The accounting argument is that not all software development is R&D work or creating an asset with long-term value. A lot of it is operational work or closely tied to the revenue that pays for it (so analogous to COGS.)
There is also an accounting and tax principle that small/solo businesses should be able to maintain simpler books that let them reliably feed their families year-to-year; an sudden upfront tax burden for a solo dev impedes that.
There is also plenty of "R&D" that has only short-term value.
If you make a spam filter, you have to spend resources making sure it can defeat the spammers, but the lifetime of your countermeasures is often measured in months or weeks rather than years.
You may have to pay developers to integrate your product with a third party product, but there is a new version of the third party product released every year so every year you have to do it over again.
> There is also an accounting and tax principle that small/solo businesses should be able to maintain simpler books that let them reliably feed their families year-to-year; an sudden upfront tax burden for a solo dev impedes that.
And the correct accounting period to amortize a particular expenditure may not be known in advance. If you build a product and it has unanticipated flaws that require you to start over, the lifetime of the original R&D is trivial. Or it could be a success and generate revenue for decades.
The IRS gets their money either way, whether it's now or tomorrow, but if in cases of ambiguity they insist on now, the disadvantage is primarily to early startups. Large corporations with a stable R&D budget will be deducting their full R&D expense every year because they'll have R&D expenses from five years ago to deduct this year, but anyone just starting out won't. That's a poor choice as a matter of policy.
The disadvantage is not just to early startups. I have ownership in a 9-year old small software company that has never taken investments and has managed to break even or be slightly profitable every year while growing. We reinvest revenue into a team that keeps improving the product.
In 2022 our reported "taxable income" to the IRS skyrocketed because of this rule change. Despite a small profit, we are paying tax on essentially 50% or more of our REVENUE. And because we are a pass-through entity, it pushes us into tax brackets that are quite ae bit higher than corporate tax rates of C-Corps.
2 or 3 years into this we will either have to take a loan to pay taxes, find a way to cut expenses, or (hopefully) grow enough in revenue while not increasing expenses to cover the additional tax.
It really is insanity. Our accounting firm and everyone they spoke with was convinced it would be "fixed" by congress before the final extension deadline a couple months ago. So we waited to the last minute to file, which, of course, resulted in significant late fees and interest on top of everything else.
As I understand it, under the current rules, you can classify maintenance work as an opex. You just can't argue that development of new software is an opex.
There is also an accounting and tax principle that small/solo businesses should be able to maintain simpler books that let them reliably feed their families year-to-year; an sudden upfront tax burden for a solo dev impedes that.