That “income” is being legislated into existence by disallowing the deduction of customary primary operating costs that are allowed in any other business.
In effect, it becomes a tax on revenue in the early years of a software company. Taxes tied to revenue are notorious for creating unhealthy and perverse market incentives, which is why very few jurisdictions use them. Many small software businesses are now in the position of potentially literally paying more income tax to the IRS than the profit + asset value over the entire life of the business. It is pretty messed up to make small business owners pay “income” taxes out of their own pocket in the absence of offsetting profit.
It is yet another indefensible and unique perversion of reasonable policy under US tax authority.
That “income” is being legislated into existence by disallowing the deduction of customary primary operating costs that are allowed in any other business.
In effect, it becomes a tax on revenue in the early years of a software company. Taxes tied to revenue are notorious for creating unhealthy and perverse market incentives, which is why very few jurisdictions use them. Many small software businesses are now in the position of potentially literally paying more income tax to the IRS than the profit + asset value over the entire life of the business. It is pretty messed up to make small business owners pay “income” taxes out of their own pocket in the absence of offsetting profit.
It is yet another indefensible and unique perversion of reasonable policy under US tax authority.