What do you think of Section 174? And how does it affect offshoring in India?
"Have you heard of a change in Section 174 of the US tax law that kicked in a few years ago? This change is making bootstrapped software businesses completely unsustainable.
Basically, all costs related to R&D cannot be expensed, including labor for software development. These costs have to be capitalized and amortized over 5 years – or 15 if labor is done outside of the US. I have no other way to put it: this change is completely insane. Everyone I talk to says the same.
I am curious if this has come up in your discussions with other bootstrapped companies?"
"Take an imaginary bootstrapped software business called “Acme Corp.” This company generates $1,000,000 of revenue per year running a SaaS service. It employs five engineers, and pays each $200,000. That is $1,000,000 paid in labor costs. For simplicity, we omit other costs like servers and hosting, even though those costs can also fall under the new R&D rules, and have to be amortized. So, how much taxable profit does this company make?
In 2021, the answer would be zero profit. In 2022, the answer was $900,000 in profits(!!) This is because from 2022, software engineer labor costs must be amortized over five years.
Firing of non-US software engineers employed by US companies. The tax change is very hostile to software developers employed abroad: their wages need to be deducted over 15 years. Unless a US company has massive cash reserves, it now makes no sense to remotely employ or contract with individual software developers. An engineer shared how their company fired 23 developers employed in India because of Section 174"
Note that this change only affect companies that are incorporated in US
This benefits big tech companies at the expense of startups
When taxmen bunked basic mathematics and logic classes, it's what we get.
Offshoring might reduce as amortisation is 15 years for non-US engineers.
What about software maintenance? What if they can split the costs between development and maintenance?
What about the revenues generated from the said software development? Shouldnt expenses incurred to generate the said revenues be in the same timeline?