Comment by hintymad

Comment by hintymad 8 days ago

18 replies

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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?

jncfhnb 8 days ago

If you hire someone to build you an office or office furniture, you are creating a long lived asset so it is capitalized

If you hire someone to clean your office, you are not creating an asset so it is expensed

Building software is generally creating a long lived asset

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  • MrDarcy 8 days ago

    This comment is misleading and misses the point.

    When you buy an office chair you capitalize the asset on your books.

    The chair manufacturer in turn pays wages to a person to construct the chair. Those wages are not capitalized, the manufacturer deducts them fully when they are incurred.

    The main issue is that “software manufacturers” must now depreciate those same wages over 5 years. Which is unique and does not pass a basic common sense sniff test.

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    • jncfhnb 6 days ago

      That is not correct.

      The chair manufacturer capitalizes the costs of factory wages into inventory.

      They are expenses as cost of goods sold when the inventory is sold.

      Which makes sense because they have realized 100% of the value of those expenses when it is sold.

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  • hintymad 8 days ago

    Thanks. Capitalized expense means the expense can be amortized over years? If so, the short-term profit can be higher than expensed cost? That sounds bad in this context as more profit means more tax. However, the OP seems to argue that capitalized expense is good for tech companies.

    In the meantime, the parent comment says "Depreciating means that if you pay an engineer $200k in a year, in tax-world you only had $40k of real expense that year, even though you paid them $200k." and then "So the effect is that it makes engineers much more expensive". This seems to also imply that capitalized expense is worse for tech companies?

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    • jncfhnb 6 days ago

      Capitalized means it’s treated as an investment into an asset rather than just a cost of doing business. The reason we do this is because we want revenue and expenses to reasonably match the time period where their value comes into play.

      For example, if you build 100 widgets for $1M this year, the labor and materials cost of those widgets are capitalized into inventory. Next year you sell them all for $2M.

      Capitalization rules would say you had no profit or loss in the first year, and $1M profit in the second year because the cost of the inventory gets expensed when the inventory is sold.

      Fixed assets like buildings, machinery, and now software have pre defined lifetimes that the expense is realized over. In the case of software, it’s 5 years.

      Tech companies don’t like this because they want to front load recognition of expenses to pay less taxes today.

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    • PaulDavisThe1st 8 days ago

      > Capitalized expense means the expense can be amortized over years?

      In the case of Sec 174, not can but must.

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PaulDavisThe1st 8 days ago

> I'm genuinely struggling to understand why the labor of software engineers would be treated differently from other kinds of work

Trump wanted a large tax cut. To make the numbers look better (notably the CBO reporting), Congress looked for ways to increase revenues. For whatever reason, they settled on software development, and devised Sec 174 to generate tax on 80% of s/w developer salaries in the first year it went into effect.

Why s/w development? I have seen no indication of the reasons for this; I suspect it was perceived as a "rich field" and thus suitable for this sort of treatment. Also, somewhat more fairly, s/w developers do tend to produce semi-durable assets that in some ways are like capital goods.

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  • nikkwong 7 days ago

    Machinists also produce semi-durable assets. Should we depreciate the output of their labor, too? Like others in the thread, I view this as an assault on blue states or maybe to soften my vindictive tone, as an assault on those who are not his core constituents.

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    • projektfu 7 days ago

      If the machinist is doing r&d, it's essentially the same. Suppose you pay a machinist to build parts for a new machine. This cost would be capitalized. But if you pay them to repair a machine, it's expensed.

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    • andrewlgood 7 days ago

      IF the machinists are doing R&D, they get the same treatment as software engineers.

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      • PaulDavisThe1st 7 days ago

        Nope.

        For machinists, it is up to the employer whether to treat their work as R&D or a regular expense.

        After Sec 174, for s/w developers, there is no choice.

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  • rkagerer 7 days ago

    I think this also favours large, established tech companies that are less sensitive to the costs being smeared across a few years than would most capital-hungry startups.

    I wonder if some influential ones pushed for the change figuring it would carve their moat a little deeper.

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  • fuzztester 7 days ago

    >Trump wanted a large tax cut. To make the numbers look better (notably the CBO reporting), Congress looked for ways to increase revenues.

    so is congress the slave of trump? not clear what is going on here. are the legislature and executive branches not independent?

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    • PaulDavisThe1st 7 days ago

      > are the legislature and executive branches not independent?

      I am not sure how this can be a serious question right now, in 2025.

      However, in 2017 the capitulation of power and authority by Congress was less obvious. What was still true was that the Republicans who controlled Congress and the President all wanted a large tax cut for higher income Americans, and were thus aligned on the goal. Since the President doesn't actually write legislation, this alignment was all that was needed to push the bill through.

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      • fuzztester 7 days ago

        >I am not sure how this can be a serious question right now, in 2025.

        it was a serious question.

        I did know that the republicans are in the majority in both the lower and upper houses, after the recent US election.

        but was not sure if that was the only factor involved.

        I am not from the US. just an interested observer.

        hence my question.

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