andrewlgood

Silly argument. Everything in gravitational physics goes back to Newton? Who cares about Convex Optimization if you do not undertand gravity? Math goes back to Euclid and the Greeks?

Mankind has consistently built upon existing knowledge. "If I have seen further, it is by standing on the shoulders of giants. (Newton)"

IMHO, what we are seeing is the US was generating 50% of the world's GDP at the end of World War II. In that era it could afford to many non-economical things - Marshall Plan, funding research at universities, etc. The US is no longer the dominant economic engine. It actually has to prioritize its spending. Money spent on research is money not spent on food stamps, housing the homeless, defense.

What is never mentioned in these discussions is how much money has been spent on research that did nothing. Advanced nothing. When that is factored in, what is the ROI of university-based research?

Not correct. Capital Gains taxes depend on the holding period. Short term capital gains (stock held less than a year) are taxed at the same rate as salaries (ordinary income rate). Long term capital gains (stock held at least a year), are taxed on a reduced level that peaks out at 20% (depends on total taxable income) with a possible additional 3.8% Obama Net Investment Tax.

Have you ever been a c-staff? C-staff are employees as well. Usually more expensive employees. Well run companies are trying to figure out how to win in the marketplace. To do this they hire the employees they need to win. Investors do this with CEOs.

I agree that it is much more difficult for a CEO to get fired than a line employee as CEOs have significant influence in picking their boarda. However, the consequences to a company of replacing a CEO are generally more significant as well.

Different markets. Companies are created to allow investors to create profits selling something (things, services, etc). Companies compete with other companies to attract capital. Companies which offer higher expected returns for comparable levels of risk will attract more capital. This reflects supply and demand for capital.

Employees are part of a labor market. Supply and demand in the labor market drives compensation levels. When you have a rare skill that is perceived to be valuable, you can get higher compensation - e.g. Meta AI researchers getting $100M contracts or Juan Soto getting a $750M baseball contract.

As mentioned elsewhere, some companies give stock to employees. In my experience this is for one of two reasons. 1) Employee retention - stock grants tend to have multiyear vesting periods designed to keep the employee at the company. 2) Start up companies that do not have the cash to pay employees.

None of these explanations would lead to simply paying employees more with excess cash (unless the cash was created by a group of employees that you were trying to retain).

Buybacks do not necessarily create an increase in stock price. Economically no value has been created. Cash on a balance sheet has simply been exchanged for shares. The people selling their shares in the buyout get the "value" of the company at that moment. The remaining shareholders now own a larger percentage of a smaller company i.e. a company that no longer has the cash used for the buyout.

Markets tend to reward companies that use buybacks as there is a belief the buybacks are a demonstration of discipline by the management team. Conceptually COMPANIES SHOULD BUY BACK STOCK IF THEY DO NOT HAVE BETTER ROI PROJECTS IN THE PIPELINE. This frequently happens in mature industries.

As noted above, buybacks are another means to return cash to investors. Today, in the US, the tax rate on qualified dividends and long-term capital gains are equivalent for most shareholders. This has not always been the case. When tax rates for capital gains are lower than dividends, buybacks are a more efficient means to return capital to investors.

Buybacks also allow for more tax planning. When dividends are issued, the investors have to pay taxes on them at that time. Stock buybacks allow investors to choose when they want to pay taxes. They can sell into the buyback and pay taxes now or hold the stock and pay taxes at a later time.

Buybacks are can be part of normal corporate capitalization decisions - what is the appropriate debt to equity ratio for the company.

Finally, changing dividend levels has its own impact on stock price. If a company increases its dividend, them market expects it to remain increased. In this case the stock price goes up as investors expect more dividends in the future. When a company cuts its dividend (rare event), the stock price drops dramatically as the market punishes company not only for the reduced expectation of future dividends but also because companies only cut dividends when they are having severe problems. Some companines issue a special dividend related to a one-time event such as selling a division. The stock price does not do much in these events.

All of this is to say that stock buybacks are not why corporations reduced basic research investment. I was at GE watching the famous research centers getting cut. The bottom line was the research coming out of the centers was not creating a meaningful ROI. At one point the researchers went to the various GE businesses looking for projects where their expertise could add value - an internal consulting group. They gave up after a year as there was so little success. Corporate research centers are expensive. They need to earn their keep.

As a former Finance person, it is interesting to see the panicked attitude of programmers toward AI and the resulting loss of job opportunities. Programmers have eliminated more jobs than almost any other group of people on the planet.

I began working in the late 80’s. Throughout my career I saw the steady reduction in Finance organizations as roles were reduced and/or eliminated by the introduction of computers and software. First it was spreadsheets that eliminated the tedious work of writing on 13-column sheets to create financials. Then it was accounts payable clerks who were eliminated as EDI sent better quality information that needed less reconciliation and fewer humans touching it. I watched 90% of accounts receivable clerks who were eliminated as software could create the invoices from data in the system and automatically match payments to invoices. Then it was the bank reconciliations teams that were reduced as better information flow between the banks and companies allowed the automation of daily bank reconciliations. All of these were thought by the companies to be great advances due to technology. They eliminated “non-value-added” work and made companies more efficient. They also eliminated lots of jobs, particularly entry-level jobs.

My intuition is that other functions saw similar increases in labor productivity. Why is what is happening to programmers today any different?

Every decision as to how to spend taxpayer money is political. There are always trade offs. The money could be spent on the military, enhancing social security, getting homeless people off the streets. These are all political decisions.

This sounds very similar to the challenge that companies had implementing Six Sigma (or other statistically-based quality programs). The tools significantly helped the average person improve the quality of their processes as determined by a variety of metrics. However, they were never going to tell you the solution or improvement to implement. They could give hints as to where to look for a solution, but someone still had to dream up the solution. For this reason, brain storming was always one of the most critical tools in the Six Sigma toolkit.

The definition of capitalizable expenses tends to be the same between GAAP and tax. The depreciation schedules are frequently different.

Thank you for the clearer restatement.

Apologies, I was speaking to the more general idea of allowing firms to depreciate/amortize assets faster to juice hiring. In this case, the government ended the accelerated amortization for R&D which had been juicing the hiring for many years. This happens on the “regular” capital expenditures side rather frequently with windows of accelerated depreciation to increase the purchase of machinery. It’s always for a window of time, then it expires.

For most items, there is harmony between GAAP and tax. Even though Section 174 is a tax code item, the implications of it must be properly presented on your GAAP financials. Therefore the auditors opine on it

While one of the biggest differences between GAAP and tax is the depreciation schedules for various assets, the definition of the items is generally the same.

Amortization/depreciation is actually pretty important for understanding the performance of a company. Imagine a firm buys a piece of software to run its business. In year 1 it pays $10M for the software then $1M per year in maintenance thereafter. The software enables the firm to make $2.5M Revenue in year 1 and ramp up to $3.5M thereafter. Assume no other expenses. Without amortization of the software expense, it would look like the business lost $7.5M in year 1, then made $2.5M per year for next 4 years. With amortization, the business makes $0.5M per year consistently which better reflects the stable nature of the business.

Note: ($10M / 5 years =2 m·$/year ). Year 1: $2.5M Revenue - $2.0M amort = $0.5M profit. Years 2-5 have $3.5M revenue - ($2.0M amort + $1M maintenance)= $0.5M profit.

Think of scientists developing drugs at a pharmaceutical company. They were significantly impacted by the change in deductibility.

For clarity, there is another section, Section 41, that addresses tax credits for R&D. This is still active.

Interesting perspective. Firms actually have to evaluate each year whether it is really an asset. If they determine that product is no longer useful, they would write off the remaining balance immediately.

IF the machinists are doing R&D, they get the same treatment as software engineers.

No. Not tied to a specific employee. The expense is simply capitalized then amortized over 5 or 15 years.

Short answer is yes. The finance team has to track each year’s expense as a “tax layer” and amortize it separately. By year 5, ignoring half-year or half-quarter conventions, if have a constant spend, the annual expense will be equal to fully expensing.

For clarity, the issue at hand is the “Big Beautiful Bill” does NOT reverse the tax treatment. The request here is to change the bill to reverse the current treatment.

That is actually why software development was allowed to be expensed prior to 2017 - to keep innovation thriving in the US. In 2017, they US simply stopped giving preferential treatment to R&D.

Both parties do this to make spending bills appear smaller. This is why clean energy tax credits generally passed during Democrat administrations have to be periodically renewed.

Don’t need 60% for budget bills in reconciliation (the process of merging bills from the House of Representatives and the Senate). One of the times filibusters (which create 60% requirement) do not apply.

I think it was more along the line that R&D had been formally encouraged with special expensing rules and in 2017 they removed the special treatment.

Exactly

For startups that don’t make it five years the issue is moot. Expensing the software developers compensation in year 1 rather than over years 1-5 simply creates a larger taxable loss which creates a Net Operating Loss on the balance sheet which could be used in a future, profitable year. As NOLs can expire and have rules regarding how quickly they can be used and whether they can be sold, capitalizing the R&D could be a better answer for some firms.

It’s not just software. Software developers are just the most vocal people talking about it. I worked a company that owned nuclear power plants. We did R&D on how to make the power plants work more efficiently and safely. Some of the work we did qualified as R&D and could be capitalized. This mattered as the US government gave tax credits for eligible R&D. The tax credits directly reduced your tax bill.

But the idea behind capitalizing research and development is to eliminate the difference in financial presentation between buying and building software. In both cases, one pays cash to acquire the software then uses it over a period of time to generate revenue. Purchased software is clearly capitalizable. It is then amortized over the expected useful life of the software. Annual maintenance fees are not capitalizable as they are not expected to extend the useful life of the software. Allowing R&D to be capitalized just evens the playing field.

If R&D were not allowed to be capitalized, then a company would have an incentive to create a specific entity to develop its internally used software, then sell that software to parent company. If it set up the entities properly, it would capitalize the software as purchased software rather than R&D. Many firms with international development teams do this to manage in what country they pay taxes - the goal being to derive no value in high-tax countries and high value in low/no tax countries.

Many people use depreciation and amortization interchangeably. From an accounting perspective one uses depreciation for tangible assets (can be touched and seen e.g. machinery) and amortization for intangible assets (e.g. trademarks and R&D). Depreciation and amortization behave the same way - they decrease an asset by expensing a portion of it on a regular basis.

For clarity, it is “scrap value”