OK, so based on this document (which I had not come across until now) I would say that the IRS is fairly clear that what I termed "Way #2" is the correct interpretation.
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).
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.