Tell HN: Help restore the tax deduction for software dev in the US (Section 174)

I think people are missing the actual process used by Finance teams relating to this issue. I am a former CFO and spent a fair amount of time with this issue in my last role. The firm had a significant amount of software engineering expense related to its core operating system that was the backbone of the company.

The FASB accounting rules drive the capitalization of software expenses, not the tax rules. The FASB definition of GAAP (Generally Accepted Accounting Principals) for US firms is very specific and requires significant detailed tracking to comply.

As noted in one of the other posts, many companies want to capitalize as much software engineering expense as possible as that leads to higher operating income and net income. Bonuses, option grants and stock prices tend to be tied to those metrics. The argument is that building a piece of software should be treated like purchasing it off the shelf. If a firm pays $1M to implement SAP, it does not have to expense it all in one year, but rather depreciates it over its “expected life.” Since “expected life” is difficult to define for every piece of software, there are default lifetimes (similar to saying motor vehicles default to a 5 year depreciation schedule).

Tax then generally follows the GAAP accounting except when the government intervenes to try and increase capital spending. Periodically the government will allow accelerated depreciation which increases operating expenses for tax purposes only which reduces current period cash taxes. Note total taxes do not change, only when they get paid.

The Section 174 under discussion here is simply the same idea then applied to software development in an effort to juice hiring.

For the people discussing whether the IRS is effectively tracking and enforcing this - the IRS really does not matter. A companies auditors enforce it. Without all of the necessary paperwork/digital audit trail, a firm in not permitted by the auditors to capitalize the expense. The same auditors have to sign off on the tax treatment as well. Finally, with respect to maintenance, the idea is meant to be similar to the treatment for machinery ( i.e. traditional capital expenditures). When a firm puts gas in the company truck or replaces tires or fixes a windshield, they do not capitalize those expenses. The idea is the expense do not fundamentally improve the item or meaningful extend the life beyond the initial expectations. Following that line of thought, maintenance releases are not thought to extend the life of the software while significant improvements to the software do and therefore can be capitalized.

DISCLAIMER - while I was a CFO, I was not a Certified Accountant. What I have described above is what the accountants and my audit firms described to me as I worked through this issue in preparing financial statements.

The Small Software Business Alliance has been actively working on this issue since day one.

https://ssballiance.org/about/engage/

And Michelle Hansen was an early organizer https://x.com/mjwhansen

If you work at all in energy, the Clean Energy Business Network is also proactive in fighting for change. A couple of years ago they put me touch with Ron Wyden's staff. The Democrats are almost universally opposed to what was added to Section 174.

https://www.cebn.org/media_resources/house-republicans-advan...

Fight this thing - it is terrible. Not just for software but any innovative business in the USA.

Thank you for helping to tackle this. The silence on this issue for the past few years from smaller software companies and their affiliates was surprising to me. The recent "time bomb" article was one of the few media pieces that actually took the time to describe it as anything other than a "tax cut for huge tech companies", which was refreshing.

My current favorite theory as to why there hasn't been more of an outcry is that many companies ignored the rule change (either out of ignorance or as an alternative to going out of business), and are forced to remain silent.

Thanks for working on this guys. The current tax code is fairly crazy: you could spend a few million in salaries, sell 200k of software in a year and possibly owe taxes on that. Even if the company would otherwise be shutting down.

The traditional capital asset treatment applied to software leaves a lot to be desired. Some software is a capital asset, but much just isn’t. Or at least should be considered to depreciate rapidly.

As a business owner, I've been adversely impacted by this. I still can't wrap my head around how this is legal or sustainable. If I buy $1MM of plant and equipment, I may not be able to expense it all in year 1, but I can relatively easily get a loan to finance the purchase of such--and manage my cashflows. The same is not for devs. I cannot easily get a loan for $1MM in dev salaries. In my own case, I don't need the loan to pay the salaries. I need the loan to pay the taxes for the portion of the salaries I cannot deduct as an expense. It's just insane.

I am writing my member of Congress right now.

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I'm writing to express my urgent concern regarding the negative impact of the 2022 Section 174 tax code changes on small businesses like mine. As owner of Rietta, Inc., a small cybersecurity firm, I still do much of the technical work. My wife and I have three young children under 6. My family and I have been directly negatively impacted by these changes from the 2017 act.

Previously, the tax code helped us afford open-source and experimental work that benefited customers. For example, modernizing applications to run on Docker improved testing and deployment. Our State government clients now benefit, but this was once experimental. Now we're largely back to just work-for-hire consulting, treated as cost of goods sold. I don't have the cash to pay for experimental software development only to then amortize it over five years. If I have $100k revenue and spend $100k, the current code allows only a $20k deduction. I owe taxes on the other $80k despite no cash or documented asset value. Experimental software doesn't work like that in this field.

I started this business 26 years ago. We provide important long-term custom programming and update work for private sector and State government clients ("STATE A" and "STATE B" judicial branches). Often, we work with code we didn't originally write.

As a professional computer scientist and business owner, I rely on my CPA for tax compliance. If I've erred in my example, that's on me. But I can tell you this amortization requirement particularly cripples small businesses like Rietta, Inc., where cash flow is critical, severely limiting the quality of services I can afford to provide. I support undoing this tax change.

For folks that don't know the background on this, here's a layperson summary:

- A business is usually taxed on its profits: you deduct your revenue from the cost of producing that revenue, and the delta is what you are taxed on.

- In software businesses, this usually means if you spend $1M in software development to develop a web app, and it makes $1.1M in that year, you'd get taxed on the $100K profits.

- However, a few years ago, the IRS stopped allowing the $1M to be deducted in the year it was incurred. Instead, the $1M was to be amortized over 5 years, so now the business can only count $200K as the deductible expense for that year. So now it's going to be taxed on "profits" of $900K. Assuming the tax rate is 20%, that means the business owes $180K in taxes, even though it has a total of $100K in the bank after the actual expenses were paid. So it would have to either borrow to pay taxes or raise venture capital, meaning that VC-funded companies would be advantaged over bootstrapped ones!

- The letter's goal is to bring things back to how they were (and how they are for all other businesses): let businesses deduct their actual expenses from their actual revenue, and tax that actual profit.

I am neither a lawyer nor an accountant, this is just my understanding of this issue.

Edit: Switched the tax rate to 20%. The logic is still the same.

This US tax code change directly impacted my small business in a very real way that was directly felt by my household. In the past, it was a big boon for us and helped me afford to pay for some open source work and experimental things that helped our customers in the long run. Now we are back to mostly doing work-for-hire consulting. Even the experimental work I am doing, I am just paying for it and writing it off as typical business expenses. I cannot afford to take the credit because that means no deduction for this year. I don't have the cash in this small business context.

What inspired working to reverse this now?

I'm all for it, just curious as the law has existed for 8 years and been in effect for 3. Seemingly little interest from anyone in the tech world to put lobbying behind reversing it until this point.

What changed?

Signed and called my representative and senators.

I ask simply "If I have $1m of revenue and $1m of expenses that is entirely software dev salaries, what do you think my profit is for that year? How much should I be taxed on that?"

https://www.house.gov/representatives/find-your-representati...

https://www.senate.gov/senators/senators-contact.htm

@dang (and others). If you want a groundswell of support have you consider have you considered reaching out to game devs and indie game devs? It seems like they'd all be negatively affected. They'd spread the word to players.

I seem to remember people being broadly in favor of this change at the time it was first proposed because it would elevade software development and create more long-term stability, but in a world where the primary focus is on quarterly funding rounded and acquisitions it obviously skews the numbers and thus the potential founded/early investor upside.

There are two possible motivations for the impending change. One is the argument that deducting 100% of developer labor isn't ideal because developers create IP whose value can compound as an asset, rather than the labor being 'consumed' in production as with manufacturing (where any long-term benefit after the initial sale goes to the consumer). The other is that it's a legislative stick designed to herd a powerful investor/donor lobby into supporting budget legislation in exchange for turning the favorable tax treatment faucet back on.

Signing a letter is fine, but will not have the same impact as phone calls made to your representatives.

https://5calls.org/why-calling-works/

You don't need to use that site - the point is that if you want to have the loudest voice, make some calls.

Signed. As a US-based developer, I fully support restoring the deductibility of software development expenses. This policy change quietly gutted countless startups and engineering teams—it’s long past time we fix it.

Appreciate YC and folks like @itsluther pushing this forward. This isn’t just a tax issue—it’s about keeping innovation and talent thriving in the US. Let’s get it done.

Luther et al, would you be willing to share some high level statistics about the submissions, such as how many signatures it gets?

Possibly dumb question... For a medium/large company, is this really a big deal? Their payroll is relatively stable year-over-year, so after a few years, it all evens out (very roughly). Or am I missing something?

IE, is this really an anti-competition law, designed to protect entrenched tech industry players and prevent up-starts from, well, starting?

Forgive me if this has already been answered in one of the other threads (I haven't been following them), but:

How does this work in other countries?

Japan has required amortization of capitalized software over five years for qualifying internal-use software since at least 2000. Correct me if I’m wrong, but I believe most other countries have similar rules.

Until 2022, U.S. companies had a real competitive advantage.

Software developer salaries in Japan are depressed—other roles too, but especially engineers. Without digging too deep, perhaps the previously unfavorable (now roughly equal) tax treatment of was perhaps a contributing factor.

Is HN/YC going to submit the google form submissions to the relevant committee members on the signers' behalf?

As I understood it, it makes a difference between R&D on one hand, and "maintenance" on the other hand. This has resulted in that my US corporate overlords are shifting maintenance work to the US (better for taxes) and doing greenfield development where I am in the EU.

This must be excellent for morale in the US office, but I'm not complaining.

I don't favor any tax breaks for big tech until they actually start paying meaningful taxes. There have been far too many giveaways. The country is running a massive deficit, and the current "solution" is to balloon the deficit and throw the poor under a bus.

The SSBA (Small Software Business Alliance) was set up by Michele Hansen -- co-founder of Geocodio, http://geocod.io (and the SSBA is now run by another person) for this reason -- to raise awareness in Washington DC of the issue with the Section 174 Capitalization changes and the efforts to repeal it.

https://ssballiance.org/

She has also spoken about it on podcasts: https://www.youtube.com/watch?app=desktop&v=oF-xsDd1A4o

This will stay because it’s a barrier to smaller companies and nothing significant for larger companies that make political donations

I wonder if something like this could also help the hardware industry, thus encouraging more manufacturing in the US.

What's particularly wild about the choice to tax software development in this way is that it assumes that code is always asset. For companies that are pre product market fit, it's often a liability!

By forcing software wages to be amortized over 5 years (15 for foreign devs), Section 174 has sapped cash flow, prompting layoffs and project cancellations totaling $3–4 M for some firms. Reinstating immediate expensing could unlock roughly $240 B in stuck deductions and supercharge R&D credits, materially bolstering hiring and keeping IP onshore. Has anyone modeled the macroeconomic gains of full expensing versus the budgetary trade-offs in the current $4.5 T tax proposal?

I am not sure I understand how amortizing these expenses benefits the government at all, as it is. I won't speak to the methods the government is using to value software, because others have made those points better than I could.

First, I think the impact on large businesses has diminished greatly since 2022 anyway, so restoring the tax deduction would essentially give those businesses a 1-year "bump" in their deductions (since they'd be able to expense the previous 4 years of left-over deductions all at once, plus the current year in full). As far as I can tell, the expense isn't tied to individual workers, just the combined salary expense. So hiring/firing shouldn't be largely impacted. And, any benefit the government would have gotten from large corporations has (again, since 2022) now expired.

For small businesses and start-ups, there is of course a much greater impact. And, ironically, I think the government is actually collecting less from small businesses in the long term, because the businesses that needed the full deduction to survive can't be collected from, having gone out of business.

So the government isn't collecting any more taxes today than it used to. It is probably collecting less, depending on how much revenue has shifted from small (and now failing) businesses to large ones. And we're basically encouraging all of those more entrepreneurial technologists among us to go work for larger corporations instead of striking out on their own.

I guess my question then, is, who does this tax code even benefit?

Edit: looks like it was just a victim of the TCJA, meant to make TCJA look less expensive. I don't think it had its intended effect.

Salaries aren't a one-time expense, so is the amortization rolling? Like, year 1, you pay me $200k and deduct $40k. In year 2, you pay me another $200k, do you get to deduct $40k for year 1's salary and $40k for year 2's salary?

I guess another way to ask is, does this mean that if you keep someone for 5 years and don't change my wages, is their yearly salary effectively fully deductible? If so, does that create incentives to try to keep employees longer-term in order to make them more cost-efficient?

Doesnt this new law inhibit rapid turnover tho? Since it takes 5 years to get the full deduction of an employee’s salary, there is an incentive to keep the employee around. OTOH, the souless bean counters who want quarterly (if not shorter) time horizons, will simply decrease starting salaries and use other methods to be net zero. If they do shaft the software engineers, then the converse is true-no employee should stay at a job more than a year because only the corp will benefit as the deduction grows

If the software written in a one year period of time for $100k is an asset then I, as a small business owner, can go to the local credit union and take out a loan on favorable terms with the that asset as collateral. No, of course not! They would laugh me out of the branch or the loan would be credit card interest rates. Software is demonstrably NOT AN ASSET like a major piece of equipment.

> but this issue has as close to a community consensus as HN gets

Curious how this is assessed of you could share?

the real question is why is r&d for startups in general amortized in the first place? doesn't this discourage startups pursuing risky hard science ventures?

Signed.

That said, here's my perspective on 174 (which should be reverted to full deduction on the year the expense is incurred).

You do not have to amortize 100% of your engineering costs. Not even close.

Here's the key:

  Development costs incurred to remove uncertainty are amortized.  
  All other costs are deductible during the tax year where they are incurred.

You are going to design a new robot arm.

In January, you spend $100K to "remove uncertainty". In rough strokes, this means discovering all the things you don't know and need to know for this robot arm to become a product. This amount will be amortized over five years under 174.

Now, with uncertainty removed, you spend an additional $1.1MM from January until December for engineering implementation. No uncertainty being removed. Just building a product. This is 100% deductible that tax year.

Analogy: You want to build a new brick wall with specific properties. You spend $100K to develop a new type of brick and $1.1MM to build the wall using that brick. The $100K is amortized, the $1.1MM is deductible in one shot.

BTW, at year 6 the amortization schedule reaches steady-state and you are amortizing the full $100K every year. In other words, the impact of 174, if treated intelligently, is the time value of money until steady state is reached for the engineering costs incurred to remove uncertainty.

https://www.law.cornell.edu/cfr/text/26/1.174-2

Doesn't this incentivize outsourcing or fractional work to some degree, because that would still be counted as regular expenses?

I think the most impactful thing you can say about Section 174 is that if it continues, I will be starting my startups outside the US. An employee should be taxed like an employee, not a panel truck. There is no guarantee the software developer will produce anything of great value, so this is a tax on unrealized gains.

I would not use section 174 as a reason not to startup but rather as a way to ensure you are running a lean ship. It’s very possible the rule change could be retroactive. Thats just my poker take on this bluff. It may not be retrospective or it may not happen at all. But indecision will kill some startups, the ones who don’t will be a year or three ahead.

I've heard that many of the big tech layoffs where actually just moved / converting them to contracting groups, so they lose the direct head count but kept the developer via the intermediary. Have others heard this too and could this have been a way to label contractors differently so they don't fall under this tax code?

As an international founder, I'd like the section 174 to be fully restored as it was before – not just for domestic R&D but offshore one as well, so we're not hit with 15 years deprecitation (it is as good as "infinity")

I also own section174.com and sec174.com

Would these help with visibility?

The tech community, correctly or incorrectly, is broadly seen as "anti-tax cuts", so - regardless of the actual merits of this particular tax cut - I'm not sure how well-received this campaign will be.

I'd brace for some rather heavy sarcasm on social media for anyone brave enough to tread those waters.

Wish someone in EU do similar signing / votes for lobbying EU for taxing US Tech companies or applying 15 years amortization for all US products as a revenge - sorry US but 15 years amortization for everyone outside US is just worldwide tariff for any other software producers, freelancers, etc.

>We therefore urge Congress to include a retroactive carve-out from Section 174’s amortization requirements

What if I'm in favor of restoring the previous deduction behavior, but not of doing it retroactively?

Note that this letter's requests DO NOT include voting against the reconciliation bill, just modifying it to add a carve-out to fix Section 174. While I agree that Section 174 desperately needs reform and is harmful to the tech industry, the bill as a whole must be opposed, not tweaked.

There are many, many things wrong with the "Big Beautiful Bill", too many to fix through piecemeal efforts like this. It must be resolutely opposed, not endorsed with minor changes.

My understanding is that the current "Big Beautiful Bill" reverses this

https://pro.bloombergtax.com/insights/federal-tax/rd-tax-cre... good explanation is here

This is where it's really important to use a bug tracker that can distinguish between bugs/maintenance and feature development. The former can be deducted but the latter has to be amortized.

Does Section 175 apply to other professions? For example, if I hire a full-time handyman for my office, does their salary count as a deductible cost?

Sorry if this sounds naive—I'm genuinely struggling to understand why the labor of software engineers would be treated differently from other kinds of work. It seems logical that either all labor costs should count as costs, or none should. If different types of jobs are treated differently, what's the reasoning behind that?

I built a lightweight grassroots advocacy tool for this.

It figures out who your reps are and sends them a pre-filled note based on what matters to you (you can edit/customize it before it sends). Includes a call script too if you're up for calling...

https://secure.legisletter.org/campaign/cmbpf5js80000l70d5fn...

Does not restoring the tax deduction for software dev in the US help solo founders who don't draw salary to compete with large businesses?

Happy to support this, desperately needs to be changed.

Does anyone know how AI coding fits in with S174? If a person’s “coding” part of the job is primarily running prompts and checking code outputs (quality control and minor reprompting) with the remainder of the time used for other activities, does this count as software engineering?

It seems like an inevitable outcome of this is elaborate system-gaming to mitigate how much employees fall under S174…

I support this effort. Government should tax economic gains, not revenue. A business with $1 million in revenue and $950,000 in expenses is far less profitable than a business with $1 million in revenue and $200,000 in expenses. If both were taxed on their $1 million revenue, the first business would be in a dire situation.

Nowadays, with more and more economic output coming from knowledge work (IP), this depreciation and amortization approach feels hopelessly out of date. I don't know what a good replacement is, but I know software and IP more generally shouldn't be treated at all like a material good.

Does anyone have any insights into what type of engineering services the IRS defines as SRE - meaning, does forward / customer facing integration // engineering meet the SRE classification threshold?

How does it work for outsourcing? Do you get full tax deduction if f you just pay offshore company to do dev?

I would support the OBBBA changes to Section 174 for life sciences companies but not for software development.

I've been working on a project called x174 to deal with this disaster. Think of it as a bugfix. Will reach out

Btw - this sort of project is what my startup does - we spin out autonomous projects - that could be companies - that provide social good and solve otherwise unsolvable problems.

i'm torn. on one hand, i simply do not care if business do not want to pay more in taxes. in fact, i gladly accept the premise that business should pay more in taxes.

in practice, the slippery slope argument is that this will entrench big-money players, which i don't support, because they'll be the only ones who can afford this. i also fear that it'll lead to an irresponsible adoption of "virtual coders" because it's cheaper than paying juniors.

kind of a rock and a hard place for me.

In general, anything that encourages companies to reinvest money into infrastructure, research, etc is a great idea. The trick is to make sure it actually does encourage research, infra, etc etc and doesn't just give a loophole for companies to take more profits and pay less tax.

It’s just a salary expense, where should software come into it?

Eg

1m salary costs 100k other costs 1.1m revenue 0 profit 0 tax

Anything else doesn’t make sense to me

Why payment to Software Engineers is not an expense for the current year? Is it because of the size of the expense? or some other rule that I am missing. Those employees are also paying taxes to those salaries as well. Isn't it? What is the catch? I'm confused.

honest question - why dont companies just hire software engineers under the guise of some other title like "researcher"? would that allow them to get around the 5 year depreciation? how is it even enforced?

What other employee roles pretty directly produce assets that often have value for the company across multiple tax years?

What kinds of workers who produce IP?

What kinds of workers who build equipment retained by the company (not quickly sold)?

And how are taxes for those employee expenses currently handled?

Wait, I have questions, you are selling software or services with the software you make, right?

The dev costs are costs related to the thing you are selling, so they are costs of goods no? So they should be deductable regardless, no?

This whole discussion has me thinking its unfair to force any capitalisation to be amortised over x years, whether its salaries or machinery. You spent the money, you're out of pocket, why not claim the expense.

Yes, but with strong exceptions against offshoring software development labor and H-1B abuse.

Both of these problems are rampant. I’ve seen entire shops with underpaid foreign workers and mass layoffs with workers replaced with offshore and nearshore firms.