New R&D tax rules could bankrupt your blockchain startup

The new R&D law has overly broad language that states “any and all” software development must be amortized over five years if the development took place in the United States, or over 15 years if the work was done overseas. The change doesn’t sound so bad on its surface; some argue it might even create more tech jobs in the U.S.

But that isn’t how it will play out. Many countries have better R&D credits than the U.S. Much of U.S. software development will shift to countries such as the United Kingdom, where the rules are simpler and more lucrative. For tax-smart companies, U.S. entities will just be for marketing and sales.

Imagine a company that lost over a million dollars but owes over $300,000 in taxes! How is this possible? This hypothetical company has roughly $2.5 million in income and, in 2022, spent $1.5 million building its software and $1 million in other costs, meaning it had a negative cashflow totaling $1 million dollars. However, because the $1.5 million of development was done by a team in India, it will only see $50,000 from the software development side, leaving a $1,050,000 deduction to offset the $2.5 million of income this year — meaning it owes tax on $1,450,000 in net income, or a bankrupting $304,500 in tax!

Proponents of this tax say companies will still receive all the benefits of the deduction — just over many years. Put one of these proponents in front of a company that lost a million on operations but owes $300,000 in taxes and see if they say the same thing. Cashflow is king for finding startup success, and these types of R&D costs have been deducted nearly as long as the United States has had an income tax because of how vitally important innovation is to fueling national growth. With the current climate of high-interest rates and increased regulation, this law change will kill the most creative development in the U.S. on future-thinking technologies, such as AI and blockchain.

Some of the Big Tech layoffs taking place may be a result of this rule change. No surprise: It makes more sense to restructure so that subsidiaries outside the U.S. do R&D. For blockchain, crypto, and nonfungible token (NFT) companies that already have to deal with all the Securities and Exchange Commission scrutiny, it just seems a no-brainer to distance from the U.S. now.

Related: Get ready for a swarm of incompetent IRS agents in 2023

There are so many complications and unanswered…