The Law That Will Ruin The U.S. Tech Software Industry 🇺🇸 \ stacker news ~tech

The Law That Will Ruin The U.S. Tech Software Industry 🇺🇸blog.pragmaticengineer.com/section-174/

8396 sats \ 26 comments \ @davidw 6 Jan tech

Startup founders read this... https://blog.pragmaticengineer.com/section-174/

WTF Is Going On? 🇺🇸

Many US software businesses amassed surprisingly high tax bills in 2023, seemingly out of nowhere, due to a tax change which took effect in July the previous year, which many small companies knew nothing about until finalizing their 2022 returns.

The change was expected to be repealed (reversed) in December 2022, so many accountants didn’t inform customers for that reason. So, businesses got a surprise when the first tax payments fell due last April.

The amendment to Section 174 means employing software engineers can no longer be accounted as a direct cost in the year they are paid – unlike the norm, globally.

Example Company 💻

A software 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. $0 profit.
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.

Knock-On Effects ⤵️

What happens to a small, bootstrapped company without $189,000 in cash floating around with which to pay this tax?

Take out a loan at a relatively high interest rate (likely at around 10%+)
Lay off a software engineer on $200,000 per year and use this saving to pay the bill!

Other Implications:

Less hiring of software engineers in the US/more layoffs 👎
Firing of non-US software engineers employed by US companies 👎
A boon for purchasing SaaS companies and vendors (mergers & acquisitions) 👍
It makes a lot less sense to incorporate tech startups in the US 👎
Startup software IP will likely be moved out of the US 👎
Tech companies are now forced to understand – and use – R&D credits 👎
Innovation across all US software companies will take a hit if Section 174 stays 👎
Thanks to the Section 174 amendment, starting a tech company outside the US is far more attractive now – including for raising startup capital 👍

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100 sats \ 2 replies \ @hyperfree 7 Jan

The best thing to do with the US would be to switch it off and on again but then install linux instead of this corporate crap.

21 sats \ 1 reply \ @Caleb 8 Jan

If you can find the off switch, please let us all know.

0 sats \ 0 replies \ @hyperfree 8 Jan

Yes it's called #BTC

391 sats \ 4 replies \ @siggy47 6 Jan

This is absolutely ridiculous. It's not a solution, and I'm certainly not advocating this, but you may see some "creative" job descriptions ameliorating this issue. I have worked in various industries where capital improvements magically turned into ordinary expenses come the end of the year. This seems analogous.

375 sats \ 3 replies \ @davidw OP 6 Jan

We may see a massive shift to 'contractor' work too. People fired but then re-employed as a non-employee on higher day/hourly rates, but with fewer rights/benefits to circumvent the tax.

And/or U.S. companies looking more to Argentina, Colombia, Philippines - where talent is available at a fraction of the cost. Definitely "squeeky-bum" time though, if the guidance stays as-is.

297 sats \ 0 replies \ @siggy47 6 Jan

Yes. In fact that's a better solution than what I metioned. There will be workarounds, but it's still emblematic of the U.S. turning away from paying lip service to a business friendly, free market economy and fully embracing socialism.

297 sats \ 1 reply \ @Natalia 6 Jan

And/or U.S. companies looking more to Argentina, Colombia, Philippines - where talent is available at a fraction of the cost

Egyptian devs are actually my fav:)

Guys, working with people from other time zones earns you extra time too! Imagine when you are sleeping, others doing the work, and then when you wake up, things are done:)!

0 sats \ 0 replies \ @davidw OP 6 Jan

It certainly works well for me.

Can be challenging when you have a 12 hour inversion of time zones though, as you very rarely get any face to face time with your team.

After finishing your day too, you need to line-up theirs & make sure you “pass the baton on”, which can lead to staying later. But the benefits drastically outweigh the drawbacks.

391 sats \ 5 replies \ @Natalia 6 Jan

curious why these companies don't register their companies in other jurisdictions? I mean, shouldn't tech companies be borderless and remote-compatible?

0 sats \ 4 replies \ @davidw OP 6 Jan

Bingo!

Seems to me, despite the pool of talent, exclusively basing your business from the U.S. may be a huge liability from here on out. Especially when you could likely recruit U.S. engineers from afar. The IRS is actively torching their 'golden goose', if this doesn't get unwound. I guess those 85,000 agents need to do something to fill their miserable days.

390 sats \ 3 replies \ @Natalia 6 Jan

honestly for those small / bootstrapped companies, I assumed all they want is a. register a company b. being able to charge with Stripe or other payment processors c. being able to pay the employees d. low tax or with benefits

There are so many options out there, but yeah, you might need to be more creative if you are Americans; But the best way is always to live out of your home country ( if you can ), and being a guest somewhere; Register companies in a place that doesn't annoy you that much - yet many people planning everything default with their home country.

1 sat \ 1 reply \ @davidw OP 6 Jan

Yes, sometimes when going abroad you can get treated like a customer instead of a cow 🐄 😄

297 sats \ 0 replies \ @Natalia 6 Jan

I love being a guest:) and no one told me what to do, not even during the stupid covid time.

0 sats \ 0 replies \ @dieselbaby 7 Jan

Unfortunately if you are an American, unless you renounce your citizenship (which is almost certainly more trouble than it's worth), you are required to pay taxes regardless of whether or not you are living in the US. Even if you are paying taxes as someone living in and running a company in another country, you're still required to be paying taxes to the US.

AFAIK, the US is one of, if not the only country, with such rules. It's ridiculous.

390 sats \ 1 reply \ @SpaceHodler 6 Jan

Good for other countries. This is what we need more of - bad laws to contrast with jurisdictions where the laws are not as bad, so people can see what works better.

1106 sats \ 0 replies \ @davidw OP 6 Jan

Indeed. The thesis from The Sovereign Individual (written in 1996) is a useful reference, which I have stolen from @blocktock's summary here on SN:

Taxing capacity in Western economies will plunge by ~50-70 percent. This will tend to make smaller jurisdictions more successful.
Incomes will become more unequal within jurisdictions and more equal between them.
Unlike the Agricultural Revolution, the Information Revolution will not take millennia to do its work. It will happen almost everywhere at once.
Technical and economic innovations will no longer be confined to small portions of the globe. The transformation will be all but universal.
The cybereconomy, rather than China, could well be the greatest economic phenomenon.
The Information Age will be the age of upward mobility. It will afford far more equal opportunity for the billions of humans in parts of the world that never shared fully in the prosperity of industrial society.
Those who live in jurisdictions that remained poor or underdeveloped during the industrial period have the most to gain by the liberation of economies from the confines of geography. This is contrary to what you will hear.
Jurisdictions in Latin America and Asia where per capita income is rising rapidly may endure for generations, or until lifetime income prospects there equate with those in the formerly rich industrial countries.

390 sats \ 1 reply \ @aljaz 6 Jan

Yay, another thing to add to the discussuion in #370129

30 sats \ 0 replies \ @davidw OP 6 Jan

Great post and question 👏 will get involved in the discussion

390 sats \ 1 reply \ @xz 6 Jan

I know little about this, was just wondering how this works currently in other industries. Say, if I was running a company that was a physical hardware version of what this software company provides, i.e, I employed five hardware and electrical engineers who perform maintenance and installations of electrical hardware, would I still be subject to the same amendment?

Sounds very undemocratic.

11 sats \ 0 replies \ @davidw OP 6 Jan

It's specifically targeted at 'Software Development', so they wouldn't be captured under this new tax law. My take is that the country might be serious about pivoting to bring back manufacturing, so I think that type of business will get various incentives or fewer disincentives at least for the foreseeable future.

390 sats \ 0 replies \ @TheBTCManual 6 Jan

Hmm that doesn't seem like good incentives here for the US, either you get your engineers to automate as much as they can and keep them on as freelancers, spin up your tech division in another country, use freelancers from around the world or just set up offshore completely but serve the US market

I guess they see tech as an avenue for some taxes but this doesn't seem like its going to generate much and just reduce the tax base. oh well

311 sats \ 0 replies \ @rustaceanrob 6 Jan

As a software engineer in the US with hopes to start a business… yikes. Where do you suggest going? I see Uruguay in the comments. Anyone else want to give their 2 sats?

42 sats \ 0 replies \ @niftynei 7 Jan

paying down tech debt is now a capex investment 😂

111 sats \ 1 reply \ @davidw OP 6 Jan

P.S. Come to Uruguay 🇺🇾 cowboy & cowgirl founders. Read this SN post again on what it offers 🤠

390 sats \ 0 replies \ @itsrealfake 6 Jan

It's on my list :)

0 sats \ 0 replies \ @WeAreAllSatoshi 6 Jan

Eek 😬