site banner
PaperclipPerfector  1mo ago (text post)   3734 thread views

Small-Scale Question Sunday for August 18, 2024

Do you have a dumb question that you're kind of embarrassed to ask in the main thread? Is there something you're just not sure about?

This is your opportunity to ask questions. No question too simple or too silly.

Culture war topics are accepted, and proposals for a better intro post are appreciated.

2
Top Bottom Old Controversial Comments
Jump in the discussion.

No email address required.

One thing no one has mentioned yet...

As an unintended consequence of the Trump tax cuts, there was a change in how software developments salaries must be expensed. Before, the entire value of a software dev's salary could be written off immediately. Now, the salary must be amortized over 5 years.

So, let's say you start a software company. Your first year, you pay $1 million in salaries and sell $500,000 in licenses. Not only did you lose $500,000 in cash but you have a paper "profit" of $300,000 which you now must pay taxes on.

This heavily penalizes startups and makes software devs just less valuable generally. In some ways though, it levels the playing field with brick and mortar businesses who often face similarly outrageous taxes on phantom profits.

Everyone expected this to be fixed by now as it was an unintended consequence. But the Democrats love taxes and control the government so we appear to be stuck with it for now.

That's actually really interesting, is there a name for the loophole?

I don't think so, this is all new since last year.

It's not really a loophole since the government is taxing profits that don't exist. What's the opposite of a loophole? A gotcha, perhaps?

"Section 174"

https://blog.pragmaticengineer.com/section-174/

I'm not entirely convinced that this is inappropriate. If you pay $1 million as a one time investment to develop a software, and then sell $500,000 in licenses every year for five years, you get a profit of 2.5 - 1 = 1.5 million. Over five years that's 300,000 profit per year. Similar to if a factory bought 5 years worth of materials up front for $1 million and then spent five years producing and selling stuff for $500,000 per year. I assume that's the logic behind this regulation. Now I understand it's not realistic for a startup company to have literally no costs during that five year period, presumably they'd be doing tech support and adding new features and whatnot, but it's probably less than what their initial costs.

Further, shouldn't this actually help them pay less taxes in the long run? Unless I'm misunderstanding how corporate taxes work (which is very possible) a corporation that reports a $500k loss followed by 4 years of 500k gain is going to pay taxes on 2 mil, while a corporation with amortized costs that reports five years of 300k profit is going to pay taxes on 1.5 mil (their actual profits).

I get that it'll hurt more the first year. And if a company does actually have constant software costs every year then this will hurt the first few years before the amortization has a chance to reach equilibrium. But for companies that invest in software inconsistently as upgrades it makes sense to treat them the same way as any other infrastructure investment, which I believe are similarly amortized.

Similar to if a factory bought 5 years worth of materials up front for $1 million and then spent five years producing and selling stuff for $500,000 per year.

Yes, the new regulations put software on the same footing as brick and mortar. It's extremely painful for brick and mortar too since it penalizes any capital investment. This is likely a contributing factor to why no one builds anything any more.

Further, shouldn't this actually help them pay less taxes in the long run? ... a corporation that reports a $500k loss followed by 4 years of 500k gain is going to pay taxes on 2 mil.

No. They will pay tax on 1.5 million. Losses offset future gains for tax purposes.

And if a company does actually have constant software costs every year then this will hurt the first few years before the amortization has a chance to reach equilibrium.

Exactly. This rewards incumbents at the expense of startups. It's bad for that reason alone.

What is this place?

This website is a place for people who want to move past shady thinking and test their ideas in a court of people who don't all share the same biases. Our goal is to optimize for light, not heat; this is a group effort, and all commentators are asked to do their part.

The weekly Culture War threads host the most controversial topics and are the most visible aspect of The Motte. However, many other topics are appropriate here. We encourage people to post anything related to science, politics, or philosophy; if in doubt, post!

Check out The Vault for an archive of old quality posts. You are encouraged to crosspost these elsewhere.


Why are you called The Motte?

A motte is a stone keep on a raised earthwork common in early medieval fortifications. More pertinently, it's an element in a rhetorical move called a "Motte-and-Bailey", originally identified by philosopher Nicholas Shackel. It describes the tendency in discourse for people to move from a controversial but high value claim to a defensible but less exciting one upon any resistance to the former. He likens this to the medieval fortification, where a desirable land (the bailey) is abandoned when in danger for the more easily defended motte. In Shackel's words, "The Motte represents the defensible but undesired propositions to which one retreats when hard pressed."

On The Motte, always attempt to remain inside your defensible territory, even if you are not being pressed.


New post guidelines

If you're posting something that isn't related to the culture war, we encourage you to post a thread for it. A submission statement is highly appreciated, but isn't necessary for text posts or links to largely-text posts such as blogs or news articles; if we're unsure of the value of your post, we might remove it until you add a submission statement. A submission statement is required for non-text sources (videos, podcasts, images).

Culture war posts go in the culture war thread; all links must either include a submission statement or significant commentary. Bare links without those will be removed.

If in doubt, please post it!


Rules


Recommended Posts And Communities

Recommended Realtime Chats