The question remains open: is the intent that all software development expense MUST be treated an amortized capital investment, or that all software development (fitting the description above) CAN be treated in that way.
"(3) Software development. Section 13206(a) of the TCJA added new § 174(c)(3) to require that any amount paid or incurred in connection with the development of any software in taxable years beginning after December 31, 2021, be treated as a research or experimental expenditure (and thus an SRE expenditure to the extent paid or incurred by the taxpayer during the taxable year in connection with the taxpayer’s trade or business)."
and
".02 Requirement to capitalize and amortize SRE expenditures. Taxpayers are required to capitalize SRE expenditures (as defined in section 4.02(2) of this notice) and amortize such expenditures ratably over the applicable § 174 amortization period beginning with the midpoint of the taxable year in which such expenditures are paid or incurred."
Which is, as many have noted, absolutely batshit crazy.
The only scenario that remains unaffected by this absolutely batshit crazy SNAFU is the case of a self-employed software developer who incurs zero costs related to their work. They simply collect all revenue as salary, pay normal tax on it, and they are done.
Anyone with any expenditures at all (contractors, employees, equipment) must treat these as capital expenditures, amortized over 5 (or 15 years for foreign based work).
It really is as bad as it could possibly be.
Not true anymore, the IRS guidance linked above in Notice 2023-63 specifically indicates they are adopting interpretation #2:
"Section 5.03 - Activities that are treated as software development. Activities that are treated as software development for purposes of § 174 generally include but are not limited to:
(1) Planning the development of the computer software (or the upgrades and enhancements to such software), including identification and documentation of the software requirements;
(2) Designing the computer software (or the upgrades and enhancements to such software);
(3) Building a model of the computer software (or the upgrades and enhancements to such software);
(4) Writing source code and converting it to machine-readable code;
(5) Testing the computer software (or the upgrades and enhancements to such software) and making necessary modifications to address defects identified during testing, but only up until the point in time that:
(a) In the case of computer software developed for use by the taxpayer in its trade or business, the computer software is placed in service; and
(b) In the case of computer software developed for sale or licensing to others, technological feasibility has been established, product masters(s) have been produced, and the computer software is ready for sale or licensing to others; and
(6) In the case of computer software developed for sale or licensing to others (or the upgrades and enhancements to such software), production of the product master(s)."