The time bomb in the tax code that's fueling mass tech layoffs

Work-for-hire open source contributions often already bear a copyright holder of the entity paying for the work. The problem isn't who is the copyright holder.

The problem is that the license assigned says that anyone is free to use the code. Anyone is a set of people that includes the contributor, which then triggers the interpretation that the research is incrementally in the contributor's benefit and thus disqualified from preferential tax treatment.

You'd need a custom license where everyone in the world could use the results except for the contributor, and then like, a source control system that hides the source files from the contributor's view of the repository.

Often the way this works is that some time bomb is added to the tax code so that forecasts for future tax revenue will be higher (justifying more spending in the short term) and congress then needs to remember to remove the time bomb before it blows up. So it isn’t that uncommon for these things to be reverted.

It's actually not uncommon for something stupid to make it to the official tax code and then get reverted. They knew the history.

Get a better government.

The article is pretty clear that the law was from 2017 had a scheduled start date of 2022. Although probably not the actual intended effect, it does have the effect of confusing who would be responsible for it by those who don't read past the effective date.

Foreign workers are to my knowledge effectively always a service contract, since it's pretty complicated (if even possible) to hire FTEs across borders without subsidiaries, which are expensive to maintain.

I'm curious if contract work is really exempt, would look like a major loophole to me.

Politics are complicated.

Generally, in tax bills they try to keep them "neutral" where any tax cuts or tax breaks are coupled with tax increases elsewhere BUT they tend to report the 10-year affect for whatever reason. This bill provided a ~30% cut in corporate tax on profits, with a delayed increase in tax cost on Software R&D pushed to the next term.

If the next party wants to reverse it, they'd have to find the money with an increase in tax - directly undoing it would be a ~50% increase in corporate tax rate, which (I guess?) would be a tough sell politically. Meanwhile, the tax code on software engineering sounds too niche to expend political capital on.

Either way, its another example of how corporate America is trading long-term growth (R&D, product development) for short term gain (lower taxes today).

They tried. They had Senate spoilers.

Why should they? Why did we allow a president to put in tax raise for the future. Replicants were playing politics from the start. Pass a bad bill, and then hope to get about it when the bad parts kick in when the other side woo be in power

if you retain power, you can fix it. the US government currently has the significant problem that one party campaigns on the government being dysfunctional, so they do their best to make it so.

No. It’s after re-election. Bad news late in your second term isn’t that big of a deal, unless you care about legacy.

No. It went into effect in 2022 [0], which means the timeline absolutely does track with OP's theory. That gives a hypothetical Trump term 2 a full year to fix it but also imposes enough of a time crunch that they could plan on sabotaging attempts to fix it by another party.

I'm not saying it's the actual story, but the timeline does track.

[0] Page 60, Sec 1306(e) sets the date: https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf

> (15 for software engineers outside of the US)

Yikes. Does that apply to outsourcing?

If they could be required to craft single issue bills, this wouldn't be as big an issue. Instead we get the clusters of good and bad that inevitably die or sometimes worse, pass.

If everyone agreed on it, Congress would have no problem doing it (Congress itself, after all, is a subset of "everyone".)

Theoretically no, but congress won't vote anything that has no collateral advantages to everybody involved.

Why would a senator from Kentucky vote for a bill that doesn't benefit his state to a meaningful amount?

I think there is a limit on the number of bills that can make it through the procedures so it’s too low profile to get scheduled.

If anything it has been the opposite problem, with modern congresses having been more than happy to delegate away their powers. You might have heard the recent tariff news for example.

How could Congress get less powerful than now?

Just last year, Congress snapped to attention and wrote and quickly passed a bill to ban the eminent national security threat of a video-sharing app. That bill doesn't do anything else.

Just a reminder that Congress, even now, can rapidly act on a laser focus when it is sufficiently motivated.

And it gets so bizzare that even legislators have to laugh when they read it out loud, like in this case here in Switzerland:

https://www.youtube.com/watch?v=S9hztUCq15o

There's a little of this, but more so, you only get one reconciliation bill per year. And anything that's not a reconciliation bill has to be bipartisan.

You forgot renewing the Patriot Act :)

You don't want to live in a society where an increasingly large percentage of the population have nothing to lose.

Regardless of whether it benefits our industry or socioeconomic status, it'd be incredibly shortsighted to just do all of that at the expense of the lower classes.

I don’t have to be in support of something just because it benefits me

I agree but I think the huge cuts across public research & development basically hurt everybody in the long term.

I have to say that you sound very biased in the way you're talking about the bill. If a primary goal of this administration is to cut and make government more efficient, this bill is about as big of a failure as one could conceive. Any reasonable person would have to admit that.

I'm fine admitting that I would benefit greatly from this bill. I also hope to heaven it doesn't pass because an additional trillion dollars to suit me sounds asinine. I don't need help.

>Every Congress increases the debt,

And yet only one party campaigns on fiscal responsibility, debt concerns, and reduced spending

> This bill is goated for upper middle class and tech and defense sector

No, it's not, because giving its authors any power or wins or ability to execute on their agenda is disastrous for nearly everyone, including tech and the middle class. The only people that its illegal acts are good for is a tiny minority of crooks, fascists, and oligarchs.

Given the firehose of illegal stuff they are doing that is impossible to push back on, it is utterly imperative to push back on every little thing that is possible to push back on, and to hold consent hostage to an end to the former.

You're letting them burn your house down because they promised you a bottle of whiskey.

The value is far less than the amount being amortized for its development.

Continuing your observation, this presumes they read and think deeply about the bills they vote on. They do not.

Yeah; start-ups will start paying tax much sooner since salaries are the main expense in software development, and only a fraction can be deducted per year. The tax change must make things marginally more difficult for young companies that have some revenue, aren't cash-flow positive, and have a short horizon.

Software developers are already too expensive in US, so this applies some downward pressure on those salaries. Frankly the economy will be much better off when tech salaries equalize across geos, thus avoiding the deep whole US manufacturing is in (for example, manufacturing wages in Vietname are one tenth of US manufacturing wages, and thus it is better to open new plants there).

Don’t forget the other stakeholder - the general public.

Yes it sucks for developers, but does it make any difference for any other employee? Why does Joe’s plumbing have to pay those taxes, but Jane’s AdTech company doesn’t?

Sure, there are benefits to investing in R&D in general, and tech has fueled a lot of growth, so incentivizing it has likely paid off for the whole economy. But will that forever be true? Maybe?

Which is fine for steady companies, but perpetually drags down any rapidly growing company

It is complex - is it better for the money to go back into the economy by paying high salaries to a specific group of highly-educated people? Or is it better for the money to go back into the economy through taxes, then disbursing the benefits to lower-income benefit programs?

I’m not sure what the answer is. The former is likely to drive some innovation, which I’m sure varies by company. Where the latter could also unlock innovation by giving the bottom-quartile of earners a chance to improve their situation.

Mostly, Amazon will do stock buybacks, so that its investor can invest into other top stocks.

Software is like Art, it doesn't have value until sold or can be used. If they sell services based on the software, they are generating revenue and then taxation on that revenue can occur.

Same as if they sell the software, either as a copy or ownership.

But not being able to take salary as a business expense seems like as thing that would happen if software in and of itself has value, which is largely does not.

> I've seen no justification for the government deciding that from 2022 on we should actively discourage R&D, it just seems to be a mistake.

Removing a specific tax exemption to create a level playing field isn’t discouraging R&D.

That’s the thing, every year such exemptions exist the US taxpayers are handing out money. Just because we subsidize say EV’s or Corn doesn’t mean that’s the baseline forever more.

What about construction worker and other labor time to build a factory? That’s the analogy being made here by the tax code: Software whose development is a capital expense with value returned over time.

But the employee time that had a one time use was turned into software. That software is the thing that has value longer than "right now"

It's also massively shifting the companies' cash flows. The company paid $X for R&D this year, but for tax purposes 80% of that $X expense is moved to next four years. So for this year's tax purposes, the company R&D expenses are much lower than what the company paid.

Yeah I think we did kick up a fuss?

The better question is why the tech industry seemed to forget that the first Trump administration was terrible...

That is correct. Some historical context is much appreciated in this thread.

> tl;dr on Section 174, Research & Experimentation costs went from being fully deductible in the year incurred to being deductible over a 5 year period.

Larger tax bills and a tightening on what roles/activities are deductible as R&E are likely what OP is pointing at with his comment.

To the best of my non-inside baseball research, Section 174 changes were simply one part of a package of revenue generating measures to offset the large tax cuts from the broader tax act they were a part of.

The changes came from The Tax Cuts & Jobs Act of 2017 that was introduced to the House of Representatives by Congressman Kevin Brady (R) Texas. The bill passed both houses of Congress along party lines. Then President Trump signed the bill into law. Section 174 changes did not take effect until 2021.

https://news.ycombinator.com/threads?id=heymijo&next=4332098...

This change was added in 2017, triggered in 2021/2022. It's been the policy for years now.

There is very little pressure on elected officials because big cos can afford it and it bankrupts their tiny future disruptors.

Why would you let it be fixed?

Yeah, I just read that. So it's actually 10-20-20-20-20-10, which is both weirder and also slightly worse than my formula above.

The root of this subthread makes it clear why the current provisions to force software expenses to be amortized are different than other kinds of R&D.

I mean, yes, it will be true for other R&D types. But that's also new and also broken for the same reason: it means new R&D companies are at a massive disadvantage in their first few years compared to the established players who have lots of expenses queued up to deduct. It's wealth redistribution from young startups to established players who have 5 years of past expenses to use in their favor, and that is going to be a very bad thing for the health and vibrancy of our economy.

And, as a sibling points out (and as I pointed out in a comment at the top level), software is in this regime singled out from all other possible R&D expenses, making it particularly vulnerable. A skilled accountant/lawyer can probably turn big chunks of other R&D expenses into something that doesn't fall under 174. No amount of skill can do that for software, because we're singled out.

Because you slinging a React component or Vibecoding a security pile requires no Technology Readiness Level assessment nor does it have development liability. Rather, what we call Software Development is more appropriately labeled Software Engineering.

Do you take a standard deduction?

It's clearly not enough to cover all of the expenses that are required to generate your "revenue", but it's a gesture in that direction.

Are you a company? If not, then you probably don't have revenue -- you have income.

The answer is that it's an operational experience when it's a salaried employee and a capital expense when it's a contractor. Like not in a theoretical sense, this is how it's classified right now.

> Because taxing unrealised gains are wealth taxes.

No, wealth taxes are a tax on retained wealth (a stock). Taxing unrealized gains is a tax on income (a flow), it just changes the point at which taxation attaches from a realization event to the actual gain.

If pegged to inflation then they are not, but I think they generally will not be pegged. People who might think this is great should understand that the government makes more money increasing wealth inequality aligning the interest of the government and the ultra rich.

The revenue minus expenses is taxable, yes. And if the business itself makes no money, that means all of it was taxed through payroll.

There is so much gold in that show. Just rewatching it now. Fucking billionaires...

They're still expenses, they just now need to be amortized.

Buying a truck is an expense, as is buying gas for the truck. But the former you have to amortize over x years, the latter you can expense immediately.

The law used to be "employee salaries for software are like buying gas" and now it's "employee salaries for software are like buying a truck".

Based on my exchange with wdaher, who seems to understand this well, it's a bit more subtle than that:

The salaries are of course expenses, but they are exactly offset by the value of the IP created by the R&D activities.

It's a bit as if you spent money on buying some materials. As long as the material doesn't degrade, the cash is gone but the value is the same and therefore won't reduce your taxes.

If that IP is amortized over a single year, it does not contribute to taxation, but it does if it is amortized over a longer period.

They are expenses, but amortized over 5 years. So if you spent $2m on employee salaries, you would then deduct $400k from your revenue every year for 5 years.

If your employee expenses remained constant, then by year 5 you would be deducting $2m from your revenue since you'd be accumulating the deductions from the previous four years.

So in steady state it wouldn't necessarily be a big problem. But for a startup which is hiring many new employees and whose revenue is growing it's a huge problem.

This was my first reaction when I heard about it before it passed. I was horrified.

>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.

What 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

This is what the Sec 174 change said: it says that you do have to capitalize it.

Elsewhere 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.

You 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.

No, 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

How would that help? R&D developers helped saving taxes, now they don’t.

Classifying them as non R&D doesn’t help saving taxes again.