As a SMB, if your salary expense is $500k and your revenue is $500k, you are absolutely struggling, no matter the tax situation. In this case you "just" need another $100k in revenue. After all, you are throwing out theoretical revenue numbers anyway. So it just moves the needle somewhat for you to still break even. You could game it just a little if there's revenue at end of year that you can book in the following quarter instead -- companies do the reverse of this all the time. Perhaps you can shift some of the expenses as well.
Note that in year 2, you get 20% of the year 2 salary expense, plus 20% from year 1. So the impact is less. By year 5 you are "caught up".
Companies don’t do “this all the time”. In your hypothetical example, you”d have to essentially forge the quarterly 941 reports to shift the salary R&D expenses. Also ‘gaming’ which quarter revenue occurred is technically tax fraud, certainly if one is on an accrual basis. And it doesn’t mean one is ‘caught up’ by year five. Any time a company increases R&D expenditures, it will have an impact.
Have you never bought anything? There is always a push at end of quarter and end of fiscal year, to sign the agreement NOW. so that it can be booked in that quarter. even though delivery won't happen until next ...
incentivized by quota but the incentive is there to get it on the books.
there is no forgery involved.
Yes, of course as you increase spend you increase the impact (in the year that you actually spent), but the context here is specifically very early SMBs, and more so, ones that would only be running break even under previous rules.
This is wrong because you are speaking on an accrual basis but you have to consider cash. The cash (salaries and taxes) is paid out in year 1 regardless of what year you try to book it in your p&l statements
i'm suggesting that as an early startup, in year 1 where this has the most impact (you aren't now bringing in previous years expense), your employees may be flexible enough that you pay out the cash 31 days delayed (example) instead of paying anything in December.
obviously if you pay salary in December, you paid in December and you have to book it that way.
I think I am being fair. The numbers $500k/$500k were picked arbitrarily to demonstrate how it would kill a business. If you were at $500k/$400k you would be similarly dead. "back then", $500k/$500k was enough to stay afloat. Now you "just" need to be at $500k/$600k, that's all. ie, your revenue needs to be somewhat higher (20% I guess? too lazy to math it) to pay the taxes. Assuming the business stays afloat, you'll eventually break even on the taxes, it's not forever lost like paying AMT for stock options that never become liquid, or RSUs that go well underwater before a lockup expires.
It does suck that a quirk in accounting means you were profitable on the books, no question there. But it "just" means you can't run so close to the bone. I don't think it's the world ender everyone is making it out to be. It means you need more operating capital up front.
Note that in year 2, you get 20% of the year 2 salary expense, plus 20% from year 1. So the impact is less. By year 5 you are "caught up".
Indeed the first years are harder.