The new R&D law has overly broad language that states “any and all” software development must be amortized over five years if the development took place in the United States, or over 15 years if the work was done overseas. The change doesn’t sound so bad on its surface; some argue it might even create more tech jobs in the U.S.
But that isn’t how it will play out. Many countries have better R&D credits than the U.S. Much of U.S. software development will shift to countries such as the United Kingdom, where the rules are simpler and more lucrative. For tax-smart companies, U.S. entities will just be for marketing and sales.
Imagine a company that lost over a million dollars but owes over $300,000 in taxes! How is this possible? This hypothetical company has roughly $2.5 million in income and, in 2022, spent $1.5 million building its software and $1 million in other costs, meaning it had a negative cashflow totaling $1 million dollars. However, because the $1.5 million of development was done by a team in India, it will only see $50,000 from the software development side, leaving a $1,050,000 deduction to offset the $2.5 million of income this year — meaning it owes tax on $1,450,000 in net income, or a bankrupting $304,500 in tax!
Proponents of this tax say companies will still…
