But aren't you deriving value from what they developed in the first year? I mean, maybe that's my mistake.

If they spent a million, made a million, and are now back to square one, it would make more sense to not amortize the investment because it's not an investment.

Yes, but according to this law you're not allowed to do that; you have to amortize it over five years.

That seems to be the rub. It doesn't differentiate between different reasons and business models for writing software: Software as wealth, and software as pure expense.

It's also pretty harsh on a business that's just plain unprofitable. The laws should be arranged so that if you start a business and it's a flop, but you have no debts, you can walk away pretty much unscathed.