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For folks that don't know the background on this, here's a layperson summary: - A business is usually taxed on its profits: you deduct your revenue from the co

For folks that don't know the background on this, here's a layperson summary: - A business is usually taxed on its profits: you deduct your revenue from the cost of producing that revenue, and the delta is what you are taxed on. - In software businesses, this usually means if you spend $1M in software development to develop a web app, and it makes $1.1M in that year, you'd get taxed on the $100K profits. - However, a few years ago, the IRS stopped allowing the $1M to be deducted in the year it was incurred. Instead, the $1M was to be amortized over 5 years, so now the business can only count $200K as the deductible expense for that year. So now it's going to be taxed on "profits" of $900K. Assuming the tax rate is 20%, that means the business owes $180K in taxes, even though it has a total of $100K in the bank after the actual expenses were paid. So it would have to either borrow to pay taxes or raise venture capital, meaning that VC-funded companies would be advantaged over bootstrapped ones! - The letter's goal is to bring things back to how they were (and how they are for all other businesses): let businesses deduct their actual expenses from their actual revenue, and tax that actual profit. I am neither a lawyer nor an accountant, this is just my understanding of this issue. Edit: Switched the tax rate to 20%. The logic is still the same.

readthenotes1 1y ago
Why do you assume a 50% tax rate in the United States when it is only 21%?
- cjbgkagh 1y ago
  State, city, property, social security tax, other fees and levies that should really be classified as taxes. The total tax burden can really add up.
- quietbritishjim 1y ago
  I think they meant "assume" like a mathematician, i.e., pretend it is this simple value to make all the calculations easier to understand. But it's still useful to know the real rate is 21%, thanks.
- jsherwani 1y ago
  In California, the maximum personal income tax rate is effectively closer to 50%, which is where my mind went, but you're right, it's different for companies. In my example, the tax rate isn't the point though, it was used just to illustrate the math. The main point is that it makes no sense to require amortization of software development expenses. The idea that this letter is an attempt to restore rationality in the tax code.
hwillis 1y ago
> a few years ago, the IRS stopped allowing the $1M to be deducted It was Trump's 2017 Tax Cuts and Jobs Act, which amended IRS code.
- cjbgkagh 1y ago
  It wasn't intended to stick, it's a bad idea that was intentionally bad in order to make it easier to reverse.
  - rgbrgb 1y ago
    I don't follow. What is the motivation of doing something intentionally bad to make it easy to reverse?
    - cjbgkagh 1y ago
      The worse it was the better it worked as a budget fudge and it could be included in projections and allow a budget neutral bill to be passed. And by being so bad it would be easier to reverse as fewer people would defend it. There was an attempt to eat their cake and have it too.
      - freedomben 1y ago
        Why is it still in place?
        acdha 1y ago
        Republicans really want to cut taxes for rich people but they don’t want to just straight-up acknowledge a huge debt increase for that goal, so they come up with different ways to say that something is budget neutral. That’s why a lot of the 2017 bill cuts were time-limited so regular people got the tax cut immediately and would hopefully remember it, but the time limit meant that CBO wouldn’t count it as a long-term debt increase and it’d be someone else’s problem when those expired and most people notice their taxes go up.
jll29 1y ago
That's a great explanation, thanks a lot for sharing it. Some big tech companies affected have laid off teams around the world, perhaps in order to mitigate the numbers looking bad to investors; so in a way, this adversely affected tech employees globally. Every country should have such a rule for software businesses, which is an industry where all the cost has to be upfronted, so that bootstrapping is facilitated. There are plenty of smaller markets where the VC model is not the most appropriate funding instrument.
tossandthrow 1y ago
While this does convey the idea, the premise is also biased. > even though it has a total of $100K in the bank after the actual expenses were paid. People running a business can perfectly understand the concept of liquidity. And yes, just because you transform money to something else, then it doesn't mean that you should not be taxed on it. The extreme example is a company that buys gold on the last trading day of the year - now there is no profit! On the first day they sell the gold again and does tax eviction. The core question is to what extend software constitutes an asset or consumption. (Personally, I do not believe that software constitutes an asset in any meaningful way, but a practical tradeoff could be that software is a 10% asset)
- usefulcat 1y ago
  > The extreme example is a company that buys gold on the last trading day of the year - now there is no profit! On the first day they sell the gold again and does tax eviction. In this example, it seems like you're assuming that the revenue from the sale of the gold would not be taxable, but I don't see why that should or would be the case. ETA: also, gold is far, far more fungible than any particular software
- pfannkuchen 1y ago
  Doesn’t that just defer the tax until later?
- teeray 1y ago
  > The core question is to what extend software constitutes an asset Maybe we can finally deduct all that technical debt.
  - ncruces 1y ago
    If a software project fails can we claim depreciation, like after a car crash?
    - tossandthrow 1y ago
      Well, until now you automatically had depreciation. In the future you will still get it automatically, just deferred.
bryanlarsen 1y ago
AFAICT, that $450K is refundable and transferable. IOW, if you make $0 in year two and have expenses of $0 in year two, you'd get a tax refund of $100K because $200K of your expenses from year one would be applied to year 2. And it's transferable -- if your company fails, there are companies out there that will buy the rump of your company to realize the unrealized tax refunds. Which is why it's usually fairly straightforward to get a factor loan to pay those $450K in taxes -- it's backed by an asset. Factor loans are usually expensive with a high interest rate. Because you can get a factor loan, the taxes are not going to immediately bankrupt the company in the short term, but the high interest rates are going to hurt in the long term. Not a lawyer nor an accountant. Not even an American.
- mediaman 1y ago
  NOLs are generally not transferrable in the US (they used to be, but now the benefit can only be used if the acquirer of the 'rump' continues the existing operating business).
zajio1am 1y ago
> Assuming the tax rate is 50% Which is not(?). According to https://en.wikipedia.org/wiki/Corporate_tax_in_the_United_States https://en.wikipedia.org/wiki/Corporate_tax_in_the_United_St... , federal corporate income tax rate is 21%, + additional <10% for state level, not sure about local level.
- rbultje 1y ago
  One of the reasons small businesses have been hit so hard with this is because for then (when incorporated as LLCs), their tax rate is 37% + state + local. I live in NYC and my LLC has a combined tax rate of 50%.
  - throwanem 1y ago
    You live in the most expensive metro in the country, one of the most expensive in the world, and tax is where you think your money problems come from?
  - dmoy 1y ago
    Note that LLC isn't a tax status An LLC can either file as a c corp and get corporate tax rates, or (sometimes) file as passthrough like as in a sole proprietorship. Or as a partnership. It gets complicated https://www.irs.gov/businesses/small-businesses-self-employed/llc-filing-as-a-corporation-or-partnership https://www.irs.gov/businesses/small-businesses-self-employe... Anyways, it's up to you, it's not necessarily due to it being an LLC.

readthenotes1 1y ago

Why do you assume a 50% tax rate in the United States when it is only 21%?

cjbgkagh 1y ago
State, city, property, social security tax, other fees and levies that should really be classified as taxes. The total tax burden can really add up.
quietbritishjim 1y ago
I think they meant "assume" like a mathematician, i.e., pretend it is this simple value to make all the calculations easier to understand. But it's still useful to know the real rate is 21%, thanks.
jsherwani 1y ago
In California, the maximum personal income tax rate is effectively closer to 50%, which is where my mind went, but you're right, it's different for companies. In my example, the tax rate isn't the point though, it was used just to illustrate the math. The main point is that it makes no sense to require amortization of software development expenses. The idea that this letter is an attempt to restore rationality in the tax code.

hwillis 1y ago

> a few years ago, the IRS stopped allowing the $1M to be deducted It was Trump's 2017 Tax Cuts and Jobs Act, which amended IRS code.

cjbgkagh 1y ago
It wasn't intended to stick, it's a bad idea that was intentionally bad in order to make it easier to reverse.
- rgbrgb 1y ago
  I don't follow. What is the motivation of doing something intentionally bad to make it easy to reverse?
  - cjbgkagh 1y ago
    The worse it was the better it worked as a budget fudge and it could be included in projections and allow a budget neutral bill to be passed. And by being so bad it would be easier to reverse as fewer people would defend it. There was an attempt to eat their cake and have it too.
    - freedomben 1y ago
      Why is it still in place?
      - acdha 1y ago
        Republicans really want to cut taxes for rich people but they don’t want to just straight-up acknowledge a huge debt increase for that goal, so they come up with different ways to say that something is budget neutral. That’s why a lot of the 2017 bill cuts were time-limited so regular people got the tax cut immediately and would hopefully remember it, but the time limit meant that CBO wouldn’t count it as a long-term debt increase and it’d be someone else’s problem when those expired and most people notice their taxes go up.

jll29 1y ago

That's a great explanation, thanks a lot for sharing it. Some big tech companies affected have laid off teams around the world, perhaps in order to mitigate the numbers looking bad to investors; so in a way, this adversely affected tech employees globally. Every country should have such a rule for software businesses, which is an industry where all the cost has to be upfronted, so that bootstrapping is facilitated. There are plenty of smaller markets where the VC model is not the most appropriate funding instrument.

tossandthrow 1y ago

While this does convey the idea, the premise is also biased. > even though it has a total of $100K in the bank after the actual expenses were paid. People running a business can perfectly understand the concept of liquidity. And yes, just because you transform money to something else, then it doesn't mean that you should not be taxed on it. The extreme example is a company that buys gold on the last trading day of the year - now there is no profit! On the first day they sell the gold again and does tax eviction. The core question is to what extend software constitutes an asset or consumption. (Personally, I do not believe that software constitutes an asset in any meaningful way, but a practical tradeoff could be that software is a 10% asset)

usefulcat 1y ago
> The extreme example is a company that buys gold on the last trading day of the year - now there is no profit! On the first day they sell the gold again and does tax eviction. In this example, it seems like you're assuming that the revenue from the sale of the gold would not be taxable, but I don't see why that should or would be the case. ETA: also, gold is far, far more fungible than any particular software
pfannkuchen 1y ago
Doesn’t that just defer the tax until later?
teeray 1y ago
> The core question is to what extend software constitutes an asset Maybe we can finally deduct all that technical debt.
- ncruces 1y ago
  If a software project fails can we claim depreciation, like after a car crash?
  - tossandthrow 1y ago
    Well, until now you automatically had depreciation. In the future you will still get it automatically, just deferred.

bryanlarsen 1y ago

AFAICT, that $450K is refundable and transferable. IOW, if you make $0 in year two and have expenses of $0 in year two, you'd get a tax refund of $100K because $200K of your expenses from year one would be applied to year 2. And it's transferable -- if your company fails, there are companies out there that will buy the rump of your company to realize the unrealized tax refunds. Which is why it's usually fairly straightforward to get a factor loan to pay those $450K in taxes -- it's backed by an asset. Factor loans are usually expensive with a high interest rate. Because you can get a factor loan, the taxes are not going to immediately bankrupt the company in the short term, but the high interest rates are going to hurt in the long term. Not a lawyer nor an accountant. Not even an American.

mediaman 1y ago
NOLs are generally not transferrable in the US (they used to be, but now the benefit can only be used if the acquirer of the 'rump' continues the existing operating business).

zajio1am 1y ago

> Assuming the tax rate is 50% Which is not(?). According to https://en.wikipedia.org/wiki/Corporate_tax_in_the_United_States https://en.wikipedia.org/wiki/Corporate_tax_in_the_United_St... , federal corporate income tax rate is 21%, + additional <10% for state level, not sure about local level.

rbultje 1y ago
One of the reasons small businesses have been hit so hard with this is because for then (when incorporated as LLCs), their tax rate is 37% + state + local. I live in NYC and my LLC has a combined tax rate of 50%.
- throwanem 1y ago
  You live in the most expensive metro in the country, one of the most expensive in the world, and tax is where you think your money problems come from?
- dmoy 1y ago
  Note that LLC isn't a tax status An LLC can either file as a c corp and get corporate tax rates, or (sometimes) file as passthrough like as in a sole proprietorship. Or as a partnership. It gets complicated https://www.irs.gov/businesses/small-businesses-self-employed/llc-filing-as-a-corporation-or-partnership https://www.irs.gov/businesses/small-businesses-self-employe... Anyways, it's up to you, it's not necessarily due to it being an LLC.