This [1] is the only definition the code actually give.

> (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.

1. https://www.law.cornell.edu/uscode/text/26/174

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Is a test or QA engineer considered a software engineer?

Is an FPGA or ASIC engineer still considered a software engineer if they are writing in HDLs?

Is a systems engineer, electrical engineer, or mechanical engineer considered a software engineer because they use MATLAB, etc and use programming to do their design work?

Is a sysadmin, DB admin, or other IT staff considered a software engineer because they write software as part of their job?

What about a quantitative analyst, data scientist, accountant, actuary, or any of the other maths and analysis adjacent job roles that regularly use some level of programming to do their job (and therefore write software)?

What about HR, etc who use excel documents? Excel is fundamentally just a graphical array programming language (and the design of spreadsheet tools is heavily inspired directly from APL). Is anyone who uses excel or builds/maintains spreadsheets considered a software engineer?

Like software engineering is such a broad field and programming bleeds into every part of modern business at this point.

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

ex: linking excel spreadsheets or setting up excel to ingest data from a sharepoint or network drive would still fall under the definiton of software developer

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

So a sysadmin or a DB admin writing scripts or a DB admin writing queries and adding new reports would be considered software development

It just seems way too easy for arbitrary employees to get pulled in under this definition because it just fundamentally misunderstands how widespread programming is.

If that's considered maintenance activities then would maintaining a software codebase not be considered maintenance activities then?

  (2) Computer software developed for sale or licensing to others. In the case of
  computer software that is developed for sale or licensing to others (or upgrades 
  and enhancements to such software), activities that occur after such software (or 
  upgrades and enhancements to such software) is ready for sale or licensing to 
  others, such as marketing and promotional activities, maintenance activities that 
  do not give rise to upgrades and enhancements, distribution activities (for 
  example, making the software available via remote access), and customer support 
  activities.

The real issue is the auditors will flag it.

For tax books?

I may be way, way wrong though.

If it leads to a new release, then its software dev. Meaning anything more than a minor patch is going to count.

The issue is that this is a lot of unnecessary complexity for orgs that aren't doing that kind of work.

This is the part that I think makes this whole jig of treating software development like a purely capitalizable expense so nuts.

I previously worked at a public company that wanted software developers to treat as much work as possible as CapEx - it makes you look more profitable than you actually are, which is bad for taxes but good for your stock price. Developers hated it. The problem with it is that with modern web based software, CI/CD, A/B testing, etc. that the line between "new software" (i.e. CapEx) and "maint" (i.e. OpEx) is so blurred as to be pointless. E.g. many times I'd be fixing a bug (technically OpEx) but that would often lead to some new features ideas, or ways to structure the software to make it easier to add new features (technically CapEx). Software is fundamentally different from capital expenditures in other areas, and assuming a 5 year straightline depreciation schedule for software is laughably absurd.

What other sort of capital expenditure has you do releases every day, or requires 24/7 monitoring? I would argue that the business of software has changed so drastically over the past 20 or so years that it makes much more sense just to categorize it as OpEx by default (for both tax and GAAP purposes), and only have it be capitalized as CapEx for very small and specific reasons.

It also warps outcomes towards a metric which "is only used for tax purposes" but which also is reported ritualistically with an expectation of compliance.

Quite a lot of them actually. If I spend $$$$ setting up a car factory with a big production line, I'm going to have people monitoring it 24/7. If I build an airport, I'm going to have air traffic controllers working 24/7. And so on.

Of course, the air traffic controllers didn't build the runway, and the construction crew don't direct air traffic, so the whole situation is much less ambiguous.

> Of course, the air traffic controllers didn't build the runway, and the construction crew don't direct air traffic, so the whole situation is much less ambiguous.

That is precisely why those salaries are NOT capex

A country wide power grid or telecommunications network are other examples that come to my mind. They are never complete, they get more features every day (new cables?), they are monitored 24/7. The owner companies also use them.

Do they?

Upthread one can read: > 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: […] • maintenance activities after the taxpayer places the computer software into service

Example: a one line change to ignore non Unicode codepoints in PDF files loaded in a web app (I did it yesterday.) Is that a new feature? Is that a bug fix? And if it's a bug fix, is that part of a feature that we should have developed before putting the sw into service? Is that maintenance? And what if that particular code point that triggered the issue did not even exist when we released the sw years ago (the code around it is from 2021)?

I believe that nobody has the time to dig the (tens of?) thousands of issues that a company opens and completes every year but there are a lot of gray areas to exploit if somebody has any reason to be pedantic.

The same is true for many capital assets. There are people who have time to look into these things because that’s their job.

And no one thinks it was sensible.

The only reason it exists is for political games by Trump 1.

Now imagine all the nonsense that’s gonna go into the much bigger Trump 2 tax cut bill.

I used to support this change because I thought that it would fairly make the software industry like many other industries who have to pay this kind of amortization for R&D and I believe that there would be carve outs for small organization so that really large ones are the only ones who bear the cost.

I also believed it unlikely that this would be enforced or audited before there were such corrections or refinement to the original language.

So the way I viewed it was it’s basically a higher tax for giant software companies, but everyone else will be unaffected by it so we shouldn’t worry.

However, I also now support repealing or changing it because whether or not it has ever or was ever gonna be enforced or audited, it’s ended up causing a lot of disruption across the entire software industry. So much so that it actually looks more like an unfair penalty against software development than anything else now unfortunately.

So I’ll definitely be signing that little petition under my US corporation.

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

The folks advocating for this could care less about the deficit, but they need to act like they care.

This really only hurts the competition, who is completely unprofitable in every sense of the word. And all for what? Left-shifting the collection of a 21% income tax by a couple years? I think many of us would’ve done terrible things in 2021 to only have an effective tax rate of 21%. The government mugged Peter the payroll tax man to pay Paul the corpo tax man, but they disemboweled Peter in the process, and most of the money had to be disposed of as a biohazard.

I don’t believe Section 174 was an honest attempt to manage the deficit. I think Zuck, the PayPal Mafia, and the blood-boy cabal bribed some Congresscritters to kill off what remained of their competition.

What's with the craze for finding conspirational incentives?

There's a repeatable pattern where commenters hallucinate an unreasonable incentive for everything.

Motivations are difficult to discern (see courtrooms), and it is a modern vice to try and analyse incentives, but too often the cause-and-effect imaginations are not even reasonable guesses, but are just pure fiction.

My best guess (based off word choices made) is that we all love to create new stories/narratives, that fit into our personal tribal stories.

I don’t think it’s such a huge leap that a policy with such unanimous opposition was put in place by the select few special interests who benefit from it. It helps (or doesn’t help?) when they all got together for that photo op at the inauguration.

Believing in fake moon landings requires believing in a level of competence I don't think exists in large organizations, but the same applies to believing there is no corruption or backroom deals, which are exposed all the time and seemingly rarely punished.

I can’t believe you’re trying to claim the high ground in rationalism here and have no clue how bad it is.

People in policy are not dealing with bribery and corruption (which is the framing of the comment I replied to).

If bribery is occurring, then I would expect it to be used to get higher value personally directed outcomes (not a few percent on the bottom line). The suggested incentives sound completely wrong to me (which is the point of my comment). Obviously my own ignorant opinion given that I have zero experience "bribing Congresscritters".

I can believe there is corruption, but I also believe smart people will hide their goals better than the internet peanut gallery assume.

What I’m saying is you in your not doing this mentality think this is fine all cloak and dagger.

It isn’t. It’s legal and it’s done very directly.

So basically the same situation that we have with bullshit speed limits everywhere.

Republican defunding of the IRS is literally insane: reform by cutting enforcement.

- It rewards people who cheat on their taxes.

- It costs the government more money that it saves, because IRS investment is net revenue positive.

But then, the modern Republican party seems more concerned with being the party of 'law(s I agree with) and order (for people who aren't me).'

Most of the blatant tax fraud is much lower down the economic ladder because below a certain threshold recovery doesn’t justify the cost and people know this. The amount you can get away with is far below the threshold where it would be worth the risk for wealthy parties. The best ROI for auditors in many of these cases is to make regular object lessons at random to discourage it rather than systematically prosecute it.

AFAIK, the increased spending at the IRS did not lead to concomitant offsetting recoveries. This is a predictable outcome, the amount of enforcement activity has been pretty finely tuned for decades to optimize ROI. Most of the recoveries come from changing focuses on compliance to areas that haven’t seen much enforcement activity in many years. Fighting entropy basically.

If you assume that most large recoveries are from sloppiness rather than systematic tax fraud, it changes what is going to be an effective strategy.

AFAIK, all the data shows exactly the opposite.

https://news.harvard.edu/gazette/story/2023/07/turns-out-irs...

https://www.irs.gov/pub/irs-pdf/p5901.pdf

(There are many more studies from various outside organizations, as well as other non-partisan government bodies outside the IRS concluding similarly)

IRS enforcement has diminishing returns because the IRS starts with the small minority of people who are very obviously cheating on their taxes. Those people get audited and the IRS very easily recovers money from them. If you want to audit more people than that, you have to audit people who are less likely to be cheating. The more people you want to audit, the lower the collections rate gets.

But if you're averaging in the recovery rate from the people who are so obviously cheating, you can get quite far down the road past a marginal benefit before the average becomes a negative number.

Meanwhile, even that isn't considering the indirect costs. The IRS spends $1 and recovers $2, but audits are much cheaper than the IRS than they are for taxpayers. So the IRS spends $1 and the taxpayers (many of whom did nothing wrong, because we're talking about averages here) have to pay $5, in order for the IRS to recover $2. That's quite bad -- $6 is being spent in order to recover $2, but it's being reported as a $1 net gain.

And it's worse than that, because those $6 aren't just money, it's actual spending -- human labor hours that couldn't be allocated to something else -- so what you're losing isn't the cost of that labor, it's the value of that labor. Someone was being paid $1 to create $2 in value but now instead of doing that they have to spend that time on an audit, so the $6 in cost is actually $12 in lost value.

Not accounting for things like this makes it seem like we should be spending a lot more resources on something with diminishing returns and large hidden costs.

Who pays taxes when it's well known that the IRS doesn't audit and follow up on tax cheats?

Especially, if all it takes to further dissuade them is engineering complex wealth structures and keeping tax lawyers on retainer.

But they do. They always have. The question is, once they've done that, should then they proceed to audit an even larger number of mostly innocent people, because a small percentage of them did something wrong and finding that small percentage would cover the costs of the IRS, but not any of those other innocent people?

> Especially, if all it takes to further dissuade them is engineering complex wealth structures and keeping tax lawyers on retainer.

This is an entirely different problem. The ones with sophisticated lawyers aren't actually violating the tax code. The problem there is that the tax code is so complicated and poorly considered that fancy lawyers can find ways to avoid taxes without violating the law.

At some point it gets to that level, but all of these studies show it is extremely far from that at present. This is also not at all what the IRS has been advocating going after.

The extremely cheap (for the IRS) audits you are talking about are the ones they have been doing for years because they can afford to. The tax situations are simple so don't require significant resources to audit. These are also the situations the original comment was talking about. The IRS and others have been advocating for years for the resource to go after actual tax cheats of wealthy individuals and corporations, whose tax situations are (intentionally) so complex that it is a serious investment to audit. Once you do audit them however, their tax dodging decreases for years into the future. This costs the employees and financial advisors dedicated to dodging taxes money.

The "hidden costs" you are so concerned about here, in many cases cannot be argued to exist. The people that would spend time defending violators are otherwise fully employed doing the opposite... coming up with ways to get around the taxes their employers or customers are supposed to be paying. Instead of costing $2, that comes out as getting yet another $2 out of that audit by distracting a societal parasite.

The criticism the parent identified is that the cost to the IRS is not the total cost to the public (i.e. innocent taxpayers being audited despite making only honest mistakes or having done nothing wrong at all), which is exactly a problem with these studies. To know where the equilibrium point is, you have to take into account these other costs, and the studies fail to do that.

> The IRS and others have been advocating for years for the resource to go after actual tax cheats of wealthy individuals and corporations, whose tax situations are (intentionally) so complex that it is a serious investment to audit.

What's really going on here is that those are the taxpayers it isn't as cost effective to audit because they have sophisticated lawyers, so they're much less likely to be violating the law. They're doing something which is complicated and then paying very little in taxes, but the complicated thing they were doing is legal so you can't get anything from auditing them. Meanwhile auditing them costs a lot because it's so complicated, so the ROI of doing it is pretty bad.

In particular it's worse than the ROI of auditing other taxpayers who can't afford such expensive lawyers and therefore are more likely to have made a mistake that allows the IRS to collect. But auditing those people makes the IRS much less sympathetic, because those people aren't the billionaires and the money the IRS collects is mostly a result of honest mistakes.

> Once you do audit them however, their tax dodging decreases for years into the future.

The assumption is that they were doing something unlawful to begin with, and then you're talking about the non-billionaires again.

Moreover, what really happens is that the people who made mistakes learn to hire tax lawyers. And then if you audit them again it comes up clean, but that doesn't mean they're paying more in taxes, because tax lawyers are pros at finding legal ways to avoid taxes, so what you've really done is encourage them to hire the people whose primary job it is to minimize tax revenue.

> The people that would spend time defending violators are otherwise fully employed doing the opposite... coming up with ways to get around the taxes their employers or customers are supposed to be paying. Instead of costing $2, that comes out as getting yet another $2 out of that audit by distracting a societal parasite.

It is definitely not the case that the number of tax lawyers and accountants employed is unrelated to the number of audits the IRS does. The more they do, the more business there is for those professions and the more people enter them. These are people who could have been doing something else and, moreover, people who consumed the resources that someone else could have used to do something better.

And then cut by 20% by the current adminstration [0].

I'd phrase the question of auditing lower income filers vs higher income filers differently -- do you think people with higher incomes should feel safer about cheating on their taxes?

Because average recoveries do scale with income [1]; unsurprisingly, it seems wealthy people commit tax fraud too [2].

While catching the low-hanging fruit (and therefore better ROI) is one goal, it needs to be balanced with ensuring there are similar levels of compliance (or penalties where it's lacking) in higher income payers.

[0] https://taxpolicycenter.org/taxvox/cuts-spending-and-staff-d...

[1] https://www.nytimes.com/2025/06/05/upshot/tax-audits-wealthy...

[2] https://www.irs.gov/newsroom/irs-launches-new-effort-aimed-a... https://www.irs.gov/newsroom/irs-tops-1-billion-in-past-due-... https://www.foxbusiness.com/politics/yellen-touts-irs-enforc...

And maybe as a Bonus what do you make of the smaller (relative) taxrate the bigger fish (companies/wealthier individuals) pay?

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.

They're suggesting you spend a minute or two per month thinking about it, not meticulous tracking.

That might not be practical, but what they are describing is a perfectly good use of the word "just".

So no, "just" is hardly fair.

Correct, they are suggesting basically just guessing.

Which is why "just" is correct for their suggestion.

It's not a good suggestion but it really is that easy to implement.

When I was doing it, I worked in an actual startup and granularity of time allocation was in weeks. This week I was doing the thing, the other I was mostly doing bugfixes/refactorings etc.

You could do more precise and account with hour or minute granularity with tools if you have to

OR they need to maintain a set of activity codes and a timesheet outlining how many hours (or partial hours) each week are spent on what types of tasks.

It's unnecessary complexity if you want to be in actual compliance with the tax code vs just guessing whether XYZ task is on one side of the line vs the other and hoping it doesn't come back to bite you later.

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.

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

R&D is amortized, COGS is not.

I posted about this on Reddit the other day. https://www.reddit.com/r/Economics/comments/1l3lo7j/the_hidd...

> Yeah, it's pretty much completely insane. Although in your example I think you accidentally picked numbers that actually work out precisely to zero dollars in taxable income. The company (if US-based) would have zero taxable income in the first year because they can deduct 1/5th of the salaries (because there is a five year amortization for US companies, and 15 year for foreign companies), so they would have $1m in gross income and $1m in deductions resulting in $0 in taxable income. But you can tweak the numbers a bit to get the result you intended, e.g., $1m in revenue and $2.5m in salary would result in $500,000 additional taxable income under the TCJA's version of Section 174 over the previous version of the code, even though in reality the company operated at a net loss. (edit, just looked this up and actually the amortization is dated from the midyear of the tax year in which the expense is incurred, which is also just fucking bonkers, but that means I was incorrect and your example does yield a taxable income, because the first year in your example would have $500k in deductions rather than the full 20% of the $5m expense, resulting in $500k taxable profit)

> All of which means that we treat R&D salaries less favorably than ordinary salaries, which are fully deductible in the year they are incurred. So our tax code now not only fails to incentivize R&D as under the previous R&D tax credit regime, it actively treats R&D employee salaries worse than non-R&D salaries. Even though R&D jobs are generally the highly skilled, well compensated, white collar careers we want to keep in this country.

> Section 174 also specifically designates all software development as R&D, so there's no way to develop software while claiming it is not R&D. I'm sure accountants have been jumping through hoops in their efforts to reclassify other kinds of product development jobs as not R&D, which is the exact opposite of what R&D tax studies used to do, which was to label as much employee compensation as R&D expenses as possible, because §174 and the related, intersecting provisions of §41 (the R&D tax credit itself), treated R&D salaries more favorably than other salaries. To a certain extent, the OP article understated how much of a swing this revision to the tax code is. It isn't just that we are treating R&D salaries worse than we used to, but that we are treating them even worse than we treat other kinds of salaries. Which is bizarre in a world where the policy objective is to retain R&D jobs in the US.

> The purpose of capitalization is to match expenses to benefits over multiple tax years. So that the tax payer can't take a huge tax deduction up front to generate an economically fictional loss in the short term on an asset that will generate income over the many years. Amortization forces them to deduct the expense of the asset over time as the benefit accrues over time.

> This model is a poor fit for software. Construction workers produce an asset with a generally predictable and known useful lifetime and long-term stable value that is independent of the business. You can always sell a building.

> Software, however, does not generally create value for very long if it is not subject to continuous development and improvement. It also decays very rapidly when not maintained (e.g. security patches), yet there is no distinction in the tax code between new development and production support/maintenance software development. Nor would any such distinction make any sense in reality, because unlike a physical asset software is subject to continuous change and there is little distinction between adding new features and maintaining existing features. This approach to capitalizing salaries contrasts with other capitalized assets like buildings, where most ordinary maintenance costs are deducted in the current year, not capitalized.

> The value of software can be much harder to predict than other capitalized assets. Both in terms of the demand, but also in terms of the technical capability to deliver the desired product. Which is why it's considered R&D in the first place: there is inherent technical risk in many if not most software projects which is not present in other kinds of economic activities that produce capitalized assets.

> Software is often so specialized that it cannot be sold on to a third-party without selling the entire business around the software, including existing customers, distribution and sales channels, and supporting software engineering staff. It's not a liquid, fungible, alienable asset the way other capitalized assets typically are. There is no real market for the source code to Reddit, for example, because there is nothing technically special about Reddit. The company's value derives from the user base, the community, and the data, not anything particularly special about its software.

> The tax code also confuses the output of the software development process with the value software can generate. Software developers produce code. Some of that code is valuable, much is not. Unlike with other capitalized assets, you can't know in advance whether the software you produce actually works 100% of the time, even with robust testing and QA. Whereas you can be quite certain that a building will continue to function as a building if it is built correctly. Many software engineers actually regard code as a liability rather than an asset. The more you have to maintain, the more work you have to do to maintain the code base and the harder it is to add new features or debug issues with existing features. So if you can deliver the same capability to your customers with less code, then that is preferable. Which is to say, the output of the software development process is much more loosely tied to predictable economic value than other capitalized assets.

> Software is also frequently delivered as a service, which highlights the inanity of treating software as a fixed, long-term asset. The team maintaining a SaaS will handle day-to-day site reliability engineering work, which is never a stable output but needs to be constantly tweaked to match actual usage patterns.

> Last, and this is implicit in much of the above, but unlike other capitalized assets, software is never really complete. There are always more features, more optimizations, more bug fixes. Software development is never steady state. Either the software isn't being developed actively and quickly loses nearly all value due to code rot, or it is being actively maintained and improved and is producing value. Buildings don't stop functioning as buildings when you stop paying the construction workers. Thus, software development does not produce a long-term fixed asset but rather is a continuous service delivery process, where the revenue produced in any given year was produced by the same year expenses to maintain the software. Thus, software expenses and revenues are mostly naturally aligned in a single tax year, and therefore software is not suitable for amortization.

Like most of our tax code, its overly complicated by unclear or incomplete codes.

The IRS will give guidance with examples, but those examples are still incomplete.

Ultimately our tax code always comes down to the filer doing whatever they (a) think they can get away with or (b) are willing to defend if they get audited.

That means, in the given example above, you are able to deduct $180k that first year instead of $900k.

That gives you a profit, from a tax perspective, of $820k.

But you only have $100k of actual dollars.

Good luck paying your taxes!

It sure seems like it could be related, but I don't know where to begin finding what actually caused layoffs across multiple companies.

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))

Today I am cash flow neutral at 5m revenue, but with this I'm paying taxes on 800k "profits", which don't exist anywhere but on paper. But I have to pay the taxes in real dollars.

So you pay taxes on 800k profits, but then each subsequent year you reduce you profit by 200k, even though you don't have 200k leaving the door.

If 1M eng salaries was your stable state, then after several years you're... going to have 1M in costs to subtract from your profit! The stable state is the same!

I'm not going to argue about the capex change being "good", I do think it's worth highlighting that for large enough companies you're now looking at a different flavor of tax flow. Amortizing your costs over 5-10 years is something people like doing for other costs after all.

If you have a pile of cash that you have no apparent use for, or can live without, yes, it makes no difference.

But for any new entrants that need to rapidly grow their engineering teams, it's a huge disadvantage.

We don't need more things in the tax code that protect large incumbents at the expense of new entrants.

> 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.

So generally you're going to pay at least 21% or $170k for those "profits."

It’s not that low. Federal corporate tax rate is 21%. So you would be on the hook for $10 in taxes.

They *were* able to, because they *were* able to offset the cost of developers instead of having to amortize it out over 5 years.

The value of software could be based on something more realistic, like a percentage of actual revenue, but I suppose tech giants would be against that.

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?

If you’re doing new drug discovery at a bio-lab, treating all your failures as depreciating “assets” seems bonkers. The same seems true of much software development where the work product ends up thrown away.

I would imagine software that is thrown away should be similar?

In fact, sometimes when you dispose of an asset, you get more for the scrape than you have left in depreciation- and you have to take that difference as a profit.

A significant percentage of algorithm and foundational computer science R&D in software is now protected exclusively via trade secrets. There are no other practical options. This wasn’t always the case but all other forms of protection have steadily eroded over the last couple decades.

Weaponizing the tax code because you have an ideological aversion to trade secrets doesn’t seem fair to me.

* It makes sense to tax capital assets as such.

* If companies do R&D and think the results are valuable enough to be kept secret, then obviously they're an asset.

* Depreciation is because real-world assets actually require ongoing maintenance or become worthless over time, but information does not.

* Finite-term IP grants (e.g. copyrights/patents) do become worthless over time, so a depreciation schedule makes sense.

* Trade secrets never expire, so it doesn't make sense to depreciate them. If they never get out, they remain an asset forever. So their development shouldn't be deductible. If they do get out, the company could release all of their (now presumably useless) info on it then for the deduction from their development.

I understand the pain for small companies and it's a strain on cash flow, but for larger companies with "real" revenue streams and profitability is this that much worse?

The cynical thing might be that this helps out big corps by preventing smaller corps from spending their way to success.

In addition, it gives companies less flexibility to manipulate their tax burden and cash flow, which makes engineering a less appealing investment to the bean counter.

Even in the absence of the Trump tax rule, a software company values the software they are building a lot more in financial terms than the cost of building it. Any project where value=cost should be cut, when the value is taking into account the value it brings to the rest of the company.

This is the entire point of the business, after all: take labor, land, and capital and make something that's worth a lot more to the world than the sum of the components.

A vanishingly small percentage of software is sold.

It's a question of whether it is a capital expense that is required to be amortized over 5 or 15 years, or a regular expense that can be deducted in the year in which it is incurred.

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.

In practice software machines need constant tending and operation by engineers in order to keep them pumping out money.

In the context of live software systems, a lot of software engineering - even engineering that involves innovation and creative research and problem solving - is done in service of making the machine continue to operate; it is operational expense.

It’s like: Buying some filing cabinets is clearly a capital expenditure. But paying an office administrator to come up with and keep modifying the filing system you use in those filing cabinets to make sure it continues to serve your business is not capital investment, it’s business operational costs.

In your analogy, when a company constructs and sells a building, labor costs are deductible as part of the cost of goods sold. Only the profit—when the finished product is sold—is taxable. But under the new Section 174 rules, software R&D labor is treated like the purchase of a capital asset, even though the company is leasing a service, not selling a final, tangible product.

The flaw? Software isn’t a static, finished asset you walk away from. It’s a living system. One update might fix a bug, introduce a feature, and improve long-term architecture all at once. Is it maintenance? Innovation? Infrastructure? The answer is usually “all of the above.” So how does anyone report that cleanly on a tax form? What’s the IRS’s standard test for sorting that out?

Before TCJA, some companies may have stretched R&D definitions to claim Section 41 credits. But after the TCJA change, the incentive flipped. Now, companies are penalized for doing real R&D—the very thing we should be encouraging. Startups are now paying painfully high tax bills simply for building something they cannot lease out en masse yet.

We should want to incentivize invention, not suppress it. We need more startups, not fewer. Software—especially with generative AI—is one of the few options for us left that can create new markets, expand GDP, and drive compounding national growth. The upside is limitless. This is hammering our economy and it’s strangling startups at the exact moment we need them most.

Congress, do the right thing; restore the rules we had pre-TCJA.

Timeline:

- 1981: Section 41 introduced — provides tax credits for qualified R&D activities.

- Pre-2018: Under Section 174, R&D expenses (including software) were fully deductible; Section 41 credits could be claimed.

- 2017 (Dec): TCJA passed by the 115th Congress and signed by President Trump; Section 174 expenses to be amortized over 5 years starting in 2022.

- 2022: Amortization rule takes effect. Companies must now capitalize and amortize R&D expenses.

- 2025: Section 174 amortization remains in effect; Section 41 credits still exist but now come with a steep tradeoff.

If R&D were not allowed to be capitalized, then a company would have an incentive to create a specific entity to develop its internally used software, then sell that software to parent company. If it set up the entities properly, it would capitalize the software as purchased software rather than R&D. Many firms with international development teams do this to manage in what country they pay taxes - the goal being to derive no value in high-tax countries and high value in low/no tax countries.

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.

This whole discussion is sort of orthogonal to the real point, though. The state (or the IRS, or Congress, or whatever) has decided that for some reason, if Jim gets paid $100k his boss can deduct $100k in expenses, but if Jane gets paid $100k her boss can only deduct $20k, because she's typing different things into a different box the computer.

This is a categorically stupid thing to assert. It's a stupid thing to say and it's a stupid thing to believe. Payroll is an immediate cost, paying for the development of software is not remotely the same thing as purchasing a capital asset, and this is exactly what we get when we keep electing nonagenarian plutocrats to office year after year, decade after decade, who think the internet is a series of tubes.

Well, that's what I had in mind, but the concept is why agile focuses on shipping early and often. Well, mostly it's to get in more feedback iterations, but engineer hours are not immune to time-value of money analysis.

> This is a categorically stupid thing to assert. It's a stupid thing to say and it's a stupid thing to believe. Payroll is an immediate cost, paying for the development of software is not remotely the same thing as purchasing a capital asset

But it's also not like paying a janitor to clean toilets and empty wastebins where we know there's no residual value accruing to the employer. Companies do buy and sell intellectual property in the form of copyrighted code, and in the form of patents. Heck, ARM basically makes a living licensing out the cores it designs.

This obviously isn't perfect and the disparate impact has unintended consequences that could make things worse overall, but the accusations against the senate are a non-sequitor given the power of the purse lies in the House.

In reality, this is something made up to balance a budget while pushing the consequences beyond the next election. It isn't a well intentioned accounting principle

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.

Software used to work like other payroll until fairly recently. If you want to understand this figure out why that changed and what the actual motivation behind it was

Not if the machine is used as an integral part of manufacturing, production, or extraction, or an integral part of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services by a person engaged in a trade or business of furnishing any such service, or is a research or storage facility used in connection with any of the foregoing activities.

The argument on HN is always just complaining that it’s unfavorable to devs; but it’s perfectly reasonable with regards to actual tax principles.

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.

This is handled in existing tax law; building or improving a capital asset is amortized, repairing or maintaining it is expensed. It can be a pain in the butt, this is why accounting is not a trivial profession.

We could (and I think should) treat software the same. Some software engineer work is absolutely creating a capital asset. Some is absolutely high-priced janitor work. It makes sense to allow for both with your tax code.

Before Sec 174, s/w development costs were subject to a choice: amortization as if they were a capital expense, or regular deduction as a normal operating expense. Companies could decide which category to put costs into depending on the nature of the work (and presumably to suit their own interests).

Sec 174 removes that option. Or rather, it narrows it significantly. You must be absolutely confident that you paid developer X for ONLY maintainance work before deducting their salary.

The important bit is that it will be used for longer than one year

Look into when this started and why and you might understand it

If the “house” (or the for loop) is sold and gone, it’s not an asset and the cost of the goods sold — salaries included - is an expense.

If the “house” (or the for loop) is kept and used, it’s an asset and the cost of producing the asset — salaries included - is capitalized.

(There are differences betweeen the “house” and the for loop but not at the extremes which are clear. I imagine by “house” you mean some building that makes sense in a commercial or industrial context like a warehouse.)

A factory worker building a product to be sold is capitalized into inventory

The key thing here is that while you generally are expected to and allowed to consider a produced good an asset, it's not assumed that paying someone salary translates immediately into an asset... unless it's software under this new rule for some reason

Sorry if this sounds naive—I'm genuinely struggling to understand why the labor of software engineers would be treated differently from other kinds of work. It seems logical that either all labor costs should count as costs, or none should. If different types of jobs are treated differently, what's the reasoning behind that?

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

In the meantime, the parent comment says "Depreciating means that if you pay an engineer $200k in a year, in tax-world you only had $40k of real expense that year, even though you paid them $200k." and then "So the effect is that it makes engineers much more expensive". This seems to also imply that capitalized expense is worse for tech companies?

In the case of Sec 174, not can but must.

For example, if you build 100 widgets for $1M this year, the labor and materials cost of those widgets are capitalized into inventory. Next year you sell them all for $2M.

Capitalization rules would say you had no profit or loss in the first year, and $1M profit in the second year because the cost of the inventory gets expensed when the inventory is sold.

Fixed assets like buildings, machinery, and now software have pre defined lifetimes that the expense is realized over. In the case of software, it’s 5 years.

Tech companies don’t like this because they want to front load recognition of expenses to pay less taxes today.

When you buy an office chair you capitalize the asset on your books.

The chair manufacturer in turn pays wages to a person to construct the chair. Those wages are not capitalized, the manufacturer deducts them fully when they are incurred.

The main issue is that “software manufacturers” must now depreciate those same wages over 5 years. Which is unique and does not pass a basic common sense sniff test.

The chair manufacturer capitalizes the costs of factory wages into inventory.

They are expenses as cost of goods sold when the inventory is sold.

Which makes sense because they have realized 100% of the value of those expenses when it is sold.

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.

I wonder if some influential ones pushed for the change figuring it would carve their moat a little deeper.

For machinists, it is up to the employer whether to treat their work as R&D or a regular expense.

After Sec 174, for s/w developers, there is no choice.

so is congress the slave of trump? not clear what is going on here. are the legislature and executive branches not independent?

I am not sure how this can be a serious question right now, in 2025.

However, in 2017 the capitulation of power and authority by Congress was less obvious. What was still true was that the Republicans who controlled Congress and the President all wanted a large tax cut for higher income Americans, and were thus aligned on the goal. Since the President doesn't actually write legislation, this alignment was all that was needed to push the bill through.

it was a serious question.

I did know that the republicans are in the majority in both the lower and upper houses, after the recent US election.

but was not sure if that was the only factor involved.

I am not from the US. just an interested observer.

hence my question.

1) the Republican majority in both the house and senate are entirely on board with all of the Trump administration's actions, and thus have no reason to pass legislation or act in any way separately from the executive branch.

2) the Republican majority in both the house and senate are craven and terrified of the MAGA base that Trump commands, and in many cases in the house, are very much connected to it, so much so that they will do nothing to stand up to the executive branch even when it has crossed lines that have not been crossed before in many different areas.

Take your pick.

thanks for the reply.

After 5 years of constant expenses, the deductions match the costs. If expenses diminish, deductions exceed costs.

-> this is bad (in the short term) for companies that are growing.

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

No! Any company (with software development expenses) for the first 5 years after Sec 174 went into effect!

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

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.

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.

Can you be more specific?

> this change brings the USA in line with international financial reporting standards

Which ones?

And an asset doesn’t come into existence out of nowhere. It comes into existence because you paid money for it. And the money you pay for it is indeed the persons salary.

Now sure, it’s possible to get away with not doing this, but it’s not correct by accounting standards to do so.

As for which standards, International Financial Reporting Standard (IFRS)

Probably exposing how little I know of accounting... If you buy a chair you have to track it and deduct it over the course of X years?! It's not just an expense the year you bought it?

A $100 chair is unlikely to get amortized, but a $100 chair as part of $450k office remodel might.

No, it's not.

Sec. 174 explicitly and specifically refers only to software development.

Also, this:

> 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.

is also incorrect. For most tax filers, and for most things, under current law, you have a choice whether to deduct the expense in the year in which it incurred or to amortize it.

If they make the chair. What if they only draw up blueprints for a chair that isn't manufactured? What if the chair is never manufactured, or won't be manufactured for two years? Until the software is licensed and installed at a customer site, how is this at all like making a chair?

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

If you’re a body shop lending out devs to build software for other people, that would be different

The question is really, payroll is made up of builders, vs nonbuilders.

Are devs different from other builders? The dirty secret is that they are not.

Ford engineers, P&G food researchers, and architect salaries are capitalized just like Software development costs.

But, in the case of software development, only those builders are getting a nice subsidy.

A world where we treat all workers as expenses is not likely since it means the end of US GAAP. So, we must treat all builders like builders . There shouldn't be special favors for some any specific builder group.

This is why I can't support re-implementing Section 174. Software engineers are now being treated in the tax code like everybody else, and they don't like that change.

I'd say the majority of the posters on this thread who are answering questions (as opposed to asking questions) believe this is not the case. What is a good source for learning more about which categories of employee salaries are amortized? Besides becoming a CPA.

No.

Presumably the value for tax purposes is based on the cost because the cost is harder to manipulate for something like software. Like some big box stores argue under the "dark store" theory they should be valued for much less because they have restrictive covenants banning competitors from using the property if sold, or that vacant property should be used as comparables.

If I pay for ... pretty much anything whatsoever ... I cannot write it off my personal income tax here in Canada. Not housing, not food. Medical expenses will come off the bottom not off the top.

Yes, corps get all kinds of tax breaks, whereas individuals don't.

I'm not sure it's helpful to simplify quite that much, doesn't this usually depend on whether we're talking about operating expenses (typically rent, utilities, salaries, supplies) or capital expenditures (typically buildings, land, intangibles...)?

This is a mess.

For software that used to be an option.

Sec 174 removes the option.

For example: your average AAA game will likely produce the vast majority of its value inside the first year upon its release.

At the extreme opposite end you have things like enterprise software using subscriptions, whereby the software continues to produce value year over year, but you're generally also paying developers' salaries to maintain and enhance the softare year over year. That, too, makes little sense in spreading out salaries as a cost over 5 years.

I can't really think of any cases where a piece of software is sold as shrinkwrap software, requires no ongoing maintenance/updates, and is expected to continue earning revenue for many years afterward. That just isn't the industry we live in.

There's also a ship-of-theseus problem here. How much change has to happen to a codebase before it's not the same software anymore?

Actual honest valuation of software is something that requires actual evidence.

Software returns have extremely high variance. From a lot, to none, to high negative (For projects that don't complete, or worse, deploy to negative effect.)

Only now if those people you have to pay to keep them running are software developers, you have to act like the money you’re spending on them is helping make new value, not merely paying interest on technical debt. Fun!

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.

https://www.taxnotes.com/research/federal/other-documents/tr...

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.

And then what happens after five years if they are still around?

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.

You’re forgoing returns on .1 * salary * tax rate for 5 years, .2 * salary * tax rate for 4 years… for every software dev in the company.

But if you are correct that is supremely dumb, especially in place like US.

> (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.

Q: Isn't this about whether you're doing "R&D" or not?

We may need to argue about the word "development", but in any case, do you have a reference for that?

https://www.thomsonreuters.com/en-us/posts/tax-and-accountin...

"In the United States, to help spawn innovation as part of the Economic Recovery and Tax Act of 1981, the Research & Experimentation Tax Credit was introduced. Although it was initially supposed to last three years as a specific incentive to encourage companies to invest in R&D, Congress recognized its value in helping businesses create more products and services.

However, it was quickly realized that this tax code made calculations for R&D complicated, especially for small businesses, which led the government to create other iterations of tax codes in order to help clarify the situation. However, not until 2017 and the enactment of Section 174 of the TCJA has there been such a comprehensive change to R&D accounting.

Indeed, before the TCJA’s enactment, businesses deducted the total amount of R&D expenditures as an expense in the taxable year. Beginning in 2022, all costs related to R&D must now be amortized over five years for US-based companies or 15 years for non-US companies."

I'm struggling to understand why we think R&D expenditure - including software development - should not be amortised?

For example, if you're a first-year startup and you make a software product with $1 million in revenue but pay $900,000 in software dev salaries, and the tax rate is 25%, without amoritization you pay (1,000,000-900,000)*0.25 = $25,000 in tax and make a profit, but with 5-year amoritization you pay (1,000,000-900,000/5)*0.25 = $205,000 in tax and take a loss.

But since established companies aren't affected as much, they are advantaged by the amoritization rule.

(Not trying to be deliberately obtuse but) which people "think this"? Startups and their investors, obviously, but who else?

If world+dog has to amortize their R&D expenditure, why should startups be exempt, essentially "because software dev salaries"?

> But since established companies aren't affected as much, they are advantaged by the amoritization rule.

Q: Why should startups get a specific tax carve-out for "R&D"?

year 1: company deducts $40k: 1/5 of the salary for year 1.

year 2: company deducts $80k: 1/5 of the salary for year 2, and 1/5 of the salary of year 1.

year 3: company deducts $120k: 1/5 of the salary for year 3, 1/5 of the salary for year 2, and 1/5 of the salary for year 1.

year 4: company deducts $160k: 1/5 of the salary for year 4, 1/5 of the salary for year 3, 1/5 of the salary for year 2, and 1/5 for year 1.

year 5: company deducts $200k: 1/5 of each of my 5 years of employment. I leave the company after year 5. Year 1 of my employment is fully deducted.

year 6: company deducts $160k: 1/5 of years 5, 4, 3, and 2. Year 2 of my employment is fully deducted.

year 7: company deducts $120k: 1/5 of years 5, 4, and 3. Year 3 of my employment is fully deducted.

year 8: company deducts $80k: 1/5 of years 5 & 4. Year 4 of my employment is fully deducted.

year 9: company deducts $40k: 1/5 of year 5. Year 5 of my employment is fully deducted.

what is the corporate tax rate? 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.

I dunno man. In a world where places like Amazon pay $0 in income tax each year, I kinda feel like companies should be paying more taxes. companies get all kinds of deductions that employees don't get themselves, and will never get. businesses have a whole heap of unfair advantages already.

I'm sure the capitalists among you will want me dead for saying this, but: pay your fair share. I don't care what the law says, pay enough that no one can say that you're a lamprey on society, please.

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.

Maybe they felt like software companies were too heavily incentivized by the tax code to invest in unproven, unsustainable businesses and would structure their businesses in a way that meant they’d never end up paying taxes.

Startups would blow a bunch of money on R&D for unprofitable moonshot ideas for a few years then the company would fail most of the time, with the government missing out tax revenue where workers could have been allocated to more profitable ventures.

Still, I think that the more cynical take is more likely (big companies lobbying to make it more difficult for small companies to disrupt their businesses)

They were cutting taxes for the very richest people in the US and paying for it in ways like this.

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).

that depends entirely on how much the business is taxed. every $1 deducted from taxable income is NOT $1 saved in that business' tax payment. It's much more like $0.10-$0.30 saved in taxes.

And I'm not making this up. We are about to get cash flow neutral in our company, and this law will literally kill us and make 20 US citizens unemployed.

The only businesses this hurts are small or young businesses that have yet to develop an established product and reliably revenue stream.

For them in the best case scenario they make so little that they can't even deduct but otherwise this means taxes being paid pulling away from the runway that a young business has before it builds up a stable income stream.

It’s a rare thing these days: a law everyone can hate, regardless of ideology. You don’t have to be a Laffer curve believer to recognize that you can design tax schemes that would destroy competition and/or cause excessive deadweight loss. After all, if all taxes were created equal, we could just replace them with a money printer.

Hopefully it doesn’t take three years to reach a consensus on these moronic tariffs, which are far more destructive to the overall economy.

So a startup that's paying $200k in its first year but only making $40k in that year, they still get to deduct the labour costs over the next 4 years.

But of course this is only true as long as revenue is less than labour costs. Eventually you do want to make money, and it feels like you can only do that when you stop hiring more people.

But regardless of its effects on different types of companies, I don't understand how anyone could pretend that this way of handling labour costs makes any kind of sense.

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

https://www.macrotrends.net/stocks/charts/AMZN/amazon/total-...

https://en.wikipedia.org/wiki/Corporate_tax_in_the_United_St...

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.’

But I do wonder what the effect on smaller shops would be.

> I'm sure the capitalists among you will want me dead for saying this, but: pay your fair share.

Is the equivalent of a finance person saying to a developer "can't you just hire more developers and we can build our product faster". In other words, it's not that simple.

The "half year convention" means that when you amortize a purchase, it's assumed you purchased it exactly halfway through the year, so you can only deduct half the amortization in the first year that you would normally (and the other half is in the year after the depreciation period).

So it looks like

year 1: 1/10

year 2: 1/5 + 1/10

year 3: 1/5 + 1/5 + 1/10

year 4: 1/5 + 1/5 + 1/5 + 1/10

year 5: 1/5 + 1/5 + 1/5 + 1/5 + 1/10

year 6: 1/5 + 1/5 + 1/5 + 1/5 + 1/5 (the last 1/5 being the other half from year 1 and the 1/10 from year 6).

They’re gonna lobby to get as low taxes as they can. Why would they do anything else? That people think they are “lamprey” is (or would be) a minuscule problem in a country like America.

If I paid salary of 100k, and invested 100k. Then I made 0 profit regardless, actually I would have a loss of 100k?

I guess the difference comes in if I made 200k, so I would have a profit of 100k.

Not sure how it affects the pnl, but is it fair to say it doesn't affect total tax, just distributes it more evenly across years?

"What they've actually done, congress said, is bought a capital good, like a machine."

Replace "like a machine" with "like software"

15 years in the case of foreign developers.

" H.R.1990 - American Innovation and R&D Competitiveness Act of 2025 "

https://www.congress.gov/bill/119th-congress/house-bill/1990...

> A bipartisan bill reintroduced in Congress last month could offer long-awaited relief to small tech companies hit hardest by an obscure federal tax change — one that many founders say is threatening their survival.

> Industry groups from the Small Software Business Alliance to the National Venture Capital Association and TECNA are backing the bill, which sits in committee. Over 100 House members have signed on. The bill would reverse the changes not just going forward, but also retroactively.

https://technical.ly/startups/r-d-tax-change-reversal-startu...

> On May 13, the House Ways and Means Committee passed “The One, Big Beautiful Bill.” This bill includes several provisions that, if enacted, will be important to businesses claiming research and development incentives:

> The bill would suspend the current amortization requirement for domestic R&D expenses and allow companies to fully deduct domestic research costs in the year incurred for tax years beginning January 1, 2025 and ending December 31, 2029.

https://www.crowell.com/en/insights/client-alerts/house-comm...

> The OBBBA suspends required capitalization of domestic research and experimental expenditures for amounts paid or incurred in taxable years beginning after December 31, 2024, and before January 1, 2030. Under the OBBBA, at the taxpayer’s election, such expenditures can be: deducted as paid or incurred under new Section 174A(a),

https://www.skadden.com/insights/publications/2025/05/the-on...

The CBO calculates costs over 10 years, so if you introduce a tax cut that sunsets after 5 years it looks much less bad (for the deficit) than it really is. Then you hope that in 5 years some other legislation comes along to renew it for another 5 years...

Because that would be just typical.

what happens if an engineer leaves after the first year, or at any other time?

what happens to the calculations then?

The total amount spent will ultimately be expensed, whether immediately or over five years. The sole impact is on the time value of money, which I don't believe warrants the current scale of developer dismissals.

Also, the claim that taxes are levied even during a deficit seems incorrect. While I'm not familiar with US tax law, it's typically possible to carry forward losses.

For example, if a developer is hired for five years at $100 annually, the expensed amount in the fifth year would still be $100, even after any legal changes.

This is an incomplete description. The ordinary rule depends on the nature of the expenditure. If your expense is for building an asset that generates recurring revenue—including paying people to build such an asset—then you cannot immediately deduct that expense. Instead, you must depreciate it over the lifetime of the asset.

The issue here is that software development is sometimes genuine R&D and other times more like building an income producing asset. E.g. if you spend money building infrastructure software to move bits from one place to another, that’s more like a factory building a conveyer belt than it is like investing in fundamental pharmaceutical research.

So why do we need to give these large, very profitable companies another tax cut?

Or maybe we should be asking, what of the 2017 tax cuts are they willing to give up to pay for this change?

Remember that after a few years, none of this matters. You might be paying $200k in salary to an engineer and can only deduct $40k, but you're also making deductions "earned" in previous years?

Basically, I reject the argument that this change is responsible for layoffs. It is not. And changing it won't lead to a hiring binge. Layoffs exist to suppress wages in these largest employers.

Maybe we should allow a 100% software development tax deduction if the company hasn't fired more than 1-2% of its workforce in the last calendar year. Or maybe only if the workforce is unionized.

This whole thing is so anti-worker. It doesn't have to be this way.

i dont know how this is anti-worker? it's an extra cost to growing the number of people youre hiring, where you need them for 5 years. i guess businesses should start witholding RSUs and starting bonuses until youve been there for 5 years to match your tax ammortization?

This actually understates the issue slightly. The amortization is calculated from the midpoint of the first tax year, so actually you only take 10% in the first year. Meaning it takes six years to get back to square one. In your example, you would only capitalize $20k in the first year, $40k for the subsequent four years, and then another $20k in the final year.

Correct me if I'm wrong, but if a company hires someone to say, mine coal or brew beer, the expense of those employees is an expense any company can claim a full tax deduction on. If you're a line chef or wait tables, your salary is tax deductible to the restaurant.

So it's not that we are asking for R&D to be treated "specially" and get a deduction that other companies don't have. The problem is that R&D salary expense is being singled out as producing an asset (e.g. IP), and thus being classified in the same category as other assets, like, brewing equipment, a mining excavator, or a pizza oven. Simply put, Section 174 argues to classify people in the same category as things because ... 'these people's work outputs may have long-term value, kind of like things'(?).

Allowing Sec 174 to stand is a slippery slope to classifying more and more everyday Americans' salaries into this category. One could argue in the future, for example, that those who design cars or operate machines to produce tooling dies, should not have their labor treated as regular expenses, but instead as capital assets because their labor output is captured in assets, just as Sec 174 treats the labor of software developers as assets. Everyday people should be concerned by this because if the rule stands, it could be extended to you, too.

For those objecting to the equal treatment of R&D employees as all other employees in America of all stripes and vocations, keep in mind that software people have to pay personal taxes on the income, just like everyone else. Section 174 doesn't have anything to do with personal income taxes: we all pay income taxes fair and square. The question is whether there is a double-tax on software labor, paid at the corporate level (and in all likelihood, your salary is currently a tax deduction for your company, unless you write software or do R&D).

I think the assumption that we are asking for "special treatment" is driving some confusion and grass-roots objection to the movement here, so I wanted to highlight that we are just asking for everyday people who work software and other R&D jobs to be treated just like every other American who works a day job.

[edits for clarity]

In the future? That's how it works!

> just as Sec 174 treats the labor of software developers as assets.

[I was wrong about the following. I misread the text - and the submission title.] That's not what 174 does.

Example 4. Acquisition or production cost. D purchases and produces jigs, dies, molds, and patterns for use in the manufacture of D's products. Assume that each of these items is a unit of property as determined under § 1.263(a)-3(e) and is not a material and supply under § 1.162-3(c)(1). D is required to capitalize under paragraph (d)(1) of this section the amounts paid to acquire and produce the jigs, dies, molds, and patterns.

I thought it was for the first paragraph.

But I was wrong about 174, maybe you meant that.

But I'd also observe that since business owners have to capitalize the wages of the machine operators producing injection molds, then there is an advantage to outsource the whole operation.

Comparing a procurement manager and a CNC operator [the person running the milling machine making a mold] paid the same amount, the CNC operator has a bigger negative impact on the businesses' bottom line, because the business can't expense most of the CNC operator's wages in the current tax year, whereas the procurement manager is generally accepted as fully deductible expense.

Of course, the labor that went into making the mold is effectively built into the acquisition price of the mold, so you haven't gotten rid of it by outsourcing it.

But, by building it into the price of an outsourced mold, one can delay the purchase of the mold to next year to improve the P&L this year, but you can't similarly delay the wages of the tooling operator to a later date.

So, when a CFO is looking for a way to improve the P&L in a given calendar year, there's an incentive to cut operators who build factories, tools, and other assets that have to be amortized, and replace them with more flexible outsource options.

Of course, part of the reason mold making left the US is wages are lower outside the US. But I'd say the current situation with software engineers is a datapoint that demonstrates the impact of expensable versus amortizeable labor on employee retention. It could be that if the tax code is not fixed, the same "CFO logic" would lead to more and more software being outsourced over time, as management is an immediate expense, but software engineers are not.

I suppose one can then argue, why should software engineers get special treatment compared to tooling operators; but then I would counter-argue that perhaps tooling operators should have gotten better treatment so we could have retained more of them in the US.

is manager of AI agents (especially when they become more productive and capable than people) going to be a manager or software engineer?

...no, not a manager.

Aircraft are also more productive and capable than people in specific activities, and useless wastes of money in others.

Not really. For example for L1, a visa for managers and executives, managing people isn't a hard requirement, instead it may be "employee’s ability to manage an essential function of the organization at a high level, without direct supervision of others", and thus project managers and architects and even senior engineers make the cut.

Handling capable AI agents would seem to fit if those AI agents perform "an essential function of the organization" and you manage them "at a high level, without direct supervision of others".

This is bad for the economy and ultimately reduce our tax base.

About the only thing that doesn't happen is for non-reproducible privileges such as land, intellectual properties, the electromagnetic spectrum, etc.

So are you saying that 0% rate taxes would capture the most tax?

Yes. It’s a second-order effect. Imagine if there were a 100% tax: the government would probably get no taxes, because there would be no economy.

> So are you saying that 0% rate taxes would capture the most tax?

No. There’s a sweet spot. Everyone argues about where it is, but obviously 0% and 100% tax rates would both be problems.

If you tax inputs but not outputs, then a 100% tax rate increases the cost of goods and services but does not necessarily kill the business.

If you tax income, then a 100% tax rate kills all income. However, income taxes are usually progressively, so a 100% marginal tax rate places a cap on income, but income below that can exist.

If you tax profit, a 100% tax rate leads to shifting profits to reinvestment and salaries and benefits.

There wouldn't be any money to reinvest into salaries and benefits, because capital would not be deployed on a risky, potentially money-losing venture without the possibility of profit.

However if the tax is too high then it would cause land abandonment.

If you tax the usage of the electranetic spectrum too much, you would get no usage but the electromagnetic spectrum would still be there.

Yes, there are people who think tax==bad. Most people (and for a century or so) have understood that taxes are ultimately spent, and normally with a "multiplier". That is, on something which actually stimulates further economic activity.

Corporate profit, OTOH, normally just satisfies the rent-seeking economy, which is not productive in any natural definition. For instance, dividends and stock buybacks. Yes, some corporate profit feeds entrepreneurship, but that's simply not a large fraction of the corporate economy.

The state can still tax in two ways, taxes on undesirable negative extremity such as products that give you long cancer, and unreproducible privileges. I listed those examples. There may be ground for taxing extreme wealth but I want to see extreme inequality fixed first.

I am not even disputing that the government spending encourages economic activity, but we should at least not shoot ourselves in the foot only to heal the foot with another hand.

I am advocating for the interest of the state.

My assumption is, if tax folks in the US were looking Jealously at US companies with large Multinational presence declaring a lot of their profits abroad. They might have noticed that some of them have large dev presence in US, but through complex accounting, IP transfers, licensing and other actions are able to claim that majority of the value is generated outside of the US.

If a company had, say, 100k software devs, 50k in the US, and 50k scattered across other countries, but claimed the value of it's software was primarily in Puerto Rico and Ireland... In that case, I'd expect questions around the 50k devs in the US.

Is software dev the only activity where this is possible - no, but is currently by the far the largest and the largest growth industry.

When are we going to break the majors up already? Google should be like seven different companies. YouTube is bigger than Netflix for Christ's sake.

Demand antitrust enforcement!

There's so much value pent up and wasted in Google today that it'll be worth more as divisible parts. They're practically giving half of the value away for free and wasting it on implementing the same thing four times before cancelling it.

And Apple and Amazon...

These giants are basically stifling the US startup ecosystem and putting a valuation cap on innovation. They're also ripping apart other industries by moving in and undercutting costs with subsidized offerings detached from the underlying economics. They're like invasive species destroying the ecosystem, eating up everything, completely immune to competition. And if that's not reason enough for you, they're putting massive wage pressure on our profession.

For a long while now, every small US-based company I look at hiring engineers have their teams in South America or Eastern Europe.

Since we tried to go to a pay-as-you-go model on bills the tax code has turned into an absolute shambles as the congresscritters look at how to tweak things to "produce" (look at the IRA withdrawals--it produced nothing, just moved some money forward one year while creating a trap that many have fallen into) the desired revenue to cover whatever the bill costs without "increasing taxes."

The question is: are you getting the value of that work in the same tax year, or is it creating an asset that creates value over time? If you hire a guy to brew a batch of beer, you’re getting the value with that batch of beer. Once you sell that beer, the value is gone.

But if a brewery hires someone to build a fermentation system, then that person’s salary cost must be allocated to capital expenses that must be depreciated over time.

There’s a good argument that most software development is creating an asset that pays off over time. If you hire someone to upgrade the payroll software, you’ll get the value of that in future tax years.

Software engineers being taxed similar to brewery design engineers seems reasonable, not the person literally brewing each batch of beer.

How so?

Assuming positive inflation, the IRS receives more total, because the taxes they get paid now are worth more than the same amount of dollars they give back in later years. And if the company goes out of business, the IRS never has to give those taxes back.

To minimize distortion, the income tax must accurately compute “income”—the actual increase in wealth. Depreciation is part of that. To compute income, the net increase in wealth, you need to subtract costs from revenue. When you buy an asset, your wealth doesn’t immediately increase or decrease—it simply changes form (from cash to an asset). The actual cost is the depreciation on the asset, which occurs over time.

Say you buy a delivery vehicle for $50,000. In the first year, you make $100,000 in revenue and have $20,000 in operating expenses. What’s your income after one year—the actual change in wealth? You have $80,000 in cash after operating expenses, plus a vehicle that you can sell for maybe $40,000. So you have $100,000+$40,000 in cash and assets in minus $20,000+$50,000 in cash and assets out, for a $70,000 increase in wealth.

Calculated another way, you have $100,000 in revenue-$20,000 in operating expenses-$10,000 in depreciation = $70,000 in income. Now, over say 5 years, you’ll depreciate the full $50,000 cost, and the total dollar amount the IRS gets will be the same. But it will get more taxes in the first year, which due to the time value of money is worth more than getting the money in subsequent years.

The problem is those of us who deal with code only rarely are actually just building a vehicle. It's an ongoing activity that more resembles maintenance than the outright purchase of an asset.

Look at how much software is going to a subscription model. That only makes sense if there is ongoing improvement to the software.

If you're 100% allocated to a greenfield project that's behind closed doors until 2027, sure. But it doesn't seem like most software engineers are in that bucket. If anything, the industry has been consistently moving further away from that, with more agile methods, tighter feedback loops, etc.

While there are software that are still in use from five years ago, there are plenty of obsolete software no one is still using made five years ago.

If we are making say, a point-of-sale software rolled out in a fast food franchise (let’s take Chick-fil-A since they have edge Kubernetes deployments), is it reasonable that we won’t add features to that software in 3 years? Perhaps.

What about bug fixes? Is that expense or should we expect time spent on bug fixes to also be depreciated in 3 years?

What about configuration? Does configuring that POS for new menu items count as software development, and therefore needs to be depreciated over the next 3 years?

Chick-fil-A has edge Kubernetes. Does the install and implementation itself counts as “R&D”? If we argue that configuration can be expensed, then would writing manifests be depreciable or not? What if we use “infrastucture as code” tools such as Chef?

What about say, excel sheets and macros? Or forget macros — just basic use of a spreadsheet. Some manager add in a summation to a column to compute totals. Very basic stuff. Is that software development? If it is, would that be depreciated over 3-years?

If we argue that this is normal use of excel and should not be depreciated, then why wouldn’t my normal use of a compiler and editor also count as normal use and should not be depreciated?

Whether it is 5 years or 3 years, the point is that unlike physical capital goods, software changes very fast, even if the underlying hardware wasn’t changing that fast. It is not always that expert designers build them — software can also be written in a way where end users modify them. We also use software to make software, and can rapidly change our tooling in a way that we cannot with physical capital equipment.

I see the merit in categorizing software as capital, from an economic theory point of view, but software also has its own dynamic that is distinct from physical capital equipment. A tax code that does not acknowledge that can bring more overall harms to the society.

A better analogy is a brewery hires someone who builds a fermentation system, then continues to operate, maintain, repair, and improve the system over time. Some of the employee's time is spent on work that could probably considered R&D, some of it is on work that is clearly operation, and some isn't clearly one or the other. So how do you determine how much of the worker's salary is R&D vs operational expense? You can try and estimate some percentage, but that breakdown is at best an educated guess, and having to try and figure that out just adds pointless friction.

But that still isn't a great analogy, because in that case the fermentation system isn't the product, the beer is. So for a company that sells software, it would be more like if it wasn't a company that sold brew, but a company that rented out or sold its brewing equipment to other companies that made beer.

Also, the same argument about creating value that pays off over time could be said about most employees. An accountant could find a more efficient way to keep the books that pays off over years; the CEO could create a strategy that pays off over years; customer service staff could create a reputation for high quality customer service that pays off over years; etc.

And then, even if you assume that an engineer's salary is entirely R&D, then the only reason I can see to want that salary taxed at a higher rate is if you want to disincentivize R&D. R&D is already a large expense now in the hopes of a payoff later, and by increasing the tax burden now, you are making that upfront cost even higher.

For example, if you pay for someone to maintain the brewery plant to keep it working in its current condition, that’s an operational expense that could immediately be deducted. But if the work is on upgrades and improvements, that’s ordinarily would be a capital expense that must be capitalized and depreciated. A bookkeeping strategy isn’t.

Your other examples are off the mark, because the question is whether the investment produces an income-producing asset. Software generally is such an asset. The question of what’s an operational expense versus what’s a capital expense isn’t always clear cut, and is the kind of thing where accountants and tax lawyers have to make judgment calls.

The tax code has been optimized by the rich over the past century to extract profits out of industrial firms and that's where the difference comes from. $100 used to, say, produce a car or a cake that you then sell is immediately and fully deductible from tax because otherwise industrial companies just outright can't survive. Hell, you get to claim back/not pay any VAT and/or sales tax you paid for anything related to them. One way to see it is that these rules are designed to get money to the (existing, "old-money") rich, so when investors don't get money, the government doesn't get money.

If it's equipment for the company to use itself, then it has to be amortized, or more to the point, it means industrial companies can't do what Amazon did: use 100% of their free tax flow to grow "tax-free*" instead having to give that money to the government and investors (15-35% to government 65-85% to the rich, sorry, investors), so they can use it for their own ends.

I'm not judging one to be good or bad, just attempting to frame this correctly. I should perhaps point out, as a last point, that this is a massive difference between the US and European countries. In Europe, investors and governments try to have their cake and eat it too: there's tax due (amortization rules, or worse) on new company creation, on company growth, except of course, for the companies of the rich: you can grow financial capital in companies without paying a cent, money, shares, obligations, ..., just nothing else. That's yet another connection to the rich, to investors. New employees, new buildings, ... are double taxed, only money isn't. In Europe, there have only ever been exceptional cases where it was otherwise. In the US "tax-free" new company creation has been the norm for all of history except since Trump changed this rule.

* between quotes because they still have to pay income tax on any wages, sales tax on any purchases, ... it is very far from tax-free, but such companies wouldn't pay a dime to investors. If they did that would make it very hard to create new companies (which is what this regulation does). Amazon's great accomplishment is not AWS or anything like that but 2 financial accomplishments: first, avoid sales tax, second, avoid paying anything to investors. Whatever business Amazon is in is nothing but a tool for that financial engineering.

How would Disney feel if the salary paid to the cast of the Avengers was no longer an expense in that year, but amortized over the entire copyright period of the film.

Doesn’t change much for the Avengers films which have production costs around $500m. Disney still has to capitalize 97% of the cost. $15m doesn’t cover a single star’s salary.

I think the issue is this fantasy that a software develop only produces long term IP. Or how is it different from an executive who is developing strategy and market positions that have future value?

Maybe it would make sense if we could distinguish such work products as a fraction of their total output, tracked as actual inventory that accountants have to assign value and track capital gains on?

How is that any different from hiring a bunch of people to write some software, that I then get the value of over the following years?

That’s not how it works in general (there are exceptions though): https://www.law.cornell.edu/cfr/text/26/1.263A-1

> most software development is creating an asset that pays off over time

This is a fantasy.

Small correction, it was a vindictive move to negatively impact companies and regions that Trump didn't like (at the time).

Wow, so there isn’t really a good faith steel man for this? They were just like, hey, we need to offset other cuts so let’s arbitrarily pick a high paying profession that, not so coincidentally doesn’t have a lot of influence in government, and let them take the hit?

It is indeed detrimental to startups though, as they can end up paying taxes even when not profitable and when cash is the key issue (which isn't the case that much for most businesses).

But, in a second thought, if you sell a software that you hand crafted to a single customer, in Spain, the software enterprise currently deducts all salaries, while the customer has to depreciate the cost. Think about that in the likes of building an expensive machine: the manufacturer deducts all costs while the customer has to depreciate the machine cost over 20 years.

So the question is, how should a software development piece be considered when it's used internally? Why if you sell that software to others have a tax implication different than if you yourself use it?

That's a very difficult question to answer with too many edges.

I'm not a US taxpayer so my opinion really is irrelevant, but I was so far in the camp of "there's no reason to make a special case for big tech".

But if what happened is actually the reverse, ie, the rule makes a special case of tech/developers and pretends their salary is not a cost but an investment, that's clearly absurd and indefensible.

Now, let's imagine a company buys a slave. It's one time capital investment, like buying a car or a machine, and you need to depreciate the cost over multiple years.

The only way it makes sense to treat software developers as a capital investment instead of an operational cost is if they were treated legally as slaves. And slavery is not legal any more. Or is it?

So comes down to whether you view a software engineer as something that has value only in the moment (like HR person) or as creating an enduring asset (code base).

A good code base obviously has long term value and there is no raw material input, just engineer time.

Either way you end up with awkward mismatches somewhere & the deferred version as you say has undesirable chilling effects, but I don't think it is entirely without merit either. Think of it from tax man perspective: They're being asked to hand out 100% of the tax credit today while receiving the income over years time. Switching this back to old model doesn't make the mismatch go away - just shifts it to taxman.

So for your example of a $200k salary amortized over 5 years, you can only deduct $20k the first year, then $40k, $40k, $40k, $40k, and then the final $20k in the sixth year.

That being said...the current version of the bill would temporarily pause the current version of section 174 (capitalization of software labor costs). There's no way for them to make the original treatment permanent without adding another trillion or so to the cost of their mega bill.

However, the original reason for that temporary reprieve was that Musk was still Trump's best buddy at the time. Right now, it's the most likely target for getting cut in the reconciliation negotiations between the House and the Senate. Thus, YC reaching out to its readers to support this abomination of legislation.