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.
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?