Comment by freeone3000

Comment by freeone3000 8 days ago

Salaries are not generally considered “capital” - HR wording aside, you do not own your employees. It’s an immediate expense that may, or may not, produce something of value.

The IRS is using a theory of value where software (1) is a capital asset (okay, sure), (2) has a six-year deprecation schedule (uhhh why not 5 like everything else?), and (3) is valued at the exact cost of all inputs to it, including salaries (uh oh).

This is unlike how capital assets are valued for any other industry! And it has the effect that hiring a second lawyer is “cheaper” (for five years anyway) than hiring a second developer.

rectang 8 days ago

> (3) is valued at the exact cost of all inputs to it, including salaries (uh oh).

Thanks, that really gets at the heart of the issue.

Are any other business processes and elements — e.g. accounting mechanisms, print design, sales funnels — valued this way?

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cjbgkagh 8 days ago

There could be a distinction between creating new value (greenfield), and maintaining existing value (brownfield). Most of my work is green field and I do consider it to be a capital asset, it's sweat equity as I don't pay myself, but I can't deduct my non-salary either. Others estimate the most of the software work is 95% brownfield.
An other issue is competitiveness with other jurisdictions that don't have these tax laws, but even if that were normalized there are jurisdictions that are far lower tax in general regardless of the classification.

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phendrenad2 7 days ago

Imagine if secretaries' salaries were applied to the "capital asset" of the well-organized file cabinets they create. Or if janitors' salaries were applied to the "capital asset" of a clean workspace. This whole quagmire is far more insane than anyone is giving it credit for.

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freeone3000 7 days ago

Straight no. That’s why they had to put in line 3, “clarifying” the intent, because it’s not done anywhere else.

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sahila 8 days ago

> This is unlike how capital assets are valued for any other industry!

Is your dismay that it's unfair compared to other industries or that the policy doesn't reflect reality that software is a capital asset that has a lifetime longer than 6 years for many companies?

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demosthanos 8 days ago

It's that it doesn't reflect the reality that the value of software is not remotely correlated with the salaries that were spent building it. It could be valued much higher or much lower, spanning a huge range.
Using salaries as a proxy for value of the asset encourages only the safest shovelware bets, discouraging risk taking lest your asset be taxed at substantially higher than it's worth.
Avoiding that risk-adverse dynamic is why Section 174 was written the way it was since the 50s to encourage R&D, and it's paid off in spades.

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- thaumasiotes 8 days ago
  
  Well, a larger issue seems to be that this whole idea is premised on taxing an unrealized gain. If I create a painting, I don't owe any taxes on it until I sell it. If the world decides that I'm Picasso and my sneezing on a canvas means it's worth $50 million, it still won't be true that, after I sneeze without covering my mouth and some spittle lands on one of my blank canvases, a government official shows up to my house to force me to sell it so that I can pay the taxes I owe for creating it.
  
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  xlii 7 days ago
  
  IMO this is the best definition.
  Especially since even in semantics we call highly successful companies „unicorns”. Because it’s rare. Usually software is worthless, whatever quality.
  I failed my own software company twice. If such politic would be in effect I couldn’t even try once.
  
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  sethherr 7 days ago
  
  While I understand the drawbacks, the current situation - where the ultra-wealthy don’t pay taxes because all their wealth is in unrealized gain - is even worse
  
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freeone3000 7 days ago

Shorter is better here — it means you’re able to take the deduction up-front. The issue is that salaries should not be included as part of a capital asset, as this precludes any other deduction for the same salary. You don’t do this for accountants or lawyers, even at a software firm, but you now have to for your developers. It makes a particular role of employee more expensive!
It’s this absurdity I’m upset about. Six year vs five year is weird but meaningless. Internal software not being sold can be a capital asset, or at least I can point to examples of it (MSFT Hyper-V, ex). But the valuation process is both arbitrary in both directions, and discourages companies from hiring software developers as a policy effect.

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vessenes 8 days ago

Software just isn't a "capital asset" in the traditional sense. It might have a multi decade depreciation in real life, or it might be worthless shortly after writing. I mean, we live in a tax regime where a jet is 100% depreciable in the year its purchased. Srsly.

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[removed] 8 days ago

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marcosdumay 8 days ago

> you do not own your employees

Well, that framing is just wrong. The companies are paying taxes over what those employees created, not over the employees. Does the company own the software?

> The IRS is using a theory of value where...

Notice that all of your 3 points are exactly like any other kind of capital.

Most countries exclude salaries from the income calculation because it has good practical consequences (both on making accounting cheaper and on incentivizing companies to hire), not because of any theoretical problem.

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