8 ms·
Here's a toy example that hopefully makes this clear: In 2024, your business has $1m in revenue and has $2m in expenses. 100% of these expenses are R&D salarie
by wdaher 1y ago
Here's a toy example that hopefully makes this clear:
In 2024, your business has $1m in revenue and has $2m in expenses. 100% of these expenses are R&D salaries (engineers you hire.)
Your company loses $1m/year. (You brought in $1m and spent $2m.)
Under the old rules, you'd owe no tax because you were unprofitable.
After Sec 174, what the IRS now says is:
You had revenues of $1m. But you only had $400k in expenses (because you now have to spread that $2m in R&D expense over 5 years).
So actually you had a profit of $600k! And you owe tax on that $600k profit (~$120k)
So you now have an additional $120k tax expense, making your business even more cash-flow negative.
.
Amusingly, if you're pre-revenue, none of this matters (you have no income at all, so it doesn't matter what your expenses are.) You get hardest hit by this change when you have some revenue and when you do a fair bit of R&D.
- svara 1y agoIs this true even if you don't capitalize the immaterial IP asset generated by the R&D salaries on the balance sheet? Is that required in the US? Otherwise I'm quite amazed that salaries can be carried forward as future expenses.
- wdaher 1y agoThis is what the Sec 174 change said: it says that you do have to capitalize it.
- mppm 1y agoElsewhere in the world (under IFRS accounting rules) capitalization of R&D costs has been a firm requirement for a while. The US has been somewhat unique in allowing them to be expensed instead, until recently.
- svara 1y agoTaxes are calculated according to tax accounting rules, not IFRS, though? I know of at least two Western European countries where you don't have to do that. Don't worry, we pay enough taxes either way ;)
- mppm 1y agoYeah, seems I was wrong about that. Apparently most IFRS countries allow expensing R&D for tax purposes, regardless of accounting. Many even have an R&D superdeduction nowadays. Sorry for the noise :(
- bravesoul2 1y agoI was confused and has to double check. In Australia you can deduct them https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/incentives-and-concessions/research-and-development-tax-incentive-and-concessions/research-and-development-tax-incentive/previous-years/guides/amounts-you-can-claim/eligible-expenditure-under-the-rd-tax-incentive https://www.ato.gov.au/businesses-and-organisations/income-d...
- 0xWTF 1y agoCame here to ask about the Aussie RDTI. So, if I spend $10M on R&D and make $5M, what's the difference between US and Aussie net?
- anticensor 1y agoSome countries have uniform accounting where the tax accounting rules closely follow IFRS.
- deleted 1y ago[deleted]
- paulcole 1y agoBut nobody’s forcing you to classify software developers as R&D.
- demosthanos 1y agoNo, that's literally the Section 174 change. You now must count them as R&D. The relevant paragraph from Section 174: > (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. https://www.law.cornell.edu/uscode/text/26/174 https://www.law.cornell.edu/uscode/text/26/174
- mring33621 1y agowhat if you don't call it "software development"? how about "business process mechanization"?
- mring33621 1y agoOMG, I can't believe how prudish HN commenters are! Have you seen who's leading the most powerful orgs these days? Have you seen what's going on? "business process mechanization" is a fair description of what we do and probably would be just fine, tax-wise
- nsxwolf 1y agoThen you risk going to jail.
- brookst 1y agoAt that point you’re so into tax fraud that you light as well call them “postage and shipping”
- acedTrex 1y agoI mean sometimes fraud works, sometimes it doesnt.
- xhkkffbf 1y ago
- jorvi 1y ago> Amusingly, if you're pre-revenue, none of this matters (you have no income at all, so it doesn't matter what your expenses are.) https://youtu.be/BzAdXyPYKQo https://youtu.be/BzAdXyPYKQo
- lostlogin 1y agoThere is so much gold in that show. Just rewatching it now. Fucking billionaires...
- throwawaymaths 1y agoso you are okay, if you start getting revenue when you're five years in?
- singron 1y agoYou can deduct 100% of salaries paid 5 years ago, but only 20% of salaries last year (etc.), and since companies tend to hire more people over time, most of your expenses will have been in the last few years that are still amortizing. You might have enough losses to carry forward in your first year of revenue, but 6 years in that could run out. It depends on the exact circumstances.
- MattPalmer1086 1y agoWait - they are saying that employee salaries are not expenses? That is surely wrong? Just because those salaries are for R&D? I could understand if there was some additional tax break for R&D which was being removed. I can't see how basic operating costs cease to be expenses.
- deleted 1y ago[deleted]
- gruez 1y ago>Wait - they are saying that employee salaries are not expenses? >That is surely wrong? Just because those salaries are for R&D? The same would be true if you hired a bunch of scientists/engineers and got them to do R&D.
- triceratops 1y agoWould it also be true if you hired a bunch of construction workers and got them to build a stadium?
- gruez 1y agoBuildings have to be depreciated, so probably? If you have to depreciate a building if you buy it, why should you get a free pass just because you built it yourself?
- mixdup 1y agoWhat other cost do you think goes into software development? Companies are not spending that much money on IDE licenses. The vast, vast majority of software/R&D costs are labor
- MattPalmer1086 1y agoSo? They are all costs, whatever their source. In the UK, business gets taxed on profit, which is what is left from revenue after subtracting costs.
- guyfromfargo 1y agoI own a small SaaS and the numbers you presented are similar to my situation in 2023. I owed over $100k in Taxes and I’ve literally never had over $100k in my business or personal bank account.