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
There’s no need to complicate the tax code with an expansion of the Child Tax Credit when we already have the Earned Income Credit. If families need help getting by, provide our less fortunate with payments outside of the tax code. The Employee Retention Credit should remain in place with its original expiration date. Many small businesses suffered during COVID and getting some money back for the taxes that they paid for retaining their employees is the right thing to do. I understand that there are many fraudulent claims, but what I don’t understand is why can’t the IRS fix that problem? Instead of simply throwing the whole credit away, do what needs to be done to fix the fraud problem.
It’s after April 15th. I’ve asked my Senator to accelerate it’s passage so that it’s signed before the extension deadline.
Thanks for the heads-up. Here is the bill text for reference: https://www.congress.gov/bill/118th-congress/house-bill/7024/text#toc-H4075223D141441E9A23A83B2F53B8A5D
Done, and thanks!
Thank you
Sent the following to the two California Senators:
I live in California so I’m writing to ask you to to vote for HR 7024, which would roll back 2017’s TCJA 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 when it comes to the floor of the Senate.
The reason this is of such interest to me is I’m in Search and Rescue, and I’m also involved in County planning and execution of mass alerts and evacuations. The new technology developed by companies like CalTopo has dramatically improved our ability to find, protect 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. In fact my belief is that small companies like the one above, who have done so much for emergency services in a not very profitable way, could very well be eviscerated by implementation of Section 174 as written.
Please vote in favor of HR 7024.
Thank you for your attention in this matter.
Thank you for reaching out to them with an individualized note. Unfortunately the bill didn’t meet the 60 vote Senate threshold but we appreciate the community support.
I just saw a message on the main Caltopo page calling my attention to this blog post. It’s well after 4//15/2024. Is this still a pressing issue? I assume that it must be given the message bar, yes?
HJ
We had initially posted about it in the spring when it looked like the Senate might take up the measure, but it sat on their calendar for months. We recently found out 48 hours in advance that it was finally scheduled for a vote and then put the header back up. Unfortunately it failed to pass.