You MUST spread it over 15 years, which is brutal for most companies and will mean no longer hiring any foreign R&D or software development contractors.

Can't the work be done in a Canadian entity instead of labour being hired via the US entity?

This way, all the R&D expenses are happening in Canada.

I was trying to raise that same question here: https://news.ycombinator.com/item?id=39015849#39018565

My feeling is that an EoR (employer of record) like remote.com might be enough for everyone to be able to avoid R&D capitalization. The research happens in Canada, by a Canadian employee of a Canadian company. You pay an American company for outsourcing human resources. The American company pays the Canadian company for human resources services.

Then again, if you're paying another company for outsourced human resouces, but you have an IP assignment clause as part of that, maybe you would need to claim it as your R&D expense

@edgyquant, not harder, more tax efficient

Why is spreading something out over 15 years harder than spreading it out over 5?

So this year if I spend $150k on foreign research (which includes ANY software development), and then I also earn $150k in revenue: despite me having $0 in the bank, I will only be able to deduct 1/15 of that, or $10k. In other words, I’ll be taxed as if I made $140k of profit, despite me not having any actual money left over.

You can see how if this was 5 years, then I could deduct 1/5 and I would be taxed on $120k profit, which is still bad, but not nearly as bad.

I don't think it will stop foreign hiring for R&D, since the cost differential is often greater than the tax obligation would be.

E.g. if you pay $150K for local research, you expense $15K (10%) the first year (and 30K the subsequent year). You pay taxes on $135K of 'profit'. Let's say that's $45K (I have no idea what's realistic here.

Alternately you pay $130K for a dev from Canada, expense $4,333 (1/30) the first year, and pay tax on the remaining 'profit' of $125,666. Even after admin costs you're coming out ahead

I don't think many startups are thinking 15 years out. 15 months maybe.

I thought employee wages were always deducted. Is that not the case ?

Under the new section 174, software developer salaries are no longer expensable.

Just as an aside - as a general accounting principle, no, wages are not always deducted.

The easy example is a car company, like Ford. If they buy a car factory, that is a capital asset, and the cost needs to be amortized over x years. If they decide to instead BUILD a car factory...they still end up with a capital asset, and the costs (including wages) need to be amortized over x years.

In most cases this is what companies want - they'll have revenues over x years and matching costs over x years is generally better for everyone.

This isn’t like a loan where the longer the term the smaller the payments. It’s the reverse.

You essentially pay taxes now on income, and can’t deduct costs for 5 or 15 years. So it’s kind of like pre-paying taxes and not getting the money back for 5/15 years. Say that you need to go borrow cash to cover the shortfall. Is it cheaper to borrow money for 5 or 15 years?

Hah I'm still trying to understand how software developer pay should be a deduction at all.

As far as I understand it, it’s normal to deduct most all kinds of payroll as an operating expense, and historically that’s included software developers too. The way it was explained to me, the tax man gets his bite when the people receiving the paychecks pay their own income taxes.

The recent changes mean you can still do that for most staff EXCEPT developers, even if the devs are doing operational work instead of work that feels more conventionally like R&D. So you have to come up with a bundle of cash now to pay tax on most of the developers’ salaries, even though they’ll give it back to you over 5-15 years.

Essentially you making a free loan to the government for a decade or whatever, except the money’s probably not free to you.

Of course I can think of situations where the development effort really was more R&D than operational, and the revenue stream matched: the first few years operated at a loss already, and the deductions might have more been useful in 5 years when the revenues were flowing in from a mature product. But I think they might have ways to carry forward losses to future tax years or something to deal with situations like that?

It's like any payment to any contractor.

If my business makes 400k/year, but I pay a contractor 100k during that year, my effective income is reduced by 100k.

So if you run a McDonalds. Your cash flows is money coming in for finished burgers. Your expenses are workers salaries and to buy meat. Let's say your very simple business summary is:

* Total Revenue: $1,000,000

* Cost of food: -$200,000

* Employee Salary: -$600,000

* (potential profit): $200,000

Assuming you can deduct the cost of food and employee salary to sling your burgers.. you make a 200k profit, and pay taxes on 200k.

But now let's say you can't deduct employee salary. You now pay taxes on $800,000 of income despite only having $200,000 of income. Depending on tax rates etc. you might end up with $0 in your pocket, despite having a successful business.

Now replace McDonalds with bootstrapped startup, food cost with AWS bill, and keep employee cost. This is the real situation many small SaaS or other software companies are currently in.

>> Hah I'm still trying to understand how software developer pay should be a deduction at all

Because it is an expense maybe?

Most small businesses exist for less than 15 years.

Of all the startups that started in the last 15 years, how many of them are still around?