Twisting not required. Depreciation straightforwardly applies to every other business capital expenditure. Hire someone to put a new roof on a rental property, and you're out the tens of thousands of dollars cash while only getting an immediate deduction for one thirtieth of the value. If you were expecting to pay that cash out of income, it's effectively a realized income and then reinvestment.
The recent (-ly undone) change went against decades of how things were, was crippling for medium size cashflow-positive startups, effectively increased taxes, etc. But it was really just a straightforward application of the general principles that apply to most everything else.
Yes, salaries spent to build a capital asset. Half the cost of a new roof is paying salaries, right? And yet, you still depreciate the whole value of the completed thing, not just the cost of the input materials. If you hire the roofers yourself as employees, you're still supposed to be accounting this way - although obviously there are many ways to fudge it.
The point is that building a piece of software that is going to be in use for several+ years is creating an asset. It just goes against our intuition since this industry is so driven by fast fashion, and the bookkeeping of specific components, their depreciation schedules, early end of life, (etc) seems like needless complexity.
At least 50% of time on every software team I've ever been on was spent on maintenance and fixing bugs.
You can expense such time as opex, but it has to be justified, and that's often difficult to do. Did you fix a bug by refactoring some code to avoid the problem? Is that capex or opex? Can you convince the IRS of such?
The old (and now new) rules eliminated this accounting game and uncertainty.
Sure. I get that having to facilitate accounting takes away from programming, and that nothing is cut in dry with the IRS. I'm not even a fan of the general idea of mandatory depreciation schedules, seeing depreciation as more of an artifact that fell out from double entry book keeping's proliferation of different types of accounts. My only point was that this is just the same regime that everything else has to deal with.
For example if you pay someone to fix a leaky roof and they replace a section of a given size, can you call it a repair/maintenance expense or should you be depreciating it as an improvement to the building? Can you convince the IRS of such? The only reason this has more straightforward answers is that accountants have been answering this question longer.
"1-year deprecation [sic]" would mean that salaries paid in the second half of the (fiscal) year are only half deductible in that year, and half in the next.
But seriously what is with this trend of throwing out simple reframings as if they're insightful on their own?
> The recent (-ly undone) change went against decades of how things were, was crippling for medium size cashflow-positive startups, effectively increased taxes, etc. But it was really just a straightforward application of the general principles that apply to most everything else.
The error was in reconciling them by getting rid of it for software R&D instead of allowing other business expenses to be deducted when they're paid for as well.
For large stable incumbents that have the same expenses every year, the difference doesn't matter except in the first years after you make the change, because it doesn't matter if you deduct all of this year's expense this year or 5% of each of the last 20 years' expenses this year, they add up to the same deduction every year.
Where it matters is for new challengers, because they don't have arbitrarily many years worth of legacy expenses to deduct, so their deduction in their first year will be less than their incumbent competitor's.
It also creates a disincentive (or competitive disadvantage) to increase long-term investments. If some existing company had been making a $5M investment every year but is now facing new foreign competition and needs to increase it to $10M in order to stay competitive, they're in the same position as the upstart. Moreover, then they may not be able to do it, because they were going to have to run lean and divert the $5M profit they usually make to increasing their capital investments, but then the government is expecting tax on most of that $5M which means they can't spend it this year it even though it's ultimately a deduction.
Notice what this does specifically in the case of real estate: If rents start going up the normal incentive is to build new housing, but now you have to put out all the money to build a new building in year 0 and not get to deduct it for decades. Is that the incentive we want? Probably not.
Sure, a lot of that understanding was included in my recognition of the downsides.
The fundamental dynamic is that the government wants there to be a forcing function on having to actually realize profits, so that taxes have to be paid in a timely fashion. They don't want people to be able to reinvest all of the effective profit and keep kicking the can into the future indefinitely. Capital gains and retirement plans are exceptions, each for their own reasons.
> The fundamental dynamic is that the government wants there to be a forcing function on having to actually realize profits, so that taxes have to be paid in a timely fashion. They don't want people to be able to reinvest all of the effective profit and keep kicking the can into the future indefinitely.
I would have to question whether that is actually a good policy.
To begin with, it doesn't work unless you do it consistently, which they don't. Then businesses defer the taxes anyway, and you get huge market distortions because it majorly affects where investments go, e.g. we're then lacking for sufficient housing construction because it's heavily disfavored by the tax code over alternatives. But doing it consistently also doesn't work because many of the industries that have exemptions have them because they would implode without them. In particular, anything that experiences significant foreign competition would be screwed as soon as the other country does it the other way. It would also create bad incentives -- you'd have to get rid of the retirement deferral, damage everyone's retirement savings and create perverse incentives for immediate spending over saving/investing.
Moreover, the main reason we use an income tax instead of a consumption tax is in order to have a progressive rate structure. If you want to put a different effective rate on someone who spends $1M/year than someone to spends $10k/year, a merchant collecting the tax at the point of sale wouldn't know what rate to charge. (There are also other ways to achieve this, like combining a flat consumption tax with a UBI to achieve the desired effective rate curve, but that's a more systemic change.)
But if you allow business expenses to be deducted immediately, that's another path to having a consumption tax with a progressive effective rate curve. The rate can be higher for the people who spend more but you still have to pay the tax when you want to buy a yacht or a personal mansion. It also gives you a way out of the "they borrow money to avoid realizing capital gains" thing: Make the loan taxable income in the year it's taken out and a deduction in the year it's paid back, but if it's a business loan then you get a canceling deduction when you take it out and invest it (and the same for e.g. student loans), which makes it so you can't spend the money on personal consumption without paying the tax.
Meanwhile if you always reinvest 100% of profits then you don't pay tax until you stop, but that's what we want them to do. Build housing, hire people, invent things, donate to charity. These things are tax deductions on purpose.
> But if you allow business expenses to be deducted immediately, that's another path to having a consumption tax with a progressive effective rate curve
If I had written a longer comment, I was going to go in a similar direction. But I think it's a bit fallacious to be talking about that when it would make the tax code even more lopsided to heavily taxing wage earners. Like when you buy a car to be able to get to work, you can't even deduct that from your earnings even though it is a necessary expense for being able to earn that income. If that last part were changed - both with direct deduction of things like living expenses and also unrestricted traditional IRA contributions/withdrawals, then it would make sense to start talking in terms of moving towards a de facto consumption tax. But without doing that, it just seems like a rallying cry to further reduce taxes on the investment-owning classes.
(I'm using the word "deduct" in the business tax sense of direct subtraction, not the personal income tax sense where your expenses have to rise above the level that is otherwise a personal exemption. Being able to deduct so many specific expenses would of course end up placing a heavy bookkeeping burden on individuals, though)
The immediate effect of this is that one of my customers simply cranked up the amount they can spend on R&D this year by the amount of the tax savings. Which is substantial, because they were only planning to expense 20% of what they would pay us, and budget paying about 25% in income taxes on the rest.
So out of $100,000, that’s $17,600 more in spending, or a 17.6% increase. And they can expense that extra $17,600 too.
The recent (-ly undone) change went against decades of how things were, was crippling for medium size cashflow-positive startups, effectively increased taxes, etc. But it was really just a straightforward application of the general principles that apply to most everything else.