Comment by 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?
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.
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.
This valuation of software for business taxes. If a business never sells its software, the software may very well have no value.
> the current situation - where the ultra-wealthy don’t pay taxes because all their wealth is in unrealized gain
This is neither the current situation nor even a theoretical possibility.
Sorry, "don't pay taxes" was hyperbole - what I meant was have a lower tax rate than the rest of us.
Isn't that the whole point of all sorts of tax strategies, for instance Buy, Borrow, Die?
https://www.forbes.com/sites/davidrae/2022/07/14/how-the-ric...
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.
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.
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.