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when congress extended r&d credits to startups in 2016, a deal had to be struck.
a bargain that had to counterbalance the giving of money to startups,
with some way of recouping that money (or more) via taxes.
“ok fine, we’ll give startups up to $250k for their investments in product development,
but then we won’t let them deduct all those expenses from revenue in the first year –
they’ll need to spread them out (aka capitalize them) over the course of five years.”
to be super honest, this is fairly consistent with tax principles – despite being pretty shitty.
taxes follow a principle of revenues and expenses mapping to their respective timelines.
the software you build this year will likely continue to be sold well beyond this year.
and just like the upfront ARR you collect needs to be recognized, or spread out,
over the months that you actually deliver that software to your customers,
the costs incurred to develop that software follow the same logic.
more interesting than the bargain they struck in this particular case,
is the fact that it gives us insight into how the sausage is made.
as it turns out the history and politics of it all… is everything.