This is how it worked in previous years. Previously, you could elect to take the R&E expenses either entirely in a single year or amortized over the longer period. This year the change is:
1) You can no longer take it all in the single year, and
2) All software development is now R&E automatically, no exceptions.
Note that this is separate from the R&E tax credit that you can also claim, that's a different deal in addition to this.
“There's pretty widespread bipartisan distaste for that change and there have been multiple attempts to extend the deadline or amend the change, but they haven't picked up steam yet. Still possible it will be changed retroactively. The saving grace is that a lot of the expenses they are talking about you needing to amortize would qualify for the R&D credits you'll be getting. So there's often a substantial offset between the two.”
It really says a lot about the system when the people who pass laws bipartisanly are not happy about what they just passed. It's almost like they could have, I dunno, read and thought about what they were passing. Just imagine all the other BS slipping through.
The 2017 TCJA was passed on pure party line votes (in the House, all Democrats and 12 Republicans opposed the bill), so it definitely wasn't bipartisan. More generally, big tax cut (the top 0.1% saw about $250K in lower taxes under the TCJA) and big spending bills jam in all sorts of random shenanigans to try and prove themselves revenue neutral, even though they almost never work out as described. One favored tactic, as we see here, is to kick big cans down the road and let a future Congress work out the problems. They (and this is one of those cases where both parties are equally complicit) know what they're doing, they just don't want to be honest about the fiscal implications of what they're doing.
Fixing these tax issues, on the other hand, would have had to be attached to the NDAA or omni last session, both of which require bipartisan support; big bipartisan bills are so contentious that it's hard to get unrelated deals through, especially since everything goes down to the wire these days. In this case, a deal that would have expanded child tax credits in exchange for a bunch of corporate and high net-worth household goodies, including section 174 fixes, was on the table, but couldn't get through negotiations. (I'll note that, while the Republicans created the section 174 mess in the first place, they are now trying to repeal that and other TCJA changes, but aren't willing to add lower-income individual tax cuts into the mix, which is what stalled things in the last Congress.)
It's a hell of a mess, and things are made crazier by the weird power dynamics in the current House leadership, where a small group of fiscal bomb-throwers have outsized power in the Republican party (and it's not clear that they care about tax minutiae, at least not while they're playing with a federal default on the national debt), but the inter-party margins are so slim that you could potentially cobble together a bipartisan majority on the edges. No one seems to like the section 174 situation, so it's at least theoretically possible that you could get a small coalition together to cut a deal at the last minute -- but I'm not sure we can count on that.
The fact that there are unintended consequences in legislation does not mean no one read, or thought about it. These are thousands of Congressional staffers who read and study legislation, along with many more outside of Congress, but there are missed requirements, implementation bugs, and other problems in edge cases in legislation just like everything else, because the world is complex.
I am a formal congressional staffer in both the House and the Senate and virtually no one reads any given bill or even cares much about what is in it other than memorizing the talking points about it. Bills are almost completely written by lobbyists and a bunch of 23 year old staffers are not knowledgeable enough to have any valid comprehension or input.
The job of a congressional staffer is to ensure reelection so we spend almost our time getting the member on the most powerful committees (for more campaign contributions) and getting on tv (for free media).
Committees do spend more time on the content of bills but each member usually only has one staffer for multiple committees and they are still told how to vote by the party.
This is true. I was a congressional staffer long ago, and before that I was an intern at the Legislative Digest, an official publication that summarizes legislation for the members of Congress. These summaries were often the only thing that members would read before they voted. If a member was really ambitious, he or she might read the committee report as well. But that's it.
I wasn't 23 years old when I was writing these summaries. I was 21. There was no one in the office over 30, and no lawyers.
There are 435 House members and 100 Senators. On any given bill they are not all going to have a role in shaping and negotiating it, and their staff will not have access to bill language as that is happening. Or perhaps even right up to the vote.
That does not imply that no one reads any bills. As a change to the tax code, the Section 174 language we’re all talking about was read by at minimum the (very capable) professional staff of the Joint Committee on Taxation and the CBO, for purposes of scoring the revenue impact of the bill.
The impacts of the Section 174 changes are in fact intentional, done to change said scoring. Whether or not they would be popular was not the point; all changes to the tax code are unpopular to someone. The point was to find a configuration of changes that could pass both houses at that time and get signed. That usually means a few big-ticket changes, and then lots of monkeying around with other things (like R&D) to offset those.
This is one reason why I think there should be a cap on the total volume of legislation (measured in pages). If you want to pass a new law, you need to repeal an old, obsolete one.
Nobody should be subject to a corpus of rules too volumous for them to read and understand.
It's absolutely unforgivable that legislators don't even read the laws they pass.
A version of this system was apparently implemented in Iceland - under the traditional law, once a year a designated person had to recite the entire law, and whatever he forgot to include was no longer the law.
There's a difference between unintended consequences from something like an n-order affect on the system due to complexity vs a clearly written piece and uncomplex rule in the law. The latter suggests that due diligence was not performed. Of these thousands of staffers, it seems nobody bothered to read and understand it. We can look to history on how bills have been passed rapidly after introduction, without enough time to read and think about them. This makes me feel like the people in power don't really pay that much attention and don't care for careful deliberation.
Sure, bugs happen. But in a system that holds immense power over people's lives, we should be striving for the level of bugs to be similar to life critical safety systems and not some glitchy business website.
Just because they're not happy with it doesn't mean they had a better alternative.
It's easy to get a small change in when there's general agreement. But sometimes it's like immigration law --- few like the status quo, but there's no consensus on what direction to change it.
If it's the old status quo was that much better, it should be easy to get that one thing changed back. Legislation can be quick when enough people want it to be, and there's no mandatory business pending.
Can be. But small business don’t have lobbyist like the big businesses that likely dreamed this up and pushed it through to begin. They’re building moats, it’s what they do.
"It really says a lot about the system when the people who write code are not happy with the bugs they just wrote. It's almost like they could have, I dunno, read and thought about what they were writing. Just imagine all the other BS slipping through."
Just because you write, read, and understand anything doesn't mean mistakes don't get through. Should we never release any code unless it's completely bug free?
This is what I've also heard from our CPA (that no one likes this and it shouldn't be happening), but since it's here and taxes are due in April, here we are.
You asked for advice and are ignoring it. ~~Don’t take the R&D credit.~~ Don't use Section 174. Problem solved.
EDIT:
Let me elaborate: unless you are in the “start up phase” incurring startup costs, you are not required to follow section 174. I suspect the confusion is between how we use “startup” colloquially vs how the IRC uses “startup costs”. Once your business is up and running you are “carrying on” business, even if you aren't yet making a profit. You are only required to follow section 174 if you are choosing to classify your expenses as “startup costs” which in my experience would be very odd after the first year and even after the business is founded.
Not an accountant of course, but nobody is going to tell me to pay taxes on revenue before expenses. And writing software does not automatically mean you are doing R&D. Not even in spirit. If you’re writing a script that speeds up part of your business and makes you more money, thats not “R&E”. It’s just work.
EDIT2:
> In the meantime, the Section 174 amendment should not cause established taxpayers to adjust their accounting methods when applying Section 162. Existing taxpayers incurring R&E costs as part of their ordinary and necessary expenses while carrying on a trade or business can continue to make deductions with confidence that legislative and judicial history support that practice.
Again, I agree with everything you are saying in your edit. It's just not what my CPA is saying the actual tax code says anymore.
Honestly my main reason for starting this discussion was a) to see if anyone else's professional advice (e.g. from a CPA) was different, and b) to hopefully drum up awareness so maybe in some roundabout fashion this gets changed.
That's all fair. You're pretty persistently knocking down alternative interpretations as "not what my CPA said", though. Maybe just let them be and let people draw their own conclusions since this is a discussion. Idk. People are trying to help out and you just keep saying "not what my CPA said". Obviously we should be having this discussion with your CPA, then (:
If anyone knows of a CPA who thinks this isn't how it works now, please let me know their contact info, as I would love to pay them to advise me on this and get a third opinion.
You may want to consider consulting with an actual tax lawyer, not just a CPA. CPAs are not necessarily experts on all the implications of recent changes to tax law.
I don’t think your interpretation is correct. All R&E costs are now required to be capitalized. “Ordinary R&E” related to 162 doesn’t exist. If it’s any sort of R&E related expense, it’s technically supposed to be capitalized.
I’m an attorney who works with companies doing software dev everyday, and this is not only a really bad tax policy, but will be detrimental to US innovation. There are a few things you can do, as many others pointed out, like claiming the R&D credit (section 41), extending your tax return, and making sure you have sources of financing if you a owe a big tax bill.
1) You can no longer take it all in the single year, and 2) All software development is now R&E automatically, no exceptions.
Note that this is separate from the R&E tax credit that you can also claim, that's a different deal in addition to this.