Software Firms Across US Facing Massive Tax Bills That Threaten Tech Startup World Survival (cnbc.com) 77
Across the software development field, founders are experiencing an income tax season that has become an existential threat to their company's survival. Software startups say they were blindsided by shocking tax bills as a result of a change in law related to research and development costs, and if Congress does not provide a retroactive fix, business failures will spread throughout the industry. From a report: The root of the issue is the inability of lawmakers to extend a key tax provision that had bipartisan support at the end of last year that allows for full expensing of research and development costs under Section 174 of the tax code. That did not come out of nowhere, and was a big disappointment to major corporations that had lobbied for the measure. But for many small business owners who often wear multiple hats, don't have lobbying arms or relationships with big four CPA firms, the change to require R&D amortization over a period of five years first became known this spring when accountants showed them the massive tax bills they owed the government. As word has spread throughout the software community, some owners remain too afraid to look at the full tax cost as they file for tax extensions and accountants revise their returns.
The pain is being felt from the smallest software developers of a dozen or less employees to large venture-backed companies sitting on pre-2022 frothy valuations, with tax bills rising to a level where cash flow is being drained, forcing painful financial decisions. Startups need to take out loans or extend lines of credit at a time of tighter bank lending and higher rates, ask VCs for more money during the worst fundraising environment in over a decade, freeze hiring and contemplate layoffs -- if they have not started making them already within a sector leading the economy in job losses and running at a rate higher than the worst layoffs of the dotcom bubble. Many software firms will make it through this year, but if R&D full expensing treatment is not brought back, they say survival will become an issue. The software development field is the starkest example of the fallout from the R&D tax change because its biggest expense is software development talent. Developers don't come cheap, and until tax year 2022, these companies could fully expense those costs as R&D rather than having to amortize them over multiple years. Industry success relies on the contribution of software talent, but when that cost overwhelms cash flow and profits, it potentially makes the business model untenable.
The pain is being felt from the smallest software developers of a dozen or less employees to large venture-backed companies sitting on pre-2022 frothy valuations, with tax bills rising to a level where cash flow is being drained, forcing painful financial decisions. Startups need to take out loans or extend lines of credit at a time of tighter bank lending and higher rates, ask VCs for more money during the worst fundraising environment in over a decade, freeze hiring and contemplate layoffs -- if they have not started making them already within a sector leading the economy in job losses and running at a rate higher than the worst layoffs of the dotcom bubble. Many software firms will make it through this year, but if R&D full expensing treatment is not brought back, they say survival will become an issue. The software development field is the starkest example of the fallout from the R&D tax change because its biggest expense is software development talent. Developers don't come cheap, and until tax year 2022, these companies could fully expense those costs as R&D rather than having to amortize them over multiple years. Industry success relies on the contribution of software talent, but when that cost overwhelms cash flow and profits, it potentially makes the business model untenable.
Meh (Score:2)
Re: (Score:2, Troll)
No, its just SillyVally; saying hey everyone should pay more in taxes their fair share and all, but we're special so we need carve outs!
Kinda like every other industry, interest group. Which why when you see the CEO types and VC guys saying taxes should go up, the first thing anyone ought to do is say lets your filings and companies filings. What credits and deductions are YOU getting!
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I understand amortization rates, revenue recognition, just fine thank you very much.
This is a give away where by VCs get to dump money into startups who get to hire people, and delay paying taxes on salary expense. Which is a great because most start ups fail. However when they do the assets get sold off or transferred. Someone gets the software, the tax liability goes away because the law is jury-rigged to avoid incurring the liability in the actual year the activity took place, they are no longer a goin
Re: (Score:1)
Re:Meh (Score:5, Informative)
This reads like the sky is falling but is it REALLY that big of a deal?
Probably is. If I'm reading the article right, and while I'm married to an accountant I am not one, this could have a major effect on tax liability. After a few years it won't matter but there's a difficult transition period.
I think what is going on is this. Companies get taxed on profits, that is revenue minus costs. The issue is the definition of "cost". Some things, like CNC machines or data centers, are capital costs. If I buy a $1 billion data center, does that reduce my taxable income this year? One the one hand, sure, you paid for it this year. On the other hand, you're getting value from the data center for years and expensing the entire thing in one year makes profit and taxes very volatile. As a compromise, companies can amortize the cost of the data center over a number of years, say $200 million a year for five years. That means you get to claim a $200 million expense every year and reduce your taxable income by the same.
The issue here is how to account for developer salaries. Do you claim developer costs in one year or over time? I don't understand that part because the cost of developers is their salaries and I thought salaries are part of your expenses. Anyway, it sounds like instead of being able to expense software R&D in one year, you're going to have to amortize over several. Once we get to a steady state, this won't matter, it's just a smoothing function. During the transition, companies will pay a big slug of taxes now that they weren't prepared for.
Given that R&D is probably the single biggest expense for software firms, this could be an enormous change. It could easily be the difference between being profitable and losing money.
As a meta note, when people talk about how complex the tax code is, the complexity comes from defining income and costs. There are enormous amounts of detail in figuring out what is a cost and what is not. Amortization schedules are a major component of that argument and there's a lot of money riding on the answer.
Re:Meh (Score:4, Interesting)
My company used the R&D credits for a few years; it is a little more complicated than that. Basically you got to take the expense for the payroll plus a credit on tax liability for R&D portions of payroll. We had a $4-5 million payroll, and the tax credit was roughly $100k/40% of our tax liability. The program is heavily abused and should have been restructured a long time ago.
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My company used the R&D credits for a few years; it is a little more complicated than that. Basically you got to take the expense for the payroll plus a credit on tax liability for R&D portions of payroll. We had a $4-5 million payroll, and the tax credit was roughly $100k/40% of our tax liability. The program is heavily abused and should have been restructured a long time ago.
Thanks. What I don't get is whether a developer's salary is a regular expense versus an R&D expense. I thought all salaries were deductible from taxable income. Is that right or are some salaries different from others (e.g. sales versus development)?
I have no doubt people torture the definitions until they scream. That's what tax accountants do. When my spouse worked in public accounting, she tells me one of the first questions a partner asks a new client was how aggressive did they want to be on their
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The R&D credit is in addition to the labor expense; it is a tax *credit* so any taxable income is offset and there are machinations that VCs can do to apply that tax credit to themselves.
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Given that R&D is probably the single biggest expense for software firms
why? their biggest cost are salaries no doubt, but how much of that go really into r&d is murky waters, and my intuition would be that it is only a tiny fraction. some tech startups surely do, specially when flooded with capital, but i'd say most of them are most of the time they're crunching for the next milestone. generalist "software firms" usually don't do any r&d whatsoever. then again at again i guess it's easy to report the rewriting of an obsolete product as r&d.
Re: (Score:1)
Something that keeps the big fish getting bigger and kills all the little fish that might slow that down? Naw, can't see any deals here.
Re: No problem (Score:5, Insightful)
Re: No problem (Score:5, Insightful)
You dont want to pay taxes when you are starting up. You dont want to pay taxes after you are big because you can park the profit in tax havens. Normal flesh about blood citizens do not have such options. We pay tax without any ability to call this "earned income" a different name like "carried interest" change the tax. I can't call my salary "long term capital gains" and pay less tax, These corporations dodge tax all the tim.
You want to be part of the most rewarding society in the world, shut up and pay your dues.
Re: No problem (Score:5, Informative)
Unlike you, businesses are actually useful to the world at large.
We don't remember it because it isn't true.
Top 10 Countries with the Highest Personal Income Tax Rates - Trading Economics 2021:
Ivory Coast - 60%
Finland - 56.95%
Japan - 55.97%
Denmark - 55.90%
Austria - 55.00%
Sweden - 52.90%
Aruba - 52.00%
Belgium - 50.00% (tie)
Israel - 50.00% (tie)
Slovenia - 50.00% (tie)
Top 11 Countries with the Highest Corporate Taxes - Trading Economics 2021:
Puerto Rico - 37.5%
Suriname - 36.0%
Chad - 35.0% (tie)
Equatorial Guinea - 35.0% (tie)
Guinea - 35.0% (tie)
Iraq - 35.0% (tie)
Malta - 35.0% (tie)
Sudan - 35.0% (tie)
Zambia - 35.0% (tie)
Brazil - 34.0% (tie)
Venezuela - 34.0% (tie)
Source: https://worldpopulationreview.... [worldpopul...review.com] However, that is just one of many places to go get tax numbers. I did find where you got your thought from though. I am not going to name the person who made the claim that you bought into though.
As far as including health care, I agree that it should be included. Many other nations also include health care in their taxes. Further, by looking at it as a tax, we can then examine it and ask if we are getting the best health care for our money (spoiler, we are not).
Re: No problem (Score:4, Informative)
You're correct that this is really a "timing" change, but your characterization of what/why is incorrect. This has nothing to do with "losing money for decades" but is instead not being able to write off R&D costs incurred in a single year in that tax year, but rather having to spread it out. A poor, but simple example of the situation and what changed is:
Imagine you have ongoing R&D costs of $100k a year. Last year, you wrote off all $100k. But now the law is different, and you have to amortize (over 5 years, though 15 is possible for some activities). So, this year, you can only write off $20k ($100k / 5) of those expenses. Next year, $40k ($100k * 2 / 5), then $60k, then $80k, until finally you are back to writing off the full $100k ($100k * 5 / 5).
Obviously, real word situations will be more complex than this, but the gist is that this year your R&D tax deduction got cut by 80%. If you're a company that primarily does engineering, software development, etc (thus, their labor is likely the vast majority of what you can write off) then the next few years (and especially this year) would be pretty painful, though the amount of pain lessens over time. The increasing interest rates are just icing on the cake, because if you don't have sufficient reserves to pay and have to borrow, it will be at a cost that is also multiple times what it was last year.
Note: I neither advocate for against the change, I am simply stating what is.
Re:No problem (Score:4, Interesting)
Don't pillory them for using dodgy Irish loopholes, then turn around and pity them for having to pay taxes on their massive revenues.
I don't read this as software companies dodging taxes forever. Amortization of expenses is about the timing of when taxes are due, not how much tax you ultimately pay.
What this change is doing is moving expenses into the future resulting in taxes being due now. The tax code is chock-a-block full of this sort of thing. It can be dealt with but you have to plan for it because it's a relatively large amount of money compared to profits. Not giving companies time to adjust plans makes life really difficult for them and I can totally see it driving many to bankruptcy when they run out of cash.
World's smallest violin (Score:2)
My deepest condolences to your money.
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A good many of them are indeed buzzword factories who spin up investment money. But in general it's best if big tax changes are gradually applied if possible.
Re:World's smallest violin (Score:4, Insightful)
My deepest condolences to your money.
Way to show some compassion.
The issue I have is this was an abrupt change. If the change was made late last year, that gives companies absolutely no time to adjust. That's a dick move. It's kind of like your landlord telling you "you know how you've been paying rent at the end of every month? We just decided we want you to pay quarterly, in advance, starting right now." From a cash flow perspective it's no big deal, it's the same amount of rent. But lots of people just don't have that kind of cash on hand.
Re:World's smallest violin (Score:4, Interesting)
My deepest condolences to your money.
Way to show some compassion.
The issue I have is this was an abrupt change. If the change was made late last year, that gives companies absolutely no time to adjust. That's a dick move. It's kind of like your landlord telling you "you know how you've been paying rent at the end of every month? We just decided we want you to pay quarterly, in advance, starting right now." From a cash flow perspective it's no big deal, it's the same amount of rent. But lots of people just don't have that kind of cash on hand.
From the summary "inability of lawmakers to extend a key tax provision" to me that reads like a time limited tax break know well in advance. How am I supposed to reason from that to "an abrupt change" without assuming someone felt really entitled to another?
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From the summary "inability of lawmakers to extend a key tax provision" to me that reads like a time limited tax break know well in advance. How am I supposed to reason from that to "an abrupt change" without assuming someone felt really entitled to another?
I can't tell for sure from TFA either. Tax law is complicated. But that's what it sounds like to me: that employers used to be able to deduct software development costs in the year incurred and as of December, you have to amortize over a number of years. That increases your liability right now and decreases it later. The net effect is a sudden increase in taxes due right now.
Thinking about it, what's unfair is changing the tax law essentially after the fact. Companies spent money on salaries on the assumpti
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There's nothing in TFA that suggests to me what I believe to be your interpretation, that the law has changed. The law was a temporary relief with an end date and some just assumed that they would be given the same relief with a new law and that their hope now is a retroactive law rewarding those who ignored the limitations in the law and spent money they were supposed to pay in taxes after the known end date of the relief.
Pay your fair share (Score:5, Insightful)
I just paid 800k between Fed and State yesterday. I didn't cry and whine about it. I just got it done. It would have been 3x that if I hadn't prepared for this hit a year ago.
These guys are supposed to be executives and professionals with money to spend on accountants and a CFO and all that. No excuse for having a "surprise" tax.
Do your fucking jobs as executives and understand your cost structure. Or your company can die. Because if not for this tax then it would be something else you didn't think of.
Startup life is tough, not everyone is cut out for it and if a tax bill is enough to kill your startup you were going to die from something else anyway. Better that your company is dead and frees up VC, oxygen, and engineers for others who do have their shit together than you continue to zombie along dragging down the rest of the startup ecosystem with your dead weight.
Re: Pay your fair share (Score:2)
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Couldn't have said it better myself.
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Just curious, but how would you have prepared for this in a way that lessens your liability other than "slashing R&D spending?"
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That doesn't even seem like something you have to be an accountant to understand.
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I would guess something like "Saving some money specifically to cover these taxes". If you don't do a bunch of stock buybacks and you don't spend all your profit right away assuming it's just going to sit in your account, you can reasonably have saved something to cover unexpected (or expected and forgotten about) expenses as they come up.
That doesn't even seem like something you have to be an accountant to understand.
Yes, that's all nice from a "late stage capitalism blah blah blah" rhetorical perspective, but does not at all answer my question. You do not "reduce tax liability" by "saving extra money to prepare for it." The claim made was that $800k was paid in taxes, and, due to foresight which is the job of the CEO/CFO, the liability was reduced from ~$2.4M. $1.6M was not found in the couch cushions to pay for it, the bill was lowered. The question is "what mechanism did you use to accomplish this?"
Given that thi
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To decrease tax liability, the only realistic proposition is to earn less money to pay taxes on, or assume your R&D expenses are not deductible in the way you think they are and plan to pay higher taxes in advance. That's not "late stage capitalism" that's "paying attention as a business owner or manager".
This is not a problem where there's a magic bullet to let y
Re: (Score:2)
The issue is a change in how R&D expenses are amortized. "Entitlement?" "Living like a rockstar?" "Responsibility?" NONE of that has any bearing on the subject at all, this is all about how costs are structured.
Re: (Score:2, Insightful)
What it sounds like is a provision in the 2018 tax code overhaul expired and these companies just assumed they would get an extension.
I specifically remember when they passed the 2018 tax code overhaul that over the next 5-10 years certain "breaks" were going to expire. If I owned a company, I would have an accountant and this accountant surely would of told me, hey this tax break you've been enjoying is going to expire next year so you should plan accordingly.
These companies crying about this "abrupt" chan
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It requires understanding the differences between quarterly estimated payments, an end of tax year payment, and an annual tax liability, as well as an understanding that the statement "I just paid 800k between Fed and State yesterday.... [and] [i]t would have been 3x that if I hadn't prepared for this hit a year ago" was not referring to an entire year's tax liability -- a term
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So you're suggesting that his liability did not change at all, he merely adjusted his quarterly estimated payments? That seems at odds with his admonition to "understand your cost structure" and with the article's theme that it's the additional tax liability in 2022 that is the problem for companies. Your answer just resolves a short term cash crunch, it doesn't address the underlying problem that the R&D deduction for 2022 is 1/5th what it was in 2021 and will be again in 2026 when the last of 2022's
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Yes.
Not at all. If you don't understand that you have a tax liability that must be paid for during the year, let it pile up to be entirely due in April 2022, and suddenly discover that you don't have the cash r
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Fair enough.
While I wish the original poster would clarify his initial comment (I still have no difficulty reading that as he lowered his liability) I'll chalk this up to a reading comprehension fail on my part. Thanks for the link, by the way.
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My 800k is personal taxes not corporate. I stated that as a "wtf why can't these guys figure out their taxes with a whole company of professionals to deal with it when I'm just this one guy and I figured it out??" statement.
As far as how did I reduce my liability? I followed the tax code to the letter. There are legal ways to avoid taxes entirely or push them out into future years so you're paying 10-15% per year over many years instead of 53% up front.
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Wow, I can only aspire to having 800k in taxes. As a friend's dad used to say, "I love paying taxes. It means I made money."
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What country are you in? The United States doesn't have a wealth tax, we have an income tax (among many others).
Re: (Score:1)
Your net worth goes up by $100000 thats taxable my friend.
Inflation turns your so called income tax into a wealth tax, and its taken even if you choose not to play the protect against inflation game, just that it then happens in that inflationary way instead.
Buy the DOW to protect against inflation, and even if it doesnt even fully keep up with that inflation, well you still got a capital gain my friend. Still paying taxes on that wealth you accumulated long ago. T
Re:Pay your fair share (Score:4, Insightful)
The surprise was that many businesses, not unreasonably since there was bipartisan support, expected an extension. The Economist [economist.com] noted that relatively higher spending on R&D was a driver behind the US relatively good economic performance. How much of this increased R&D was due to the tax benefits remains to be seen.
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They gambled and lost. I have no sympathy or pity. Others who made smarter bets will get their engineers and VC attention. These others can go back to 9-6 jobs.
In other news, incompetence (Score:1)
The new model is a ponzu scheme. Be buzzword compliment. Get new funding to cover past investors. Get corrupt banks, like the Silicon Valley Bank, to back you and give you credibility
I am part of
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I can't tell whether you were going for a funny or it's a serious comment because of all the typos. I can see one or two slipping by, but this is actually impacting your message.
I think I could parse most of it to get the gist of it, and don't disagree, but some of it is escaping my grasp. Perhaps slow down a bit?
copatent, ponzu, compliment, activity, la his Latin, over night,
Seems fine (Score:2)
Tech startups have been more of a nuisance than a benefit. I won't miss them when they're gone.
CBNC is just a corporate mouthpiece (Score:2)
All CNBC does is say what corporations want. They want lower taxes. They want hype for their stock prices. Screw them,
Blindsides? Hardly (Score:2)
Only if they have been living under a rock. What actually happens is that they were planning to complain and get tons of taxpayer money all along. How repulsive.
"R&D" (Score:2, Flamebait)
Blah blah give me a government handout. (Score:2)
So... (Score:5, Insightful)
So, in other words, all these startups were relying on subsidies through the tax code.
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Worse. They are startups. They weren't planning for any future and are now SHOCKED that they survived long enough to pay this completely surprise and hither to for unforeseen tax. I mean these are businesses, businesses don't have cash laying around for unexpected expenses, they have shareholders to pay. /s
Re: (Score:2)
The only people dumber than you are the ones who modded you up to +5.
This is a targeted attack against small companies, not simply the end of an artificial subsidy. It was added to the tax code by the Trump administration.
If you had more brains than a LLM running on a C64, you'd ask who was really behind it, and what their motivations were. But it's easier to earn mod points by posting catchy "anticapitalist" cliches.
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The Trump administration, that's been out of office for over two years now...So these companies failed to plan for a tax break they should of known was going to expire. Instead, they were gambling (hoping) that congress would extend the tax break, but that didn't happen so they are stuck having to pay taxes, as per the law that's been in place since before Biden even took office.
Sounds like poor planning on their part. They assumed something and now look like asses.
Can't work up any sympathy over this (Score:3)
I know they say it's gonna hurt the small companies - but, reading between the lines, it seems like who it's likely gonna hurt is the founders of small companies who are hoping to take advantage of the current environment and get filthy rich selling their startups while they're still in the "theoretically losing money" stage.
It will probably change the dynamic between venture capitalists and startup wannabees. In fact, it may cost the VCs profit, which is what I'm guessing is really the "problem".
Actual Business Owner Cali (Score:3, Interesting)
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If a 5 - 15 percent R&D credit is the difference between boom and bust, your business sucks ass and was going down anyway.
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Thats a thing you know. Like Xerox Parc of yesteryear...
"What do they make?"
"Patents."
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That's specifically not the companies that are bitching here. The ones complaining in the article are silicon valley tech companies paying developers.
The kind of enterprise you're talking about, one that actually does R&D and isn't trying to do a tax grift, has no problem playing the long game. One has to have that mentality when chasing IP income.
Re: (Score:2)
After a quick "View Selection Source", I determined that the user's Enter key wasn't broken. Instead, the user's Comment Post Mode was set to "HTML Formatted", which does not convert newlines to <br> elements. Paragraph breaks were intended before "Whatever AI bots", "This is an attack", "However, who it does hurt", "So if your out there" [sic], and "Any small business tech company".
It's called "wages". (Score:2)
It's what you pay people to do "work". In this case the "work" is done by software developers. These are "employees" of your "company".
Under the tax code wages paid is an allowable expense that is deductible anyway. We're not talking about that going away.
What we are talking about is companies have devised a way to get *extra* deductions from their employees by calling their programming "R&D" and taking an additional yearly deduction for it. So it's being applied as a deduction on top of deductions.
Color me Confused (Score:2)
need to rewrite it (Score:2)
Creating fake "profit" on top of income taxes (Score:1)