A Quick Call to Action – Help us pass HR 7024 in the Senate
Today we’re taking a break from our usual blog fare to update you on a little-known tax change with a big impact on small software companies such as CalTopo.
The short version of this story is that businesses have always been able to treat their payroll as a direct expense – if you made $100k in revenue and spent it all on payroll, you had no profit. In 2022, that changed for software development and other tasks categorized as “research and experimentation”, due to a delayed-onset provision of the 2017 TCJA tax law. Under that change, section 174 of the internal revenue code now allows only 10% of software development costs to be treated as an expense in the year the money was spent, with the remaining 90% spread out over the following 5 years.
Now, for every $100k a software company makes in sales and spends improving its product, the company is taxed as if it made $90k in profit, despite having no cash left over. This tax on “phantom profits” is devastating for self-grown companies that reinvest their sales into product improvements; many companies have wound up with tax bills in excess of their actual cash profit. I know that sounds hard to believe because it makes no sense, but it is the new reality for software development, and one that many small companies are only just now waking up to.
Recognizing the importance of this issue, the House overwhelmingly approved HR 7024, a bipartisan bill that undoes the section 174 provisions alongside other tax changes, with each party having a supermajority in favor. In the two months since then, political brinksmanship has left the bill languishing in the Senate as the 4/15 tax deadline draws near. Bipartisan governance means compromise, and we recognize that not everyone will love every provision in this bill, but it is the final chance for companies like CalTopo to treat their payroll as a normal business expense for 2023.
It’s hard to believe that our first (and very rough) app release was just 5 years ago. From live tracking to LIDAR, we’re proud of the sea change in capability that we’ve been able to bring to rescuers and recreationalists alike since then. That’s in no small part because as the company has grown, we’ve continued to reinvest our revenue into product improvements, with some very exciting photo related news just around the corner. However that reinvestment is hard to sustain when we can’t call it an expense, which is why I’m asking you to consider contacting your senator in support of HR 7024.
As a smaller bill without extensive press coverage, HR 7024 is exactly the sort of legislation where constituent outreach has the most impact – even brief written comments can go a long way. If you’ve never contacted your senator before, as I had not until recently, it’s easier than it sounds; you can find them here and simply say something like the following:
“My name is [your first name] and I live in [your state]. I’m calling to voice my support for HR 7024, which would roll back the section 174 changes that have been devastating to small software businesses. The bill had large bipartisan support in the house, and I’m asking the Senate to approve it prior April 15th.”
If you are in a first response role, consider mentioning that specifically. For example:
“I’m in Search and Rescue, and new technology has dramatically improved our ability to find and rescue people. Section 174 means that the tools we use to accomplish our mission will see fewer innovations, due to the burden it places on the small companies developing them.”
And if you want, feel free to tell them CalTopo sent you.
-Matt Jacobs
CalTopo Founder