If you make a million and pay a million in salaries, you have no cash left, right?
But! You get to pay taxes as if you made 800k in profit. So lucky you, you have zero dollars and now you get to pay 240,000 in tax (800k * 30%) to the government.
You're now 240k in the hole. Game over, no year two, three, or four.
This doesn't affect venture funded companies as badly because they have millions in funding and they can ride out the amortization. It does, however, affect bootstrappers trying to start a thing. Perhaps you could call them small, indie hackers?
If anything, HN should not be cheering this law as it doesn't affect large incumbents and those with millions in VC funding, but crushes the little guys.
You hire consultants.
You paid them a million, you also made a million on the product they produced that year.
So they were not really 'researchers', working out on unknown with high risk probabilities, instead they were building an asset that made you money the same year.
You would deduct the payment to these consultants as expense. they pay their own taxes on their salaries.
You are left with an asset that you can make money on, year after year.
That's, I think what they are thinking.
But a) you were not prepared to turn your salaried employees into consultants
b) the asset requires extensive up-keep, that costs as much as money as it was to 'create it'
c) the asset value without the up-keep can become zero in year
d) the asset itself is very risky and may not have value later on.
So I overall agree with your sentiment.
The gov does not want to classify software dev as 'research', but yet -- they have not established how to fairly classify it.
We aren’t supposed to ask direct questions on here, but you “get” that a company charges 20% of each of the past 5 years, right?
Like, we agree that’s what depreciation/amortization is, right?
So this most affects companies that have a relatively large R&D org relative to the past few years (aka my point about growing R&D ahead of other functions).
> If (as you imply) SW developers are critical to this year’s revenue (vs. building for future years revenue), then why don’t they go in COGS?
Ok, so we're on the same page! Salaries should be expensed!
Unfortunately, the page that you and I are on is NOT the page that United States Government is on. Which... is the point.
You said in a parent comment
> So this most affects companies that have a relatively large R&D org
This has nothing to do with R&D orgs. We're talking about software developer salaries, not R&D. According to the new change, all software developer expenses must be amortized over 5 years, which you and I both agree seems like a silly idea.
I think you're arguing for a common sense approach of not categorizing them as R&D, which I would highly encourage you to run past your CPA before you accidentally commit tax evasion.
You think that all sw devs now are in R&D and not COGS?
Golly! Plenty of SW devs who work on this years revenue are COGS throughout the industry. The game is putting sw devs who work on future years’ revenue in opex.
Since you’re so attuned to cash accounting let’s change up your example.
I prepay $1mn in advertising cost for ads that will run over 5 years. I spent that cash now, but should I be able to expense that whole $1mn this year?
EDIT: Don't believe me, here's Airbnb:
Cost of revenue includes payment processing costs, including merchant fees and chargebacks, costs associated with third-party data centers used to host our platform, and amortization of internally developed software and acquired technology.
> You think that all sw devs now are in R&D and not COGS?
Huh? I don't think that, that's literally what this law is doing. Moving all software developer expenses out of COGS and into R&D that must be amortized.
You're arguing what should be, and I agree with you. It should be COGS. If you go read the law (or... even the article) you'll realize that what should be the case, is not the case.
It has nothing to do with what I think!
> Since you’re so attuned to cash accounting let’s change up your example.
> I prepay $1mn in advertising cost for ads that will run over 5 years. I spent that cash now, but should I be able to expense that whole $1mn this year?
Umm if you're doing cash accounting, yeah. Haha. That's not the point you were trying to make though. If you're doing accrual accounting, no. That's a prepaid expense (asset) which changes to an expense over time as you incur it.
If you want to learn more about accounting, I have a website where I teach introduction to financial accounting topics at https://acct229.com. You might enjoy it!
Sorry but you are the one that needs to slow down and understand what people are trying to say. According to the tax law, it is now a stipulation that all Software Engineers (SWEs) are classified as R&D professionals. This is not a matter of personal interpretation or opinion.
If the developers worked on this years revenue, they should go into COGS, but if they are building things that will have value over many years they should be charged over many years.
Yes, it's tax evasion because the value delivered by those engineers is realized over multiple years? Which is why this old amortization rule is coming back into effect?
EDIT: Just my final reply - this law has nothing to do with COGS. I'm saying R&D is usually a category with multi-year amortization, it's only recently that an exception was made for political reasons.
You are arguing that R&D expense should always be expensed in year, which I assume is a product of not having seen what the normal world was like.
This isn't even a new law fwiw, it's not extending the exception to the existing law.
If anything HN should be cheering this law since it incentivizes growing your R&D team quickly and consistently.