Your salary costs for all programming and other development can only be written off over a five year period instead of the year you incur them. That means if you are breaking even normally with 1MM of developer costs, the government will tax you as though you made 800k. Because it says 80% of the code they write is a long term investment and therefore needs to be written off over time like a company car or a drill press.
For mature companies, it all evens out, because you write off the costs over 5 years and it's just a blip. You can just borrow that money as a corporate bond, creating a real but manageable cost. For growing companies, it's forcing you to set aside money now (in the form of a tax deduction) you won't get back until year 5. So your burn rate is going up. And, unlike a mature company where the cost decreases over time (by year 5 it was a one time blip), that's only to the degree your salary costs have been stable for five years. Every time you scale up engineering staff, it puts you more in the hole for another five years.
It’s not five years. It’s whatever the useful lifespan of the software. Web dev we usually did 2 years since that was the average lifespan of a web page.
For public companies, they are incentivized to amortize over longer period because it hides expenses and can boost earnings that boosts stock price.
Talking about software development which can be classified r&d for tax credits but it can also be capitalized like any other assets.
This pdf has handy chart to determine how to determine software development should be treat for accounting purposes. Grant Thornton is the external auditor for many large companies.
No. TCJA requires all software development costs to be treated as r&d, and capitalized over 5 years (or 15 years). Guidance from pre-2022 no longer applies.
My reading of this document is that certain software development activity (e.g., “corrective maintenance to debug, diagnose, and fix programming errors”) is not SRE.
This seems to contradict your statement that “all software development costs [are] to be treated as r&d,” but my experience is that you know what you’re talking about. What am I missing here?
I would suggest reading notice 2023-63. That provision is very limited, and may not be available to you at all depending on the software you're developing, and/or the stage of the development that those steps occur in.
For example, for a new feature: if you plan (SRE), design the interface (SRE), write the feature (SRE), run it through QA (SRE), and then discover a bug and correct it -- that's still SRE.
If you put the software into prod, then discover a bug, then fix it (without improving performance or adding any functionality), then it might not be SRE.
But if you sell software, and you sell or install a release to a customer, and they (or you, under a support contract) discover a bug and fix it... but then you include the fix in your next release, probably SRE.
Or, if you put the software into prod, discover it breaks with a large data set, and you fix it by improving the performance of that section of code, probably SRE.
The expenses falling under that provision aren't going to make a significant change to the impact of TCJA on software development.
Third to last paragraph: if I sell software, a third party bug bounty type guy finds an exploit, notifies me, I patch the vuln, and release the patch as a hot fix: you figure all of that is SRE, probably?
(Disclaimer: not seeking tax advice or legal advice, we’re just two dudes casually discussing section 174 like normal people do all the time).
That notice was a helpful read. I think what I may have been missing was section 5 of Rev. Proc. 2000-50, whereunder non-SRE software dev was also afforded some similar protection. I’ll read that after work but I’d still love you to answer the foregoing.
I re-read the section of the notice that scenario would apply to, and I actually think its pretty clear that is not SRE. Correcting defects discovered after the software is put into production, or discovered in released version of software, and not considered SRE. See section 5.03(5)(b) of the notice. Pre-release bug fixes are still SRE though.
Definitely ask your CPA though. I'm not an accountant.
> 26 US Code Section 174, paragraph D - Treatment upon disposition, retirement, or abandonment
If any property with respect to which specified research or experimental
expenditures are paid or incurred is disposed, retired, or abandoned
during the period during which such expenditures are allowed as an amortization
deduction under this section, no deduction shall be allowed with respect to
such expenditures on account of such disposition, retirement, or abandonment
and such amortization deduction shall continue with respect to such expenditures.
This means something different than adrr is asking about. The IRS has depreciation schedules for different asset classes. For example, trucks are 5 years; real estate is 39 years; but you can under some circumstances use an Alternative Depreciation Schedule (ADS).. the depreciation schedule should match the usable lifetime of the asset.
But if the typical lifetime is 5 years, but you use an ADS of 2 years... you are not disposing or abandoning the asset if you keep it for 2 years. 2 years is the expected life time of the asset, and at the end of year 2, the asset has a value of $0.
If you depreciate over 5 years, but then on year 2 decide you don't need the asset anymore, then you'll dispose of it. The asset is valued at 3/5ths of the original price. The paragraph you're quoting applies to this scenario.
ADS doesn't apply here though, because TCJA requires 5 years for domestic and 15 years for foreign research.
For mature companies, it all evens out, because you write off the costs over 5 years and it's just a blip. You can just borrow that money as a corporate bond, creating a real but manageable cost. For growing companies, it's forcing you to set aside money now (in the form of a tax deduction) you won't get back until year 5. So your burn rate is going up. And, unlike a mature company where the cost decreases over time (by year 5 it was a one time blip), that's only to the degree your salary costs have been stable for five years. Every time you scale up engineering staff, it puts you more in the hole for another five years.