This is what the parent means by "batshit crazy".

What parent?

No accountant is saying you'd have to pay at literally zero revenue, unless they're very badly misinformed.

The absolute worst case scenario would be having to pay taxes as if your revenue was nearly all profit - as if you had no expenses (or very few). As always, you only pay taxes on 'net income' - revenue minus expenses - this whole mess comes about by tweaking how expenses are calculated.

> The absolute worst case scenario would be having to pay taxes as if your revenue was nearly all profit - as if you had no expenses (or very few).

And that will be the case for me next year, so yes, this matters to me.

Sure, it's reasonable to worry about that. But it's still not the case that you'd need to pay taxes on 0 revenue.

I know several people who are being advised by accountants that they have to pay for startups with net zero profit.

It is literally backbreaking for a friend who is self funding a team of engineers. The money to pay taxes literally doesnt exist. It was paid as salary.

I told him to ignore the accountants and simply not pay. Let the IRS come after him

Accounting (and taxes) does not match one-to-one with cash flow. It is very critical for any business to understand this. This bites many businesses, sometimes very badly. It's especially difficult when the rules change, as they have in this case with R&D/software expenses.

But there's a very critical misunderstanding happening in a lot of comments here -the IRS taxes profit (net income), not revenue. Anyone with zero revenue is safe. Anyone with SOME revenue will potentially owe some taxes, and potentially in a very surprising (and unfair, I think) way. The basic example in the submission is quite correct.

>>>I told him to ignore the accountants and simply not pay. Let the IRS come after him.

This is a great way to end up both out of business AND in jail. It is not the smart play.

>But there's a very critical misunderstanding happening in a lot of comments here -the IRS taxes profit (net income), not revenue

Not in this case, which is the challenge and pain. You can have a company with negative profit, and have to pay income taxes on revenue.

>This is a great way to end up both out of business AND in jail. It is not the smart play.

Strongly disagree, and this is how I run my business. There is sufficient ambiguity and debate on the topic to support an ambiguous reading. Nobody is going to jail. Worst case scenario you get a nastygram from the IRS in a year or two, provided the issue hasn't been clarified in YOUR favor.

If your company is living hand to mouth with expenses above revenue, the money the IRS wants literally doesnt exit.

>>>Not in this case, which is the challenge and pain. You can have a company with negative profit, and have to pay income taxes on revenue.

Incorrect; you can have a company with negative cash flow and have to pay income taxes on profit - as the IRS defines it. And you can certainly disagree and argue with them about it, but they're likely to win.

>>>If your company is living hand to mouth with expenses above revenue, the money the IRS wants literally doesn't exit.

"I don't have the money I legally owe you because I spent it" is not a claim the IRS is going to care deeply about.

Here's the same situation, for not software. I buy a big fancy truck for my trucking business. It's 100k, capital asset, needs to be amortized over 10 years. I make $100k in revenue that year. No other expenses. What do I need to pay tax on in year 1? The $90k in net income that I have. I can't say to the IRS "but I spent all my cash on the truck" - they'll say "tough, pay us".

edit: as an aside - the above is why businesses usually like to lease or finance - the cash flow matches better.

You are right, it has to do with how the irs defines profit. Invest 100k in a big truck, that's capital expense. Spend 100k on gas and goods to make deliveries, that's operating expense.

Obviously, the question is then which one makes more sense for software development.

Exactly. And I do think the truth lies somewhere in the middle - some software development creates capital assets, but lots does not.

And either way it's very painful to change the rules entirely in a single tax year, especially for small businesses. FAANG companies will weather this either way, but it could kill small software businesses.

agreed. It is quite backbreaking if you dont have a huge bucket of money.

One alternative if it must be treated as a capital asset is to allow accelerated/immediate depreciation for small firms and individuals.

I can see the point that for large firms like with diversified R&D portfolios, development, on average, results in creation of capital assets.

For small firms, it is absolutely unclear that the product has any durable value at all.

> jail

Hyperbole. IRS doesn’t lift a finger for amounts such as these. They will send a letter of what they think you owe and offer a payment plan if you don’t have it immediately.

How would IRS get “their” money with you in jail? They’d also have to provide you with room and board.