> For unprofitable startups it could cause issues during a phase of very high revenue growth.
So I guess my most question is "how this work irl?"
Say a new startup raises money and hires 20 people. Pays $5m in salaries, office space and such. All 20 people are developing a software product. Are 100% of this startups expenses amorotized?
Then they sell the product. They receive $2m in revenue. What does the P&L look like.
If they hire 20 devs in their first year paying $5m in salaries, only $1m or $500k (if the mid-year convention applies) would count as a business expense in that first year.
If their revenue was $2m, that would leave them with $1m (or $1.5m) of taxable profits unless that was eaten by other costs.
It doesn't have to be a problem, but if revenue grows fast and they go on another hiring spree in the following year then it could become a problem.
That said, if revenue grows so fast, it seems likely that they would have huge marketing and sales costs that could be expensed immediately. So maybe this isn't really a problem for many startups. I'm not sure.
1 million profit, while they have 3 million negative cashflow, that's exactly the problem. They can only take 20% of that 5 million in R&D investment as depreciation in the first year.
So I guess my most question is "how this work irl?"
Say a new startup raises money and hires 20 people. Pays $5m in salaries, office space and such. All 20 people are developing a software product. Are 100% of this startups expenses amorotized?
Then they sell the product. They receive $2m in revenue. What does the P&L look like.