The Meter Is Running

Myron Scholes and his co-authors open Taxes and Business Strategy with a reminder that “the taxing authority is an uninvited party to all contracts.” Few contracts signed this year carry as many zeros, or draw as little tax scrutiny, as the ones companies sign with AI model providers. The government is a party to every one of them. Most finance teams have not yet asked what share of the bill it will pick up, or what it wants in return.

The research

In his October 24 Daily Spark, Torsten Slok, Apollo’s chief economist, lays out five charts. Revenue per worker and profit margins are rising for the Magnificent Seven and flat for everyone else in the S&P 500. Productivity shows no lift. Mainstream companies, he argues, have begun to treat token spending as a drag on margins rather than a source of growth, and he concludes that the AI story “will be decided in the S&P 493, not the Mag 7.”

It is a sharp, honest piece; Slok has a gift for saying in a few charts what others need forty pages to say. It also squares with what T. Rowe Price’s equity and credit teams called “the token tax” in May: the cost of embedding intelligence into a product, which investors now have to underwrite.

The tax angle

Once a CFO labels something a cost center, the useful question is who else shares the cost. For a token bill, the answer depends on what the tokens did.

Every token is deductible. Production use (customer-service bots, document review, meeting summaries) is an ordinary business expense. Since 2025, new Section 174A lets companies deduct domestic research costs immediately, and the statute names software development as research. So the deduction is not the story. At a 21% rate, the government already covers about a fifth of any token, spent on anything.

Some tokens earn a credit. The research credit counts amounts paid “for the right to use computers in the conduct of qualified research” (Section 41(b)(2)(A)(iii)). Congress wrote that language for rented mainframes; The Tax Adviser’s June 2026 piece aptly calls these “the computer rental rules time forgot.” The regulations add three conditions: someone else owns and operates the computer, it sits off your premises, and you are not its primary user. Metered access to a frontier model appears to fit all three. The IRS has issued no guidance on AI costs specifically, so the analysis runs by analogy to cloud computing. Tokens that U.S. engineers burn while building and testing new software can qualify. Tokens a call-center bot burns answering customers cannot.

The credit now wants receipts. For tax years beginning in 2026, Section G of Form 6765 becomes mandatory for most claimants: those with more than $1.5 million of qualified research expenses or more than $50 million of average gross receipts. They must report research costs project by project, covering at least 80% of the total. An engineer can tell you what she worked on last quarter. A token cannot. Unless usage is tagged when it is consumed, by API key, project, and team, the credit will be hard to claim and harder to defend.

Northline runs the numbers

Northline Parent, Inc. spends $10 million a year on model APIs. Of that, $6 million runs production workflows. The other $4 million is consumed by U.S.-based engineers building and testing an internal underwriting agent that meets the four-part test for qualified research. Northline uses the alternative simplified credit and elects the reduced credit under Section 280C(c).

Swipe sideways for the other columns.

The give-back line is the part most summaries skip. The simplified credit measures this year’s spending against half of the prior three years’ average, so today’s development tokens quietly raise the bar for the next three years. Net of that, Northline earns about five and a half cents per qualifying dollar, not the fourteen on the label. That is no fortune. But a company whose development spend doubles each year stays ahead of its own base and keeps more of the headline rate, and unlike the margin gains Slok is waiting for, this benefit is available now. (Our figures are federal only and assume Northline can use the credit; state credits can add more.)

Two wrinkles worth watching

Where does the research happen? Section 174A covers only research conducted in the United States; foreign research is still amortized over 15 years. When an engineer in Austin prompts a model served from a data center in Dublin, we think the location of the people doing the research should control. No guidance says so yet.

Sales tax. States are still deciding whether a token is software as a service, a digital automated service, or data processing. Writing in Tax Notes State in July, McDermott Will & Schulte’s Hague makes the sensible case for looking through the token to the rights actually delivered. Depending on the state, a cost center can arrive with sales tax on top.

What we would do before year-end

• Split API keys and billing by project and purpose now, so development and production usage are separated at the source rather than reconstructed next spring.
• Read the provider contracts. Prepaid token bundles and reserved capacity are paid up front and used over time, which raises timing questions for both the deduction and the credit.
• Map where the people doing the prompting sit, especially in mixed U.S. and offshore teams.
• Build Section G business components that include token spend before the first 2026 return is due.

Our take

Slok is right that the AI payoff for the S&P 493 remains a forecast. The tax benefit is not. The uninvited party to every AI contract has already agreed to share the bill; it simply wants to see the meter readings. Companies that keep them will carry a lighter cost center than their competitors do.

Sources, with thanks

• Torsten Slok, “No Signs of AI Payoff Outside the Tech Sector,” The Daily Spark, Apollo Global Management, October 24, 2026. The charts are worth your five minutes.
• T. Rowe Price, “The token tax: A research-driven view on AI and software across equity and credit,” May 2026. A smart cross-asset conversation.
• The Tax Adviser (AICPA), “R&D credits and the computer rental rules time forgot,” June 2026. The best history of this provision we have read.
• Bloomberg Tax, “Claiming R&D Tax Breaks for AI Costs Requires Precise Records.”
• Aprio, “Does Your AI Spend Qualify for the R&D Tax Credit?” July 29, 2026.
• Hague (McDermott Will & Schulte), “AI Tokens and Sales Tax: Key Considerations,” 121 Tax Notes State 239 (July 27, 2026).
• Smith + Howard, Leyton, and CBIZ on the Form 6765 Section G requirements.
• Myron S. Scholes et al., Taxes and Business Strategy, 5th ed., ch. 1, p. 20.

Important notes

This alert addresses U.S. federal income tax unless it says otherwise. Northline Parent, Inc. is a hypothetical company, and the figures are illustrative and rounded.

This client alert is for general information only. It is not tax, legal, investment, or accounting advice. Consult your own advisers about your particular circumstances before acting on any matter discussed here.

C . A . S .

This alert is for general information only and is not tax, legal, investment, or accounting advice. Consult your own advisers before acting. Carlos A. Schmidt, MBT, MBA, CPA · carlos@lapresallc.com · (917) 558-6393.