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

"If we need immigrant labor, give them Green Cards instead of precarity."

This is counter-intuitive but absolutely the right answer. Giving immigrant employees full bargaining power will murder H1B mills. And no waiting periods in precarious limbo either. If you want an immigrant worker, they automatically get all bargaining power as an American and then you make your decision based on the market forces.

> Keep good paying jobs in the USA. If we need immigrant labor, give them Green Cards instead of precarity.

I'm all for giving more people a faster path to a green card if they want it.

But should a person really have to get permanent resident status to have a decent job here? If someone wants to work for a few years in the tech industry in the US but expects that they may want to go back to their home country (or another country), and if they and their employer pay the appropriate taxes, what's wrong with that? Similarly, if I as an American citizen wanted to work abroad for some period without having pre-decided to become a permanent resident ... why is that harmful?

Exactly this. If the aim is to bring back physical manufacturing, bring back software "manufacturing" as well.

> provided that employer pays local taxes in those countries for those roles.

This was phrased a bit confusingly, at least to me. Can you explain?

The whole point is leverage/precarity.

> Keep good paying jobs in the USA

Uh oh!

> give them Green Cards instead of precarity

Oh, right, yes! :D You had me for a minute.

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.

Most European countries don't have deductions for SW devs. Romania had it for a long time and removed it due to gov budget deficits. Some other CEE countries might still have them, but in general most socialist western European countries don't have them, which is why they don't have a tech industry.

I think that was the whole point of this change. "Too much tech, not enough coal mines" seems to be Trump's whole thing.

Exactly, this letter refers to the "reconciliation bill" without mentioning the better known (and more notorious) monikers "Big Beautiful Bill" or "One Big Ugly Bill".

There are so many horrific things in it, the bill must be fully opposed, not endorsed with minor changes.

When you buy farm equipment, you're getting something that (barring manufacturer defects, natural disasters, etc) is (nearly always at least) a long-term asset going to be providing a very predictable level of value over the next many years. Same with computers and things like that. With software development, the predictability is almost entirely non-existent for new and/or smaller software companies. I've personally worked on many projects/codebases that either never shipped or threw away huge parts of the code before shipping.

You're not really taking a financial gamble .

Also I think it's worth mentioning that, software engineers are people who are paid salaries, while farm equipment is not.

A more accurate comparison would be if instead of buying a finished tractor you hired a couple of handymen to come build you one from scratch. It may or may not work at all. It might end up costing you 10x or 20x or more what you would have paid for an off-the-shelf solution (so valuing it at the labor cost is a ridiculous thing to do. Who in the market is going to buy a custom-built tractor at 20x the market rate?)

There is an analogous set of rules for things like farm equipment. It is called accelerated depreciation and the government has used it for decades to increase incentives for purchasing capital equipment.

Because software development did not already fit in the definition of a capitalizable expense, the lawmakers modified the research and development rules to allow it.

presumably it's status quo bias

Unaffiliated or None, if you're gonna get in on it.

My personal opinion - make corporate taxes go to 0% and shift tax burden to wealth and billionaires. Also, lower taxes on w2 income.

Counterintuitive, but I think that would bring offshore corporate bank accounts bank on-shore and encourage hiring.

Also, heavily penalize stock buybacks when corp tax rate goes to 0%.

No, it sounds like they want signatures from only US taxpayers. Which makes sense.

It's much worse than that. The whole US tax system is severely regressive, with labor paying up to 50% incremental rate if your income is low enough, and return on capital paying as little as zero if you have enough of it.

It's possible to care about more than one thing. Who doesn't?

Can’t you just exercise early to avoid AMT?

In any other company, employee salaries are counted as an operating expense against revenue, much like raw materials, utility bills, etc.

If you sell $100 of goods and you have $100 of expenses, you have $0 net income and owe no taxes as a company- you've made no money!

Because software salaries are counted as research and development, and 174 forces you to amortize the expense over five years, you are now in a much harder position:

You sell $100 worth of software and have $100 of developer salaries. You haven't made any money, and you have $0 in your bank account. The government compels you to not expense more than $20 of those salaries, and taxes the remaining $80 of revenue. You are now bankrupt.

Because employee salaries are normally deductible as an expense for companies which generally pay taxes on something resembling profit rather than something resembling revenue. The issue is they are classifying software development as a research activity so the salary has to be amortized over five years with 20% of the expense applying in each of the five years.

When a company that earns $150k/yr and hires a software engineer who costs $100k/yr, that company should be able to deduct that salary in full.

The way it works today they must amortize it, taking only 20% per year. So they’d owe taxes on $130k of $150k, instead of the more rational $50k of $150k.

This effort is to restore rationality.

> What is a software dev expense

You might be more familiar with the term "salary and benefits".

> why should it be tax deductible?

Business expenses are tax deductible.

Disclaimer: I’m not an expert, just vaguely interested.

My understanding is that previously, software dev salaries would be counted as a business expense in the year they are paid. Now they are amortized over X years on the tax paperwork. As a result, a lot of software companies suddenly show relatively high income, and have a large increase in their tax burden. This is especially hard for startups that were “on the edge” of making it. If the salaries go back to being an expense in the year the salary is paid, the tax burden will decrease again, because apparent company income will be less.

pg used to do it semi-regularly, especially on internet freedom isssues (edit: and software patents, IIRC), so arguably this is getting back to HN's roots.

I remember he did an anti-SOPA thing on HN which involved some kind of banner at the top of the frontpage. It's probably saved at archive.org somewhere.

May I ask why?

It's expressly the intention of democracies to hear from constituents (and conversely: groups of constituents). That we happen to call that feedback loop "lobbying", and that the term carries some societal baggage from corporations using/abusing it is unfortunate, but shouldn't be an indictment of what is otherwise a democratic function.

Some group FOO with a shared ill should be able to convene about it and petition congress about it.

But who is advocating against this reform? Lobbying against stupidity should be generally acceptable.

Having to pay taxes earlier hurts liquidity. This is particularly problematic for small companies growing quickly, such as startups. For VC financed companies it means that they need to raise the money to pay the ta when they're still smaller, and thus have a lower valuation.

This is something that both impacts them and impacts you if you're a developer.

This tax treatment can increase the cost of a dev by 5-15% which leads to less hiring and a looser job market. Which will impact us even if we're not looking for work because most companies look at market rates when deciding raises.

Sure, YC is a business. But HN has so many people building software that there's also a community interest here—otherwise I wouldn't have suggested this thread.

pg used to do this kind of thing on HN from time to time, especially on internet freedom issues, so this is a bit of return-to-roots for the site. SOPA is the one I remember but there were others.

And how does this all get paid for ? It doesn't.

It massively increases the deficit and debt which in turn will have a raft of knock on consequences for the economy and the reputation of the US.

IMO, if you lobby for a thing which does not do harm to other people, you are not the bad guy. If you do, you are. Lobbying itself is not immoral.

The oil and gas industry, and the tobacco industry et al., lobbied (and lobby) for things which they know were (and are) doing harm. This isn't the case here, IMO.

Code is not an asset in all (I would even argue most) cases - proven by companies which open source the vast majority of their code and live from service contracts or certain addons to it, and basically pay developers to commit to open source software.

Often they buy market- or mindshare. There is no way in hell e.g. Akamai wouldn't have been able to bootstrap "Linode 2". I'm unable to see the secret sauce why OpenAI couldn't have created their own VS Code fork instead of buying Windsurf. But why do that if you can acquire their existent customers / market share? Additionally, the term "acquihire" didn't plop into existence with no precedent.

Being able to immediately get a full deductible for salary, which in many (western) countries is the norm for virtually all businesses, does not strike me as particularly immoral. It's a normal office job, developers do not create gold out of thin air.

Big tech isn't even the most affected by this change, they (often) have obscene margins - small software companies do not.

While your response is valid, the specific circumstances warrant closer consideration and potentially reconsideration.

One problem with the change being appealed is software engineers have become more expensive to carry and that has contributed to layoffs. Unfortunately there appears no logical reason software activities are taxed differently than other things you might hire a skilled worker for. When one goes looking for a logical and direct motivation for the change it’s tough to find. This special tax treatment is a one-off, and engineers earn high salaries - so is it possible this change was to fund some other tax cut? The optics aren’t good, at least.

Finally and more importantly, this change impacts risky ventures & startups most of all since larger tax bills may be incurred even on failed ventures. When you look where economic growth is coming from, the lion’s share is in tech. Higher costs and layoffs discourage experimentation and discourage the development of a broad range of capability in an organization by way of carrying large teams of engineers. It thus jeopardizes the current most promising sector in the US economy. Yes, tech is also having an “are we the baddies” moment - but layoffs and higher costs for startups are a separate issue that dominates here.

If you want even further proof just look at how this is activating the HN community. Comments are through the roof. This issue warrants more than a default response.

You might be amused to hear that the only exception for Section 174 is software developers working at oil and gas companies!

From the legislation:

“ Section 174(c)(2) provides that the required § 174 method does not apply to any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (including oil and gas).”

Is there an explanation how software developers creating software for oil and gas companies are different than for any other industry?

Or can we assume that the oil and gas industry managed to (yet again!) have its lobbyists where it mattered?

Oh yes it's still helpful - that date must be from an earlier version of the letter. We'll fix it!

(And thanks— I can't believe I missed that!)

wow, i'm going to copy/paste my response to someone upthread about how it's a bad idea for HN to get involved in political things like this.

"The main issue to me is now every political issue that isn't raised here makes HN complicit in its success/failure. Once HN starts down this path it can only continue and accelerate or else face accusations of support/opposition through silence."

https://hn.algolia.com/?dateRange=all&page=0&prefix=true&que...

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I would strongly suspect you over-estimate the number of people on HN who voted for Trump.

Also, generally speaking, calling people "dummies" isn't usually an effective way to persuade them to examine your arguments rationally/logically.

Probably hoping for a bribe. Trump has made at least two clear mechanisms for that -- purchasing meal tickets or Trump-coin.

What do you propose instead?

maybe we can do more than one thing at a time

What's wrong with H-1B?

Is H1B a tax issue?

I posted a short explanation here [0] on the thread the other day, but the even shorter explanation is that "software development shouldn't be taxed" is not an accurate description of what repealing the change to Section 174 would do. This discussion has nothing to do with what work gets taxed (all profit is taxed no matter the industry) and everything to do with what counts as "profit".

The Section 174 changes altered the accounting method that software development companies must use for calculating their profit for tax purposes. Starting in 2022 software dev must be treated not as an expense but as an investment in an asset, such that you're now required to amortize the expense over 5 years instead of deducting it from your revenue the year you spent the money.

The gigantic problem with this change is that without the ability to expense software development expenses as expenses, a new software startup can very easily be considered profitable in their first year because only 10% of their software development-related expenses get to be counted as expenses.

And note that, contrary to what you say, most white-collar work is not treated this way, and software is further singled out from other R&D-type work in that it is the only type of work that is explicitly called out in the section as being required to be marked as R&D. So we're not asking for software to be treated specially, we're asking why it suddenly changed in 2022 to be treated specially in an extremely negative way.

[0] https://news.ycombinator.com/item?id=44204565

> other white collar work

Some examples of white collar work that builds long-lived assets but where the work isn't required to be amortized over long periods of time:

- marketing collateral development, unless it is done by engineers

- development of standard legal documents like contracts

- development of HR policy

- development of financial processes & associated reporting, unless done by engineers

- art development (e.g. for packaging and other collateral)

- building customer lists, unless it is done through software by engineers

- developing service offerings (e.g. Costco membership)

Software is not fundamentally different than any of these other white-collar assets that are used to build companies, except that it typically requires more ongoing maintenance.

Almost all work is tax deductible. This isn't just for software developers and employees still pay taxes. The issue is software development is being classified as research which is one of the few areas where salaries aren't directly deductible but instead need to be deducted in pieces over five years.

That's not the issue. What people are asking for is for software to be treated like every other profession.

That's how it should be, and that's also how it actually was until relatively recently. A new law went into effect that treats software differently. I believe Congress was looking for an easy way to generate extra tax revenue by tapping into the wealth of rich tech giants. Whatever the intent, the workers ended up being the ones who suffer because now hiring people has worse tax consequences than it used to.

So all that people want is to undo that, to take away that special rule that applies only to software, and put it back like it was.

The UK has (had) a tax credit for "Research and Development", intended to be a tax break for genuine R&D, but of course everyone lumped all software development into.

The UK eventually put out guidance that business as usual development isn't really "research and development", but afaik there hasn't been a serious crackdown on the practice.

It seems kind of absurd to pretend that most work that developers do is pioneering the profession.

R&D tax breaks make sense, both to encourage genuine research but also to prevent brain-drain.

Not taxing (or tax credits / refunds ) for line-of-business software isn't really excusable.

It's bad that the law in the US has been changed in a cliff-edge way though.

This isn't changing if it is taxed or not. It is merely about if the tax should be paid in the year the work was done, or spread over the 5 years after the work was done.

https://news.ycombinator.com/item?id=44204565

Software is being singled out

It's not a matter of whether it's taxed. It's a matter of how the costs are expensed. If I invest a $1m in software development now, I'm not making any profit yet. I may not make a profit. It's a question over whether I need to pay taxes on potential future profit now.

The proposal isn’t that it not be taxed. Rather that software dev be taxed like an expense, which is easy to track and rationalize, as compared to a capital improvement which is much harder to do so.

The exact law is a bit more nuanced than a "tax deduction for software engineering", but I'm guessing OP put it that way because it makes for a snappier title on a SWE heavy forum like this one. I would check one of the threads that OP posted for more specific information on how the tax code changed a few years ago.

I don't think you understand the post.

Are you suggesting that we eliminate all tax deductions for businesses? Or that we eliminate corporate taxes entirely?