US tech innovation dreams soured by changed R&D tax laws A US federal tax change that took effect in 2022 thanks to a time-triggered portion of the Trump-era Tax Cuts and Jobs Act may leave entrepreneurs with massive tax bills. Section 174 of the US tax code - prior to the passage of the 2017 TCJA - allowed companies to handle the tax bill of their specified research or …
Gergely Orosz seems to be missing the part about all employee's salaries (& fringe benefits) in all US businesses being standard business expenses and are written off against income within the same year. That's independent of whether they are R&D folks, floor sweepers or whatever. That's independent of what type of business it is. His "a theoretical company with $1m in revenue and $1m of software developer salary costs" example just underscores that he is clueless about how to run a business in the US.
What would be affected in R&D are capital expenditures as well as expense expenditures.
That's not true. Employees performing or supervising R&D work don't have their salaries treated the same as floor sweepers. Even the cost of electricity in an R&D lab is an R&D expense which must be capitalized.
Now WHY the tax code bothers to treat R&D separately is due to past giveaways - in order to give tax credits for R&D work the tax code had to treat it separately. Those tax credits went away in the past, but the disparate treatment for R&D remained. There's no reason to treat R&D differently, either for capitalization or tax credits. It should be as you think it is, with R&D expenses the same as expenses for floor sweepers and print toner.
As for why that changed with Trump's tax laws, it was already a $2 trillion giveaway to mostly millionaires and billionaires. In order to make it not be even worse there were some changes slipped in that raised taxes. Not surprising that Trump's cronies would want to raise taxes on the Silicon Valley types they hate.
I just had a quick glance at 10-Ks of a few American software companies. They show salary costs under either Cost of Revenues or R&D (or both). Most software companies deploy a vast majority of their engineers to develop and maintain their software and a small minority for futuristic R&D work. The new rule only impacts companies that show 100% of salary costs under R&D, which helps companies goose up their Operating Margin (which considers Cost of Revenues but not R&D). What's to stop companies from showing bulk of engineer salary costs under Cost of Revenues (where it rightly belongs in most cases), which can - and is - expensed 100% within the financial year?
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