Michele Hansen

Last call for signatures on the Small Software Business Coalition Letter to Congress!

Deadline is midnight.

Congress needs to know that an unintended tax policy is putting small software-related businesses in a cash crunch.

If you’re a US-based founder of a software or related company with under $10M revenue, sign here https://ssballiance.org

Sign the letter, or tell your boss to sign the letter, here: https://ssballiance.org/

Yesterday was a massive day -- the Small Software Business Coalition Letter to Congress blew past 250 signatures, so now we're more than 25% of the way to goal!

Signatures: 261/1,000 (as of 4/5)

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States: 43/50 + DC

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It's amazing starting to see our little community come together like this 🤝

Small software businesses are getting hit hard by Section 174 changes that make all software development and other R&E amortized and not expenseable. Congress needs to know this is an urgent issue that needs an immediate solution.

Our goal is 1,000 signatures by April 10th so we can deliver this letter to Congress before Tax Day.

Signatures: 104/1,000 (as of 3/29)

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States: 38/50 + DC

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Sign: https://ssballiance.org

Let me put it this way: Small businesses are the cute kittens of the policy world. Everybody loves us. 😻 But right now, we’re getting run over by a truck because of Section 174, and Congress is hardly aware. 🐈 🚚 ☠️ => ☎️ 🏛️ Almost 100 founders have already signed up to help fix Section 174. But we need to do more. The Section 174 changes are an existential threat to software businesses. Join 100+ founders who are doing their part to fix Section 174. Sign the letter from the small software business community telling Congress to immediately repeal R&D amortization: https://ssballiance.org/ The deadline is April 10th so we can deliver this letter to Congress before tax day. And our goal is 1,000 signatures. If you're a US small software business owner, sign the letter and share it with your founder friends.

Congress was widely expected to delay/repeal this before it took effect. Last session’s House bill had 114 co-sponsors, and the Senate bill had 34 co-sponsors. Both were almost evenly bipartisan. (When does broad bipartisanship happen these days?!) https://www.congress.gov/bill/117th-congress/senate-bill/749/cosponsors https://www.congress.gov/bill/117th-congress/house-bill/1304 Thankfully, the current legislation would reverse Section 174 amortization retroactively to 2022 (meaning you could get a refund in the future). This session’s Senate bill also has bipartisan support, with 21 co-sponsors and counting. https://www.congress.gov/bill/118th-congress/senate-bill/866/cosponsors Despite the fact that Congress never intended for the Section 174 changes to take effect, and despite the fact that fixing it has broad bipartisan support… Congress still hasn’t felt the urgency to act. So now, unless WE fight like hell, we’re stuck with this mess. Big companies might be able to absorb a higher tax bill because of Section 174. But many small businesses can’t. Congress must hear from *us* – small business owners – to help ensure Section 174 gets fixed. Folks are freezing hiring, laying off staff, taking out loans, and worse because of the Section 174 changes. So I’m spearheading an effort to help get our stories in front of policymakers. They HAVE to hear from *us* – YOU! – in order to have any chance of fixing this.

Next, let's talk about what people and Congress have been trying to do about it, and what YOU can do about it. The R&D Coalition, which includes Microsoft, Intel, Netflix, Zoom, and more, has been engaging with Congress on fixing Section 174 since 2019, along with many other business groups. https://investinamericasfuture.org/rd-coalition-cfo-letter-to-house-and-senate-leadership/ But it’s only recently that Congress has started to understand the impact of Section 174 on small businesses. We’ve just come out of the woodwork in the last few weeks, as we’ve started receiving our tax bills. Reminder: Sign the small software business coalition letter to Congress. Congress needs to know that the Section 174 changes are an URGENT problem for small businesses. It is the most impactful thing you can do right now to fix this mess. https://ssballiance.org You probably haven’t heard anything about Section 174, nevermind the work large companies have been doing on it, until now because it’s a wonky tax issue. “Amortization rule change” doesn’t make the headlines often. But the WSJ did cover the effect on small businesses recently https://www.wsj.com/articles/small-businesses-face-big-tax-bills-from-research-deduction-change-a189b113 The most unbelievable thing about all of this bad tax policy? Congress understands that Section 174 amortization is a bad policy, and they never even intended for it to go into effect.

Hours spent upgrading dependencies? Unclear. Making a UX change to confusing functionality? Unclear. Only thing that’s clear? Section 174 is a giant mess. Section 174 might also mean that all software developers have to start time tracking, even if they aren’t doing client work. If bug fixing time doesn’t count and can be expensed as normal but feature dev does & has to be amortized, all of that will have to be meticulously tracked. Section 174 isn’t just about salaries. It’s also about other expenses. ANYTHING you use to create or improve a product could be R&D. Salaries, servers, component libraries, analytics tools, the list goes on. You can see how Section 174 will quickly become an onerous administrative burden for companies, and especially small ones. You might have to track the amount of minutes you used a staging server for bug fixes vs new feature dev. It’s a nightmare. Since I’ve seen this come up: You can’t get around Section 174 amortization of software dev salaries by changing job titles. That would probably be considered tax fraud. (I’m not an attorney, and this is not legal advice. But, y’know, fraud = bad) The R&D tax credit can offset some of this, if you qualify and have kept the required records. However, it is unlikely to offset all of this. Talk to your tax preparer for information on your specific situation. https://www.thesaasacademy.com/podcasts/the-saas-cfo/episodes/2147905458 So that’s the mess we’re in with Section 174.

You may have heard Rob Walling talk about how you can only deduct a portion per year on Startups for the Rest of Us. Here’s how you’ll have to amortize R&D costs* 10% the first year 20% years 2-5 10% year 6 https://www.startupsfortherestofus.com/episodes/episode-652-mixing-no-code-with-code-developer-superpowers-5k-angel-check-and-more-listener-questions *And yes, the tax code is weird that you will spread US expenses over for five years….but it’s really six. (For simplicity, I won’t get into that here.) Ok, so what exactly does this mean? What does software *development* mean? The short answer is that we don’t really know. The IRS never explicitly defined software development. The IRS hasn’t issued full guidance on Section 174 yet since Congress was widely expected to delay/repeal the change before it took effect. But companies are already getting hit with higher tax bills because of the 174 changes. https://saas.transistor.fm/episodes/banking-meltdown-more-taxes-on-small-software-companies-take-me-back-to-the-beach Generally, R&D development costs refer to expenses related to eliminating uncertainty or improving a product, but not quality control. That means bug fixes may not fall under Section 174, but new features could. (Again! Still waiting for IRS guidance.) IRS will have to define what does and doesn’t constitute R&D software dev.

This means that companies of every size and type will need to split out R&D expenses – even if you don’t think of them as such – from non-R&D expenses LLCs. C-Corps. S-Corps. Sole proprietorships. All company types and sizes may have R&D expenses. Alarm bells starting to go off in your head about Section 174? They should be. Get involved and sign the small software business coalition letter to Congress https://ssballiance.org Let’s say you pay a US developer a salary of $100k. Instead of being able to write off (expense) $100k of the salary immediately, you can only write off a portion of it per year. This means fewer deductions. And fewer deductions = higher taxes. DRAMATICALLY higher taxes. Or, let’s say you have $1,000 a year in AWS bills for the new SaaS you’re launching. Instead of being a $1,000 expense, you can only write off $100 of that for 2022. The other $900? Taxable “profit.” This isn’t a hypothetical problem. Small software business owners are already getting dramatically higher tax bills because of the Section 174 changes.

However, in 2017, Congress changed the rules, starting with 2022. Starting in 2022, companies must now amortize their R&D expenses over five years (15 years for international expenses). Among its several definitions, Section 174 includes software development as a R&D expense. NOTE, since there is a lot of confusion about this: This is different from the R&D tax credit. You’re probably impacted even if you don’t take the R&D tax credit. (But if you do take the R&D credit, you are almost surely impacted.) R&D isn’t just building a new product. There may be other things you’re doing that you may not think of as R&D but the IRS probably does. Think: building new features for an existing product, or market research. So, if you’re making software, taking an R&D credit, or doing other activities the tax code considers R&D, your taxes are likely higher in 2022 because of Section 174. If you haven’t heard from your accountant about this, you should ask. Section 174 R&D costs can include salaries. But also much more than that. Servers used for testing product improvements? Probably R&D. Tools you buy to improve your existing product? Probably R&D. We’re still waiting for full IRS guidance on what is and isn’t R&D. But on a simple level, this could mean that a portion of your server costs and software subscriptions are no longer regular write-offs but R&D that must be spread out.

FOR US SOFTWARE BUSINESS OWNERS:

There’s a lot of concern over the Section 174 tax changes in the US.

In short, it means that software development and other R&D activities cannot be immediately written off as expenses, but rather amortized (spread out).

This thread tries to answer some of those questions.

If you already understand how big of a problem the Section 174 changes are, I’ll save you some reading and skip right to the CTA: Sign our coalition letter to Congress.

This letter will be delivered directly to Congress, and is the most impactful thing you can do right now to fix this mess.

https://ssballiance.org/

It’s increasingly clear to me that the Section 174 changes requiring R&D amortization are an existential threat to small software businesses

Even if they don’t think they do R&D.

Even if they don’t file for R&D tax credits.

Even if they don’t have employees.

But first, obligatory disclaimer: I am not a tax accountant or a tax attorney. These answers have been checked with professionals, but check with a professional for your specific situation. This thread is not tax advice.

(This disclaimer is how you know this thread has been reviewed by pros. 😉)

Since 1954, companies have been able to immediately deduct their R&D costs. Software development (whether new products or just new features of an existing product) is included in this definition.

“"If you spend $90k in dev salaries, you used to be able to write that off as an expense...But now with 174 changes it has to be spread over 5yrs. Suddenly your profit has gone from $10k to $91k for tax purposes...Call your Congress people." - Rob Walling

"This is an absolute cluster... it seems to have caught founders, accountants, even the government flatfooted. Talking to other founder friends, it seems like most people’s accountants are not super aware of this change." - Derrick Reimer

"If you have a software company in the US, you need to be aware of Section 174. Instead of saying a development salary is an expense, you have to categorize it as R&D. It is actively harmful for small software companies." -
@mijustin@mastodon.social

🎧 Startups for the Rest of Us

https://www.startupsfortherestofus.com/episodes/episode-652-mixing-no-code-with-code-developer-superpowers-5k-angel-check-and-more-listener-questions

🎧 Build Your SaaS

https://saas.transistor.fm/episodes/banking-meltdown-more-taxes-on-small-software-companies-take-me-back-to-the-beach

Is your company one of the many small software businesses that will have to freeze hiring, lay of staff, take out loans, or worse, because of the Section 174 changes requiring all software development to be spread out over many years rather than expensed? Congress needs to know. Join here to get plugged in: https://ssballiance.org

#saas

It’s International Women’s Day, so I want to give a shout-out to all of the men who:

- are equal parents with their spouses and do as much comforting, playing, logistics, cooking, and cleaning as their female partners do
- model a healthy, full range of emotions to boys and girls in their life
- understand that making comments about any child’s appearance / future dating potential is wildly inappropriate
- consider childcare costs a shared expense rather than something the woman’s job should cover
- know that trans women are women
- don’t put gender expectations or stereotypes on anyone, regardless of gender
- correct people (read: other men) when they disparage women’s achievements
- understand that gender equity issues go beyond gender and are impacted by race, nationality, and other factors

It might not be the most common thing to shout-out men on women’s day, yet it’s important to point out that men play a huge role in elevating women to equal status. We won’t get there without you standing up to the muppets in your life, treating the women in your own life as equals, and raising your boys with gentleness. It takes all of us!

Deploy Empathy is 42 copies from selling 2,500 copies, so I'm running a little sale (of sorts)

If you want to buy a couple copies for your team/friends, the paperback is temporarily $€£ 10

If you bought a digital edition and loved it, you can buy the hardcover for $€£ 42

Only on Amazon.

Since this is an anti-sale, you can find the link yourself

@CharlesOttoson @loke @jesse I was at a conference a month ago in Brussels, and was sitting at a table with Belgians and Dutch people. It was interesting to learn that when Flemish Belgians speak to people from the Netherlands, the people from the Netherlands will often switch to English. (But not vice-versa when the Dutch speak Dutch in Belgium.)

@loke @CharlesOttoson @jesse walking around in the Netherlands and Flemish parts of Belgium I can usually figure out about half of the signs. But I’m absolutely lost when it comes to spoken Dutch 😂

@loke @jesse English, though I had 10 years of German in school/university, so both help me with Danish. Spoken Danish 😅 The only hack for it is to find the equivalent in (Bokmål) Norwegian, which in many cases is effectively phonetic Danish.

@loke @jesse yes!! “Des” (though usually “jo”) in danish. As a Danish-language learner this kind of linguistic history helps me tremendously.