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Section 174 has definitely been talked about a lot over the last few years, (even here on HN from time to time) but it's tax code details like this that never s

Section 174 has definitely been talked about a lot over the last few years, (even here on HN from time to time) but it's tax code details like this that never seem to make it above hype-fueled misrepresentations like "AI Is Taking All Software Jobs!" Yes, it's a huge problem for small startups. Many of them went from not making revenue in the eyes of the IRS to being profitable and having massive tax bills. FAANG has the ability to move things around to their EU offices, but they also have the ability to spin it and do a layoff to help with their tax burden but also cover up issues like over-spending on projects like a shift to VR that didn't go anywhere, for example.

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timr 1y ago
> Yes, it's a huge problem for small startups. Many of them went from not making revenue in the eyes of the IRS to being profitable and having massive tax bills. Let's be clear: as a small startup this means that you went from not making any money (i.e. losing money), to losing slightly more money. It certainly sucks that you get a tax bill when you're not profitable [1], but the tax is still proportional to revenue, which for many early stage startups is small, and should be growing rapidly enough that the marginal investment in your meager R&D team is worth it. And if it isn't growing, you have bigger problems and probably shouldn't be hiring anyway. You budget for it and move on, just like you budget for anything else. My point is that the rhetoric around this issue has made it sounds like your median founder is going to stop founding in the USA and go so somewhere else, but that's fairly silly. It isn't good to not be able to deduct salaries, but it's probably not a "massive" problem. For the truly early stage startup it doesn't even merit consideration, because you're not making enough money for the tax to come close to a salary. US Corporate tax rate is 21%. Assuming that you aren't able to deduct anything at all, you'd have to be making $1M a year in revenue (real annual revenue, not theoretical extrapolated future revenue) to get close to a fully loaded engineer. Where this definitely will hurt is in a large corporation that is bringing in billions of dollars in revenue, and employing many thousands of people in R&D. That's a real knock to the quarterly report, which can (and will) be found by cutting the fat -- of which there is a lot. [1] and, to be clear, I think the change in rules are dumb and should be reverted.
- kulahan 1y ago
  > Let's be clear: as a small startup this means that you went from not making any money (i.e. losing money), to losing slightly more money. That’s not how it’s playing out in reality at all. Are you lying or confused? Small groups working on government grants are getting hit with six figure tax bills. They aren’t undergoing a minor shift; this is something that will destroy many small businesses working on research specifically, if nothing else.
  - timr 1y ago
    > That’s not how it’s playing out in reality at all. The math is straightforward. You can make wild assertions all day long, but ultimately, you have to have significant revenues for this to matter on the margin. > Small groups working on government grants are getting hit with six figure tax bills. Setting aside the...let's say "rarity" of what you're describing -- small, for-profit groups applying for government grants (oy) as a startup -- for these orgs to truly be getting "six-figure tax bills", it means that they have to be making about half a million dollars a year in revenue (minimum), with no deductions at all. I'm not saying that small startups aren't getting tax bills or that those bills don't suck; I'm saying that they don't explain industry wide hiring trends.
    - kulahan 1y ago
      > You can make wild assertions all day long, but ultimately, you have to have significant revenues for this to matter Oh, you actually are just straight-up lying, or purposefully wallowing in ignorance. Here, read this so you can’t play this game where you pretend not to know that this is true. https://sensiba.com/resources/insights/protecting-qualified-small-business-eligibility-while-navigating-section-174/#:~:text=Section%20174%20rules%20requiring%20businesses,benefits%20and%20capital%20gains%20exclusions. https://sensiba.com/resources/insights/protecting-qualified-...
      - timr 1y ago
        > Oh, you actually are just straight-up lying, or purposefully wallowing in ignorance. Wow. I know I shouldn't reply, but: 1) That's about QSBS, not income tax. 2) QSBS is only relevant should your equity be liquid (i.e. IPO, sale, etc.) in the distant future (there's a 5-year holding period). 3) QSBS is only applicable to a fraction of startups anyway. The section 174 change interacts with both things, but the reason people want to change it has nothing to do with QSBS, and everything to do with the fact that they cannot deduct expenditures in the current tax year.

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timr 1y ago

> Yes, it's a huge problem for small startups. Many of them went from not making revenue in the eyes of the IRS to being profitable and having massive tax bills. Let's be clear: as a small startup this means that you went from not making any money (i.e. losing money), to losing slightly more money. It certainly sucks that you get a tax bill when you're not profitable [1], but the tax is still proportional to revenue, which for many early stage startups is small, and should be growing rapidly enough that the marginal investment in your meager R&D team is worth it. And if it isn't growing, you have bigger problems and probably shouldn't be hiring anyway. You budget for it and move on, just like you budget for anything else. My point is that the rhetoric around this issue has made it sounds like your median founder is going to stop founding in the USA and go so somewhere else, but that's fairly silly. It isn't good to not be able to deduct salaries, but it's probably not a "massive" problem. For the truly early stage startup it doesn't even merit consideration, because you're not making enough money for the tax to come close to a salary. US Corporate tax rate is 21%. Assuming that you aren't able to deduct anything at all, you'd have to be making $1M a year in revenue (real annual revenue, not theoretical extrapolated future revenue) to get close to a fully loaded engineer. Where this definitely will hurt is in a large corporation that is bringing in billions of dollars in revenue, and employing many thousands of people in R&D. That's a real knock to the quarterly report, which can (and will) be found by cutting the fat -- of which there is a lot. [1] and, to be clear, I think the change in rules are dumb and should be reverted.

kulahan 1y ago
> Let's be clear: as a small startup this means that you went from not making any money (i.e. losing money), to losing slightly more money. That’s not how it’s playing out in reality at all. Are you lying or confused? Small groups working on government grants are getting hit with six figure tax bills. They aren’t undergoing a minor shift; this is something that will destroy many small businesses working on research specifically, if nothing else.
- timr 1y ago
  > That’s not how it’s playing out in reality at all. The math is straightforward. You can make wild assertions all day long, but ultimately, you have to have significant revenues for this to matter on the margin. > Small groups working on government grants are getting hit with six figure tax bills. Setting aside the...let's say "rarity" of what you're describing -- small, for-profit groups applying for government grants (oy) as a startup -- for these orgs to truly be getting "six-figure tax bills", it means that they have to be making about half a million dollars a year in revenue (minimum), with no deductions at all. I'm not saying that small startups aren't getting tax bills or that those bills don't suck; I'm saying that they don't explain industry wide hiring trends.
  - kulahan 1y ago
    > You can make wild assertions all day long, but ultimately, you have to have significant revenues for this to matter Oh, you actually are just straight-up lying, or purposefully wallowing in ignorance. Here, read this so you can’t play this game where you pretend not to know that this is true. https://sensiba.com/resources/insights/protecting-qualified-small-business-eligibility-while-navigating-section-174/#:~:text=Section%20174%20rules%20requiring%20businesses,benefits%20and%20capital%20gains%20exclusions. https://sensiba.com/resources/insights/protecting-qualified-...
    - timr 1y ago
      > Oh, you actually are just straight-up lying, or purposefully wallowing in ignorance. Wow. I know I shouldn't reply, but: 1) That's about QSBS, not income tax. 2) QSBS is only relevant should your equity be liquid (i.e. IPO, sale, etc.) in the distant future (there's a 5-year holding period). 3) QSBS is only applicable to a fraction of startups anyway. The section 174 change interacts with both things, but the reason people want to change it has nothing to do with QSBS, and everything to do with the fact that they cannot deduct expenditures in the current tax year.