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s1artibartfast parent
>But there's a very critical misunderstanding happening in a lot of comments here -the IRS taxes profit (net income), not revenue

Not in this case, which is the challenge and pain. You can have a company with negative profit, and have to pay income taxes on revenue.

>This is a great way to end up both out of business AND in jail. It is not the smart play.

Strongly disagree, and this is how I run my business. There is sufficient ambiguity and debate on the topic to support an ambiguous reading. Nobody is going to jail. Worst case scenario you get a nastygram from the IRS in a year or two, provided the issue hasn't been clarified in YOUR favor.

If your company is living hand to mouth with expenses above revenue, the money the IRS wants literally doesnt exit.

patmcc
>>>Not in this case, which is the challenge and pain. You can have a company with negative profit, and have to pay income taxes on revenue.

Incorrect; you can have a company with negative cash flow and have to pay income taxes on profit - as the IRS defines it. And you can certainly disagree and argue with them about it, but they're likely to win.

>>>If your company is living hand to mouth with expenses above revenue, the money the IRS wants literally doesn't exit.

"I don't have the money I legally owe you because I spent it" is not a claim the IRS is going to care deeply about.

Here's the same situation, for not software. I buy a big fancy truck for my trucking business. It's 100k, capital asset, needs to be amortized over 10 years. I make $100k in revenue that year. No other expenses. What do I need to pay tax on in year 1? The $90k in net income that I have. I can't say to the IRS "but I spent all my cash on the truck" - they'll say "tough, pay us".

edit: as an aside - the above is why businesses usually like to lease or finance - the cash flow matches better.

s1artibartfast OP
You are right, it has to do with how the irs defines profit. Invest 100k in a big truck, that's capital expense. Spend 100k on gas and goods to make deliveries, that's operating expense.

Obviously, the question is then which one makes more sense for software development.

patmcc
Exactly. And I do think the truth lies somewhere in the middle - some software development creates capital assets, but lots does not.

And either way it's very painful to change the rules entirely in a single tax year, especially for small businesses. FAANG companies will weather this either way, but it could kill small software businesses.

s1artibartfast OP
agreed. It is quite backbreaking if you dont have a huge bucket of money.

One alternative if it must be treated as a capital asset is to allow accelerated/immediate depreciation for small firms and individuals.

I can see the point that for large firms like with diversified R&D portfolios, development, on average, results in creation of capital assets.

For small firms, it is absolutely unclear that the product has any durable value at all.

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