Section 174 snuck up on companies and punched them in the face. It's terrible for anyone that doesn't have a large reserve of cash. But now it's here, we know about it, and can plan to minimize the damage.
If you're VC funded, you should get more money upfront to deal with it. The VC firm should be fine with this - those future tax deductions are an asset that can be sold if your company fails. In fact, with relative differences in tax rates, they might even be more valuable to some other company than they are to you.
If you were planning to bootstrap and are just one person, you are probably pretty heavily incentivized to create a single-member LLC and reorganize (sell?) into a S/C corp down the road, at least after an MVP or better is generating revenue. As far as I can understand, Section 174 does nothing to a single-member LLC because there is no salary.
I'm sure that some startups are going to go overseas, but I'm not so sure that it will be a huge thing.
What I know, from my fortunately tiny exUSSR accounting practice (greetings from Ukraine!), investments to capital cannot be expensed.
Instead, these costs have to be capitalized and amortized (but exists some not too wide spectrum of variants, how exactly capitalization payments will be distributed - linear, and non-linear).
And usually this is not bad, because, when you for example buy building for office, without capitalize, you have to immediately pay taxes for all it's cost. But with capitalize you'll pay taxes on amortization payments.
I don't know, why R&D programming (engineering) before considered as expenses, but technically govt is right, they are really investments.
For material actives, like buildings all these are important, because investments could be huge, and also large risks, building could become unprofitable.
For example in Japan, now, when you found building, you have to create special fund (and fill with money), which will cover all annihilation costs, including expenses of third persons and return terrain to some approved state after building become unprofitable.
From other side, all these could open new opportunities for insurance business, to insure investments on R&D programming. As now, officials recognize R&D programming as investment.
TFA gives an example of amortizing the cost of a $2,000 server with a 4 year life. If you did not amortize the cost, you would have a "bumpy" expense with a $2,000 charge in Year 1, then $0 for the next 3 years. It is more convenient to smooth out the cost of the server over the expected lifetime, instead treating it as a $500 cost in each of the 4 years' of its expected life. Essentially treating it more like a service or pay-over-time situation.
But employees don't work like that. Employees don't have multi-year expected lifetimes which you are required to pay for upfront. In the US at least, it is fairer to say that an employee has a 2 week expected "lifetime". If you stop paying them, they will go somewhere else.
How can you take something that you essentially lease 2 weeks at a time, and amortize it over 5 years?
At least that's now how the IRS sees it. Similar to buying machines to create a physical product.
Maybe they read all these articles about developers working in a feature factory.
https://news.ycombinator.com/item?id=34627712
I have zero accounting background, but my understanding is that salaries are normally deductible from revenue. Before this change, SWE salaries were deductible from tax bill under R&D credit? And after this change, SWE salaries can only deduct from tax bill under 5 year amort?
(Interested to hear correct version if someone actually knows)
"costs have to be capitalized".
So all these are about capitalization. They (govt) mean, all your software R&D are now considered as investments into entity capital.
Must admit, this is really make sense, even when I also admit, this will be extremely hard hit on SMB, for example on Indie gamedev, just because it's hard to account all these things, even if close eyes on additional costs.
