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This is a good thing. Prior to this, I had to make up a paper explaining why my team was R&D with help from an outside consulting group annually.

It was always a sham. We were building product.




Your consultants were helping you get a tax credit for R&D under section 163. That has not changed - not all software development is R&D for section 163 purposes, and you still need to justify why you're classifying software development as R&D for section 163.

What has changed is section 174 - previously all software development could be expensed (without any justification needed) and now it must be capitalized.


My understanding[0] is that building product was always categorizable as R&D (though it was up to the company to choose to categorize it that way). What was not R&D was operational expenses (production support, etc).

[0] This is based on working at a company that went through a brief period where we had to do extra tracking to be able to capitalize our time if it was possible, and then reading up on the matter to try and understand what the hell the purpose was. Possible I'm wrong about the matter--I've never been the one doing the finances.


The IRS definition of R&D is intended to encompass product development. Quote the tax code:

    The term generally includes all such costs incident to the development or improvement of a product.
[0] https://www.law.cornell.edu/cfr/text/26/1.174-2




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