There used to be a bit of hesitation for organizations to go offshore for software development. There are unique obstacles that exist only in offshore development, and for some businesses, those hurdles weren’t worth the trouble. Now? The temptation to go offshore is growing ever stronger for U.S.-based software development companies. The 2017 Tax Cuts And Jobs Act, signed by then-President Donald Trump, made significant changes to tax codes. One such area was Section 174, which deals with businesses and their ability to deduct or amortize specific research and development costs. The new iteration of Section 174 has changed how and what can be expensed as part of R&D. These changes will have a fundamental impact on software development organizations based in the U.S.
Now, is this the death of R&D stateside? No. Will U.S. developers no longer be able to find jobs due to these changes? Also no. However, the impact of Section 174 is not to be trivialized or underestimated. Such a fundamental change went unnoticed before it hit companies’ books, and now it’s on every organization’s doorstep. That being said, the cost-effectiveness of offshore development, which was already a boon, has become even more impressive. Organizations that may have previously belittled or minimized offshore development are being brought around to the idea. Let’s talk about why offshore development will become an even more attractive option for software development organizations following the changes to Section 174.
The changes to Section 174 are complex and confusing for, well, anybody really. The necessary expertise to understand these alterations and their intricacies isn’t easy to find and can’t succinctly be detailed in an article of this nature. There are some articles that detail the itty gritty nuances of the new Section 174, and as such, those needing that information should check out the available resources.
However, the focus here is on software development organizations and how going offshore might behoove companies that traditionally turned their nose up at such an endeavor. Here’s a table detailing a fictional organization and the impact Section 174 would have on them being onshore vs. offshore.
That’s a significant difference, no? This is where the rubber meets the road. Orgnizations are already doing cost benefit analysis around the U.S. and are finding the same results. It’s a game-changer. Having your product go through necessary iterations over an extended timeline is essential. Rushed development usually equates to failure. Businesses know that fact and, as such, know the importance of creating a refined, functional product that meets the expectations of end-users. It takes time and money to do this the right way. It looks like now that time and money would be better spent with an offshore development team or a full-on offshore partner organization rather than being limited by these new taxes.
What does this all mean? Well, several things. Firstly, there is now a strong incentive for organizations to actually buy software instead of building it themselves. Grabbing an off-the-shelf product won’t affect your books, and thus your tax payments, the way employing a multitude of engineers would. As such, this option will likely become more prevalent for businesses looking to increase capabilities or augment their own products. Secondly, organizations that don’t have a huge reserve of cash will most likely prioritize investment in areas other than R&D. It just doesn’t make sense to pour money into the possible creation of a product if you don’t have the liquid capital to afford the increase in tax requirements. Thirdly, keep an eye out for more and more start-ups to be formed outside the U.S. Software development start-ups, oftentimes, spend the vast majority of their early year(s) experimenting, refining, and iterating on a product until it’s ready for a full launch. In the past, that wouldn’t have required the company to spend money it doesn’t have on its tax bill. Now, those funds will be required regardless of the stage the company is in, which means starting a company outside the U.S. will save the nascent company from losing its cash reserves to taxes. This isn’t all doom and gloom. Agile, wily organizations are already seeking out alternative options and innovative solutions to this new problem. The main one, of course, is going offshore with any sort of R&D venture. However, it’ll take a while before we’re exactly sure what impact these changes will have on the R&D environment within the U.S. Until then, those who stay proactive and pragmatic will find ways to continue experimentation in all its forms. The promise of offshore development has never been so high, and taking advantage of this chaotic period may rear some fascinating new products if R&D is done at the right time and in the right place.