New "Developer Tax" Might Kill Startups Forever (Section 174 Rant)
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- Опубліковано 2 лип 2024
- Section 174 is...terrifying. I really hope this gets repealed.
SOURCES
blog.pragmaticengineer.com/se...
/ 1752867915588620294
www.nbcnews.com/politics/cong...
Things I plugged
Fondo (startup tax thing) - tryfondo.com
s/o Ph4se0ne for the edit! - Наука та технологія
It’s bonkers how little talk there has been about this, given the impact- also why I wrote about it. Thanks for making a video on it! I had to triple check it’s this bad: and it is! Let’s hope the Senate votes to reverse it, partially at least.
it's so important!! it's terrible that filing and law aren't talked about more in the startup space. I think this is a pain point for the startup space because of founders are just unaware of these important documents
Laws are very convoluted, at the end of the road for one reason, to make the rich richer and the poor poorer. Same old shit, different day.@@LukasSmith827
Do you know if it applies to software consultants?
Chuck Schumer's committee keeps voting to block it. He wants to strongarm the GOP and won't allow it out for a general Senate vote until they acquiesce.
Let me ask you something - how often do you actually sit down and read those legislative proposals? You know, those riveting page-turners they churn out from the dream factory of bureaucracy. And even if, by some miracle, you do skim through them, what's your game, huh? What's your grand political hustle? Are you out there shaking hands, kissing babies, or just angrily tweeting from your couch?
And here’s the million-dollar question - do you even know who your district counselor is? Oh, wait, let me guess, you’re gonna tell me you at least know your mayor's name, right? Because that’s the bare minimum for citizenship in this comedy show we call democracy.
If this isn't either wrong or an oversight. The only purpose of this is to make impossible for new tech startups to come from nowhere. Instead they'll all have to be owned by the people already in power.
I'm not an expert in US taxes, but maybe it was abused by those who doing tax evasion? just moving all profits to "expenses" by making insanely high dev costs on paper. And how you gonna say that it's too much? code cost is unmeasurable like art
That, considering the levels of lobbying, and how much the bigger companies helped with the whole "get out and vote (for our chosen candidates)"; but also a general 'race to the bottom', by removing one of the most industrious pillars of the United States economy, in our post-industrial era.
Ding ding ding ding!
This is not an accident. You're 100% correct. Big tech is reducing competition.
That's why big corporations love socialism.
RIP USA tech startup scene.
Welcome Tech Startups everywhere else in the world!
Basically every EU country (even the micro states): *adjusts tie* allow me to introduce myself...
Make USA Europe Again
@@de-learning If only it gave us the walkable cities.
land of the free... BUT
In meantime Hungary is immediately passing new law that IT companies with at least 60% foreign employees settling here can operate under 15% tax. I imagine other countries follow with similar tactics to make these companies that would otherwise be funded in USA be funded at their place instead...
In what world is labor, the most expensive part of running a business, not tax deductible? Are they acting like the receiver of that income is not also paying income tax on that money? ridiculous
Are you sure that the wages (to devs or other employees) can't be expensed immediately?
@@sledgex9 that's what i'm confused about. I think Theo must be wrong about what counts as "r&d" here. He makes it sound like the salary of the engineer and r&d are the same thing, when I don't think that's the case. I can't possibly imagine a business not being able to write-off the salaries of their employees.
@@themartdog You misunderstand. Current section 174 defines software development as R&D, unconditionally, including salaries, benefits, and even the electricity used by the developer.
@@headlibrarian1996 that is absolutely not passing lol
@@themartdog That is already current law, which is why everyone is complaining. The fix would likely pass if Chuck Schumer would allow it out of committee.
As a CEO of htmx i have to speak up. This will make the U.S. a barron wasteland for software innovation.
Agreed, my costs to develop are around 35k last year for a modest project that wont have any commercial benefit for a couple more months. I probably would of slowed down development for sure had i known this.
old grug wise. old grug no stay quiet!
*barren
Or, the companies need to do what the Chinese companies do... Incorporate outside the US (or China) first to be outside of US (or China) tax laws. And then figure out how much direct exposure you really need to a country's laws, and keep that to a minimum.
A company in the Cayman Islands may well be able to pay American workers without being subject to pointless nonsense.
As a CEO of HTMX, I agree with this CEOs assessment.
So I shouldn’t be surprised when I get a title change from “software developer” to “software manufacturer”.
Also, it’s crazy that I never heard of this until now. These layoffs really sucked.
Come to Switzerland with your startups, we're happy to have you!
Yessss
Everyone: Tax big corporations
US Government: Tax startups to protect big corporations? Ok!
$4.8 Billion "additional" tax, does not sound negligible even for Microsoft.
It means it can be managed and it is not going to put the company in a different place than what it is now, it is a lot of money, but the effects are not expected to be big for that company.
Woah, could S174 be the root cause of the massive recent tech layoffs? Less R&D costs now, but still get the amortized tax benefit from over-hiring a few years ago.
If you're paying people to do anything in a company, that is an expense, any interpretation other than that is insane.
I know it sounds that way at first, but accounting principles have reason behind them. While colloquially anything with a cash outlay is an expense, things that add business value are capitalized. For example, if you buy a ton of computers for your company, they are kept on the books on a set depreciation cycle because they are an investment that continuously add value and also have residual sales value. So too for intellectual property. This is why they all so eventually get expensed, but on a long term schedule based on the category of asset. If everything were considered an immediate expense, then buying land for a company wouldn't appear as an asset on their books, which should also "feel" wrong even if you don't have a business background.
@@CaptTerrific Your premise applies to machinery and other physical assets or expenses on third party intelectual property that is acquired for the purpose of being used as tools. If you buy Jetbrains licenses for example, those can be categorized as assets.
Software development doesn't have "raw materials" like Iron Ore being used to produce Steel, the developers are the raw materials, they generate the product, that just happens to be intelectual property, but doesn't change the fact that a developer is not an asset.
I may not be versed on specific US tax law, but I am experienced in Brazil's law around accounting and taxes and we share various international agreements that facilitate trade and investments, so the fundamentals must be the same... So I can say is that human resources expenses are part of the costs and expenses deduced from the profit calculation here... there are provisional tax credits that can be used to further deduce R&D expenses from the taxes over profit, but not like this law in the US.
I stand by my argument that treating human resources as assets is insanity.
@@luizfcavalcanti I think the developers' wages (or any wage expense for that matter) can still be expensed immediately. Other expenses related to R&D cannot.
@@CaptTerrific This comparison of yours is absurd.If you buy machine it is yours, if you apply for patent it is yours. You can not own software engineer. SE is not and can not be your assset because he can leave at whenever time. It would only be comparable for like 1% of SE that are on non compete clauses and who are vital to the business in some way doing high expertise work. It can not be compared across the board, especially in start up scene.
@@sledgex9 Not so. This tax law change unconditionally categorizes software development as R&D.
4:40 Actually, it's crazy to think you can pass a budget that is "balanced" by a tax increase that you don't expect to go into effect. You're basically saying this budget I want to pass is known not to be balanced, but we're just going to pretend it is anyway.
Not necessarily - if you debate over the next year and then come up with a different tax increase that everyone can agree on more and amend the tax code again then you’ve still accomplished the same thing just with the tax increase in a different form.
@@0oShwavyo0 Building in that assumption is insane, and would almost certainly be illegal for anyone else. It's definitely extremely unethical.
It's a joke system overall. It has been an embarrassment almost since George Washington's second term when excess divisions led to both parties starting to sabotage each other.
It only works semi-decently when things are desperate and the parties come to be aligned on what to do next.
The point is to pass tax cuts during your term while creating a ticking timebomb for your opposition if they get elected. If you get re-elected, you simply cancel the tax increases. If you don't, all you need to do is obstruct your opponents from canceling them.
It also makes it very easy to pass tax cuts without worrying about how or who is going to pay for them since that can gets kicked down the road potentially forever (until the whole system collapses).
@@nelakendra2296 That does sound like something that should be illegal.
Taxing paper gains makes zero sense
Taxing realized gains makes zero sense.
@@aliendroneservices6621 why?
@@konstakuosmanen taxation is theft of course lol
@@TigreXspalterLP Wrong.
@@konstakuosmanen Because:
1. Tax anything and you get less of it.
2. There are myriad possible forms of taxation. Income taxation isn't needed.
I don't get why people aren't talking about it. I stopped hiring developers and focused on my own projects because of it starting last year.
Tax professional here with 15+ years of experience. Even if you are a foreign entity, you may still be affected by this. A foreign entity selling in the US would be subject to US tax law for the income related to US customers.
In your example you mention you can be “losing money and paying taxes”. But since you do get a deduction for these costs, just in a later year, you can also be making a profit and not paying any taxes. Under the 174 change alone, the total amount of taxes paid is the exact same. It is just a timing of when the taxes are paid.
There are many big companies pushing for the immediate expensing of 174 to come back.
When immediate expensing went away, it also generally increased the R&D credit. Bringing back immediate expensing would cause the r&D credit to drop by about 21%
Taxes have nothing to do with why so many companies are incorporated in Delaware. So many companies are legally domiciled in Delaware because Delaware has very well established corporate governance laws.
I think many people dont understand that all this becomes is a Cash flow issue not a Profit and Loss issue. Also every time he says expense it reminds me of why people need some more basics in accounting.
The voice of reason.
The biggest problem for start-ups is cashflow and survival until operational profitability. It doesn't matter if, at the end of a 5 year period, you will have paid the same amount in taxes - for that to be the case, your company would have to survive for 5 years. The way this is going to be handled by VC-funded companies in practice is a BVI (or similar jurisdiction) domiciled company that holds the IP and employs the developers (directly or through a US subsidiary) coupled with a US-domiciled operational subsidiary that sells to the US market and just so happens to pay approximately the same amount as it takes in gross revenue as licensing costs for the IP to the BVI head company. US won't get any more tax revenue from VC-funded startups, but they *will* kill bootstrapped and small-angel funded startups that don't have the money, sophistication and wherewithal to create these structures. I have *never* seen a software start-up do anything with federal R&D credits, for them they might as well not exist.
@@paulie-g you might run into an issue with the IRS challenging your transfer pricing if your licensing fee were equal to your revenue.
I agree, historically the R&E credit didn’t help startups since they were not generally in a taxable position. A few years ago there was a change that for small companies (less than $5MM of revenue) the R&E credit can be used to offset payroll taxes so startups can monetize it.
@@paulmorrow8372Obviously you'd do it in a smarter way, say have the license actually outstrip revenue and book losses to offset against future profits ;) Flat fee + percentage of gross, all above board and industry standard _wink_.
The severity of issues with the IRS is in inverse proportion with your ability to fund a defense, hence why FAANG have been using such schemes with impunity for so long. If the IRS decides to clamp down on it, it won't matter how theoretically/logically defensible any structure is unless you can match their desire to enforce with a sufficiently big pot of cash, the corollary being that trying to make it eminently defensible might be wasted effort.
Smart VCs were domiciling portfolio companies in BVI since mid-2000s, at least the ones I've worked with. Disclaimer: not an account, just really familiar with VC.
As others have pointed out this is about killing startup to protect entrenched companies. It's even worse when you realize that those developers are already paying more than 40+% of their income to taxes in most cases.
That is something I don't understand in the US. How can someone pay 40% in taxes yet the goverment provides nothing. I'm Canadian, I don't mind paying 40% of my income in taxes so that everyone can go to school and get fixed when sick. Why do anybody is taxed in the US and where that money go is such a mystery to me.
@@RememberingGames we get things that go *boom* and *bang* and *pew pew pew* and *kaboom*. Also very few people are paying 40% in taxes unless they live in a state with higher state taxes, and those often are correlated with more social services. An extra .63% tax on my state taxes means everyone working for a typical employer can now have paid maternity leave along with being able to keep an income if they need time off to care for themselves or a loved one having a serious medical issue.
@@RememberingGamesOur Gov (aka we the people) provide and export the worlds police force. Mystery solved.
@@ItsDan123 Yep pretty much, at $100k household income (married) we only pay 20% taxes even including a flat 4.5% state tax and social security. It would be ~15% income if we were in a 0% tax state. Very, very few people are paying 40% tax unless they're single and living in Cali making at least $400k. If married, you're looking at a household income of $800k+ to hit 40% including state tax -- at which point, you're still bringing home after tax ~500k a year and can afford pretty much anything you could ever need, even in the most expensive cities.
There isn't even a '40% tax bracket' federally, the highest it goes is 37% for single filing above ~600k, only things that prop that up further are social security (~6%) and state taxes (too many variables to account for). In my state, we would need to make >$1m household income to approach paying 40% taxes. I'm not even sure a normal employee could hit 40% effective tax somewhere like Houston TX with 0% state tax, would need to earn about 1.5m married/750k filing single to get there by some quick calculations.
@@RememberingGames A big and growing chunk of taxes go to pay interest on the debt which is paying for programs you've already overspent on. Canada and the US are both running big deficits (that add to the debt) despite the fact that these are 'good years' even while your healthcare can't keep up with the demographic bulge that's been obvious since the 80s.
Treating labor as capital is weird.
Okay, laborer. Work! For that’s how your master wants it.
Organic tools. Who happen to be losing the love they had for pizza parties.
It's normal in manufacturing, labor spent creating inventory is part of cost-of-goods-sold and can't be expensed until the created inventory is sold
True, but I suspect in someone's mind somewhere they were thinking of taxing the outputs (IP, whose value is mostly ephemeral) and not the inputs (labour).
Well it’s a simple cost thing. Chatgpt does 90% of the labor 10% daddy issues. And there’s a cohort of laborers who are 90% daddy issues and 10% labor. Which really changes the mental tax code for a lot of executives. We were handing out free therapy at work for so long we just assumed it was a cost of doing business. But now all the subsidy for free therapy is gone and these workers need to pay for their own damn therapy.
And that’s just the competent workers. The incompetents, make workers, and busy people are the laziest sons of bitches to have ever existed.
Lol. Rule #1 of freelancing in Finland - start a 1 person incorporated company, pay yourself as little as legally possible to limit the income tax and expense everything incuding your own home (office rental). The money on the company account that are not payed out to employees are not taxed.
Similar to the US tax structure. I subcontract with my own company and I write off everything.
@@jfkst1 would you mind sharing your entity structure?
@@jusnaturale
Single proprietor LLC. You can write off a lot of business expenses and discount your actual salary to decrease tax burden. Now I am not an especially high income earner ($10k/month) so I am not a very high target for the IRS. If you are doing a lot of business, obviously you get more scrutinized.
@@jfkst1 Correct me if I am wrong, but aren't single-member LLCs taxed as self-employed? If you are considered self-employed, then how are you contracting with yourself? Are you perhaps taxed as an s-corp? Thanks.
Isn't the money that's not paid out to emplyees considered to be the company's profit, and thus being taxed at the end of each year (corporate tax), plus another personal income tax on top of that when you withdraw "dividents"?
This really is ridiculous. I am a US citizen who owns a consulting company based in Canada and lumped in with this code change was a change that forced owners to pay income tax on any profits made in the company in a given year (even if the company already paid income tax on it).
We aren’t offshoring billions of profits to Ireland to avoid taxes. We are a tiny company trying to survive.
That law dis-incentivizes a small company to establish any reserves because it will be taxed twice on it (technically the tax is prepaid and you can claim it later, but like the amortization rule, it hurts small companies at their most vulnerable)
Both of these code changes took effect after the administration that voted them in was out.
This was a calculated political move that used startups as expendable pawns.
curious if you can loophole it by changing the jobdesc to armed guard or something then they do coding in their "free time".
i'm sure in the legislator's brain it's to curb big pharma or something.
@@TheBuddyCassius So you say, but all you've done with your blabbing is prove that your own brain is lacking. If you had any literacy whatsoever, you'd realize tony said that he *isn't* offshoring to Ireland; he clearly states that his company is based in Canada. Allow me to repeat that to be perfectly clear: His company has NO RELATIONSHIP WHATSOEVER with Ireland. Your utter lack of reading comprehension would be pitiable if you weren't so obnoxious, but instead all I can do is laugh at you.
I'll bet this being lobbied for by big tech companies who are 'always' doing R&D and, as mentioned in the video, it levels off after 5 years. It prevents startup innovation, which is often the threat to the establishment. Establishment often heads off competition by buying startups, and either incorporating the IP or burying it. That often works out to be more expensive than in house R&D, assuming you can predict (or control) the direction of the market. So all in all, establishment is the winner, because there will be less competition.
Definitely on point.
Leveling off unfortunately doesn’t get back what you got burned for in years 1-4.
@@headlibrarian1996 burining money to achieve a more dominant market scenario seems more like an investment for big tech though. Although I do wonder if there is really a need for such underhanded action. I would think the more innovative market with more costly acquisitions would be better for big tech, instead of a mature stagnated space where startups can't get off the ground without larger investments.
@@MB-Kajtech The burning I was referring to was the unnecessary tax burden amortization imposes.
@@headlibrarian1996 Yes the difference between amortization and having the whole cost deductible in the first year. That was what I was referring to too.
Thanks for making the video, it's great to make an issue like this one visible. It boggles my mind that a country like the US could pass a law as asinine as this one. And it's even worse to think this section was just a placeholder.
This is standard operating procedure for Congress, everything they do, whether the Democratic or Republican party, ends up screwing us in the long run. That’s why many of us call them the Uni-Party, they are one and the same, they just pretend they are different for the ignorant masses.
Please keep us up to date on this issue each quarter.
As a European, the US legal system sounds like a hellscape.
It is lol.
But perhaps this will make Europe the place for software innovation.
Europe is worse.
As a European citizen, it's actually hell to be forced to use so damn much US developed stuff. But in essence they dug their grave, they can lie in it.
Especially in CA where they have dozens and dozens of incentives stacked upon each other, just to justify exorbitant wages. The industry actually desperately needs a hard reset and CA is going to force it upon us sooner or later.
Yes.
Makes one wonder about the politicians and their staff which write laws... do they think about the ramifications and the harm they do or are they playing a game of power.
Not unless it impacts their pockwt book or how much power they have. Those are the hallmarks of every corrupt system.
Finance with CS and startups... That was sooooooo good. I'm a university student, this s genuinely very educative
Get finance news from someone who doesn't have a clear conflict of interest. He's a literal capital owner lashing out that he's going to have to pay taxes. His analysis is also wrong but that's because his interests aren't aligned with workers.
@@dropyourself I have to disagree with you. It's exactly as he said. You can google Sec. 174(c)(3):
Sec. 174(c)(3), which explicitly states that any expenses incurred in connection with software development must be treated as an R&E expenditure (capital asset) and therefore amortized.
Previously, software development expenses were not explicitly under the purview of IRC Sec. 174. Instead, Rev. Proc. 2000-50 provided that software development expenditures “in many respects so closely resemble the kind of R&E expenditures” that fall under IRC Sec. 174 that it warranted “similar accounting treatment.” Thus, a taxpayer could elect to deduct 100% of these expenses under IRC Sec. 174, amortize the expenses over a five-year period, or amortize the expenses over a three-year period under IRC Sec. 167(f). However, software development expenses did not fall under the definition of “research and development expenditures” under IRC Sec. 174. The TCJA changed this by formally defining software development expenditures as an R&E expenditure subject to IRC Sec. 174.
Under the amended code section, businesses are now required to charge the R&E expenditures to a capital asset and amortize the asset over a 5-year period (15 years in the case of foreign R&E expenditures). These expenditures must also be amortized using the mid-year convention, meaning that in the first year, taxpayers will only be allowed to deduct 10% of the total R&E expenditures.
I'm not talking about updates that's directly related to another major. This video is particularly a good mix of majors. Without going into too much depth, he is able to explain how it will affect the developers itself.@@dropyourself
You basically may have saved my start-up. thank you
What's your startup?
@@everythingponyUber for dogs
Thank you for breaking this down in such a great way. It gives people a chance to rally behind an effort to respond.
Keep talking about startup content! Thank you for informing us on this. Very scary
Boom called my rep. They voted against the bill bc of the child tax credit quote, "benefitting illegal immigration" so I asked if the rep would be willing to consider the R&D tax policy separately and what their position was on that specifically. They took my email and said they would ask the representative to get back to me. They said they would note down my position and thank you for calling in and voicing my concern.
What a good lap dog you are!
Beg master for less whips!!!
If they don't get back to you, you should probably vote against them next election.
How do you guys seem to always get a rep to talk to you?
@@macmcleod1188 cuz that fixes it!
@@everythingpony there are a lot fewer voters for each representative in small states. You can have as few as about 200,000 in Wyoming to as many as about 800,000 in california.
Just tax land lol. This is why the income tax system, both corperate tax and personal income tax systems are idiotic. Just tax the monopolization of land and allow people to keep the full value of their labor.
Based
Thanks for covering this.
Thank you. This is the most valuable posting I've seen on UA-cam this year...
Theo. This video is a bangger... I'm so happy to see this type of content
Yes! As a dev, these videos help me understand what my employer goes through.
I got laid off along with 80 other devs in Dec. now it makes sense why
Quick question: I too am a new startup founder, not based in US, and am wondering why software devs are not taxed as regular employees? What's the difference between R&D, the previous tax write offs, and other employees (like marketing, support agents, etc.). I feel like I'm missing something here..
You can claim that there is and you can claim that there isn't. None of it makes any inherent sense. What makes sense is the cause and effect lines between the legislation and the people following the resulting law. Is the effect of more rnd beneficial in your eyes? Make it beneficial for people to run rnd. Simple as. Or apparently not, for the people in DC
@@Mordewolt thanks, but i still don't get the distinction though. if support says people are having issues, and marketing says the videos aren't being watched then the design team has to do "research and development" as well - in the end it's a group effort of all people (ui/ux updates, making the app snappier by optimizing things etc.). why is the focus on software r&d so important here for taxation?
That's what the argument is. Until recently there was no distinction.
So the idea, broadly, is that you are building A Product. The average person in Congress, regardless of party, is elderly and tech-illiterate, and and I don't mean those things as insults really, just statements of fact? There are exceptions, but they're rare. In their heads, we're building widgets. If you were building a physical thing, you'd accrue all your research and development costs and then when the product was developed, you would sell the product, and have no more research and development costs on it. It would be done. You'd start R&D on the next product. Marketing and support are costs associated with the product after it's done, so get expensed immediately, but "development" costs belong to products you're not selling yet.
Waterfall. They think we still do waterfall development. They thought we were doing waterfall development and essentially *cheating* by expensing so much of it up front, before the thing was "done". I'm pretty sure they genuinely thought they were closing a loophole.
The fact that you have to continue to develop the product basically continually until it shuts down is the part that makes this stupid. If you have a SaaS product, there will be no revenues on it a year after development stops, much less five. They aren't "research" costs, they're costs of operating the thing. But the average US congressperson is about 60 and the most powerful are in their 70s and 80s. I suspect that a number of them may think we still sell copies of software on discs in actual boxes in actual stores.
@@Nassifeh To be fair, lots of products *are* able to run in maintanence mode for years and earn money. Just look at all the succesful companies out there, there is tonnes and tonnes of legacy software that's still in use and not being developed anymore.
I loved the content! I just opened my own and we are "profitable", we are a very small team (3 people) working on health care software for LATAM. I will definitely look at fondo as I needed this service badly. Again Theo huge thank you.
I would absolutely love more of this. Your advice and insight on software business management is HIGHLY appreciated and very hard to find.
Hire me lol
This is incredibly valuable information and will greatly influence the VC backed startup I'm creating. I need to give my startup the best chance possible to succeed. That is much more important than where I live.
Wtf. I wish I had heard about this before I hired an overseas dev last year!
This scares me not just for Software Startups. Could hurt Vegan Food startups, automobile startups, Farming startups, etc... Basically anything that needs R&D.
losing vegan food startups is actually a good thing
Killing vegan food startups is *not* the argument against this policy that you think it is
The argument is not really for food at all, it is about everything has R&D, which means all have startups.
PS: Would help if vegan food did not try to say their products were a different steak, burger, cheese, etc... Just call it something new so we could not have something to compare it directly to, at least till we make up our minds about it. Kind of like everything taste like chicken statement.
@@deatho0ne587"Vegan food" is just a way for silly people to go extinct, which would be adaptive from an evolutionary perspective and thus good, but they're not willing to do so quietly without annoying everyone else, which is bad.
That's the idea..They own everything..you continue to bend the knee in submission..
9:27 Delaware isn’t incorporated because of lax tax laws, they aren’t even low there 8.7%. NC is the lowest at 2.5% Most large corporations are incorporated there because of their special court system for business matters, which investors like.
Thanks for sharing Theo.
I just emailed my Senators. Everyone here should too.
This not entirely correct, I just went over this on Feb 9th with our tax advisors. You can deduct 80% of the R&D costs without triggering section 174. It's just that most tax advisors have no idea how to deal with this, I suggest finding people who actually know what they are doing. I've exited a number of startups, this is annoying, but it's not really unusual to have odd changes like this.
TL;DR The Trump "tax cuts" were not tax cuts, they raised taxes on people at the bottom while reducing rates for the very wealthy (over $500k in annual income).... Never mind the hyperbole of this video - in France, for example, you are tax on gross revenue, so the US is not the "worst in the world".
Lol, rich caring for the rich, who would have thought, honestly when it was mentioned I thought about it and thought no way it's this stupid, guess it is.
.. and how many startups are there in France? FYI: if you're comparing your country to France in terms of being friendly to small business/startups, you're f-cked. It's like saying "there's not as much cannibalism in my country as there is in Papua New Guinea" - technically true, but not the glowing endorsement you think it is.
Those are two different concepts. I would circle back with your accountant. You are referring to additional first year depreciation under section 168(k). This section allows an accelerated depreciation deduction for certain depreciable assets purchased and was 80% for 2023 and 60% in 2024. Section 174 has no acceleration mechanism.
@@paulmorrow8372do you work with clients from Nevada?
@@gosteampunkdotcom I no longer am in public practice. I now work for one company and just do work for them.
As a fellow founder, please find room for this content here on the second channel. It is content that quite literally changes my life.
is it just me or the govt has just become a productivity killer
Thanks for making this video, it’s boring but soooo important.
I literally thought all corporate expenses were deductible? Like I was under the impression that all payroll, all business expenses, anything for the business no matter what, is deducted. Isn't that why big corporations don't pay any taxes? They just spend it all on R&D... that's like literally the whole idea behind corporations under capitalism?
it's still deductible, but this change forces them to spread it over multiple years, rather than being able to deduct it in the same year they've incurred those costs. But if you're a young business, you suddenly need to cash out a lot to the government, meaning you have less money (and less incentive) to invest into R&D. Ultimately making it more likely for your company to go out of business before it starts making any profit at all.
Literally a wtf
Large physical assets which are used for years are typically deducted on a multi year schedule. Services or small consumables, not so much.
this would explain those huge layoffs we had last year
Yeah, this was the real reason. But what did they tell to the engineers they laid off? Fake "performance" reasons, "there is a recession", "we have no cash due to inflation", etc. Fake reasons.
@@couldntfindafreename these layoffs are happening all acroll the world, you're talking non-sense. Not every country has suddenly changed theyr tax code.
I love that your dev tools are open while reading this xD
I'm so excited to graduate this May without having secured an internship last summer, There are just so many opportunities... Well this sucks
I don't think the tax law applies to normal software development when building a product. It just prevents you from immediately expensing research that's not directly building a product.
Thats only if you capitalise the costs software devs. I would just expense it all then then revalue the IP at year end and then boom you back up with your asset.
For tax purposes you are required to capitalize the costs. The tax implications are not related to any valuation of the underlying IP.
Thanks for the video and hot topic, we need to talk about this!
As a small tech startup founder, this video earned my subscription.
Delaware does not have lax tax laws for companies businesses incorporate in Delaware because. It’s primarily for legal reasons
1. They have a court system that handles corporate suits quickly
2. The decision Delaware courts make are predicable because of the amount of cases that have been held in Delaware in the last century.
3. It’s become standard for lawyers to study Delaware corporate law in school, this is a self reinforcing thing
4. It’s very easy to incorporate in Delaware you can do it in like 15 minutes
The actual taxes are pretty comparable to other states if not higher than many
Also on the point that companies are no longer going to incorporate in Delaware. I view this as unlikely, Delaware has a huge competitive moat for the reason listed above; it has become the standard in the corporate law industry and that’s hard to move away from
Sounds like a trap
This is just making me SERIOUSLY consider moving my startup to Dubai or the Carribean.
Dubai makes sense but what parts of the Caribbean have low tax?
@@TerriTerriHotSauceArgentina will.
@@TerriTerriHotSauce Cayman Island, Bermuda, Bahamas, Aruba, Curacao, St Vicent, BVI, Panama and Costa Rica if you set up correctly (both are not technically the Caribbean but well)... And more but these are the most common ones, basically all of them can get a lower rate than the 9% from Dubai
@@enkidu9298 Huh? I guess you are being sarcastic
@@bozzistef Things have changed drastically there in the past year.
A way around this is subcontracting out. What you will see is small startups paying devs on a 1099 instead of as an employee, and then later bringing them on as a full time employee. The only problem with this is that generally, part of the attractiveness of a startup is that joining early and sticking with it can result in significant stock/ownership of the company, and if the company ever goes public, you get a great amount of wealth from it. Being paid as a contractor doesn’t necessarily allow for this unless it’s specifically in your contract.
Oof. As someone thinking about starting a company this is scary. Hope it changes soon
This is a super good callout. Startups are what drive innovation and growth which drives our economy generally. Insane that this tax ever made it into law.
Not being able to expense salary is downright absurd. Canada lookin like a better place to start a business from a tax perspective right now lmao
Canada also has a SRED credit for r&d development which can be 30% tax credit.
How can there be such a ridiculous law? You don’t have money. But you still have to pay taxes. From where?
From your new owners at BigCo. “You will service us”, as the Borg liked to say.
Does this mean that even if Senate reverts Section 174 this year, we would still need to pay for R&D expenses for the next 2 years?
The real question is where would startups go? Europe has just as much bureaucracy and taxes, and I don’t really see devs moving to China.
The reality is, do to agglomeration effects, the US will still have great software.
The real issue is that it puts a bigger damper on who can start a biz. Now only the most well funded will make sense, eliminating moonshots
Assuming Canada elects a real leader next round, there's a very small possibility of it up here but it's very small.
Random South American countries and random Island nations? It would essentially fracture everyone into many different splintering groups depending upon what the needs of each individual company. I can see Philippines and Thailand or even Mexico.
or you can offload to open source, since the RnD cost is "zero", developers will work like painters the code will be auctioned-off for "charity", and/or paid for support (explaining the corpo on how to use the program instead of paid to make the program).
expect more layoffs and big corpo like microsoft uses more open souce component on their business.
the cheating part for google and co:
they can use their AI as running business instead of RnD so it's tax deductible despite that it is used for RnD anyways.
@@socialkruption Canada has jack shit in population, plenty of Canadian tech companies consist almost entirely of American employees.
Wont companies start just classfying their employees differently?
Everything works until you get audited.
How would that help? The tax break came from treating them as working on R&D, if they’re not working on R&D then there’s no tax break with or without this tax code change.
@@0oShwavyo0 💀
As a lawyer in Canada, we pay taxes on our invoices even if clients don’t pay us. Similarly, this affects new law firms more than big established law firms.
Worse than requiring software companies to depreciate the expenses associated with developing applications, Section 174 also covers research and development of "any activity intended to discover information to resolve uncertainty concerning a product or process."
Section 174 is ambiguous about whether the payor or payee, or both, are responsible for taxes on work product developed under a work-for-hire agreement. However, if the agreement permits shared ownership of the intellectual property (as my agreements often do, while including covenants against competition), then both parties would owe taxes on the value of the investment by the payor and the associated revenue of the payee.
The effect of Section 174 is so broad that it will have the effect of bringing research and development in manufacturing and engineering (including structural, mechanical, electrical, biological, etc.) to all but a halt within these United States, for only the largest corporations could afford to deal with the cash flow implications of the resulting taxes due the IRS.
why devtools are open
Force of habit? 😂
The easiest way to make the webpage narrower without resizing the window.
I literally did not notice because I'm so used to devtools being open.
Tell me you don’t actually code without telling me 😂
Still laughing at “Mr code” asking why dev tools open
Ethical Tax Evasion™
Applies to most of them tbh, but this one makes it as morally correct to evade it than to pirate adobe products
Well, all tax evasion is ethical anyway
Sharing this to people that this might effect. I am terrified :(
Fantastic video! This should have been in the press. We were so distracted by politics that something like this would never get any play and now that we had the border crisis no one's going to take a second look at this.
Explains so many of the layoffs
Though at the same time can help startups and R&D firms that focus on doing work for others. As well as making 1099 contractors a better value to businesses as they can still be expensed.
@@mwwhited No they can’t. All R&D expenses are amortized, not just salaries. 1099s won’t fix the problem.
IMO this is just part of a bigger issue that led to layoffs. Most of the reason was corporate greed. The way Netflix started charging for households, then Hulu started doing it, then Disney+.
One company tests the waters, others see and follow.
This isn't passed
@@natescode The fix isn’t, the tax has been lurking since 2017.
As a US citizen, if you own 10%+ of a foreign company, that company is considered a Controlled Foreign Corporation. Therefore, your Canadian subsidiary company buying the US parent idea won't fly cuz they're both considered US companies for tax purposes. It's nigh time all the sheeple start waking up and realize they're in the least financially free country in the world.
As a software developer, I deeply care about this topic. Startups are never going to hire..
Jesus christ i really can't wait to see this...
War isn't cheap
This is a Trump law to fund his tax cuts, unrelated to war.
Solutions:
1. Pay employees in stock-options, instead of cash.
2. Eliminate the income-tax.
You can't eat stocks
@@vipinsanthosh2230 Friends and family can be surprisingly generous. Ask Google's first employee. He negotiated his salary down to zero, and today is a billionaire. I'm sure his friends and family aren't sad about that.
Redeemable at company store!
Private companies often don’t have stock options, especially one-person shops.
@@headlibrarian1996The subject of this video was funded C-corps.
Is this part of what's been hitting game development? Massive layoff waves. I can imagine their creative process being qualified as R&D when it comes to US tax code.
I've been complaining about the US tax code for most of my adult life and I think it's going to get way worse going forward. There is no incentive for politicians to create a tax system based on practical reality. Overall, I'm shocked at how much Americans are taxed and how little we get in return for what our government spends vs what other countries get for much less gov spending.
this is just the beginning. Next they will tax the networth of the company and people. So even if you don't make money if they market thinks you're worth you will pay insane taxes and be bankrupt. No startup will be possible. You will have to make money since day 1 or avoid being a public trade company to avoid making the value of your company low.
Feels good to be in Europe
The problem is the IT industry in one way or another way connected to USA
Big European company must have offices in USA, small company from the Artic also must have office in USA
They invent the IT industry, example Oracle invented the DBA job position
Like it or not USA is too big to be ignored
The requirement to amortize the costs of applications development is nothing new. The application used to be treated as a depreciable asset for many years before a change in law permitted expensing of development labor. The change back to the current model requiring depreciation came as a surprise to many. The problem is that those companies unaware of this requirement may end up bankrupt.
I became aware of the requirement to amortize software development costs back in 2000 when our team had downtime and used our "training" hours to begin developing a product we could commercialize. This was nipped in the bud when the accountant questioned the expenses and became aware of what was going on.
I guess lobbysts had a hand in this law because the only ones benefiting are big tech who were "hoarding" developers in order to stiffle competition. Not to mention the bill would also severely lower salaries among engineering talent.
This is why developers will be replaced by AI.
Not because of crazy demands by developers, but as usual, a direct result of government meddling.
This happens today in other industries and almost in every country but we normalized it so much that we dont talk about it.
Example: If you start a company, and you need a factory and a lot of machinery, you buy everything, so the government takes that as an asset, so you only take 1/5 of the loss and you amorize it in 5 years or even 10 years (as they are doing with this RD stuff).
So if you put 50 million dollars to start a company, spent 50 million in machinery, and earn 5 million on that year that you reinvest in more machinery. Those 55 million wont be deducted from your taxes, so you pay for the entire 5 million as it is the case for software.
The US has to fight so that this is not normalized on the software industry, it will sink even further an industry that is taking huge layoffs and losses. I am amazed that the US is doing this kind of things.
I have to disagree... asset amortizing is normal yes, but we are talking about salary and other HR related expenses. If you have an internal R&D department, those expenses are part of the profit calculation and even may be further deduced from the profit calculation.
If the business builds and sells software, their sales gross 1M and your expenses are 1M, there's no way around it, you're not profitable.
Computers, software, servers, those are "assets", in case of software people are the "raw material" you industrialize.
The difference is that labour has never been classified as an asset to be depreciated or amortized. It is not a norm in any industry or any country. Assets yes, you don't buy factories every year and don't buy manufacturing equipment very frequently or even yearly, so it makes sense that they are treated as such.
If you spend a million on wages, you will probably also spend another million on wages the next year. It is considered a running cost that is not technically capital in nature. Now the argument can be made that the labour used is classified under R&D and is being used to develop an IP or new asset that would have capital value in the future, but if that's the case, then no company at all will be incentivised to even try to innovate because it would have been that much more expensive.
This isn't about normalising amortization/depreciation in the software industry, even in the software industry, offices, servers/it infrastructure are all amortized, thats normal. This is asking labour to be amortized. Meaning maybe in the future, food development, research, medicine breakthroughs, energy research, this will be precedent for having labour in those industries also amortized. Imagine further down the road, where this tax is stretched even further, where setup/prepatory costs or even costs related to projects such as business meals/meetings or functions are also amortized because maybe long term projects isnt complete within the year or you didnt actually get the clients from the convention you paid for so you need to amortise that too, because technically they also help you bring up your "capital value".
It is an EXTREMELY slippery slope, but not exactly for the reason you mentioned
More to the point, machinery and buildings, unlike salaries, are usually financed with debt. Not getting a 100% current year deduction doesn’t burn you hard like it will when you expend firm capital on salaries you can’t deduct.
This sounds like most small businesses that rely on this will be bankrupt soon. The public thinks nothing of it, even with mass layoffs they will blame the person in office forgetting that in most issues Congress has all the power.
Its weird to carve out just engineering labor for a separate deprecating expense from all other labor.
Trump made the choice to support big business by weeding out any startup and small competition and making monopolies stronger... it's all by choice.
Keep voting Democrat
Why? It was Republicans in the House who were pushing to fix this issue and the Democrats would only consider it if the child tax credit was added to the bill. Most Democrats weren't pushing to change this provision. (There may have been one here or there talking about it, but the party as a whole certainly didn't care.)
This is a big issue that honestly effects both technology creators and consumers. Super sad to see the legal system fail in this way.
I had no idea! This is horrifying.
I agree with the essence of the Section 174 changes.
Mainly: Too many companies write off too much of their dev staff as R&D.
But sorry, devs working on maintaining an existing product that sells well, shouldn't be completely writen off as R&D, which was happening a lot before.
However, the correct way to do this, was to redefine what R&D means for existing product lines. Not this weird cashgrab.
Huh? Too many companies "write off too much of their dev staff as R&D"? What does that mean? My understanding is that all employee/worker compensation is deductible from a company's revenue for taxes. I must be missing something? Are you saying that R&D costs for a company currently get extra "write offs" that other expenses don't?
That's backwards, though. "R&D" costs traditionally are the things you can't write off immediately. Support for an existing product by any traditional definition would always have been able to be expensed immediately. That's the first thing that would go back to being able to be expensed immediately. The main question is what to do about the million dollars that you spent developing a whole new thing. The problem with this is that little companies are already short of runway because available cash is low, but anything that gives them enough time to compete lets bigger companies play tax avoidance by doing big hirings and layoffs instead of maintaining more consistent expenditures.
I concur with your observation that maintenance should be taxed, as it's an asset now from which a company can actually create their wealth (like land). OTOH, new features or product expansion could be considered investments.
Well, mso tof Sillicon Valley are progressives who loves taxes and pubic spending, nwo you are getting what you want, so dont complain.
Libertarianism for me but not for thee? thats nt how this works, Theo.
Hey look, someone who didn’t watch the video. This was a result from a Republican tax bill
Like I said, you cannot complain, no matter if its form republicans or democrats, the leftists want this and they got it.@@JonathanRose24
@@MyriadColorsCM so we’re just ignoring the reality that “leftist” didn’t want this, it came from a right wing Republican that shoved this into the law to give massive tax cuts to wealthy people. You are free to live in denial
@@JonathanRose24 REpublicans love tax bills, they just don't want the tax money to spend on normal people but on weapons and the rich.
Hey look, someone that isn't willing to take accountability for their parties action. "leftists" want to tax those with the most wealth not the little guy trying to make a living.
This is so ludicrous that I almost feel sorry for the authors of such bs as my first conclusion is that such proposal can only be made out of absolute incompetence and stup1d1ty.
Called my senators using the info at the bottom of the article. That was surprisingly easy. I should probably do that more often for more controversial topics.
the loop of your company pays taxes the client of the company pays taxes for the service and then your employee also paying taxes
Gonna be honest, as someone who is very for taxing companies, I think this is an insane law. R&D should not be capitalized. If anything, this is only benefit large companies (simply from the fact that they can afford it, and smaller competing companies will literally be killed off).
There's no way a small start up or any small company can scrounge up enough cash to afford the tax liability.
Instead of trying to tax like this, they should be going after major billion dollar corporations that use tax loop holes like Amazon. They pay billions of dollars to an offshore company for that "owns" the amazon brand name, thus using that as an applicable expense to decrease the tax burden (mean while the off shore company has little to no tax burden). THIS is what we should be taxing.
This is as anti-competition as it can get for almost any industry, and extremely anti-innovation.
Its insane that this exists.
Contact your senator and tell them that. It would help maybe get it changed.
Now I am curious. So would you expect startups to move to canada? What do you think would become the best countries for startups after this?
So, government tricks with potential taxes has a real cost to some. And, it appears the trick is on an important piece of our economy.
This is absolutely insane. Congress must do their jobs! Or they should be let go!
This doesn't make sense for things like games where games might not have a 5 year life span.
It is nearly guranteed to be intended by the super massive AAA corpos. After all if you cant create a small business and start up from the bottom, they dont have anything to fear.
I really hope this doesn't kill my company and put me in debt.
I bootstrapped everything and started in 2021.
Taxation is designed to keep you in debt.
The sooner people realize this the better we all will be.
If you lack consent when being taxed you are effectively expected to be a slave, this is a fact.