You didn't generate an additional $1m in revenue in years 2-5. So in a situation where you get paid a $1m contract once, and pay $1m in salaries every year, here's what happens.
Year 2022: $1m revenue, -$1m expenses amortized to $200k: $800k profit, approximately 20% ($160k) is paid to tax.
Year 2023: -$1m expenses amortized to $200k, previous year's $200k: -$400k loss, carryforward. You cannot carryback 2023 losses to 2022 taxes.
The carryback is how Congress will resolve the issue for people who paid the tax.
The dispute is that you paid $160k in tax in year 1. Is that inefficient? In my opinion, it is. You paid $1m in salaries!
In markets like game development it's not uncommon to have one big release that generates a lot of revenue in one year, and then not release anything for a couple years and have minimal revenue as a result while you keep paying salaries. Carryforward won't help you in that case. Without this stupid amortization you could at least write off a full year's salaries against your launch income.
In a reasonable world where you can depreciate your assets over their expected lifespans rather than a fixed 5 or 15 years, video game dev would probably actually be fine with capitalization. A SaaS startup that fails fast still gets really screwed in that more reasonable world.
Year 2022: $1m revenue, -$1m expenses amortized to $200k: $800k profit, approximately 20% ($160k) is paid to tax.
Year 2023: -$1m expenses amortized to $200k, previous year's $200k: -$400k loss, carryforward. You cannot carryback 2023 losses to 2022 taxes.
The carryback is how Congress will resolve the issue for people who paid the tax.
The dispute is that you paid $160k in tax in year 1. Is that inefficient? In my opinion, it is. You paid $1m in salaries!