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The Almighty Buck

Open Source Tax Credit? 108

An Onymous Coward writes: "While looking for a few loop holes in the tax code, I ran across this interesting IRS Regulation. I was wondering, if using this if Open Source programming is tax deductable? Linked from here under Credit for Increasing Research Activities." It's an interesting-sounding twist in the tax maze, but probably better to get your certified tax accountant to sign off on it first. Note that the second link there goes to (allegedly) "Plain Language Regulations," but they remind me of the book Unbridled Power intead. Does anyone else have any good hindsight on how techies can / should approach their tax forms?
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Open Source Tax Credit.?

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  • by Anonymous Coward
    for an open source community.
  • by Anonymous Coward
    Yes I'm pretty sure he wasn't expected tax credits simply for USING free software. But if this pans out, it may let people spend more time writing free software. I wonder what the ruling on derivative works would be, hmm.
  • by Anonymous Coward
    Someone posted an urban legend about a person making a painting, valuing it at $1000 and donating it to the Red Cross, claiming a tax writeoff. While this could happen, the artist would not be writing off $1000, s/he would be writing off the cost of the materials to make the painting.

    No, writing off costs has nothing to do with donations. You can sell the painting yourself for $1000 and still write off the costs.

    The IRS runs itself bookkeeping on reciepts. What reciepts are there in this picture? There is no $1000 receipt (unless the painting materials cost $1000).

    You get your receipt from the Red Cross. Just like when you donate clothes, they'll value the stuff and will give you a printed receipt if you ask for it. If they value your painting at $1k - bingo, you get a receipt. Whether they'll value your painting at $1k is a different question.

  • by Anonymous Coward
    > You always hear (friend of a friend) stories
    > about people who paint pictures, value them at
    > $1000, then donate them to the local Red Cross
    > or YMCA.

    That doesn't gain you anything. You'd have to claim $1k worth of income from creating that painting, and then claim $1k worth of charitable deductions. End result is the same.

    > My impression is that's a good way to get
    > yourself audited, but if you can sell other
    > paintings for $1000, it is legal.

    Nope. It doesn't work that way.
  • If the Red Cross sells the painting at an auction for $1000, then the painting is worth $1000, and the artist should get a receipt for that amount.

    You can donate cars and get a receipt for the blue-book value of the car, even if it doesn't run.

    These things would come into the tax paper as an itemized deduction, which comes off of your regular income and doesn't require you to have a separate business.

    If you're a Linux consultant and donate hours to a non-profit and get a receipt for the time you spent there, and the time is in line with the other customers you have, why can't you deduct that time?

    Now, in all these cases, there are services or items you're donating. Writing software is a different subject. Go talk to your tax lawyer/accountant.
  • Posted by polar_bear:

    I don't know if that would apply, but I think it might be a good idea for the Free Software Community to try to get a law passed that would give companies and individuals credit for releasing code under an Open Source or Free Software license.

    I don't see why a company shouldn't get tax credits if they release code... if they spent money on hardware and gave the hardware away to a charitable organization, then it'd be deductible, right?

    Useful Free or Open Source code is a benefit to the government and organizations that can't afford to pay for proprietary licenses.
  • That's what I was thinking. You can take a loss for three years, then you have to at least break even, or change "skins" and become a different entity. (Change the project name!)

    It's not immediately apparent to me that there's a difference whether you open the source or not.
  • Get an experienced Tax ATTORNEY. not a loser accountant. in order to get something past the IRS you need to demonstrate that what you're doing is "probably legal" (i don't remember the exact legal phrase) which means you need a tax attorney ( a good one) to convince them!
  • You can earn money writing code or technical articles in same time it would take to argue this deduction with a tax laywer or (God forbid) an
    IRS auditor. How would you rather spend your time?
  • There's cute things you can do- like file an ammendment like another poster suggested. Another thing you can do is file an automatic extention, which extends your time to file another two months- to the 15th of June.
  • It's not good getting a huge check, no. Problem is, for most, they don't have much in the way of options to tell them how much to withhold. Unless you're self-employed, you're at the mercy of the witholding rules, which aren't finegrained enough to prevent overpaying or underpaying for some.

    Worse, they'll penalize you if you severely underpay those taxes.
  • I'm sure the FSF has been asked this question before. Drop them a note and ask... certainly, it would help further their goal of getting GPL software assigned to the FSF, so they might be happy to do it. On the other hand, they may not want the associated accounting headaches, so...
  • I don't believe you get charged interest and penalties, *if you pay before the deadline.* And, it does take some discipline to ensure that you've got the bucks at the end of the year to pay the taxes.

    You should be able to find liquid money-market accounts that pay decent interest, and reasonably liquidable split stocks that pay very good interest with little risk.


    --
  • by FFFish ( 7567 ) on Sunday April 15, 2001 @04:27PM (#289904) Homepage
    Heck, and if you can figure a way to end up owing the revenue folk each year, *DO IT.*

    Otherwise, you're basically floating them an interest-free loan. And that's just senseless.


    --
  • If you are getting a big refund check, then you are probably paying too much in taxes. By not hanging on to that money yourself, you've lost the time value it had. You could have put it in something low risk like money market and still have come out ahead.

    Sounds like the person doing your taxes might be getting you screwed.
  • It's almost like a gift from the IRS telling me I can take the money and go buy myself a present like a new Powermac G4 cube or something.

    Whoops, we took too much of your money. Here, you can have a little back, but we're keeping the rest. "Gee, thanks IRS! That's swell!" :)

  • on how techies can / should approach their tax forms?

    Isnt April 15th a little late to be asking this???
  • by Dredd13 ( 14750 ) <dredd@megacity.org> on Sunday April 15, 2001 @03:40PM (#289908) Homepage
    In a word.. bull shit.

    If you OWE money on your taxes there isn't a single good reason not to earn interest on it in your interest-bearing-account-of-choice up until the last possible day.

    If you get a refund due, absolutely, file as soon as you can, but if you owe unto Caesar, then there's no reason to give it up any sooner than the last possible date.

    D

  • This looks like a way for someone who pays money for the development of certain software (not the person who is paid to do the work) can deduct it.

    I don't see anything in there that suggests it applies more to free software as opposed to closed source.


    ---
  • By your own analogy with the painting, I *could* deduct the *cost* of developing the open source software if I dontated to FSF, for instance. If I bought hardware solely for that purpose, for instance, or if I purchased a commercial compiler, development tools, or whatever, I could deduct that.

    Correct?

  • I did my own taxes and got back $900. Am I on the line? And I did it in a Perl script for my company so I claimed the time spent on taxes as a deduction.

    That's legal; right?
  • Because I qualify for few deductions, I've always done my own taxes. I refuse to pay even a measly $50 for someone else to save me an single hours time. I figure it wouldn't take them a half an hour, and they certainly wouldn't get me more money back. My tax status is basically this:

    A part time student with a full time job. I usually get back a good portion of my federal taxes back and I don't need H&R to explain the already simple-as-cake 1040EZ. Now, If I made a lot of money, were married, or ran my own business then I might consider some sort of professional advice.
  • Technically you can get more than a fraction back. For example, in Australia, you can get 125% deduction on R&D, even 175% if you undertake marginal increase above and beyond a rolling average. So in theory, if you wanted to set up a server in Australia dedicated to reverse-engineering closed software for "interoperability" reasons, then if you structured it properly, you'd get the government owning you a lot of money. This is also given another name ... tax rorting. Basically the tax system is not intended (or even designed) for encouraging innovation because the legal code from which it is derived is backwards looking. It cannot define what has yet to be invented. In the past some R&D syndicates (an older law) basically were side-marketed as tax-shelters which caused the closure of that scheme. I would like a citation but hearsay is that tax incentives are a negligible component in the innovation process. Marketing (identifying a need), availability of venture capital, and source of talent are ranked much higher. In addition, the government would refuse to deduct more than the matched income stream so effectively it is carried forward as an interest-free debt.

    However, on reflection it would be a glorious legal hack to set up OpenSource servers in Australia to undertaken R&D projects in stuff like quantum computing [uq.edu.au] or DNA computing [uq.edu.au] (theory/code) and let the government handle the paperwork. Costs would be recovered by securitising the future tax windfall from any real discovery. ie discount the net 75% differential by the risk factor. ie supposing someone came up with a useful and aptentable application of quantum computing. Then you've suddenly recovered your sunk costs (basically server + mailing list + perhaps some prototypes). However, this is risky (about the same level as finding treasure ships but without the maps :-) ) so only the bold and brave need apply.

    LL

  • Simple. They're due then. I owe Uncle Sam a little this year, so he's not getting any free interest on it by paying it before it's due. If I'd had a refund coming, I would have filed by Feb. 7th or so. My taxes and forms have been ready since the 10th of February. It's just smart management of my assets (although, if I had done it MORE intelligently, I'd have zeroed the amount owed. But you can't always plan your paid overtime, or your consulting income.....)
  • by Brento ( 26177 ) <brento@@@brentozar...com> on Sunday April 15, 2001 @02:18PM (#289915) Homepage
    You need to be more specific. According to the document you linked to:

    SUMMARY: This document contains proposed regulations under section 41 of the Internal Revenue Code of 1986 describing when computer software which is developed by (or for the benefit of) a taxpayer primarily for the taxpayer's internal use can qualify for the credit for increasing research activities.

    Just because it's open source doesn't mean you developed it. Open source usually means you're using someone else's work as well. Furthermore, I'd doubt you'd be able to pass the test of saying it's for your internal use - especially if you work collaboratively on it, and upload your source code to external trees frequently.

    As I read it, this is for companies/individuals who develop their own software, so that they can take advantage of the R&D credits. The government smiles on those who do their own R&D.

    So, going by what you asked, if you're simply using Linux and expecting a tax credit, that's ridiculous, because it's not developed primarily by you, for your internal use. (Unless your name is Linux Torvalds or Alan Cox.) If you're rolling your own code that you use for your own internal use (logically speaking, that could even be batch programming) then you might be able to use this.
  • The GPL and the BSD-license, the two most common licenses, does not restrict you from using the software commercially. What could be tax-deductable anyway, is developing software and giving it out under an opensource-license.
  • by hey! ( 33014 ) on Monday April 16, 2001 @07:00AM (#289917) Homepage Journal
    First of all, you cannot deduct the value of your time. This is one aspect of the tax code that really sucks, but it was put in place to stop egregious claims by rich folk who used to write off vacations. GWB should find a way to loosen up on this.

    If you can come up with a defensible fair market value for an original piece of software you created, I don't see why you couldn't claim that. Companies already take the value of software licenses donated, so assigning full rights to a tax deductable charity should in principle work too (caveat -- there may be precedent against this which overrides any kind of reason so check with your accountant). The problem is that licenses have easily determinable market values, whereas a new work could be pig-in-a-poke. Supposing Digital Creations wished to assign rights to Zope to FSF. What is the value of that? It overlaps with some valuable commercial products such as Cold Fusion, but it isn't really comparable.

    It may be that this would work best if you have a closed source product which has a track record of sales. You can point to past sales as evidence for putting a market value on the product. The problem is that abandonware is usually not fabulously valuable; this would only work if a company is open sourcing a valuable product for strategic reasons.

    In any case, if your work consists of changes to already open sourced works, you probably can't claim anything, because you have no ownership stake in the original product or any derivative works.

    Finally, be aware that anything you claim as a gift must be claimed by the recipient as income. While they do not pay income tax, it will create income on their income statement, and in subsequent years it will likely need to be depreciated, producing paper expenses. The reason this is important is that many kinds of charities (probably not the FSF) are dependent upon the generosity of old money farts who like to back sure winners, with their investments or their philanthropy. I've been in the position of considering rejeting software gifts because it would make us look financially unstable.

  • IRS taxes income,

    Actually, the IRC taxes things besides income. It has this weird idea that it can tax you on the value of stock options you exercised, even if you didn't sell the stock at that value. There was no income (you never had your hands on the cash), but you owe taxes anyway.
    -russ
  • One book (besides Unbridled Power) that I recommend is called "Why we must abolish the Income Tax and the IRS" (http://shopping.yahoo.com/shop?d=b&id=3222255&cli nk=dmbk-tr) ...

    The argument there is for sales taxes as a fairer approach, and I think that is at least a better option.

    However, whatever form the actual collection takes, here is my modest proposal: link specific areas (down to zipcodes, say) to specific projects. Figure out the tax yield of a certain region, and attach it to a tax-supported project of the closest size you can find. Re-allocate each year and rotate, so people have a chance to see how much various government spending projects cost. I have a feeling that a lot of unctuous, thieving programs would suddenly grow less attractive if a group of specific people realized they actually had to pay for them.

    Let's say (for instance) that a certain city generates 105 million dollars: that's the size of the 2001 congressional budget for the National Endowment for the Arts, according to http://arts.endow.gov/endownews/news00/Funding.htm l

    Wouldn't it be nice if the citizens of the NEA City had some say about whether their money was being well spent on the project their money is allocated to? (I won't here get into into the even better level of determining how many households should be forced to pay for the next Andres Serrano or Chris Ofili work ...)

    Black budgets, pork barrel spending, last-minute, closed-door budget "negotiation" (by people who are only redistributing the money, remember, not the ones who earned it) are what lead to the best but least funny Dave Barry columns. If people knew their money was going to support silly, wasteful, counterproductive things, it might lead to some better spending, and the best spending when it comes to tax dollars is less.

    I would happily re-direct some of my tax dollars away from tobacco subsidies, psychic viewers for the pentagon, money for pigeon farmers, etc to better things, and even more happily put those wasteful programs out of business (well ... not 'business,' but you know what I mean) and keep more of the money I earned.

    Just some ranting,

    timothy

    p.s. (a) Pay off the debt, then talk about "surpluses" b) all alleged "surpluses" are really overcharges for services badly rendered)

  • by akb ( 39826 ) on Monday April 16, 2001 @06:02AM (#289920)
    Last session there was a bill, the Artists' Contribution to American Heritage Act [loc.gov], that would have allowed the picture painting scenario you describe, see Sen. Leahy's letter [cptech.org]. It seems likely that it would have applied to software but its not clear how it would be applied to Open Source software because it is unclear how to appraise Open Source software. See the thread [essential.org] on the Union for the Public Domain's mailing list.

    In the discussion, according to RMS companies (not individuals) can already claim a credit for donations of proprietary software to FSF (which would presumably "free" it) or other such organization, but that he was not aware of any such situation where that had occured. It would surprise me if no companies would take advantage of this as companies like IBM are donating copyrights on code to FSF. I believe that patches to GCC must have copyright assigned to FSF.

    The bill didn't pass, it will probably be reintroduced this session.

    Of course, any discussion of taxes and free software would be incomplete w/o mentioning the Hacker Tax Credit [resource.org].
  • IANALNAA, Neither Lawyer Nor An Accountant

    Does anyone else have any good hindsight on how techies can / should approach their tax forms?

    I've tried a number of approaches.

    Blunt instruments, sharp instruments, shredders with safety cover removed. But the most satisfying approach to american tax forms is the good old fashioned flame thrower. Watching it burn can make you feel as if you have some control in the face of the behemoth.

    Note, this year I had to file tax returns in five different countries. I'd prefer your cash to your pity at this point. (do I need smileys in this post? :-)

    the AC
  • Rarely will working on your own car land you in jail if you do it wrong.

    Rarely will asking your friends for advice about personal problems put you in serious debt six years later when you're audited or arrested.


    And rarely is somebody dumb enough to be unable to tell the difference between the opinion of a semi-anonymous armchair expert and a trusted paid professional. Both have their place, and both are helpful. So maybe you could stop raining on somebody else's parade via copy and paste?

    You will note that this thread, for all your grumbling, contains pretty much exactly the advice a professional accountant will give you: the link the original poster dug up doesn't get you beans with the IRS, and that if you are donating your professional services you can only deduct expenses, not your hourly rate. How do I know? I asked my accountant about this a couple of weeks ago.

    And even if people want to double-check with a professional, now they know the issues involved and can go ask a couple of quick questions, rather than paying $250 an hour to cover all the ground we've covered here. Thank goodness you have stepped in to save us all from this terrible fate.
  • by dubl-u ( 51156 ) <2523987012 AT pota DOT to> on Sunday April 15, 2001 @04:36PM (#289923)
    Get some professional, personal, specific advice from someone who is accountable for the answers they provide.

    I completely agree. This is as silly as looking online for technical information, trying to work on your own car using some sort of "book" for the consumer, or asking your friends for advice about personal problems. We have professionals to do these things for us.

    Anybody who is foolish enough to ask anybody other than a professional gets what they deserve; life is too complicated to be dealt with by amateurs. Sure, other people might have "experience" that appears to be relevant, but only a trained expert can tell the difference, so don't risk using your own judgement. Some might suggest that talking about things with your pals first might help you collect your thoughts, but they're just likely to steer you wrong; after all, they're only amateur friends, not professional ones.

    So in sum, if you aren't paying for it, it isn't worth getting. This poster has wisely pointed out how foolish it is, and thank goodness he is nipping this tendency in the bud. Next thing you know people will be thinking they can use software that they don't pay for, or having a girlfriend who doesn't charge them by the hour.
  • by dubl-u ( 51156 ) <2523987012 AT pota DOT to> on Sunday April 15, 2001 @04:38PM (#289924)
    Hmmm... I gave my accountant about $500, and I get about $8000 back this year. I see a correlation here. Could somebody please give their lawyer all their money and let me know if they get millions?
  • I did my own taxes using Turbo Tax, I received $2k back! This was not a suprise, on my W2 forms I always put down in the addtional witheld: $my hourly rate. This is a forced savings account, so I do not spend money :)

    --
    microsoft, it's what's for dinner

    bq--3b7y4vyll6xi5x2rnrj7q.com
  • You can always file an ammendment for past years, and get anything back that you were owed (or possibly have to pay more)
  • That we should establish a few non-profit organizations that act as charities that employ hackers for projects based on donations from the community. Sort of like the developer networks except that they are tax writeoffs for the donors.

    I'm no tax code expert but it seems to me that you could set up a real 503C corporation, employ actual programmers full or part time and pay for it all with donations. It seems legit to me. Most charities have a staff that either directly does things or tells volunteers what to do. They get paid and the people donating their salaries get a tax deduction for so doing.

    We could even set it up as a church ;-) Let's elect Linus as our patron saint! "Ha ha, only serious, world domination now" (tm). CaTB as the bible.
  • To follow on to what Fjord said, if they let you deduct the $150,000 you're asserting your labor is worth, they'd also want to tax you on the $150,000 of *income* for that labor, so you'd lose badly. It would be equivalent to being employed by the charity, paid $150K in cash, and donating the cash back. If you don't claim the monetary value of your labor as income, it counts as worth $0 for the deduction. So just as a painter who donates a painting only gets to deduct the paint and brushes and such, maybe if you're writing free software and donating it to the FSF you can deduct the value of those blank CD-Rs and any electrons you weren't able to recycle, but it typically ain't worth the paperwork.

    Dealing with tax collectors is like dealing with vampires - if you invite them into your house, it's hard to make them go away without them sucking your blood first.


    The one place you get special bennies on your taxes is if you buy capital assets (typically stock) and donate the stock rather than selling it and donating the cash. I think you get to deduct the market value of the stock rather than your basis, but you manage to get around some of the differences in tax treatment between capital gains and ordinary income. So if you gave the FSF your RedHat shares last year when they were worth big bucks, that was a win ; doing so today is less useful :-)

  • [stock rant on the subject] [explorati.com]

    The abbreviation IANAL normally stands for the caveat, "I am not a lawyer," which often serves as a disclaimer in online discussions where lay people are exchanging legal advice or their opinions on matters of law.

    I contend, IANAL better means "Incompetent Advice Necessarily A Liability."

    Why do people ask legal advice on weblogs where a real lawyer is essential? If you're concerned about a licensing issue or personal freedoms, especially with large corporate or government interests at stake, why would you even consider taking the opinions of anonymous amateur pundits on a for-profit advocacy weblog?

    Get some professional, personal, specific advice from someone who is accountable for the answers they provide. As much as some people don't like the lawyer culture, it is clear that a reputable lawyer wants to stay that way, and will be very careful to consider your situation thoroughly.

    [end of stock rant on the subject]

  • Rarely will working on your own car land you in jail if you do it wrong.

    Rarely will asking your friends for advice about personal problems put you in serious debt six years later when you're audited or arrested.

  • by Freedom Bug ( 86180 ) on Sunday April 15, 2001 @02:32PM (#289931) Homepage
    You always hear (friend of a friend) stories about people who paint pictures, value them at $1000, then donate them to the local Red Cross or YMCA.

    My impression is that's a good way to get yourself audited, but if you can sell other paintings for $1000, it is legal.

    I've had companies charge $150 an hour for my time, so why can't I donate code to the FSF or other charitable group, and get myself a nice fat charitable donation?

    Bryan
  • The linked-to IRS document says it's a tax credit, so no, you don't necessarily have to have income to claim it. But there may be limits buried somewhere in the part of the document that exceeded my attention span.

    More importantly, it seemed to say it was for software developed primarily for a taxpayer's own use, and that it had to accomplish some task for which there is not readily available or purchasable software to do the job. One or both of these would seem to rule out most open source projects.

    Some of the one-off stuff I put together (often in python) would seem more likely to meet the terms of this credit than most open source projects. But they probably don't accomplish significant enough tasks, and they're usually just for my own hobbies rather than any business purpose, so they probably wouldn't qualify either.

  • 42 percent of my income yet still being taxed as if I were bringing home 70 percent, my Jackson-Hewitt employed mother-in-law goes over my taxes with a fine-toothed comb and then I do as well. I do use the tax credits for continuing education and every computer book and non-game piece of software I may acquire is added to my deductions at the price on the box.
  • I guess merely by posting you are not only ominous but also onymous. ^_^
  • I think that its too bad that economics have been so politically polarized. Sure Rep/Dem have agendas, but it seems like we're locked in a battle between taxing the rich and creating loopholes for them to escape from, instead of having some actual dialog on what taxes should be like for various income brackets.

    If tax law were simplified it would be a lot easier to see where the money was really coming from, and it would end the existence of loopholes that exist only for those rich enough to pay CPAs to exploit them.

    Ultimately this should be fairer--it will eliminate the gap between ostensible and actual taxation.
  • by Tiroth ( 95112 )
    Kind of ironic, really:
    onymous: bearing a name

    That is, the opposite of anonymous.
  • Changing them changing parts of the meaning

    eh?? You don't find anything amusing about an onymous coward in the context of /.'s anonymous cowards?
  • by Tiroth ( 95112 ) on Sunday April 15, 2001 @02:12PM (#289938) Homepage
    Does anyone else have any good hindsight on how techies can / should approach their tax forms?

    With a 10 foot pole?
  • Then post date the cheque
  • If the Blue Cross sells it at an auction, the artist doesn't get a receipt. Why would they? They gave the painting up for free.

    And if the artist did get a receipt for that amount, then the IRS will ask why he didn't claim that income on his/her 1040. If the artist did claim the amount of the 1040, then the result is at least as much tax as s/he can write off.

    I knwo about the car donation thing. You have to pay for the car. You have to show that it is worth that much.

    You can't deduct the time because you didn't earn anything. If you do deduct some amount, you had better have a receipt for the amount you are claiming. And if you are claiming it as a donation, you had better claim it as income on your 1040. You can't donate something you didn't earn.

  • There are ways that you could reduce yur taxable income using this, but don't expect to get 100% of your taxable income (which for me would be 29% of the machine cost) back. If you were to do the work, and then donate the machne, so you get no after benefit, or if the work took the amount of time it takes for the machine to depreciate fully, and you don't use the machine for anything else, then you may be able to deduct that.

    This is based on the rules for business. The iffy thing is that in this case it's not an expense of the business but an expense of the donation. My understanding of the tax system is that you can write it off (since you lost the money to make the donation, effectively donating that amount), but charities work a little differently than business expenses. You'd have to get something from the charity that says they "received" the donation of the depreciation. Once you go there, things get very tricky, because without donating the whole machine and letting it depreciate on their accounting, how do you account for the machine on two different books. The IRS isn't really set up to allow you to donate 1/6th of a machine, and then let that 1/6th be the first to depreciate, while the rest is entact. Typically shared equity (like in a partnership) depreciates evenly across all the partners. So if you did donate 1/6th of a machine, and it depreciates 1/6th, your portion would have depreciated 1/6th (worth, now 25/36ths of its orginal value), and the FSF's portion is worth 5/36ths of the value. This leaves them with a stake in the machine.

    This I would talk to a tax attorney about, and you would have to get a buy in from the charitable organization in question, since it is ultiately their receipt of donation that will allow you to write it off.

  • But the Red Cross isn't going to give you a receipt for $1000. And even if they did, it's like a previous poster stated, the IRS will then ask you to claim the $1000 on you 1040.
  • Once it is appraised, you will be taxed on the increase in value on the appraisal. This is similar to the government taxing you on an increase in the value of your home (and how you can write off a decrease in the value of your home). You can think of the art as an investment, and the appraisal establishing your investments gain.
  • Yes, bu tthen you would have to claim the $20000 on your income, if the value of the painting increased while it was in your posession. It's capital gains.
  • by Fjord ( 99230 ) on Sunday April 15, 2001 @04:12PM (#289945) Homepage Journal
    There seems to be some confusion among the people on Slashdot as to when you qualify for tax credits/writeoffs. The only way you can qualify for a tax credit/writeoff is if you have earned the money that it applies to.

    Someone posted an urban legend about a person making a painting, valuing it at $1000 and donating it to the Red Cross, claiming a tax writeoff. While this could happen, the artist would not be writing off $1000, s/he would be writing off the cost of the materials to make the painting. The IRS runs itself bookkeeping on reciepts. What reciepts are there in this picture? There is no $1000 receipt (unless the painting materials cost $1000). If you honestly think you can look at an IRS agent and claim $1000 without a receipt backing it, you deserve the fraud charges they will lay on you.

    One other thing that should be pointed out is that even though the painter writes of the cost of the materials, that doesn't mean he gets the cost of the materials back from the Government. It's not like the government is paying him to make paintings for the Red Cross. It just means that his taxable income will be reduced. I paid about 29% on my taxes (no state tax in Florida), which means I would get 29% of the material cost back.

    Bringing this back to the task at hand: the tax credits are based on the cost of developing the software. This makes sense when you look at other things the IRS allows businesses partially deduct. If a business cannot find shrinkwrap software to fulfill it needs, and it spends money to develop software, then part of the money it spends can be deducted. If someone pays you to develop open source code for their internal use, then they can deduct some of that cost.

    You cannot just say "I bill at 150/hr, and worked 1000 hours on this open source project, so I'll deduct 150,000 dollars from my income". Think of it this way, you didn't loose the 150,000, you just didn't gain it. Since you didn't gain it, it wasn't taxed anyway. Since it wasn't taxed, it isn't subject to a deduction/writeoff/credit.

    This all stems around the two immutable facts: the IRS taxes income, and you cannot get more money back from the IRS than you put in*.

    *: actually this isn't totally true. There are certain rebates that you may qualify for that will have them sending you money, even if (especially if) you made no income that year. But they are always a fixed amount, and very little (on the order of hundreds).

  • As far as I can see, this is a tax credit for R&D, including all type of programming.

    I can't see any statement anywhere which indicates that "Open Source" programming would be treated any differently from "Closed Source" programming.
  • Guys, if you want the R&D Tax Credit, you have to develop something new. Seeing what gets announced each day, the bulk of what goes on in "open source" land is the redevelopment of commercial products.

    That isn't R&D anyway. The R&D credit is to encourage businesses to advance what the US can produce (I believe it stems from the economic crisis of the 70s, but it might be a bit earlier), not to write software designed to take away the revenue stream of a company in the economy.

    I truly doubt that most stuff that comes out open source would qualify anyway. However, this makes sense, the truly novel and interesting stuff is often sold under a commercial license, even by people that mostly deal in Open Source.

    Alex
  • I'm an Ominous Coward!!!!
  • You should aproach your taxes with a little more time to do them. The 15th is a little late to start thinking about tax loop holes, H&R Block doesn't want to waste their time on the busiest tax day of the year covering you but for a few hundred dollars. They will tell you "No don't do it," and move on. This is the sort of thing you should think about in January/February when the real tax pros have time to look into things more carefully.
  • Is there a tax credit availble for commercial software developers who decide to make their formerly proprietary code open source?

    Something like a charitable deduction?

    Seems like that might be an incentive that would get some companies to release code that's no longer a profit center to the public. Of course it could result in a lot of useless crap getting open sourced, but there could be some good stuff too.
  • I recommend consulting a good tax lawyer. When you get down to the issues in tax law that haven't been fully explored, a specialist is required.
  • He's not donating time, he's donating a product. He's just saying that the value of said product would be approximately $150 x hours spent coding.

    I agree the whole plot seems rather sketchy, but it's not because of the line you quoted.

    The only "intuitive" interface is the nipple. After that, it's all learned.

  • And the stock had whatever value is taxed when the options are excercised.

    Likewise, if someone gives you a house, even though you're not getting any money, you better believe the IRS'll tax you on the value of it.

    The only "intuitive" interface is the nipple. After that, it's all learned.

  • Why do people ask legal advice on weblogs where a real lawyer is essential?

    Because sometimes what they're really trying to find out is if a lawyer really is essential.

    For example, if I asked here, "I just got a speeding ticket; should I fight it," most people would probably say, "Don't bother; you'll waste the legal fees and still have to pay the ticket." Granted, a good lawyer would tell you the same thing, and an ethical one wouldn't bill you for telling you that, but you get the point.

    That's more like legal meta-advice. The legal meta-advice in this thread has been, "Yes, get a lawyer; this is too sticky for mere mortals to figure out, or fight in Tax Court."

    Nothing wrong with that.

  • Not really. ESR is a libertarian. He doesn't believe in tax breaks, he believes taxes are wrong, period, goverment shouldn't coerce people into "being compasionate". Although, I fundamentaly disagree, I'd like to point this out. And libertarians are pretty much the way republicans were in the days of Hoover, not what they have turned into these days. I however, do not think taxes are fundamentaly wrong, and do not find property rights to be natural and on the same level or above Human Rights. Yet, I am pointing out that current 2-party system no longer stands for its original values, and is merely rule by moneyed interest groups.
  • s/pole/cattleprod/

    --
  • But Tim,

    This plan runs counter the philosphy of income redistribution our modern tax code is based on.

    Secondly, this plan runs counter the basic Lockian (Hobbesian) concept of government. If you decide where your money goes what use is the government?

    P.S. Go read Greenspans statements on the surplus. He is quite clear that we will pay off the entire debt in the next 4-6 years. Then what do we do? Does the government join the stockmarket?

  • You have to have related taxable income to use the R&D tax credit. And you have to have related expenditures. But if you do, this is worth looking into for open-source developers.
  • For some people, it stands for "I'm Anal".
  • two points of data are enough to form a line, but the accuracy would be shit. let's get several more points and we should be able to map some sort of curve.

    Peace,
    Amit
    ICQ 77863057
  • there are people across the board who don't use accountants/lawyers, and will either get a refund for or have to pay varying amounts. these people are the ones who spent 0 on tax preparation. For the sake of this exercise, we will let f(0) = undefined, cause we're trying to figure out whether or not paying someone else to do your taxes gets you back money linearly, logarhythmicly, exponentially, or other.

    Peace,
    Amit
    ICQ 77863057
  • "Does anyone else have any good hindsight on how techies can / should approach their tax forms?"

    Go to HR Block, give them $50, let them do your taxes. Last year I got $40 back, this year I got $100 back. Not bad.

    Peace,
    Amit
    ICQ 77863057
  • If you're developing a new kind of neural net, that is computer research.

    If you are making a web browser theme(able), that is development.

    So, unless you're making some kind of scientific breakthrough, I doubt it would count, all licensing issues put aside. Reoptimizing ls and more for new processors hardly strikes me as a "research effort."

  • They have a 3-part test in addition to the basic description. It basically says that the software development has to be innovative, meaning remarkably faster or economically advantageous (they're thinking TCO here), it has to involve a substantial risk or dedication of resources, and it has to serve a purpose that cannot be found in commercially available products. I would imagine that if the commercially available products have such horrendously high licensing fees that it is actually cheaper to develop an in-house solution, you satisfy this, but that would have to be a rather small portion of the market.
  • huh? you are not an alcoholic? why use that as a disclaimer? shouldn't that lend you *some* credibility here?

    ---
    I'm not ashamed. It's the computer age, nerds are in.
    They're still in, aren't they?
  • Instead of different tax brackets a simpler tax system would just use the exponential curve.

    If you earn x dollars the govco gets T(x) of that in taxes then T(x) x*(1.0 - (0.6)^x). As x goes to infinity T(x) approaches x.

    Once the exponential nature of progressive taxation becomes apparent it will become unpopular in the mathematically challenged crowd leading to a giant simplification to either flat-tax or zero-tax. So it will all be all right in the end.

    --
    Eat goat-cheese.

  • Lips and an asshole.. that was all that was left of him by the time the medics arrived. Two lips, an asshole, and a little bit of brainstem. The medics, being trained professionals were able to handle the situation calmly, they must have to deal with these things all the time, rebuilding people from their orifices must be old hat to them by now.

    After they arrived, the medics coolly swept the remaining bit into a box, and carted him of to fix him. Nobody realy understands how they do it, but they do, they're professionals.



    That was the last we saw of Oscar Meyer for a few weeks.
  • by VSarkiss ( 173815 ) on Sunday April 15, 2001 @06:00PM (#289968)
    The original poster's article referred to tax credits. You're crossing the line into deductions for charitable contributions, which are very different things.
    You can donate cars and get a receipt for the blue-book value of the car, even if it doesn't run.
    The difference is that you (presumably) paid money for the car at some point. Your deduction is not your cost basis, but the fair market value. It works the same way with some other things which you bought, not created, such as stocks and bonds.
    If you're a Linux consultant and donate hours to a non-profit and get a receipt for the time you spent there, and the time is in line with the other customers you have, why can't you deduct that time?
    Get IRS Publication 526 [irs.gov]. Time and services contributed to a charity are never deductible.

    However, I agree with you 100%:

    Go talk to your tax lawyer/accountant.
    Not even the most well-meaning Slashdot post can take the place of professional advice.
  • hmm don't you think you should have asked this ohhh about 3 months ago? hehe
  • IAAL (1) I'm not sure about the american system, but the Australian system for granting tax credits (ie more than 100% deducticble, eg 175%) on R&D is limited when it comes to software. The government argued that every billion-dollar profit making bank would claim their inhouse systems, so they introduced a need to licence to more than 2 parties test on the software. (2) I am preparing an R&D claim for a company which GPLs its code and I have a problem. I need to demonstrate that this company holds the benefit of the R&D. In a GPL environment, this appears tricky. I hope I'm not too late on this but it would be nice to cut a tax break for a company doing something good.
  • Here is the actual relevant passage, minus the junk about when the hearing were to be held, etc. It actually sounds more like a tax break that a big corporation would use than an individual - Actually, this text is fairly readable.

    > > > > >

    Par. 3. Section 1.41-4 is revised to read as follows:
    1.41-4 Qualified research for taxable years beginning after December 31, 1985.
    (a) through (d) [Reserved].
    (e) Internal-use computer software--

    (1) General rule. Research with respect to computer software that is developed by (or for the benefit of) the taxpayer primarily for the taxpayer's internal use is eligible for the research credit only if the software satisfies the requirements of paragraph (e)(2) of this section. Generally, research with respect to computer software is not eligible for the research credit where software is used internally, for example, in general and administrative functions (such as payroll, bookkeeping, or personnel management) or in providing noncomputer services (such as accounting, consulting, or banking services).

    (2) Requirements. The requirements of this paragraph (e)(2) are--
    (i) The software satisfies the requirements of section 41(d)(1);
    (ii) The software is not otherwise excluded under section 41(d)(4) (other than section 41(d)(4)(E)); and
    (iii) One of the following conditions is met--
    (A)The taxpayer uses the software in an activity that constitutes qualified research (other than the development of the internal-use software itself);
    (B) The taxpayer uses the software in a production process that meets the requirements of section 41(d)(1); or
    (C) The software satisfies the special rule of paragraph (e)(5) of this section.

    (3)Computer software and hardware developed as a single product. This paragraph (e) does not apply to the development costs of a new or improved package of computer software and hardware developed together by the taxpayer as a single product, of which the software is an integral part, that is used directly by the taxpayer in providing technological services in its trade or business to customers. In these cases, eligibility for the research credit is to be determined by examining the combined hardware-software product as a single product.

    (4)Primarily for internal use. All relevant facts and circumstances are to be considered in determining if computer software is developed primarily for the taxpayer's internal use. If computer software is developed primarily for the taxpayer's internal use, the requirements of this paragraph (e) apply even though the taxpayer intends to, or subsequently does, sell, lease, or license the computer software.

    (5) Special rule. Computer software satisfies the special rule of this paragraph (e)(5) only if the taxpayer can establish that--
    (i) The software is innovative (as where the software results in a reduction in cost, or improvement in speed, that is substantial and economically significant);
    (ii) The software development involves significant economic risk (as where the taxpayer commits substantial resources to the development and there is a substantial uncertainty, because of technical risk, that such resources would be recovered within a reasonable period); and
    (iii) The software is not commercially available for use by the taxpayer (as where the software cannot be purchased, leased, or licensed and used for the intended purpose without modifications that would satisfy the requirements of paragraphs (e)(5)(i) and (ii) of this section).

    (6) Application of special rule. In determining if the special rule of paragraph (e)(5) of this section is satisfied all of the facts and circumstances are considered. The special rule allows the costs of developing internal-use software to be eligible for the research credit only if the software meets a high threshold of innovation. The facts and circumstances analysis takes into account only the results attributable to the development of the new or improved software independent of the effect of any modifications to related hardware or other software. The weight given to any fact or circumstance will depend on the particular case.

    (7) Effective date. This paragraph (e) is applicable for taxable years beginning after December 31, 1985.

    Check out the Vinny the Vampire [eplugz.com] comic strip

  • Given that most Open Source software development going on right now is an attempt to steal or copy other available software... Umm how can writing your own code be stealing some one else's software? Writing software to do the same task as anothers is NOT stealing!!!!!!!!!! -james
  • by pjrc2 ( 193148 ) on Sunday April 15, 2001 @08:52PM (#289973) Homepage
    I am an accountant with a Big 5 firm. While I do actually prepare taxes, I studied tax accounting and am dangerously close to becoming a licenced CPA. (I sailed though the tax portion of the exam, having problems with the law portion.) There seems to be some confusion here about what is a tax deduction vs a tax credit. A deduction is subtracted from your gross income to determine your taxable income. The tax you owe is based upon your taxable income. A tax credit is a reduction of the tax that you owe. Having a tax credit does you no good if you have no income and pay no taxes.

    As mentioned earlier, in order for you to take deductions, you must have income. For many types of income, such as hobby income, you can only take deductions to the extent of your income. No money to be made here.

    Now on to the R&D Tax Credit - that is what those in the tax business call it. The idea of this credit is to get US businesses to invest in R&D. The tax law usually responds to the current trends in the economy. This credit came about when there was a lot of talk and attention about the US falling behind in technology development.

    Now let's dive into this section of the code - which is section 41 if you are interest. First, the credit is not for 100% of all R&D expenses. It is actually only 20% of expenses that exceed a calculated base amount. There is a list of what expenses qualify, and they have to be actual out of pocket expenses. Not working and sitting at home working on open source projects does not qualify as an expense. The base amount is calculated by using the average annual gross receipts of the taxpayer. No receipts = base amount = no credit. Qualified Research is the next issue. Found in 41.d.1.a Qualified Research is undertakenfor the purpose of discovering information which is technical in nature AND the application of which is intended to be useful in the development of a new or impoved business component of the taxpayer. Paragraph D also has some restrictions on software credits.

    As I was just reading through this section of tax code, my engineer bf walked in and said all that jibberish made no sense to him. I think him trying to read tax code is like me trying to read the Stevens book on that TCP/IP stuff.

  • Someone posted an urban legend about a person making a painting, valuing it at $1000 and donating it to the Red Cross, claiming a tax writeoff.

    This may not be entirely myth. If you look at the Kentucky State tax code, they do accept donations of art as charitable tax deductions. The painting has to be appraised by a qualified person, but the fair market value of the painting is used for the deduction. I'm not sure about the Federal government, but there might be something like this in there as well.
  • No. The deduction described is a charitable deduction. For example, if I donate a painting worth $20,000 to a museum, then I get a $20,000 tax deduction, even if I painted it myself.
  • This looks really interesting- it seems to be oddly silent on the subject of what "external" use would be- I am guessing that any available GPL'd software that had more than one application would fall under this category.

    Only tricky part to watch out for - you can't get credit unless there is substantial uncertainty about recouping the profits from the research. The intent of this provision seems to be to encourage only real innovations in turbulent markets (where they need the most help), but what if they took it the other way? What I mean is, what if some establishment types said "well, if you give your software away, there ceases being any uncertainty about whether you'll make a profit, but rather a complete impossibility of recouping your costs!"

    Of course I don't think that way, but lawyers are funny about interpreting the law sometimes.
    Bryguy
  • Because they will charge you intrest and penalties that's why. And most peoples interest bearing account doesn't amount to jack. The only interest bearing accounts that I have that are worth anything are my 401k accounts. Most people would be better off making sure all your credit cards and auto-loans are paied off. If that's done you should put the $$$ on their house if they are buying one.

    Best bet,(IMO), don't owe, don't pay. They way you aren't floating the IRS a loan and you won't have to pay penalties or interest.

  • IANAA, but perhaps you could form a non-profit organization and filter your expeneses related to open source development through it? Check out these guys [osdlab.org], that seems to be what they are doing. Of course with the mountain of regulations faced by a nonprofit these days, who knows...
  • Now they tell us this, right as our taxes are due :P

    Now we are going to see Accountants around the country getting Slashdotted. Although I am still waiting for the day when it shows up on m-w.com

  • I used to think like this. But, realize this: the bulk of the U.S. Tax Code is not devoted to figuring out what percentage of income people pay. It is devoted to defining what your income is in the first place. The actual table lookup is probably not much harder than using a function such as the one you gave.

    Take a look at The United States Code [gpo.gov] yourself. Specifically, Title 26: Internal Revenue.

    Also, while I would like to see the tax code simplified, I have a feeling that doing so would actually open loopholes. Well, maybe there'd be less loopholes, but they'd probably be bigger because the tax code would be less specific.

  • by Karma Sink ( 229208 ) <oakianus@fuckmicrosoft.com> on Sunday April 15, 2001 @02:20PM (#289981) Homepage
    This sounds like something you should ask an accountant, and, if you can get away with it, tell Slashdot... All that this sort of question will do is get a while lot of speculation, and an overuse of the acronym IANA(T)L...

    From a brief glance, though, it doesn't seem like it would qualify. This cut applies to software produced for internal use, from the looks of it, and Open Source projects are meant to be used by the community as a whole... However, remember... IANAL...
  • jrockway is my name, in case you cant read it yourself

    --Jon

  • I'm not an tax professional, but in order to claim deductions, don't they usually (with some exceptions) need to offset demonstrable income ? Since I presume most people who do open-source software are not making money from that work, I would guess it would be pretty hard to claim any deductions. Of course as others have noted, people *should* consult a tax professional.
  • Good thing I payed too much in taxes. :) I more than likely would have forgone a low risk money market fund but rather risked it on High Risk tech funds.
  • If you havent read that document you would see it says license*, there are no definitives in it whatsoever to differentiate between any licensing schemes no matter which you post. Which is why I even mentioned GPL.

  • by deran9ed ( 300694 ) on Sunday April 15, 2001 @02:26PM (#289986) Homepage
    The software is not commercially available for use by the taxpayer (as where the software cannot be purchased, leased, or licensed)

    Wouldn't the GPL or whatever the hell Open Source "License", just kill all those thoughts of geeks getting a tax break.

    Primarily for internal use. All relevant facts and circumstances are to be considered in determining if computer software is developed primarily for the taxpayer's internal use. If computer software is developed primarily for the taxpayer's internal use, the requirements of this paragraph apply even though the taxpayer intends to, or subsequently does, sell, lease, or license the computer software.

    Suggestion would be to honestly ask a CPA or so, someone is likely going to end up shafting themselves if they think that program they just wrote for SourceForge qualifies for a break.

    boobs [antioffline.com]
  • Allowing tax breaks for using Open Source software will just encourage Big Evil Corporations to use things like Linux and The Gimp (because we all know that you can get quality work done with The Gimp) to further their tax evasion practices! We need the money we get from taxing the sale of Microsoft software to fund programming etiquette workshops for inner-city children (and locking up potheads).

    We need equal opportunity! We need to level the playing field! First it was just the rich that got tax breaks, now it's the educated!?!?!? Don't you think we're going a little too far?

  • Qualified research was narrowed to require that research be undertaken for the purpose of discovering information that is technological in nature and the application of which is intended to be useful in developing a new or improved business component of the taxpayer.

    I guess the term 'business' precludes any benefit towards Open Source development, which some might term Charity. If your development is indeed business-related, then of course you would be mentioning such fiscal returns on your claim?

  • Apparently, you can get away with a lot [yahoo.com] these days. A tax expert described this as: "many business people treat the filing of their tax return as a 'first offer'"; if the IRS doesn't audit them, they pay a small fraction of what is due.
  • abe ferman wrote
    Only tricky part to watch out for - you can't get credit unless there is substantial uncertainty about recouping the profits from the research.

    I have over the last decade with various entrepreneurial companies that I've started been able to qualify for the R&D tax credit. The key issues that my CPAs have always wanted from me to be well documented was that:

    The work was clearly R&D, and not maintenance of existing code or code that was currently for sale or licensed. We had to provide accurate time logs when programmers did work on both types of software.

    That we only got a credit when our R&D expenditure was greater then last years, making it useful for only the first few years of the corporation.

    At no point can I recall that we had to document the goal of the R&D was toward a profit making activity, though that may have been implied because it was our goal.

    Though I do believe that that further research on the R&D tax credit will be that to qualify for it that the intent of the R&D has to be for profit.

    On the other hand, successfully becoming profitable will not be -- in my case, a couple of the R&D efforts didn't result in a final sellable product. We might not have tried the R&D if the tax credit had not been available, which is the purpose of the regulation.

    -- Herder of Cats

Politics: A strife of interests masquerading as a contest of principles. The conduct of public affairs for private advantage. -- Ambrose Bierce

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