You have to have income in order to be taxed. So there is no taxing non-existent profit. There has to be actual profit. What people must be complaining about is that they can't take all the income from product X in year Y and say it was spent on developing product X so no profit was made. Instead they'd need to have spent that income on marketing supporting and maintaining that product. Then they'd be making zero profit and no tax owed.
If you paid 100k in salaries and earned 100k in revenue, then you broke even, and no actual profit was made. Under the rules being discussed here, however, the 100k you spent in salaries has to be amortized over five years, meaning that even though you actually spent 100k this year, only 20k is deductible from this year's taxes. The IRS then taxes you on the 80k of "profit" you made, which doesn't actually exist, so you don't have the funds to pay the taxes, and your business becomes insolvent.
This is absolutely about taxes being charged against non-existent profit.
That “income” is being legislated into existence by disallowing the deduction of customary primary operating costs that are allowed in any other business.
In effect, it becomes a tax on revenue in the early years of a software company. Taxes tied to revenue are notorious for creating unhealthy and perverse market incentives, which is why very few jurisdictions use them. Many small software businesses are now in the position of potentially literally paying more income tax to the IRS than the profit + asset value over the entire life of the business. It is pretty messed up to make small business owners pay “income” taxes out of their own pocket in the absence of offsetting profit.
It is yet another indefensible and unique perversion of reasonable policy under US tax authority.
