coming full circle, this must require the vendor/developer demarcate programmer effort between feature vs. maintenance & support. If anyone has a sythensis of all of this or reference it would be appreciated

Those construction workers will build the building (= the product) on top of the land that you acquired (another asset) which means you are assets become the land itself and the building. Land and building will have their own asset value (purchase price or evaluation) that will be used for over X years.

As far as I understand as an European watching this from abroad, they are trying to evaluate the value of the asset (= code, the product) of a startup by using development costs as a proxy.

It snuck up on a LOT of people, including CPAs, and represented tax bills for businesses that were multiples of the previous year's tax bill, and sometimes _multiples_ of their actual cash profit.

It's also so counter-intuitive that you can't deduct software dev salaries, that many people still don't believe it works the way the law says it works. If you read the comments here and in other threads where this has been mentioned, on Hacker News or elsewhere, years into this fiasco, you'll see widespread doubt and misunderstanding. Many people equate this to the same R&D rules for the older tax _credit_ or will argue that it can't possibly work the way the articles say it works. People don't magically begin to understand section 174 just because they run a business, and it's not in their financial interest _TO_ understand how it works. Many can't afford to.

What 174 does is make software a capital expense with no choice in how it gets depreciated over time. It's like having to expense the electricians wages during factory construction over 5 years.

For every developer I hire I pay tax on 90% of their wages in year 1.

So, if I hire a 200k a year developer, I have an increased tax liability of 180k. That works out to paying about $75k ~ $85k. So my 200k developer becomes an 285k developer.

Now, eventually I could regain that cost, or I could do like I know of a few companies and commit tax fraud by not correctly reporting my expenses.

BTW even as a partner I am hit by this - to correctly file my taxes I have to report my retirement savings as development revenue and pay tax on what is supposed to be tax free.

Pretty cool.

All this does for large companies is that it might cause them to layoff developers.

For a small software company it can threaten our existence.