From the blog post: ... (Note: this is a simplified example where the only costs are labor costs. For many businesses, the tax change would be lower.) ... ... ...
From the blog post:
Many US software businesses amassed surprisingly high tax bills in 2023, seemingly out of nowhere, due to a tax change which took effect in July the previous year, which many small companies knew nothing about until finalizing their 2022 returns. The change was expected to be repealed (reversed) in December 2022, so many accountants didn’t inform customers for that reason. So, businesses got a surprise when the first tax payments fell due last April.
The amendment to S174 means employing software engineers can no longer be accounted as a direct cost in the year they are paid – unlike the norm, globally. Here’s a simplified example of the change from the final tax year before the change.
Take an imaginary bootstrapped software business called “Acme Corp.” This company generates $1,000,000 of revenue per year running a SaaS service. It employs five engineers, and pays each $200,000. That is $1,000,000 paid in labor costs. [...]
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In 2021, the answer would be zero profit. In 2022, the answer was $900,000 in profits(!!) This is because from 2022, software engineer labor costs must be amortized over five years.
(Note: this is a simplified example where the only costs are labor costs. For many businesses, the tax change would be lower.)
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Less hiring of software engineers and more software engineering layoffs are already happening at smaller US tech companies. In January last year, in a Wall Street Journal article, policy analyst, Alex Muresianu, estimated this tax code change would cost the US about 20,000 full-time software engineering jobs. And I have more real-world accounts of how US businesses are being hit, straight from the companies themselves [...]
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Why did we not hear the largest tech companies protesting the tax change? Actually, several did, but their protests failed to cut through on the news agenda.
Large tech companies tend to speak up about issues like this via coalitions, trade associations, and lobbyists. Amazon, Microsoft, Intel, Ford, Lockheed Martin, and other US companies created the US R&D Coalition in 2018 to advocate in reversing this change.
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Here is how the S174 change impacted some companies, based on what I found in their annual reports:
Microsoft: $4.8B additional tax paid in 2023. The company generated a $72B profit that year, so this tax increase was manageable. It’s still a very large amount!
Netflix: around $368M in additional tax paid – also manageable with $4.4B annual profit.
Google: the tax change was minimal, because Google was voluntarily amortizing software development expenses for most staff, already. This was for all projects that reached “technological feasibility,” which is a milestone products pass before public release.
For companies with large cash reserves, the tax change was inconvenient, but manageable. Over a five-year period, the amount of tax evens out. After five years, there can even be tax benefits to this kind of accounting.
I'm interested to know how other R&D positions are accounted for, and if this amortization is specifically for software development. For instance, would a mechanical engineer designing a car have...
I'm interested to know how other R&D positions are accounted for, and if this amortization is specifically for software development. For instance, would a mechanical engineer designing a car have their labor costs amortized?
It’s not just software engineers, but engineering labor costs as a percentage of all expenses tends to be higher for software startups so they’re more affected. A car company’s other expenses are...
It’s not just software engineers, but engineering labor costs as a percentage of all expenses tends to be higher for software startups so they’re more affected. A car company’s other expenses are enormous.
From the blog post:
...
(Note: this is a simplified example where the only costs are labor costs. For many businesses, the tax change would be lower.)
...
...
...
I'm interested to know how other R&D positions are accounted for, and if this amortization is specifically for software development. For instance, would a mechanical engineer designing a car have their labor costs amortized?
It’s not just software engineers, but engineering labor costs as a percentage of all expenses tends to be higher for software startups so they’re more affected. A car company’s other expenses are enormous.