In the example given they received a revenue that covers the entire cost of the software. The problem is that they then used that revenue for payroll which would be fine previously as if you make $X and pay $X in payroll then you pay ($X - $X) 0 in taxes and there isn't a cash flow problem.
To stick with the apples-oranges lathe example. Imagine GM got a loan of $1M for the lathe and they can only depreciate 1/5 the cost of the lathe. So come tax time, GM has to pay taxes on their 800K of "profit" since they can't fully count the cost of the lathe against the loan.
Loan example doesn't work because it's not revenue used to buy the lathe. That type of loan situation is exactly what depreciation/amortization/MACRS is for. If the company brings in $500,000 but buys a $1,000,000 lathe with a loan, they have a net cash flow of +$500,000. Their NPV isn't immediately affected by the loan liability because it's offset by the positive value of the lathe asset.
Then they pay taxes on $357,100 of adjusted earnings because under a 7-year MACRS depreciation, it's assumed the lathe lost $142,900 of value in its first year of ownership (under double-declining or straight-line methods).
Your first part is accurate though.
Anyways, this tax law is fucking terrible. W2 Wages should not be capital expenses because you generally won't be using loans to pay them.
I think I'm failing to see your point, as I cannot find one here.
If GM needs a lathe and has a reasonable business strategy, they should be able to get their accounting office and their leadership to align on how to make it make sense over 5 years. If they can't, it's a business run poorly, and according to the basic tenets of free market capitalism (which you seem to be leaning on heavily) that business would and should fail.
More generally, this seems a natural consequence of the impersonal ways that businesses treat employees, aka "human capital stock" to use the term of art. Capital stock / assets used for generating revenue should be taxed the same across the board.
In a world where you venture-fund software development, this is fine, since the venture funding isn't revenue. In a world where you fund software development with revenue, this hurts a lot, particularly for young companies (and especially for companies that get research grants, which are revenue).
Established companies can probably debt-finance development the way GM would debt-finance a lathe (yes, large enterprises often use debt to buy everything possible). Small companies likely won't have that benefit. Particularly because that software isn't necessarily a capital asset that can back a secured loan, the way a lathe is.
Software definitely is a capital asset: if it weren't, it wouldn't be IP and all code would be open-source.
VC has spoiled software folks for the past decade. This is just how small businesses become bigger businesses. The dogma of "bootstrapping" in software circles has been distorted into what is now clearly, retrospectively, an unsustainable means of developing industries. There doesn't seem to be any reason to treat software differently from others.
The arguments here given scream of panicked, defensive rationalizations how actually we're super special and saving the world through technology, and how dare they claw back the rewards we're given for enabling humanity's progress.
Arguably, software fits this definition, and under 1221(a)(3)(C) it would not be a capital asset for most closely-held companies (eg a lot of bootstrapped firms).
Revenue Ruling 55-706 provides that IP created by employees of a corporation does not fall within the scope of 1221(a)(3).
And generally, corporate-created IP is treated as a capital asset on the books. This is in line with how capital assets are generally treated; as other commenters have noted, the expense of building a factory (including the salaries of the construction workers, if employed directly by the taxpayer) is also subject to capitalization.
Considering that this entire discussion revolves around how the law is misaligned from the economic impacts of business activities, it is a circular argument to use law to explain and justify your argument.
Considering that this entire discussion revolves around what is and isn't a "capital asset," which itself is a legal term, I would suggest to you that the law is all we have to argue about it. And the law, in general, sucks here.
For most companies, 1221 doesn't apply, but some companies are going to get screwed on this front by having to incur a capital loss to pay for something that is not a capital asset.
In a less legalistic sense, I'm not sure if there are many companies who provide software-backed debt anyway. That would make software less of a "capital asset" than almost any other intangible asset out there.
I'd prefer to get away from the lathe example because it's not actually a great example of whats going on. I solely used it because the person I was responding to used it.
So back to software. If I have an idea for some company (lets say Twitter2.0) and I bring in ~10M in revenue from selling ad slots but I also paid a bunch of programmers ~8M over the course of the year and somehow the rest of overhead/expense was 1M. I think we can both agree 10M > 9M and so my business venture is profitable.
However, come end of year I have book 10M - (1M + 1.6M) = 7.4M of profit. You may wonder how I can book 7+M of profit when I spent 9M on 10M of revenue and this is exactly what this whole thread is about, programming salaries must be amortized.
This leads to the problem I have to pay taxes on 7.4M of profit using the 1M that I actually have left over so as long as the tax rate is below 13% there's no problem but if its any higher than I need to take out a loan to pay taxes.
In the example given they received a revenue that covers the entire cost of the software. The problem is that they then used that revenue for payroll which would be fine previously as if you make $X and pay $X in payroll then you pay ($X - $X) 0 in taxes and there isn't a cash flow problem.
To stick with the apples-oranges lathe example. Imagine GM got a loan of $1M for the lathe and they can only depreciate 1/5 the cost of the lathe. So come tax time, GM has to pay taxes on their 800K of "profit" since they can't fully count the cost of the lathe against the loan.