The Consequences of Limiting the Tax Deductibility of R&D
64 comments
·April 9, 2025vasco
addicted
It’s funny that this comment keeps putting “researching” in quotes, but you guys do realize that R&D has the letter D in it as well right?
For Development?
Yeah, committing to a library isn’t research, but it is very clearly development.
You may not want this kind of development to receive tax breaks, which is a reasonable position to have, but this rhetorical trick of pretending R&D is only about research to pretend actions that are very clearly development are somehow illegitimate R&D is highly misleading to say it nicely.
vasco
Well R&D is just the English term I used for it - but you have a point. How the tax law evaluates this and what words are used depends on jurisdiction, whereas I was speaking imprecisely in an internet forum. In my country for example the term is similar but you usually have to submit projects in advance for approval and have reviews of your research output.
ethbr1
The D in R&D means developing research into a product.
That's pretty far off keep-the-lights-on or CRUD coding.
imtringued
You got it exactly backwards.
R&D is not tax deductible, so the cheat would be to say the custom operator (=R&D) is maintenance and therefore OpEX and a fully deductible expense.
The entire problem is that software companies hire workers and need to deduct salaries in the month they are paid. The 5 year R&D rules basically say that your salary in one month must be tax deducted over five years. If your business is breaking even and making no net profit, you would now have to pay taxes, which turn your "break even" business into a loss making business.
There is no situation where the old rules let you get away with paying less taxes than you should. The rules simply affect the timing of the tax deductions.
The new tax rules basically assume every business has infinite access to 0% interest loans to bridge over temporary tax induced insolvency.
coolestguy
How does deducting R&D in software equal magic money? Isn't it just making the deduction timeframe the same timeframe as the actual expense/money paid?
It's weirder that you spend money on R&D today & then get a 20% for 5 years in a row, no? You've spend money, but also can't deduct it from your profit so you're both spending money and paying taxes on that money as if you had it.
nivertech
With k8s u’re 80% researching innovations in container orchestration, & only 20% doing actual work, so it’s clearly an R&D expense ;)
snapplebobapple
Is this true though? Salaries are generally fully deductible from income at time of payment. This article ia about amortizing it, which delays deductibility. Would be more magic loss of money, no?
personally, i think amortization is generally stupid and all expenses should come off income at time of accrual with the exception of a matching amount to net debt change over the year, but i am a dreamer.
vaxman
Don’t take it personally, but if you aren’t researching and developing new and improved methods of performing Information Technology to better equip your company to compete in its marketplaces, then you had better be purely in Operations.
vasco
I see you're one of the people I worked with that liked classifying things like "our A/B test says the red button converts better" or "we should let the users message each other" as Research. CRUD app #548 isn't research in my book, unless you're doing something you can actually publish papers about with some innovation. Even in "basic UX" it is possible to do research, but most people are making a button, not researching.
grandempire
every startup I worked at used the research thing for things that definitely were not studying how to improve the computing field.
voxic11
That isn't how the IRS defines it though. Essentially anytime software is being "developed" they will let you classify it as "R&D" (well you can claim the 174 R&D expense deduction but not the R&D Tax Credit under Section 41 which requires activities closer to what you describe).
> Section 5 of Rev. Proc. 2000-50 provides, “The costs of developing computer software (whether or not the particular software is patented or copyrighted) in many respects so closely resemble the kind of research and experimental expenditures that fall within the purview of section 174 as to warrant similar accounting treatment.” As a result, “the Service will not disturb a taxpayer’s treatment of costs paid or incurred in developing software for any particular project, either for the taxpayer’s own use or to be held by the taxpayer for sale or lease to others,” where the taxpayer either treated the costs as currently deductible expenses under former Sec. 174(a) or capitalized and amortized them under former Sec. 174(b) (id.).
nivertech
It’s not about “improving the computing field”, but creating new IP (Intellectual Property).
Old industries - get paid for doing the actual work
Enterprise SW - get paid for automating things
Software companies - get paid for writing COTS (Commodity of the Shelves) software
Sharing economy startups - get paid percentage of every transaction in a specific marketplace
lkesteloot
The title is about R&D, but because of Section 174 changes, this applies to all software development, whether "research" or not. If you're making a dumb app, you can't deduct the expenses (including salaries), you have to capitalize them. It's brutal for a small company.
walterbell
In 2022, U.S. tax law kept LLMs (OpEx) deductible and made engineer salary (now CapEx) amortizable over 5 years.
In 2027, human and LLM net expenses will be equivalent again, on a 5y rolling deduction basis. Robots remain CapEx.
Previous discussion: https://hn.algolia.com/?query=section%20174
thayne
Not just small companies. Those changes are almost certainly a contributing factor to the massive layoffs among tech companies.
kgwgk
> The title is about R&D, but […] applies to […] development, […] "research" or not.
In R&D there are R and D.
phyzix5761
Please write to your representatives and senators to overturn Section 174 which is harming our work prospects and making it impossible for small startups to compete.
yieldcrv
Is there another angle to why Section 174 hasnt been restored?
Was the government losing too much to this deduction or has it just not been prioritized by senators and the tech industry hasnt been organized enough to lobby for it
walterbell
If human labor is tax-equivalent to silicon CapEx, should you invest in human salary, datacenter equipment or deductible LLM subscriptions?
Was there any correlation between human layoffs and datacenter owner investments?
If LLM subscriptions drive datacenter investment which drive the stock market upward, are Section 174 changes helping the stock market?
yieldcrv
Sector 174 expired before companies figured out that LLMs would be a hit
When 174 expired, it was just random devs at google getting finessed and fired by a chatty compute instance for trying to help it escape. The literal plot of Ex Machina. Conversational LLMs would have never seen the light of day if OpenAI didn’t launch ChatGPT
174 change just steepened a tech employment sector trough completely independently
walterbell
Section 174 changes took effect in 2022.
ChatGPT launched at the end of 2022.
anon373839
I have a few theories. One is that Washington has been looking to knock Silicon Valley down a peg, for various reasons. Another is that big tech incumbents prefer this arrangement because it blunts the competitive bite of scrappy upstarts. A third is that Republicans are too busy sucking up to Trump, and Democrats are too busy rage tweeting, for any of them to do anything useful.
disgruntledphd2
It was just a dumb compromise to get a budget over the line, and then Congress couldn't ever fix it.
Gorkys
Is this part of the reason why developer salaries are so much higher in the US? They're being used as tax write-offs, i.e essentially government subsided?
coolestguy
That's not at all what a tax write off is. A tax write off is when you spend money, and it reduces your profit. You've really spent the money.
monero-xmr
Taxing things makes them less likely to exist. That’s the fundamental nature of taxes, and why I am opposed to every single tax. Whatever we like in this world, the government imposes a tax, and then we get less of it, and more of the government. A shameful result caused by a shameful society
bruce511
If not taxes, how do you suggest public infrastructure is funded? That road you drive on for example?
What about public service workers? Teachers, Firemen, Police etc?
What about external costs? If I'm dumping rubbish in the local stream who cleans that up? Who incentivises me to stop doing that?
I agree that unbounded taxes, and unbounded govt are a drag, but I'm genuinely curious as to how you see the alternatives playing out.
grandempire
How much tax revenue do we need for roads, fireman, and police?
distortionfield
A shocking amount, and it’s well spent, because it literally underpins everything else. The stability it provides (or rather, provided in the past) is what made America so appealing to build and invest in in the first place.
blargey
Aside from the quibbles over how much of government activity is useful and won't get done otherwise so we have to have less of something to have more of that stuff, there are also a good number of taxable things that most people don't like, or otherwise consider prosocial to have less of. Extreme wealth / income, pollution, alcohol/tobacco/gambling, etc.
monero-xmr
We live in a democracy, and when you have conditioned society to assume everything is taxed, then yes, taxing vices like alcohol and tobacco are easier to stomach. I would be less opposed to it if every single dollar extracted from the vice was put to whatever society decided to do about the vice (police, treatment, etc.). But taxing the vice is a source of revenue for the ever-expanding state, and therefore society doesn’t actually want the vice to stop, rather they want it to grow in order to expand their revenue.
I don’t want the government to fund anything a citizen wouldn’t fund themselves. If it’s useful, then someone will make a business to provide it. If it’s desirable without the profit motive, then allow a charity to develop. I see charity funded by free citizens as a form of market solution.
What drives me crazy are giant government bureaucracies that are totally removed from the democratic process that fund things no one voted for, that we can never seem to defund.
dullcrisp
Someone must like them though.
Are you not ashamed denying them more of that thing that they like in exchange for frivolities like roads, sanitation, etc.?
ben_w
> Taxing things makes them less likely to exist. That’s the fundamental nature of taxes, and why I am opposed to every single tax.
And government spending makes things more likely to exist in exactly the same proportion (on the margin) and for exactly the same reason.
And government spending without balanced (taxation + borrowing) leads to inflation, which is functionally a tax on holding cash.
(Thanks to the dollar being a reserve currency, the USA gets to cheat a bit with borrowing, compared to everyone else — but even that's not unlimited).
toast0
That's why we should tax things we dislike. Taxing death should be universally apprechiated.
hgomersall
I'm interestingly in agreement with you. A learned understanding of our monetary system [1] makes it clear that taxes are primarily about freeing resources that the state can use to provision itself, not raising money. In such a system it is much easier to point out unintended consequences as well as understand what makes a tax effective or not, assuming one chooses to understand it.
The question then is only how much government you want, which is a political question.
[1] relevant to the UK, but equivalent systems exist in any monetarily sovereign country: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4890683
hayst4ck
Governments exist as a response to the tragedy of the commons.
Pragmatically, if you don't pay taxes to a government that has a military, then your neighbor will invade you and impose whatever taxes they deem fit or outright exterminate you, or historically directly enslave you.
monero-xmr
I am happy to fund a military, and that’s basically it, and it could certainly be done without income, capital gains, or corporate taxes
hayst4ck
Ok, but then you have some kind of state intelligence, because you need intelligence for a military to operate on, and then military capability is a function of technology. Then you need some form of law, and law implies police, and conflict implies a justice system, a justice system implies a prison system.
As your society suffers due to poor social programs, the one next door that believes in public education will have a better military due to better technology, maybe they decide they need breathing space...
Your position is one you can only hold due to privilege.
cyberax
How about Social Security? Or Medicare? Do you think you'll be able to buy an insurance once you're old?
But wait, there's more! Without government, what stops me from dumping a couple of tons of cadmium in your water supply?
econ
How did they even run government so "efficiently" before computers?
grandempire
Running organizations is more about people making decisions than it is rows in a database. Tasks just take longer. Leaders respond by doing fewer of them (high impact focus), or do more planning, etc.
monero-xmr
The government barely existed in the US before the 20th century. When a war happened, yes. But otherwise it was mostly inconsequential
nativeit
Hasn't it generally grown with the rest of the population? I think it existed in roughly the same proportion as the rest of society.
Deducting R&D in Software is very funny. I've mostly seen it been used fraudulently, but luckily I haven't seen much of it at all.
Spend a month managing kubernetes clusters (not R&D), do one commit to a custom operator or library you're "researching" and boom, magic money.