Comment by bunnie

That’s how it used to be until a special rule was introduced allowing only $15m (or maybe $20m) to be expensed instead of capitalized.

Doesn’t change much for the Avengers films which have production costs around $500m. Disney still has to capitalize 97% of the cost. $15m doesn’t cover a single star’s salary.

I think the fantasy is that software is mostly like inventing the transistor. Most software is CRUD apps that are more akin to a company’s profit-generating physical infrastructure.

Both cases are tax-deductible, what matters is not whether it's operational or capital, because for example building up inventory would make an operational expense a capital expense, but whether you then sell or rent/lease/use yourself/... what's maintained or repaired (then it's COGS) or you use it yourself (then it needs to be amortized)

The tax code has been optimized by the rich over the past century to extract profits out of industrial firms and that's where the difference comes from. $100 used to, say, produce a car or a cake that you then sell is immediately and fully deductible from tax because otherwise industrial companies just outright can't survive. Hell, you get to claim back/not pay any VAT and/or sales tax you paid for anything related to them. One way to see it is that these rules are designed to get money to the (existing, "old-money") rich, so when investors don't get money, the government doesn't get money.

If it's equipment for the company to use itself, then it has to be amortized, or more to the point, it means industrial companies can't do what Amazon did: use 100% of their free tax flow to grow "tax-free*" instead having to give that money to the government and investors (15-35% to government 65-85% to the rich, sorry, investors), so they can use it for their own ends.

I'm not judging one to be good or bad, just attempting to frame this correctly. I should perhaps point out, as a last point, that this is a massive difference between the US and European countries. In Europe, investors and governments try to have their cake and eat it too: there's tax due (amortization rules, or worse) on new company creation, on company growth, except of course, for the companies of the rich: you can grow financial capital in companies without paying a cent, money, shares, obligations, ..., just nothing else. That's yet another connection to the rich, to investors. New employees, new buildings, ... are double taxed, only money isn't. In Europe, there have only ever been exceptional cases where it was otherwise. In the US "tax-free" new company creation has been the norm for all of history except since Trump changed this rule.

* between quotes because they still have to pay income tax on any wages, sales tax on any purchases, ... it is very far from tax-free, but such companies wouldn't pay a dime to investors. If they did that would make it very hard to create new companies (which is what this regulation does). Amazon's great accomplishment is not AWS or anything like that but 2 financial accomplishments: first, avoid sales tax, second, avoid paying anything to investors. Whatever business Amazon is in is nothing but a tool for that financial engineering.

Is 3 years reasonable?

If we are making say, a point-of-sale software rolled out in a fast food franchise (let’s take Chick-fil-A since they have edge Kubernetes deployments), is it reasonable that we won’t add features to that software in 3 years? Perhaps.

What about bug fixes? Is that expense or should we expect time spent on bug fixes to also be depreciated in 3 years?

What about configuration? Does configuring that POS for new menu items count as software development, and therefore needs to be depreciated over the next 3 years?

Chick-fil-A has edge Kubernetes. Does the install and implementation itself counts as “R&D”? If we argue that configuration can be expensed, then would writing manifests be depreciable or not? What if we use “infrastucture as code” tools such as Chef?

What about say, excel sheets and macros? Or forget macros — just basic use of a spreadsheet. Some manager add in a summation to a column to compute totals. Very basic stuff. Is that software development? If it is, would that be depreciated over 3-years?

If we argue that this is normal use of excel and should not be depreciated, then why wouldn’t my normal use of a compiler and editor also count as normal use and should not be depreciated?

Whether it is 5 years or 3 years, the point is that unlike physical capital goods, software changes very fast, even if the underlying hardware wasn’t changing that fast. It is not always that expert designers build them — software can also be written in a way where end users modify them. We also use software to make software, and can rapidly change our tooling in a way that we cannot with physical capital equipment.

I see the merit in categorizing software as capital, from an economic theory point of view, but software also has its own dynamic that is distinct from physical capital equipment. A tax code that does not acknowledge that can bring more overall harms to the society.

Right, many software jobs are more like being a janitor or repairman. Or even more of a personal assistant or retail worker who is providing ephemeral service to another participant in the whole organization.

The usual thinking is that a business wants an asset’s upfront expense spread over the years that asset earns income to reduce taxable profit in future years. In other words, the IRS receives more upfront but less total in the end.

The problem is that R&D and software development behave more like recurring annual expenses, not upfront investments in something like a building or industrial equipment. Small VC-funded startups may not exist long enough to reap the long-term benefits of depreciation.

this change was a timebomb used for CBO engineering purposes: to make a particular budget appear to have a specific delayed deficit behavior.

The tax code strives to minimize distortions (except insofar as they are deliberately introduced). That is, it seeks to minimize how much the existence of the income tax changes people’s economic conduct.

To minimize distortion, the income tax must accurately compute “income”—the actual increase in wealth. Depreciation is part of that. To compute income, the net increase in wealth, you need to subtract costs from revenue. When you buy an asset, your wealth doesn’t immediately increase or decrease—it simply changes form (from cash to an asset). The actual cost is the depreciation on the asset, which occurs over time.

Say you buy a delivery vehicle for $50,000. In the first year, you make $100,000 in revenue and have $20,000 in operating expenses. What’s your income after one year—the actual change in wealth? You have $80,000 in cash after operating expenses, plus a vehicle that you can sell for maybe $40,000. So you have $100,000+$40,000 in cash and assets in minus $20,000+$50,000 in cash and assets out, for a $70,000 increase in wealth.

Calculated another way, you have $100,000 in revenue-$20,000 in operating expenses-$10,000 in depreciation = $70,000 in income. Now, over say 5 years, you’ll depreciate the full $50,000 cost, and the total dollar amount the IRS gets will be the same. But it will get more taxes in the first year, which due to the time value of money is worth more than getting the money in subsequent years.

IF they are a manager, then they are managing people. Are you paying appropriate salaries and benefits to your AI agents? Does HR have them in the system?

...no, not a manager.

Aircraft are also more productive and capable than people in specific activities, and useless wastes of money in others.

which applies for the part of the work producing a tangible asset; it was an option for software development before. Now all software is considered such an asset, which is a huge change and distinct from how other labor works

It all depends on where you apply the taxes.

If you tax inputs but not outputs, then a 100% tax rate increases the cost of goods and services but does not necessarily kill the business.

If you tax income, then a 100% tax rate kills all income. However, income taxes are usually progressively, so a 100% marginal tax rate places a cap on income, but income below that can exist.

If you tax profit, a 100% tax rate leads to shifting profits to reinvestment and salaries and benefits.

There are taxes on things which generally don't have this kind of effect on supply such as land, because land is an inelastic supply because it cannot be destroyed.

However if the tax is too high then it would cause land abandonment.