Sign the Small Software Business Coalition Letter to Congress

by tnorthcutt • 3 years ago

17 12 3 years ago

fideloper• 3 years ago

I’ve heard of this on twitter a lot lately - it sounds like you have to amortize some costs (like dev salary - or your own salary!) over 6 years )?!) instead of applying the full thing as a cost for the current tax year. Big yikes.

mjwhansen5• 3 years ago

And not just salaries! It applies to any expense that goes into making a new product or improving an existing one.

This includes servers and etc.

boboroshi• 3 years ago

This is a big mess. I'm sure this is probably the goal for really large companies to amortize expenditures over multiple years. But for a smaller shop, this will just reduce the amount I can spend on development.

Yes, it would balance out eventually in 5-6 years, but this would be painful for the near future and require a change up in what we're capable of doing, since so much more "revenue" is going to tax payments.

mjwhansen5• 3 years ago

Yes, this is the question - how many companies will make it to the point where they get the full write-off, especially with the double-whammy of 2022 higher + Q1 2023 higher hitting at the same time.

dohertyjf• 3 years ago

It's crazy to me that this got let through Congress. Hoping they make it right.

mjwhansen5• 3 years ago

Hey, person behind this project here. Thanks for posting.

The changes to Section 174 are a massive problem for companies that build and sell software because now all software development -- which includes both building new products and adding new features to existing ones -- must be amortized. (Time and resources spent on fixes can still be expensed.)

If you're unfamiliar with the issue, I have an explainer thread here. This thread was fact checked by tax experts before posting. [1.1]

This includes salaries as well as other expenses, like servers. I did an example breakdown in this post.[1.2]

There's a lot of confusion with this and the R&D tax credit. Software development falls under what the tax code calls "R&E" (research and experimental), which is a much broader category than R&D. This article [2] does a good job explaining the difference.

Reverting Section 174 to allow companies to expense software development has widespread and bipartisan support in Congress, but unfortunately they feel no urgency on the matter. Big companies have been engaging with Congress on this for four years, but it still hasn't happened -- likely because it's seen as a big business issue even though it impacts companies of any size. This is where small software companies come in, and this letter specifically.

The goal of sending this letter on Tax Day is to make Congress understand that these changes are already making small software companies' tax bills skyrocket to the point where they may have to go out of business. It makes funded unprofitable startups profitable and taxable (and who can raise extra capital right now?!), and lean but profitable bootstrapped companies are taking out lines of credit just to pay their tax bills.

This is not a hypothetical issue. People are already receiving these astronomically-higher tax bills. [3,4] We have to join together so Congress knows this is an urgent problem.

NOTE: Please only sign this if you're a US citizen with a US company. There will be a point later when we'll bring others into the effort. But for right now, in order to get small businesses into the legislative conversation and shake things up and hopefully speed this along, we are focusing on founders at the moment. Small businesses are politically sympathetic but horribly disorganized as a bloc, and we have to change that first if we have any hope of this ever coming to a vote.

[1.1] https://twitter.com/mjwhansen/status/1640696365637419008

[1.2] https://www.indiehackers.com/post/this-us-tax-change-could-k...

[2] https://www.forbes.com/sites/lynnmucenskikeck/2023/03/24/fiv...

[3] https://twitter.com/LandonB32/status/1636026627887964162

[4] (Paywalled) https://www.wsj.com/articles/small-businesses-face-big-tax-b...

mijustin• 3 years ago

I don't think small software companies in the US realize how much this is going to cost them.

Some folks are seeing an increase in taxable income of 466%: https://twitter.com/LandonB32/status/1636026627887964162

mjwhansen5• 3 years ago

It's so, so bad.

Many accountants aren't even aware yet, meaning that some people who have already filed their business taxes for 2022 will end up owing the stratospherically higher bill PLUS interest and potentially penalties when the IRS notices (or their accountant notices and they re-file). The IRS starts charging interest as of the due date.

kanejamison• 3 years ago

Such a silly policy to enact without restricting it to incredibly large companies that can already easily dissect these expenses into R&D versus maintenance work.

yucky• 3 years ago

Remember when people were cheering that the Biden Administration added 87,000 new IRS agents. Surprise surprise..

mjwhansen5• 3 years ago

This change was passed in 2017 in order to pay for the tax cuts, effectively a five-year time bomb. Congress basically did this as an accounting trick to pay for them, yet never intended for it to take effect.

arvidkahl• 3 years ago

Besides the fact that this will hit every single company in the US that creates software in a non-trivial way (which is likely even true for many manufacturers), how crushing must this be for people just getting started.

You pay $10.000 in development costs and manage to get maybe $2k in early revenue that first year. But instead of being able to claim the full $10k, you're allowed only $2k. And now you pay taxes on $8000 of expenses? With a business that doesn't make any profits? Quite bizarre.

Sign the Small Software Business Coalition Letter to Congress

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