Comment by zacharycohn 7 days ago
Just to drive the point home very explicitly:
That means, in the given example above, you are able to deduct $180k that first year instead of $900k.
That gives you a profit, from a tax perspective, of $820k.
But you only have $100k of actual dollars.
Good luck paying your taxes!
Only if you assume that the 900k in costs is exclusively the salary of 5 engineers. Realistically you will employ other people and have overhead costs like rent, etc., and I assume that other non-salary costs (health insurance, etc.) aren't included (b/c I assume health insurance, like rent, is a company-wide overhead cost and that companies aren't expected to carve out what portion of that is going to the software folks but what do I know?).
But if we more realistically assume it's 3 software folks at 200k, then the taxable profit is 580k (100 profit + 3*(200k salary - 40k ammortized))
1M eng salaries, 5m revenue, 4M other costs.
Today I am cash flow neutral at 5m revenue, but with this I'm paying taxes on 800k "profits", which don't exist anywhere but on paper. But I have to pay the taxes in real dollars.
This is going to sound silly but you paid 800k in profits, but now have 4 years of banked costs you can use to _reduce_ your profit margin.
So you pay taxes on 800k profits, but then each subsequent year you reduce you profit by 200k, even though you don't have 200k leaving the door.
If 1M eng salaries was your stable state, then after several years you're... going to have 1M in costs to subtract from your profit! The stable state is the same!
I'm not going to argue about the capex change being "good", I do think it's worth highlighting that for large enough companies you're now looking at a different flavor of tax flow. Amortizing your costs over 5-10 years is something people like doing for other costs after all.
A few large companies with big cash stockpiles and profit can eat this the first couple years, not so for startups and companies with thin margins.
This is why it's bad. Large incumbents can manage this and then in steady state it's the same.
But for any new entrants that need to rapidly grow their engineering teams, it's a huge disadvantage.
We don't need more things in the tax code that protect large incumbents at the expense of new entrants.
It becomes a cashflow issue for startups. While the stable state is the same (not really the same, because of how companies evolve etc), cashflow issues in early days means $$$ from the VC money that I could've used to grow the company, now goes towards taxes for 5 years. That could be make or break for small companies.
If you have a pile of cash that you have no apparent use for, or can live without, yes, it makes no difference.
The point is that if your revenue covers their salaries/contract costs, you will owe tax on 80% of their salary in the first year.
> That gives you a profit, from a tax perspective, of $820k.
> But you only have $100k of actual dollars.
> Good luck paying your taxes!
a lot of people here are conflating "taxable income" and "the amount owed in taxes" for some reason.
if I earn $100/year, and I can deduct $50 of that, my tax bill is not $50. It is some percentage of $50, usually a low number for businesses. (Amazon regularly pays $0/year in taxes.)
depending on the tax rates and the locality of that business, the amount owed on tax is going to be anywhere from $0 to $50, and it is going to heavily favor the low end of that spectrum. I don't think any business pays 100% of its taxable income in taxes unless they have been heavily fined.
$100k is likely far more than enough to pay the tax on $820k of taxable income for a business. It could be enough to pay that tax bill 10 times over, it's hard to say.
my point is that taxable income != tax owed.
For Amazon, this just costs two years on the taxes. They'll still be able to claim depreciation of this year's dev work for the next four, though.
> if I earn $100/year, and I can deduct $50 of that, my tax bill is not $50. It is some percentage of $50, usually a low number for businesses. (Amazon regularly pays $0/year in taxes.)
It’s not that low. Federal corporate tax rate is 21%. So you would be on the hook for $10 in taxes.
My taxes (flow through LLC) are significantly higher than my income for 2024 (like hundreds of k).
This seems like the biggest reason behind the mass layoffs, not the end of ZIRP.