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PaulDavisThe1st parent
I should add that's there is also vaguely middle-ground interpretation, which goes something like:

Way #1.5: if a company chooses to take R&D expenditures of any type as a deduction (which it is not required to do) then it MUST include software development expenses (which in turns means they will be amortized).

yieldcrv
unless they aren't deducting software development at all

there is no obligation to take a deduction. if you find yourself in a circumstance where its more favorable to not take a deduction then you don't have to report that transaction

drdec
> unless they aren't deducting software development at all

What business does not deduct salaries from their income when reporting taxes?

I'm open to a counter-example where this makes sense.

s1artibartfast
There are special deductions you can elect to take for R&D expenses. If you choose to deduct R&D expenses, you must include software development there.

If you do not chose to deduct R&D expenses, you can deduct software salaries as normal.

I personally think this makes a lot of sense.

PaulDavisThe1st OP
It may make sense, but your interpretation (one I happen to agree with) is what I called #1 above. It is still unclear whether the IRS regards the rules as requiring interpretation #2 (in which paying someone to do software development MUST be treated as an amortized, capitalized R&D expense) or not.
s1artibartfast
I think the only difference between what I said and your #1 is that it is more than just a statement that "all software development expenses can be claimed as R&D".

My reading is that it isnt just permission to claim all development as R&D, but an obligation to do so if you claim it all if you claim any. That is to say, no splitting it.

This is actually pretty common in other parts of the tax code, where you have discretion in how to treat costs, but different treatments come with different requirements. Selecting one treatment is what triggers the associated requirements.

Many people struggle to understand that the tax code is not just a set of rules, but also a set of choices.

As an aside, this is why the government cant simply calculate your taxes for you in many instances. Doing so involves several choices based on your long term strategy. A simple example is to take losses in the given tax year or carry them forward (when permitted). The IRS can't decide that for you, and your decision might depend on factors like if you think your tax rate will be higher or lower in the future.

Perhaps a more relatable example is when to take a IRA/401K withdrawal. Ideally you would want to do this in years in a year where you have a lower marginal tax rate.

yieldcrv
if you have enough other expenses that already nullified that year’s tax, and it is complex to file a certain remaining kind of expense then you don't need to do it
Aeolun
Wouldn’t that basically always mean you’re in the red already though?
yieldcrv
not every tax deduction uses cash so no.

between using borrowed funds, other tax credits, in-kind donations, carry forwards or carry backs from other tax years, you should be able to get it to zero or near zero without spending all cash/profits on hand

and then the corporation can have one financial circumstance that has nothing to do with your financial circumstance improved by payment from the corporation

theyre conduits, it depends on how much authority you have over the corporation

PaulDavisThe1st OP
this is the whole crux of the matter. interpretation #2 says that the law now says that you MUST ("shall") consider all software development expense as R&D expenditures that are amortized over 5/15 years.

i personally believe that the intended/appropriate interpretation is #1 - you MAY consider software development expense as R&D and include in an R&D deduction if you choose to take one.

but it is far from clear what was intended and/or how the IRS interprets it.

yieldcrv
that’s interesting well the IRS is going to get gutted anyway, I don’t see this particular issue being looked at with any scrutiny that requires litigation
PaulDavisThe1st OP
chance of IRS being gutted: not zero but close to it. that bill from the house is incredibly unlikely to even get a hearing in the senate, and even if it did and it passed, somehow, biden will veto it (and that veto will not be overridden.
yieldcrv
if not now, itll happen in the NDAA, or a budget reconciliation bill, or similar government shutdown averting action, or change of president

IRS expansion is on life support and is the first target with any little bit of leverage against the President

PaulDavisThe1st OP
The problem is that the CBO has been entirely clear that cutting IRS funding increases the deficit, and there's plenty of senators and a white house staff eager to point this out.

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