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wutangisforever parent
i don't really get why this law was invented, what was it supposed to prevent?

bobthepanda
The deficit hawks have routinely included legislation that included automatic ways to reduce the US deficit to be implemented at a future point in time, when hopefully Congress has sorted out whether or not such a thing is actually desirable. It's essentially a budget Sword of Damocles.

Of course, Congressional budget negotiations have been an unproductive circus show for a while, so this never actually happened and the thing that was never actually intended to go in place went in effect. With the current razor-thin majority in the House constantly getting derailed over budget negotiations, this is unlikely to resolve any time soon.

curtis3389
If they set it in motion and say they'll stop it before it causes pain, they have no intention of stopping it. Sequestration in 2013 was a solution to a political problem. Nobody wants to be blamed.
bobthepanda
This particular set of regulations was from the Trump tax cuts, which were passed by reconciliation and had to be "budget neutral" as a result.
bcrosby95
Achieving budget neutrality with a policy that won't come into effect for 5 years, that people expect to be negated, is an "interesting" hack.
fauntle
...and that will come to fruition during a subsequent administration. It was one of the many time bombs set up to make the opposing party look worse come election time.
ojbyrne
As I understand it, it's because they could pass "temporary" tax cuts with only 51% in the Senate through the "budget reconciliation process. The Republicans at the time did not have the 60 votes necessary to defeat a filibuster. Not quite the same.

https://en.wikipedia.org/wiki/Tax_Cuts_and_Jobs_Act

bobthepanda
There hasn’t been 60 votes for a long time. Reconciliation is how a lot of normal legislation is passed.
UncleMeat
The change was part of the trump tax bill, which at least needed to be able to claim that it was revenue-neutral after 10 years to be able to be passed through the budget reconciliation process.
hibikir
You have chunks of the explanation in other responses, let's try to put them together:

Since Obama became president, all legislation basically needs 2/3rds of the senate to pass if it's remotely controversial and every tax change is controversial. There is one exception though: if the bill is of a budgetary nature, and is revenue neutral over 10 years.

Trump really wanted to pass some tax cuts in 2017. But as you'd expect, claiming that a big tax cut is revenue neutral is far more than the senate parlamentarian would believe. So instead, some tax cuts are made temporary, and some tax changes are made that would gain revenue. Then the whole thing appears to be revenue neutral over a decade, because nobody expects that the poison pills at the end will actually be allowed to happen. They tend to come in 6+ years later, as to make sure that all senators and the president might also claim said increases are not their problem.

So the expectation is that a future congress will just undo those tax changes, and push them further into the future, by again making another bill that looks revenue neutral in the long run, but is just kicking the ball down the road.

The congress since the midterms, however, is even less functional than in the Obama or Trump years: So the poison pills that are not supposed to happen are starting to happen. Other cuts that occurred, like the increase of the standard deduction, were also marked as temporary, and could come back if congress doesn't do anything.

So ultimately it's all side-effects of people trying to bypass congressional rules, because otherwise we'd not see anything other than emergency spending bills passing in congress. Changes to legislation that would make this kind of dysfunction stop happening are even harder to pass. Every incentive pushes politicians of all parties to play with fire. This time we got burned.

jemmyw
It's pretty insane. How is the US going to get back to having a functional government? One side or the other needs to win a significant majority or the two sides need to start working together. I can't really see either happening.
> Since Obama became president, all legislation basically needs 2/3rds of the senate to pass if it's remotely controversial and every tax change is controversial.

This is an odd way to mention (abuse of) the filibuster

https://blog.pragmaticengineer.com/section-174/ is a good overview and describes some of the history:

> In 2017, then-President, Donald Trump, signed the 2017 Tax Cuts & Jobs act, which overhauled tax codes and reduced tax – for example, it reduced the top tax bracket from 39.6% to 37%. To make the bill pass strict budgetary rules, the Senate used a process called reconciliation: adding in tax code changes that delayed tax increases. These delayed increases “balanced out” the tax reduction.

> One of these changes was Section 174, set to come into effect 5 years later, in 2022. These parts deliver the blow by making it clear that software development costs need to be amortized over 5-15 years. Most experts expected Congress to push back the Section 174 amendment to a later date, or simply remove it. But Congressional negotiations to repeal the changes fell apart at the last minute in December 2022, meaning it became law.

> Amazon, Microsoft, Intel, Ford, Lockheed Martin, and other US companies created the US R&D Coalition in 2018 to advocate in reversing this change. This group concludes... "By diminishing the near-term value of R&D expenditures, the Tax Cuts and Jobs Act will reduce incentives for companies to invest in the development of new products, ultimately hurting consumers and businesses alike.”

> What about VC-funded companies? For loss-making companies this change doesn’t make much of a difference. But the change does impact VC-funded companies near to break even. Most VC-funded companies close to breakeven have big-enough cash buffers with which to pay unexpected tax bills. However, these companies might reduce hiring – or even consider letting go staff.

My 2c are that big tech companies with large amounts of cash on hand wanted to be seen optically as fighting against this change... but those with cash on hand would also benefit from being the only ones able to weather the storm relative to their would-be competitors. It's unclear that incentives were aligned here among those companies with lobbying budgets.

Anything that pulls in income and/or pushes out expenses results in a higher tax liability to the IRS. It makes a lot of sense in the world of real estate and equipment expenses (i.e. items which have very long useful lives to a business), less so for labor and other short term expenses.
badpun
I'm not an accountant, but to me it looks like the IRS was operating at an assumption that the software engineers write is not immediately consumed, but rather has on average 5 years amortization period (meaning, it's producing value for 5 years, on average).
everforward
5 years is the shortest, 15 is the longest. Their assumption is that 5 years is the minimum time that it provides value.

I don't think there's any real logic to it, it's just a way to balance the tax budget.

For 1, presuming that all software engineering is "research or experimental" is faulty. The vast majority of software engineers are implementing known things, and the "experimental" status reflects its reliability. Most "experimental" software isn't really doing experiments to answer questions, it's just checking whether an approach works correctly. I don't think anyone could honestly call writing an Okta integration for a SaaS app "experimental". You know that it will work ahead of time, you just aren't sure if your pass implements it correctly.

For 2, this would imply insane things if applied to other fields. What is the correct period to amortize a bridge engineer's salary over? 50 years? 100? We still have some Roman bridges around, maybe we need to look in the thousands of years. Patents are good for 20 years, so any salaries that lead to a patent clearly need to be 20 year amortization. Copyright is life + 70 years, so graphical designer salaries should be amortized over at least 100 years.

I don't think there's any real logic here, it's just a way to balance the tax budget.

dathinab
seems reasonable iff you have a tax system where this deductability is based on the product employees produce which seems strange to be but might be normal

if I understand it correctly it means the cost of this year would be written of over 5 year each year 20%, but if you keep your employees it means in the second year you have 20% write off from that year and 20% of the previous years and so one, so 5 years in still 100% write off every year

I wonder if that would motivate companies to have a more constant number of employees or more precise a similar income bill every year.

Through it would definitely mean if you had considered layoffs this year is the year to go.

ethbr1
I am not an accountant, but there wouldn't be a requirement to keep the employees.

If you spent $100M on developer salaries in FY2022, you'd create an amortization for that over the next 5 years.

And then in FY2023... even if you had fired your entire software department... you'd still get to claim that year's portion of that previously created amortization.

hodgesrm
That's correct as I understand the tax law. The credit carries over because it's depreciating the capital investment. Net operating losses (NOLs) work in a similar fashion. You get them as a credit in later tax years.

IANAL but have filed corporate taxes many times.

thinkerswell
Yes because normally, without this absurd law, you’d just deduct employee salaries from your taxable income.
dathinab
yes, I didn't try to say there is an requirement to keep them the writeoffs are base on what they are assumed to have produced not them being there so they would go one

but when keeping a job position (not necessary the same person tho) through overlapping writeoffs it will lead to a consistent 100% writeoff

not doing so can lead to spkies of little writeoff when increasing company size and the opposite when shrinking it. This would make new hires on a limited budged harder and in turn should motivate more long term planing when it comes to head count and that might lead to less head count fluctuations maybe

bruce511
Yep, it incentivizes getting rid of software staff as soon as you can after they complete the work. It makes downsizing especially profitable in the short term.
jacobyoder
No more than 10% in the first year is deductible.
laidoffamazon
Same reason why the Trump Tax cuts almost made PhD tuition waivers taxable.

1) Tech workers are liberals

2) Liberals being owned is good if you're an administration consumed with punishing your enemies and enriching your allies

#2 is also why SALT deduction was curtailed, to punish blue states. While I think that's accidentally good policy, it made people mad enough to flip the House in 2018.

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