Comment by rayiner

> Normally, when you have expenses, you deduct them off your revenue to find your taxable profit. If you have $1 million in sales, and $900k in costs, you have $100k in profit, and the government taxes you on that profit.

This is an incomplete description. The ordinary rule depends on the nature of the expenditure. If your expense is for building an asset that generates recurring revenue—including paying people to build such an asset—then you cannot immediately deduct that expense. Instead, you must depreciate it over the lifetime of the asset.

The issue here is that software development is sometimes genuine R&D and other times more like building an income producing asset. E.g. if you spend money building infrastructure software to move bits from one place to another, that’s more like a factory building a conveyer belt than it is like investing in fundamental pharmaceutical research.