There are some misunderstandings in the comments that seem to stem from not having read the section, so I thought it was worth referencing the actual text [0]. It's quite short and easy to read.
The most important bits:
* Subsection (a) requires amortizing "Specified research or experimental expenditures" over 5 years (paragraph (2)) instead of deducting them (paragraph (1))
* Paragraph (c)(3) is a Special Rule that requires that all software development expenses be counted as a "research or experimental expenditure".
That's it. All software expenses must be treated as research and experimental expenses, and no research and experimental expense can be deducted instead of amortized. Ergo, all software expenses must be amortized over 5 years.
I strongly recommend reading the section before forming an opinion. It really is quite unambiguous and is unambiguously bad for anyone who builds software and especially for companies that aren't yet thoroughly established in their space (i.e. startups).
Also note that this makes Software a special case of R&D. It's the only form of R&D that Section 174 requires you to categorize as such and therefore amortize.
It had a huge impact on my personally, I'm a small R&D shop and basically I have had to end all risky long-term research projects.
In addition to the research costs, I'd also have to pay taxes on the research costs mostly up-front. Significantly, if the project doesn't work out, I'm still out of pocket for the tax money. It's a penalty for taking a risk, and it kneecaps American innovators in a globally competitive technology race.
The rules are even worse than the article notes because it double-dings open source developers. See Section 6.4 of https://www.irs.gov/pub/irs-drop/n-23-63.pdf. The relevant bit is here:
> "However, even if the research provider does not bear financial risk under the terms of the contract with the research recipient, if the research provider has a right to use any resulting SRE product ... costs paid or incurred by the research provider that are incident to the SRE activities performed by the research provider under the contract are SRE expenditures of the research provider for which no deduction is allowed ..."
The rule as written means contractors who write Windows drivers could deduct their expenses (as they would have no residual rights to a closed-source work product), but contractors who write Linux drivers may not (as they would have some rights to open-source Linux drivers).
> In addition to the research costs, I'd also have to pay taxes on the research costs mostly up-front. Significantly, if the project doesn't work out, I'm still out of pocket for the tax money.
That’s how it works for every business! If Jim Bean builds a distillation facility it has to amortize the investment in that over time. If the distillation facility doesn’t pan out, then it doesn’t get a refund for the taxes paid.
> The rule as written means contractors who write Windows drivers could deduct their expenses (as they would have no residual rights to a closed-source work product), but contractors who write Linux drivers may not (as they would have some rights to open-source Linux drivers).
Is it just me or are you conflating two orthogonal things?
An open-source Windows driver would have the same issue, no? And a closed-source proprietary Linux driver privately written for some company wouldn't have this issue either, right?
It makes software temporarily 16.7% more expensive in year one if you’re operating a profitable company, but you do eventually get to deduct that over time. Pay 8% on a 4 year loan and that drops to ~4%.
We are small and so have been on a hiring freeze since 2022. I’d like to hire but the upfront cost is high.
For those around when this went into effect many business owners were surprised. Our accountants told us they seriously thought congress would fix this before it went into effect.
... they did that because that's exactly how Trump presented the change. The article points that out: this change was an attempt to lie to the congressional budget office, not intended to be an actual tax change.
I’m not sure this is exactly true. If your foreign workers are a service contract then those are services expenses immediately deductible. Same if you are using local service contracts. My understanding is this creates a drag for companies that want to hire f/t.
We don't talk about this enough. International R&D is not offshoring of call-centers to India. International R&D is the IP for the next generation of global communication standards being owned by US-based or foreign corporations, because international (e.g. Canadian, European) standards experts/developers become un-affordable for US-based corporations and are forced to work for our "adversaries" instead. Crazy.
As I understand accounting, this means that reported profits would be higher, and therefore incur more corporate income tax liability. Cash flow isn't effected besides tax.
A startup isn't likely to be making a profit yet, under either accounting rule. Is there a benefit to reporting a larger loss?
My first thought is that this effects Google and suchlike, not startups. But... assuming steady state "r&d" expenditure... it's not that much. Everything gets deducted within 5 years anyway.
So... maybe this hinders more modestly profitable, and fast growing companies most. Those that can't afford to carry 5 years worth of paper profits as easily.
Otoh... I am curious about how the difference between r&d expenses and operational ones are determined irl.
This should be quantifiable. How much extra assets are software companies actually booking?
It seems questionable that this "silent killer" had actually affected employment so much.
> A startup isn't likely to be making a profit yet, under either accounting rule. Is there a benefit to reporting a larger loss?
As an example, A two person software startup; both drawing a salary, each making $100,000 per year. Each doing things related to software development.
Startup brings in 200,000K in revenue.
Under pre Section 174 changes, the profit is zero. Both salaries are expensible in the year they were incurred.
Post Section 174, the profit is now $160,000 each year. Now they pay taxes on $160,000, even though they literally have no money left over because revenues equaled expenditures.
At 25% tax rate, that’s $40,000 in taxes, for a business that made literally no money.
That’s why this is so devastating to small software businesses; unless you’re highly profitable and have cash reserves, this change hits hard.
That was my first thought as well, but on second thought I can see how this might cause problems:
For established profitable software companies there was a cliff edge in 2022 when this change kicked in. Staff costs for previous years had already been fully expensed while only 20% of the current year's costs could be deducted.
Second, any sudden increase in research expenditures is now discouraged. This could make companies less nimble.
For unprofitable startups it could cause issues during a phase of very high revenue growth. They could suddenly be liable to pay corporation tax in spite of the fact that they are not profitable in any reasonable sense of the word. It would smooth out later, but that may be too late for some.
What I do not believe for a second is that this is causing major job losses. Companies like Microsoft or Meta do not reduce research or software development just because there is a temporary tax hit. It could be an extra incentive for an efficiency drive I guess.
Your analysis is correct, but most software companies were mostly profitable or fast-growing. For every Google, there’s 1000 wordpress vendors you’ve never heard of.
In another year the initial shock will stabilize, but any growth now has a 5-year tax hit attached. And even Facebook doesn’t want to pay that if it doesn’t have to.
Google was reportedly amortizing (by choice) long before this was in effect, so while it might “affect them”, in practice it’s likely business as usual.
I'm not an accountant, but as I understand it, you don't pay taxes on profits, but on revenue.
So previously, some 20% of all revenue would be owned as corporate income tax, and startups would deduct it all as they're spending much more on R&D than they owe in corporate income tax. But with this tax change, the deduction would be much lower (80% lower IIUC).
OK, but you've changed the topic from tax accounting to financial accounting/reporting.
In the US, it remains the case that programmers salaries must be treated as an expense (i.e., cannot be amortized) when calculating the company's income statement, balance sheet, etc. Not following that rule will get the accounting firm signing off on those financial reports in trouble (with the SEC, the Public Company Accounting Oversight Board, and maybe even the Justice Department if the purpose of the violation was to defraud investors).
Yes, that is tremendously important aspect here - the US tech would look better on paper - higher paper profits due lower paper expenses - while getting increased cash flow stress due to decreased deductability of the salaries which are among the main expenses in software dev business.
No, not in this case. 250k is an expense for the company. Company had to amortize this expense over 5 or 15 years. (15 for software engineers outside of the US)
> All software expenses must be treated as research and experimental expenses
From what I've read, not for software fixes to ongoing products, but for new products and I can't remember for new feature work. Also if you contract for someone else I heard you can still write off expenses without amortization.
I think the purpose of the change was to "increase revenue":
> Requiring that certain research or experimental expenditures be amortized over a five-year period or longer, starting in 2023, would increase revenues by $109 billion over the period from 2023 to 2027.
Idk but it was under trump. And the meta issue was balancing the budget after all his tax cuts so he needed to find more tax revenues. Which this accomplishes pretty handily
What i like about US is that compare to other countries (like for example Russia where i'm originally from) there is almost no lying and cheating here. Instead there is a respect of the law and an army of talented creative accountants and lawyers. Remember that stale "multi-used" sandwich served with the drink which by virtue of its existence converted drinking establishment into a food serving restaurant? Not being an accountant, i'd just speculate, out of sheer fantasy, that some hardware chip/gadget added to your software may similarly convert your software development into hardware/gadget one.
I'm not sure I buy into this. Sure, compared with Russia it's probably a lot less, at least in terms of being something everyday people engage in. But in terms of comparing with countries like Germany or Sweden I don't know.
Here's some food for thought:
* Global financial crises: Banks were paying (bribing) ratings agencies to rate junk bonds AAA.
* Bernie Madoff: Ran the largest Ponzi scheme ever, with an estimated fraud total of $65B raking in $17.5B in invested cash.
* Enron: straight up accounting fraud sprinkled with intentionally causing brownouts in California to pad their pockets with a side bonus of making Gov Davis unpopular & get him recalled (Enron was closely aligned with the Bush administration).
* Nixon straight up using psy-ops against Democrats & finally trying to burgal the DNC offices.
In terms of stats, the FBI does a few hundred bribery and corruption cases annually. Are they good at catching white collar crime? Well such crimes regularly take more than 5 years to investigate.
And hell, some things that are basically lying and cheating are straight up legal. Usury is legal with minimal to no regulation of payday loans. Pyramid schemes are legal as long as you call it multi-level marketing.
> What i like about US is that compare to other countries (like for example Russia where i'm originally from) there is almost no lying and cheating here. Instead there is a respect of the law and an army of talented creative accountants and lawyers
I thought you were being sarcastic here at first because, good lord, there is plenty of corruption here in the US (though those doing it used to care more about hiding it). The US, especially in its current state, is certainly not a place I'd describe with "almost no lying or cheating". I do understand that Russia is on another level, though, given the open assassinations and doing things like what was done to Navalny.
I don’t get the big hoopla. Here in Germany I’m opting to turn development costs into assets (I simplify a bit). I need assets on the balance sheet, otherwise we’re over-indebted. As long as the development costs are much higher than income (I.e. as long as you’re not profitable), then it shouldn’t matter. And once you are profitable, you pay some more corporate taxes, but aren’t they kind of not too high in the us anyway?
the big hoopla is this: you're a newish startup. You have $300k/yr revenue and $$270k/yr expenses of which $250k is paying your programmers.
prior to this rule change, what you pay your programmers is just a deductible expense, so you owe taxes (in this very simplified example with no other expenses etc. etc.) on just $50k.
after the rule change, you can deduct only $50k of the labor cost (in this year), so now you owe tax on $250k.
there is a very good chance you do not have the cash available to make this payment.
of course, after 5 years, things all balance out and are effectively "back to normal". but you have to get through those 5 years first.
It might be "quite short" but it's full of click bait style text. This tax law will change everything, but we won't say what it is for 4 or 5 paragraphs, nor what changed for another 3
Edit : sorry I just realised you meant the tax law is short. The article itself is very annoyingly written
Agreed. I think the article's text was responsible for the confusion in the comments prior to me posting this. They could have been much more clear and straightforward.
I have no doubt it's bad, but I can't believe that it's both fueling mass layoffs and also almost nobody has heard of it. Those are unlikely to both be true.
I'm not sure why TFA makes it sound like almost no one has heard of it, but it was extensively discussed on HN in early 2023 as being a primary cause of layoffs, before it was cool to blame AI.
Why the big tech firms that suddenly laid off a bunch of people the instant they started looking at their 2022 tax bill didn't tell everyone explicitly that that's what was happening I can't say, but it's not like this has been happening in secret.
Obviously interest rates also play a role, and probably a larger one. But this is objectively a very very bad contributing factor, far worse than the impact of coding LLMs.
But where an established company invests steadily in software, whether it is amoritized or deducted year to year is a wash. Rather than harm tech, this would seem to protect established US companies at the expense of startups. Thats probably great for shareholders in publicly traded companies. It seems just another querk of taxation meant to maintain the established order
It's only a wash if they've been amortizing all along. There's been no advantage to doing so, so established ones have all been deducting, and will have the same five year window of increased taxable income that startups will.
This is one of the worst things MAGA has done. Tech startups are the source of so much of our wealth, and this makes it very challenging to ever build one.
I can’t believe this still exists, and no one has changed it. We truly are governed by morons
for anyone curious, this wasn’t specifically trump, but it was indeed a republican congress bill. texas republican was the initial sponsor and then republicans lined up to cosponsor.
this was done to fuel their tax cuts to a small group of a certain people.
A dead post below says it was biden and somehow Obama, but sibling reply link says it passed into law in 2017, not 2022, the first year it went into effect I think.
It's not really targeted at tech, insomuch as at Democrats.
Everyone assumed it was a traditional accounting hack. But given the timing and the reinitialization, it's clearly political, not economic.
The code is a strategic time-bomb designed to cause a high-profile economic downturn during a presidential election cycle, specifically when the following president is a Democrat and Republicans have a house majority.
It was used to harm Biden's economy, and it will happen again in 2030 if the next president is a Democrat. While deferred, it will be spun as a major Trump "economic achievement" for the midterms, because companies will be able to afford to hire again.
The tech industry is merely high-profile fodder for extreme politics. It really is that petty.
The Democrats had control of the presidency and the house in 2022 when this provision first went into effect but had 2 fewer senators (1 fewer if you count the tie-breaking VP). Why didn't they try to change it? Is there some reason a change in the tax code like this can't be modified or repealed once its in place?
If this was passed in 2017 to go into effect during the next presidential term, wouldn't that only work as a time bomb for Biden's presidency if Trump didn't expect to win a second consecutive term?
Given the history of prior presidents winning 2 consecutive terms, it seems like Trump could have reasonably expected a 2022/2023 tax change to be his problem.
This is just wrong. It was passed in 2017 (during Trump’s presidency). It was to go into effect in 2020 (a presidential election year during Trump’s presidency). He hoped to be re-elected.
In general, the tax code does not provide immediate deductions for purchase of assets that generate recurring income. Instead, the cost of the asset must be depreciated over time. The provision you point to excludes land, physical property, and software from treatment as R&D expenditures. Because all of those things generate recurring revenue over time. It’s specifically listed in that statute, but it’s not treated as a “special case.”
E.g. If a whiskey maker pays to build a distillation system, it can’t deduct that cost immediately. Because that’s a capital asset that generates recurring revenue. Software is properly treated the same way.
Historically, Section 174 allowed everyone to opt in or out of R&D amortization. That amortization is required from anyone for R&D is new.
Further, software is the only type of R&D explicitly called out as required to count as R&D. Which means it should be taken as a given that most other industries are finding ways to count their R&D as anything else, while we've been intentionally given the short straw for some reason by having our specific field be the only one identified by name so as to leave no wiggle room. I'd say that definitely counts as being a special case. The section is even labeled "Special Rules".
Amortization is bad policy when it comes software. Software is inherently high risk. Every piece of software is unique and does not guarantee steady income over 5 years. Most startups won't survive 5 years to fully realize the deductions. This is the end of US software dominance.
> Selling you code, lol -- code is more of a liability really :)
It's important to consider that lawmakers (who are not well informed or downright stupid) might think code has intrinsic value because of media married with a lack of real-world experience.
Amortization is bad policy, period. If cost is actually incurred, it should be fully deductible immediately. No matter if it's a piece of equipment or software.
i'd disagree heavily with that... let's say you have an expense of an insurance policy that covers you for the next 10 years. You're paying for 10 years of service, that should be amortized over 10 years.
> Is US software dominance because of our startups? Or because of the giant trillion dollar monopolies we have?
Most likely neither: It is its massive trade deficit, the one it strangely wants to get rid of now, that has allowed US consumers to consume more than they produce (i.e. you can take something with no real expectation of having to give anything back in return). Which, as it relates to tech, has enabled offering services for what is effectively free to dominate the market. Nobody else in the world can compete with that.
> Didn't AAPL, GOOG and FB all create products _before_ they had any taxable income?
Wouldn't you say they had no taxable income because of it? If Facebook brought in $100,000, and paid $100,000 to developers, then there would be no taxable income under normal regimes. But if the developers were not tax deductible, then that $100,000 in revenue would be taxable, even though the bank account is empty. This isn't nearly so simple, but it has changed the calculus in a similar way. The business models of old no longer work because of it.
It's worth noting that FB was quite possibly being secretly funded with taxpayer money by national intelligence interests at inception, which would have substantially reduced or eliminated commercial pressure early on.
DARPA was working on Project LifeLog starting in 2003, was to be "an ontology-based (sub)system that captures, stores, and makes accessible the flow of one person's experience in and interactions with the world in order to support a broad spectrum of associates/assistants and other system capabilities". The objective of the LifeLog concept was "to be able to trace the 'threads' of an individual's life in terms of events, states, and relationships", and it has the ability to "take in all of a subject's experience, from phone numbers dialed and e-mail messages viewed to every breath taken, step made and place gone".
The program, at least officially and publicly, was cancelled on February 4th, 2004, the exact same day that Facebook was founded.
You can call it a coincidence if you want, I just tend to be very skeptical of "coincidences" where massive, powerful, unaccountable, immoral, unethical institutions like the US intelligence community get exactly what they want at the expense of our civil liberties.
Well, presumably the claim would be that a factor in their not having taxable income was the fact that they didn't have to amortize their development cost.
I don’t know how it works in the U.S., but we had HMRC in the U.K. write us a cheque every year, as if you have a greater R&D claim than your tax bill, you get a rebate.
It started with small and nimble innovators. Then it was shifted to Big Tech with the squeeze of patent trolling in the 2000's applied. It was capturing massive created value into the hands of few, connected, corrupt shitbags.
I’m not familiar enough with the very early days of Apple which started out as a hardware company to rebut you; but perhaps you mean the current Apple that has re-invented itself?
This impacts deductable expenses, not profits directly. The labor you pay for internally owned IP related to software must be amortorized. This screwed up an enormous number of business plans because software has more risk than many other endeavors. For small businesses, you basically can't do your own software.
It applies to things like configuring your internal tools too. Good luck at audit time.
What is that? Software sold by companies that have HQ in the US? Or software created by someone in the US? Because if it is only the first, good riddance.
This is insane, how does it make sense? Employee salary expenses are no different from other expenses to run your business. Imagine they did this for raw material instead, a restaurant could only expense 20% of the food that they sell. If they purchased $100 worth of food, but could only sell $50 worth of it, they have to pay tax on that even when making a net loss overall. It just does not make any sense. There would've been a huge uproar if this was done for cost of goods. Why are employee salary expenses any different?
It makes sense when you consider that there is no minimum tax rate on businesses.
Given the choice, Amazon would rather spend 100% of its profits on itself than allow any of its profits to be paid out in taxes. Section 174 was implemented without a minimum tax on corporate profits before voluntary deductions such as research. Therefore, it’s exploitable and all companies ought to hire and fire staff to ensure their profits show as 0%.
This tax code defect is now closed by accident, but could have been done much more intelligently than it was. Oh well.
(EDIT: My first sentence is potentially confusing when I reread it later. To restate: section 174 was defective as implemented due to the uncapped 100% deduction, but the concept of a significant research exemption is still excellent. Just need to close the effective 0% corporate tax rate loophole.)
The company already pays payroll taxes on those salaries, and the employees pay income taxes. And the people hurt by this aren't the shareholders or top executives, it's the rank and file workers getting laid off, losing benefits, and being asked to work more for the same pay.
What this change effectively did was make software developers significantly more expensive, without increasing the amount those developers get paid.
> Given the choice, Amazon would rather spend 100% of its profits on itself
And why is this bad, exactly? Money will be spent and will go back into the economy. Amazon will have to use the funds to build new offices, datacenters, do research, whatever.
And even if execs give themselves $10^11 USD in bonuses, they will be taxed as personal income, at even higher rates than corporate income.
That isn't a loophole. It is working exactly as was intended. Reinvesting is good.
The deal is that you can delay taxes by reinvesting (and either make the government more money at the end or lose it all if you were a fool, but you gain nothing by losing it all) but you cannot skip them when it comes to taking the profit out. The entire point of it was to promote investment into businesses which has kind of been a crucial factor in international competitiveness since the Industrial Revolution. Remember the fall of US Steel? That happened because they didn't reinvest.
after 5 years then every year is deducting a whole year's worth of R&D - as long as that investment is not too lumpy from year to year you are back where you started
Employee salary cost isn't always 100% an expense.
Imagine you are BigCarCo, you make cars. The salary for your factory workers that build cars to be sold is an expense, incurred in that year, to be matched against the revenues earned by selling those cars. But the cost to build the factory needs to be amortized over the lifetime of the factory - and that's true whether you buy a factory from BigFactoryCo or hire a bunch of people to build it.
Now, I'd argue that a) most software dev work is closer to the factory worker than the factory builder and b) the lifetime for most software is less than 5 years, but the idea that some cost of developing software should be amortizable is pretty reasonable.
Actually, if the company isn't selling the software they build, what their software devs do is closer to building a factory rather than working in it.
Mostly developing software is about automating things that are expensive and slow to do manually. So, to stick with the factory analogy, it makes the factory a bit better and more efficient. If you stop doing that because it is too expensive, you fall behind with your factory.
Of course the whole issue in the US is that it outsourced much of what happens in factories to China and software has become one of the main things the country runs on.
Now imagine that a restaurant buys 100 tables, 500 chairs, kitchen equipment, cutlery for 800 people, signage, a security system, and does a remodeling before opening. (Or an airline buys an airplane. Or a hotel chain builds a hotel.)
Should they be able to expense all of those items that provide value for multiple years in a single year?
Does software development provide value exclusively in the year it's done? Or over multiple years?
The reason that we require you to deduct an expense over years for some things is because they have a resale value that needs to be accounted for. It's not a pure expense because you have an asset with real value that came out of the purchase. Employee time has no resale value. Once used it's gone, so employee salaries are expenses, not investments.
The only possible justification for the Section 174 R&D changes is that employees working in R&D theoretically are producing something which does have a resale value, so there's a small tax dodge enabled by direct-expensing your R&D costs but then ending up with an infinitely-copyable asset that came out of it.
If that's what you're saying, then I'd reply to that argument by saying that paying humans to design new things has historically been a business strategy that the government has wanted to incentivize in a way that buying and holding physical assets has not been. I've seen no justification for the government deciding that from 2022 on we should actively discourage R&D, it just seems to be a mistake.
It's only shifting what year the government gets its revenue. The government should simply let the company choose how to do it, but if they choose anything other than year 1 interest will be payable at government bond rates.
Ironically I think they would want to claim that over multiple years unless they have other profitable operations under the same company. E.g. other restaurants.
Imagine a restaurant spends money on employees to build 100 tables, 500 chairs, etc. Those tangible goods would be capital assets, so the labor costs of building them would also be capitalized.
This change to the tax code is just bringing the tax treatment of software development in line with how every other industry is treated. IOW, it was closing a loophole. A very valuable loophole, whose beneficiaries used it to get filthy rich, and bragged about how their industry was so much more valuable than everything else, even though a lot of that value was due to the exception software was getting in the tax code.
Notably, in the current version of the budget as of 6/6, the loophole is temporarily coming back, though given the Musk-Trump feud, it's very possible it will get pulled again to try to mollify the hardline deficit caucus.
If the restaurant buys e.g. a fancy oven or a delivery truck, it can't expense 100% of that cost in year 1, it has to spread that cost over the lifetime of the oven or truck.
Labor that operates the business day-to-day would be an expense, labor that creates a capital asset is more complicated.
I happen to think most employee time in software dev is more on the day-to-day operation side, and should be expensed, but I can see an argument that some should (or could) be amortized.
> If the restaurant buys e.g. a fancy oven or a delivery truck, it can't expense 100% of that cost in year 1, it has to spread that cost over the lifetime of the oven or truck.
The difference of course is that you'll have a truck or oven that can be sold. If you could count the full value in the first year then you could sell and buy one each year to reduce your taxes without actually changing anything.
Thus if we want to go that route for software the salary of the R&D employees should be counted against the value of the software they created (As in, the value were it to be sold wholesale to another company). The time spent by the employees is not an asset, once you pay the employees for their time it's gone even if they generated nothing of value. The actual value is that of the software, but that's obviously not easily assigned a value.
It's a lot easier to get financing for a tangible asset like an oven or a delivery truck, which mitigates the cash flow issue.
Sure, you can only deduct a certain percentage of the asset's value as an expense each year, but your cash expenditures to pay for it are also spread over a multi year period.
It’s the same for movies, other intangible assets that are valuable and produce income over several years. And it’s done for many tangible goods, like servers in a datacenter, the kitchen equipment in a restaurant.
I think you may misunderstand. For most of those, you get the choice to amortize if you prefer. In this instance, you must amortize, which is a big problem for startups.
Worth noting: the version of the Big Beautiful Bill passed by the House ends this particular change, starting in tax year 2025. We'll have to see if this provision makes it through the Senate, and in what form.
That's crazy. We're 3 years into a 5 year depreciation cycle, and now they "change their minds". Sure convenient when you know you are in power to supercharge growth and leave a time bomb for the next admin.
> Fixing 174 would mean handing a tax break to the same companies many voters in both parties see as symbols of corporate excess.
This is frustratingly accurate. Through a zero sum political lens it'd be a handout to "big tech," so many politicians argue for keeping this on the books, but in reality S174 deeply affects small companies, new companies, boutique agencies, and individuals who want to consult or start smaller operations. I worked for a ~20 person shop that was gutted by this tax code change. It completely changed the affordability of talent.
The OBBBA (“Big Beautiful Bill”) suspends amortization requirements for domestic R&D expenditure, and explicitly allows domestic software development as an R&D expenditure eligible for immediate expensing.
The new rules would apply from 2025 to Dec 31, 2029:
Repealing SB174 has bipartisan support. The house already passed its repeal but it died in Senate because a separate took (that also repealed it) took its place but that separate bill stalled out.
174 is so small it can't go through both chambers on its own so it needs to get attached a larger bill like OBBA.
It's unfortunate because it appears both sides want this repealed to allow immediate amortization of domestic R&D expenses.
It's perhaps noteworthy that OBBBA is not the first bill to attempt to revert this tax law. It's simply the latest. There have been other attempts to revert section 174.
Other attempts that come to mind:
1. Tax Relief for American Families and Workers Act of 2024 (H.R. 7024)
2. American Innovation and R&D Competitiveness Act of 2025 (H.R. 1990)
That isn't the reason. They sunset in the bill so it has a lower CBO score (which calculates costs out to 10 years). If you sunset in the bill after 5 years, even if you know it will get renewed, the apparent cost goes down. Get it?
That isn’t how legislation is passed. If anything, it needs a section about acceptable tar shingle application standards for roofs within 6 nautical miles of any heliport operated in a subarctic area on the west cost. Then it’s looking like a bill.
This bill is goated for upper middle class and tech and defense sector
And I’m tired of pretending like we aren’t going to be beneficiaries
Every Congress increases the debt, we can acknowledge that the cuts they picked are going to wreck the lower class especially with the medicaid, we can acknowledge that it won’t meet its goals of cuts
but are you guys just scared to acknowledge its going to super charge things that you are a beneficiary of too? so busy saying it just benefits billionaires as if we’re trying to avoid guillotines. not gonna happen and many people here are going to try to take advantage of new programs
As a non-American, it seems strange to me that the cost of regular software development, i.e. that is neither “research” nor “experimental” in a conventional sense, would be deductible in the first place (amortized or not). Isn’t that subsidizing a whole business sector? Maybe I’m misunderstanding something.
Which means that if you are in Year 1 of operation, your values for YearlyExpenses[-2:-5] are all 0 and you only get to deduct 1/5 of your actual operating costs for the year from your "profit". So you can be in the hole but still owe taxes on your "profit" for the year because what you spent money on was classified as R&D.
Why should money spent on software _development_ not have to be deprecated over time like other money spent on _development_?
I get that it sucks from a cash flow standpoint but the same is going to be true of other R&D expenses. It's just that we're more exposed to this specific R&D expenditure and not others.
Salaries in general (not just of software developers) are tax deductible in many countries. This is desirable because we do not want companies to be paying taxes on revenue.
Businesses are taxed on profits, not revenue. Paying people to write code is an expense, so you'd normally deduct that expense (plus all your other expenses) from your revenue to arrive at an amount that should be taxed.
That's the rub. Is it an operational expense, like rent or a capital expense, like buying machinery?
It is sort of between the two in my view and is highly dependant on what the software engineer does each day.
Are they fixing a bug, helping a customer, refactoring? I think that is operational.
Are they building out a new feature? That is capital. But it is not quite like buying equipment because it adds no value to the books. So depreciation seems off.
But the same issue applies to other roles. Is a sales persons day trying to land a sale, or trying to develop the business.
It all comes down to "intangible assets" and whether you are making them.
I think it is easier to just say if you are paying someone to work then you can deduct. There must be better ways to claw it back.
The whole reason for most business to exist is to use operations (operational costs) as a lever to increase the growth and intangible value of the business.
It stems from the difference in treatment of capital gains and income. Either way it’s deductible, the difference being when it is deductible and how much tax is saved. Capital deductions are typically done later since they require a taxable event.
It’s a fudge to make projections look better to allow congress to pass a budget neutral reconciliation bill with the intent that congress would remove the fudge before the consequences triggered.
Governments in general are pushing for capital gains tax normalization where instead of requiring a taxation event the capital gains tax would be levied yearly. In such a scenario the only difference remaining would stem from the difference taxation rates.
> Governments in general are pushing for capital gains tax normalization where instead of requiring a taxation event the capital gains tax would be levied yearly.
So if company A pays company B to develop some software, that revenue for company B (or rather, its profit) is still taxable? Then it makes sense I guess.
No, you have it right. Software was getting a special exception from the normal rule that salaries spent on creating capitalized assets are capitalized (which is the general rule for most industries, as well as for software development in most of the EU).
I only recently learned about the Section 174 change, and honestly didn’t expect it to have such a big impact.
I used to work at a small startup, and most of our spending went toward engineers’ salaries. If we had to amortize that over several years back then, I don’t think we would’ve made it.
It’s surprising how a single line in the tax code can quietly make it harder for small teams to hire. Makes me wonder how many other policies are silently shaping things behind the scenes.
There is definitely a lot of misunderstanding here.
This provision can and does lead companies to owe significantly more in taxes than they make.
The only reason it hasn't been bigger news, is because most companies are pretending it doesn't exist and just sweeping it under the rug, hoping it will get fixed before enforcement gets serious.
I think the real reason it isn't bigger news is because the second you talk about tax code people start to tune out. It's easier to wind people up over AI taking jobs than it is to try and explain what amortization means.
> The only reason it hasn't been bigger news, is because most companies are pretending it doesn't exist and just sweeping it under the rug, hoping it will get fixed before enforcement gets serious.
Why pretend that it doesn’t exist? Why not vocally lobby for a change in the tax code?
There is bipartisan support to repeal the change. Meanwhile, further changes to the tax code are being prepared by the administration, very probably containing further such time-delayed footguns that will be the problem of the next administration to clean up, making them look like they raise taxes.
For me the worst things is that they treat all software as R&D. I understand in maybe some situation it could be abused but imagine established company having non innovative software that keeps engineers only for bug fixing and security patching and basic maintenance. In true spirit this is not research for sure. It's equivalent of someone having a hotel and suddenly telling that their cleaners, security, gardeners, receptionist qualify as R&D which would be nuts.
AFAIK it was also affecting more freelancers outside of US since amortisation is 15 years. For EU citizen IMHO this is equivalent of US putting tariffs on outside world. I wish EU at least try to fight back and revenge on US Tech by increasing taxes or also making all US tech bought by EU companies to be 15 years amortised so they have taste of their medicine.
My reaction to learning about this is that it is good news: this explains the weakening of demand for programmers, but unlike the AI explanation, this explanation does not come with a large risk of the demand becoming much weaker than it is now.
Also, finally programmers with the right to live and work in the US catch a break: salaries for US-based programmers can be amortized over only 5 years as opposed to the 15 years of non-US programmers.
I mean, the link not many people have made is that executives want to replace programmers with AI because of Section 174.
It has effectively become a lot more expensive and difficult to employ a programmer. Once this change went into effect we started to see hundreds of thousands of layoffs.
Then tech executives started aggressively talking up how you could use AI to write code instead of having humans write it.
Now of course reducing headcount and the associated expenses and replacing them with a bot sounds tempting to executives no matter what. But it sounds REALLY tempting when you've been on a hiring freeze since 2022 due to the fact that you can no longer deduct employee salaries in the year you pay them out.
Bear in mind that both Republicans and Democrats say they want to fix this and haven't done so due simply to gridlock and government incompetence.
I think most software businesses are taking a wait and see approach. Don't hire until this thing gets fixed. In the meantime, double down as hard as you can on automating those programmer jobs out of existence, in case the law never gets fixed.
> For cash-strapped companies, especially those not yet profitable, the result was a painful tax bill just as venture funding dried up and interest rates soared
Can someone explain this? What taxes do unprofitable US businesses owe that this would be deducted against?
Here's a toy example that hopefully makes this clear:
In 2024, your business has $1m in revenue and has $2m in expenses. 100% of these expenses are R&D salaries (engineers you hire.)
Your company loses $1m/year. (You brought in $1m and spent $2m.)
Under the old rules, you'd owe no tax because you were unprofitable.
After Sec 174, what the IRS now says is:
You had revenues of $1m. But you only had $400k in expenses (because you now have to spread that $2m in R&D expense over 5 years).
So actually you had a profit of $600k! And you owe tax on that $600k profit (~$120k)
So you now have an additional $120k tax expense, making your business even more cash-flow negative.
.
Amusingly, if you're pre-revenue, none of this matters (you have no income at all, so it doesn't matter what your expenses are.) You get hardest hit by this change when you have some revenue and when you do a fair bit of R&D.
If the business has some revenue, but is not yet profitable after deducting development costs, it can become profitable on paper (and owe tax) if R&D is capitalized instead.
That is kind of strangely worded, but I think I see what they're getting at.
Say you would have been exactly not-profitable ($0) if you could expense all of your R&D as in the old system, therefore avoiding tax. Now with the new rules you may be on-paper profitable because you can only deduct 20% of the R&D as an expense this year. The remaining 80% of that expense tips you over, becomes profit, and that's taxable.
Right. With concrete numbers, say your main expense is $1 million in developer salaries and you have $500k in revenue. Going by the previous rules, you have a loss of $500k and don't owe income tax. With the new rules, you can only deduct $200k of expenses which gives you a "profit" of $300k, on which you'll owe $62k in taxes.
What taxes do unprofitable US businesses owe that this would be deducted against?
An unprofitable business doesn't pay income taxes. Businesses are taxed on their net income (i.e., profit).
People are railing against this as the cause of tech's recent underperformance, but it was a non-factor for the vast majority of tech companies, because most tech companies aren't profitable and wouldn't have paid taxes anyway.
The title of this article implies that it is a major or even the only cause for mass tech layoffs, which I strongly doubt.
For example, rising interest rates I'm sure also independently contributed. I would be interested to if anyone has gotten a sense of exactly how much this has contributed.
agreed, the interest rates and the overestimation on the stickiness of the pandemic’s increase in internet usage post-pandemic are the primary other contributing factors that, imo, represent the lion’s share; even allowing that the tax changes are tertiary is a stretch much less as the primary/secondary reason
It's hurts small businesses the most, and practically destroys startups. Titles are simplified by necessity and I think the phrase "...that's fueling..." doesn't strongly imply exclusivity.
Here's a neat trick: Section 174 US tax code changes make purchasing a SaaS license a better deal than building in house. So do the R&D in a jurisdiction like India where the you can still deduct 100% of R&D under section 35. And purchase the SaaS in the US. (You have to be a non-US company for this to work and there are more details. Talk to your accountant.) Edit: fixed typos
From what I understand, this does not actually affect Google. They were already amortizing their R and D expenses.
Over long time scales (and big company revenue streams), this is sort of a wash. I think this hurts startups a bit more due to the long timescales involved which eats up much needed cash in the short term.
I think people are misinformed about how to deal with 174. That said, yes, a repeal would be a good idea. Hopefully that happens through BBB in the next month or two.
You do not have to amortize 100% of your engineering costs. Not even close.
Here's the key:
Development costs incurred to remove uncertainty are amortized.
All other costs are deductible during the tax year where they are incurred.
How does this work?
You are going to design a new robot arm.
In January, you spend $100K to "remove uncertainty". In rough strokes, this means discovering all the things you don't know and need to know for this robot arm to become a product. This amount will be amortized over five years under 174.
Now, with uncertainty removed, you spend an additional $1.1MM from January until December for engineering implementation. No uncertainty being removed. Just building a product. This is 100% deductible that tax year.
Analogy: You want to build a new brick wall with specific properties. You spend $100K to develop a new type of brick and $1.1MM to build the wall using that brick. The $100K is amortized, the $1.1MM is deductible in one shot.
BTW, at year 6 the amortization schedule reaches steady-state and you are amortizing the full $100K every year. In other words, the impact of 174, if treated intelligently, is the time value of money until steady state is reached for the engineering costs incurred to remove uncertainty.
Also, the 10+ years before the layoffs started tech companies were on a hiring binge. Much of big tech was hiring to keep people off the market and off their competitors payrolls (this is from friends of friends in FANG HR departments). These were high paying jobs, too.
It should be illegal to post graphs that start in 2020 when talking about tech hiring trends. The relevant comparison is probably the 2014-2019 era, not the peak pandemic craziness.
In knowledge-based white-collar work, there has been a significant increase in productivity in recent times. Tasks that once took days or even weeks—such as research, content creation, and visual generation—can now be completed within minutes. At the same time, both the speed of production and the quality of output are continuously improving. The outcomes are unavoidable.
bit of a self-own it seems. Start-ups and early stage companies might simply decide to start in a more friendly tax jurisdiction. E.g.: Switzerland offers a 135% deduction on R&D-related salaries in the year they are incurred, making it an attractive location for tech development
EU provides a large pool of experienced developers seeking new opportunities on salaries well below SV. Why pay 500K for a burnt out "rockstar" who spends more time on twitter than doing actual work when you can hire highly skilled people in Eastern-EU (or even in Berlin).
Section 174 seems unlikely to progress unless attached to broader legislation.
> "More promising is the Tax Relief for American Families and Workers Act of 2024 (H.R. 7024), which proposes restoring immediate expensing for U.S.-based R&D investments through the end of 2025. " -- https://www.pwc.com/us/en/services/tax/library/tax-committee...
That's a good policy but Switzerland is awful for startups: expensive, strict labour laws, few funding opportunities, risk-averse customers, fragmented European market.
If I could start anywhere in the World, Switzerland would be above all the war-torn and crime-ridden places, but business-wise it's no good for a tech startup.
I made one of the original posts on HN about this years ago after hearing about it from my CPA. Both then and now these changes make zero sense to me as a matter of good policy. I am also still surprised at the number of people in tech who either haven’t heard about this or are willfully ignoring it and likely filing their taxes incorrectly.
The most fascinating question is not "How did a single line in the tax code help trigger a tsunami of mass layoffs?" but how did a single line in the US tax code help trigger a tsunami of mass layoffs in other countries?
>The delayed change to Section 174 — from immediate expensing of R&D to mandatory amortization, meaning that companies must spread the deduction out in smaller chunks over five or even 15-year periods.
Doesn't this just amortize out to be roughly the same amount of deduction over the long term?
All the big companies mentioned should be relatively unaffected over an N>5 year time period. Also this was something that's been in the works for years so their accountants should have been planning for it so it wasn't a financial shock (and company financials seem to indicate no such shock).
If you look at the time value of money[1], a $1,00,000 deduction this year is worth more than $200,000 deductions over the next 5 years.
But more importantly, the article claims it was used as a tax shield to grow.
"Basically, as long as spending counted as R&D, companies could report losses to investors while owing almost nothing to the IRS."
"Once those same expenses had to be spread out, or amortized, over multiple years, the tax shield vanished. Companies that were still burning cash suddenly looked profitable on paper, triggering real tax bills on imaginary gains."
Sure, but that doesn't account for the allegedly apocalyptic layoffs from companies that don't fit into the "real taxes on imaginary gains" mold.
I get that this is bad for the VC monopoly bucks scene, but they were already down for the most part. If the changes are as the article alleges than all these big tech companies that are posting huge layoffs should mostly be fine because it's not a serious change from status quo for them.
> Doesn't this just amortize out to be roughly the same amount of deduction over the long term?
With steady enough employment numbers, sure. Google has a weird one-time cost where they get hit with extra taxes at 80%, 60%, 40% and 20% of their employee's salaries for five-years and then it's all balanced. You can turn the money Google needs to borrow (or not invest) at some interest rate into a known number.
Any startup that is cash poor and especially one that is growing struggles. In year 3 you get to write off 20% of year 1's salaries, 20% of year 2's salaries and 20% of year 3's salaries.
> Doesn't this just amortize out to be roughly the same amount of deduction over the long term?
Yes, but if your business is not yet profitable, having to pay tax on money you don't actually have in the bank (because expenses exceeded revenue during the year) will cut into your runway, perhaps to the point that your company might not exist in five years... or even two or three.
Google, Facebook, Microsoft and many other of those old big companies are profitable though and they dont go anywhere in next 5 years (even if first 2 bleed out users)
Yes, if you are a profitable company operating at a steady state and your investors have a time horizon of (in other words, are locked in for) a decade or more.
Most companies in question don't fit these criteria. They are either large public companies subject to the reactions of the market to quarterly earnings, or small private startups that have limited cash (a runway of far less than 5 years) and are facing a perfect storm of a historic rise in the cost of capital coinciding with this change.
In either case, their cost of labor just went up by a lot and will continue to cause layoffs, labor market shrinkage, and diminished ability to develop new products.
Yes, big tech companies are lesser affected and they were already amortizing their expenses as “cap labor”.
It’s a pretty bad article general and to blame the law change on this is all kinds of disingenuous:
“It’s no coincidence that Meta announced its ‘Year of Efficiency’ immediately after.”
If this article is accurate it doesn't sound like it. The change was a political tactic to make the tax bill it was part of comply with Senate budget rules on paper. Apparently this is a common tactic with tax bills, with the expectation that the changes will be repealed or altered in a later bill. There is a movement to repeal this change, but the effects have already been felt.
> Apparently this is a common tactic with tax bills, with the expectation that the changes will be repealed or altered in a later bill.
None of this adds up. You're saying, the legislators were trying to cheat and because it's a "common tactic" that kind of cheating is somehow good, but it's bad when the cheating doesn't go through?
On the other hand, being a common tactic implies that the possibility of it remaining in the books was well understood, and the declared "expectations" carry zero weight as evidence, even less than zero when coming from politicians.
Legislation like that has far reaching consequences and pretend "surprise" just confirms the intent behind it. It's only prudent to assume that we have a common tactic case of throwing sheet at the wall to see for how long it'll stick. If there's no backlash the "tactic" will remain there forever.
As another example of the same common tactic, consider the fact that all popular browsers have been used as Trojan horses into the users' local networks for like forever. At some point back in 2015 somebody objected so the browser makers started talking about fixing the problem but then stopped talking without fixing it because public opinion moved on to other areas affected by abundant sticky materials... Thus, that particular sheet remained on the wall for another 10 years and counting, and the story may repeat itself again.
Around ~2010 I still had a lot of coworkers who claimed tech was basically incapable of defending its interests against other sectors. Maybe a bit different than today. I don't doubt that they thought they would get this repealed, but I would suspect the risk of the live grenade went to the sector with the least lobbying competence per revenue for the tax equations.
Yes, I think there are two similar but subtly different flaws in that always.
1) Accounting rules are to match revenue with the expenses responsible for them, which I think is a good principle. If your workers make something now that provides revenue for 5 years, it makes sense to spread that expense over 5 years too. In many cases, you would want to do that as a business, makes it more clear how your business is profitable vs not.
2) Decisions whether to "build vs buy" a capital asset should not have massive tax implications. If I buy CoolSoftwareProduct from someone and resell it for the next 5 years, I'd have to amortize that. Should be similar if I hire a coder to write CoolSoftwareProduct instead.
(This doesn't mean that "salaries should always be amortized" is the right answer, of course, I think it's a very silly law)
I would say, yes there is a flaw there, because salaries are often a huge chunk of R&D expenses, and for the sake of long term growth, we want to disproportionately incentivize R&D spending
How about the salaries of employees being paid to create a new line of business? Say, the business runs restaurants and you decide to break into the tax software business. Can you avoid taxes on restaurant profits right now in order to build your new unrelated venture. ISFICR, tax law allowed outright deducting of costs of the current business, but not costs for starting a new one. Not deducting the new costs against the old profits.
After that, we can nitpick: should the development costs of new software be encouraged the same as maintenance costs of existing software. If you want to encourage startups, then yes they should. If you want to discourage startups or very temporarily increase tax collection, then no.
Discouraging starting new businesses would be unconstitutional. All freedom in the US is derived from being able to participate in controlling capital.
If your payroll ends up being about the same, after 5 years it all evens out in the sense that you will be expensing 100% of your payroll each year (but the expensing will be 20% from each of the prior 5 years).
If your payroll is quickly growing You experience the problem on all payroll growth.
If your payroll is decreasing, you get a tax benefit. Your outgoing cash is less, but you are getting deductions from prior year expenses.
Bloomstink has a short article on R&D expenses/tax credits as does Reuters on some of the back and current history.
But just as an accounting note: R&D expense has nothing to do with the company having revenues for an existing product, which already is allowed to deduct cost of goods sold, selling and admin expense. It is a cost related to future business and in that regard, it is not crazy to say it should be amortized. That in the past this did not happen, or that accelerated depreciation for other assets is in the IRS code is a function of the government wanting to effectively subsidize business investment.
I was part of a small R&D company that had a promising product (can't say more, NDA) and we had to shut down because of this. Thankfully the founders were able to get us acqui-hired or I'd be in a much worse position. But that IP is just lost to history AFAIK, in spite of significant investment of US research $.
What really changed things was the end of ZIRP [1] and even then it was opportunistic. Labor costs are a massive cost for tech companies. They have continually tried to suppress wages. In the 2000s, it was the anti-poaching agreement between Steve Jobs, Eric Schmidt and others. In the 2010s, high growth ahnd zero interest meant labor costs continued to balloon.
But then Covid came along and was a massive opportunity. A few companies may have needed to do layoffs but that created the opportunity for everyone else. Big Tech just went full Corporate America with a page straight out of Jack Welch: fire the bottom 5-10% every year. Call it "layoffs". It's a direct pay decrease for those who remain (who get assigned the work). Those are still there won't be asking for raises because they're now afraid of their jobs.
Very little of this was ever necessary. None of the big tech companies ever came close to making a loss. They've remaining insanely profitable, in total and on a per-worker basis. At different times Google's per-worker profit has approached or exceeded $1 million.
The other factor is these companies eventually reached their size limits where antitrust stopped them making any more significant acquisitions.
Consider the timing: this change came in 2017. Where were the mass layoffs in 2018? 2019?
Also, the 2017 tax cuts contained a massive tax holiday for the repatriation of foreign profits.
Mass layoffs are simply wage suppression. It's the end state for any company that can't keep growing the way the market demands: eventually it comes down to cutting costs to make those quarterly profit targets. And in that, they sow the seeds of their own demise.
> Big Tech just went full Corporate America with a page straight out of Jack Welch: fire the bottom 5-10% every year
Plenty of "big tech" already did it. Microsoft could not be more famous for stack ranking dating back to the 90s. Amazon have long had that kind of culture too.
Big tech companies are both doing mass layoffs AND hiring. How does this fit the narrative that the tax change is at least in part responsible? The new hires still have the same deduction issue, right? So what impact does this really have?
Think of it this way: if this passes, will the layoffs end? Or reduce? Absolutely not. All this does is give line the pockets of shareholders. That's it.
I'm a big fan of tying certain benefits to NOT doing layoffs. This can include:
1. You get this deduction only if you've fired fewer than 1% of your workforce in the last calendar year;
2. You don't get to sponsor for an H1B if you've conducted ANY layoffs in the last calendar year; and
3. The tax deduction only applies to unionized workers.
And while we're at it, let's roll back this ridiculous tax structure where IP can be "sold" to a subsidiary in Ireland and then royalties paid.
I feel like I'm taking crazy pills reading this article. To me, the most obvious and earliest case of mass tech layoffs was the Twitter 50% layoff by Musk. The whole lines written fiasco. The lack of mention anywhere is gaslighting me. Couldn't that have been the precedent as well? We know the market hanged on his every word (at least in 2022).
Investors and stock holders should be extremely outraged that all of these businesses are knee capping their future profitability. Can't make all those future pension payments if all your investments can't stay relevant in the market.
Some people will point out that AI will fix this, no it won't:
1) The real cost is higher than anything you'd pay for a person an there is not likely any real change there.
2) AI will be lies like Actual Indians that won't scale
3) Here's the kicker: If AI does succeed, now these multi-billion dollar firms will have to compete with multi-billion dollar single person businesses, that eat their lunch
Its a race to the bottom right? That means you need to invest in the business and all these layoffs are exactly not that, and will leave companies unprepared for the next 10 years.
Honest question, is there a community / grassroots effort I can participate in so that this this section 174 change can be reverted to its pre-2022 state?
I'm wondering, if such a movement doesn't doesn't exist already, do I need to start it myself?
- Gather up about 10 million dollars (more will help)
- Bribe the right people
I hate to provide such a cynical and lazy response but we've got until midterms (maybe) before you really have a shot at 'democratically' influencing the system. For the time being you'll have to work with the mafia that's currently running things and outbid whoever wanted this to happen in the first place.
It seems that there is quite a bit of confusion about this. What this does is that it reduce your deductible cost in the tax year.
First you have to make a profit (tax is on profits).
Secondly, what this does is to limit your software development expenses for tax purposes in the current year because the development cost is seen as a capital cost that will be amortized over five years opposed to operating expenditure in the same year.
If you are a startup and not make profits, then the loss will be less in the current year, but either way, your tax liability is the same: $ 0.
So software development is moved from opex to capex.
I can see why it would affect startups not making a profit but why would it dramatically affect FAANG (e.g. some of the most profitable companies in the world that have been running for decades)? The article contributes all these large layoffs in FAANG, in part, to this tax rule.
How this impacted our business is that when you are doing next year planning, and the goal is to grow the business, it made ads and other marketing investments more appealing versus tech hiring to expand product capabilities.
Can someone qualified answer a couple of quick questions here:
* Hiring a company to do software development is completely deductible or is still considered R&D? And there isn't any difference in regard to where the company is located?
* That company who performs the software development however, they have to pay the taxes since they are doing the development... so they are just going to raise their rates then correct? Or since they are providing a service to the company and it is work for hire does it not count?
* All other R&D expenses are still deductions including hardware development? Where is the line drawn? If you are doing the software side for a hardware product, that would be hardware correct?
* For founders, you would just take a dispersement instead of taking a salary if you are developing software? Or is that irrelevant?
I don't understand why this article is written as though amortization of R&D spending's costs is the same as completely eliminating their tax benefit. It seems that this essentially causes a large spike in tax revenue in year 0, which will revert to the mean in years 5-15. Companies now amortizing R&D essentially just have to build up those years of R&D spending backlog. Once they have reached their amortization threshold, they're essentially receiving the same tax break they had before.
In the stable state, both situations (immediate writeoff vs. amortization) would indeed be identical (assuming constant salary expenses over time).
The problem is that, when switching from the immediate writeoff regime to the amortization regime, you do not have a backlog of past-year expenses that are in the process of being amortized, so there is a sudden jump from being able to write off 100% of relevant expenses to only 20% of them.
Given that shareholders are notoriously interested in short-term profits, hitting profit targets requires either expanding revenue or slashing expenses.
Yeah, and that cliff is why they put this change into the 2017 tax reform. It'll goose federal tax revenue for 5 years in the back half of the CBO's 10-year projections to make the changes appear revenue neutral overall. In any case, the impact started in 2022 and it's now 2025. We're already over halfway to steady-state.
Oh interesting. In 2022, the company I worked for folded because a primary investor spontaneously pulled out. We were nearly 100% R&D and the sudden change in relationship was surprising.
It seems like most of the "woe is me and my startup" problems people are talking about could be solved with a revenue floor. If this only applied to companies making, say, $50mm+ per year or with software-related R&D expenditures of say $10mm+, it would not hit startups or innovative small companies working on far-flung ideas. I feel bad about those laid off from Meta and MSFT but I will not cry for those companies.
> “I work on these tax write-offs and still hadn’t heard about this,” a chief operating officer at a private-equity-backed tech company told Quartz. “It’s just been so weirdly silent.”
Hasn't Ben Thompson of Stratechery spoken about this a number of times? I'm aware of this 'feature' and I'm not even in the USA, let alone a COO at a private-equity-backed yada yada.
Wonder how much of the layoffs were due to the tax deduction change and how much was due to executives being blindsided by their accountants come tax time.
Once asked about this change during an all employee meeting. Even a large software company should care… The executives were not even aware of the policy change…
Note that Trump's Big Beautiful Bill as it passed the House of Reps would bring back 100% expensing of R&D expenses including software development costs/salaries.
If the article is to be believed, though, the damage is already done. Companies have already laid off large portions of their R&D staff, and have canceled lots of forward-looking technical work. Re-hiring those people and restarting those projects can take years, and that's if companies feel confident enough that the exemption will stick around, and not get removed again in a few years.
Deferring depreciation and deductions decreases their value as inflation happens. So it is a double whammy-not only is your profit reduced this year (and the impact that has on your stock price or return to your private equity investors) butthe value of that deduction decreases over time. So it is not a 'wash'.
Indeed. This is only a problem because software companies try to classify most of their expenses as "R&D" only to look more profitable than they really are, but at the same time they don't want to pay taxes on those supposed profits. For honest companies which don't capitalise their wage expenses, nothing substantial changes.
If anyone cares about combatting government propaganda in the US, do this:
Query any search engine for "are US income taxes direct or indirect taxes"
Every one will tell you that they are direct taxes. This is false. The supreme court has exclusively held that income taxes have always been indirect taxes (excises specifically, read about what an excise is in any authoritative source on tax law) in a constitutional sense. (See Brushaber v Union Pacific RR Co. 1916, Moore v U.S. 2024)
The sixteenth amendment did not give congress the power to directly tax citizens (or domestic corporations) and the complexity of the tax code is an attempt to obfuscate this fact, but the code is not inscrutable, it has rules.
Unsure of why this matters? Look up the difference between direct and indirect taxes in US law. None of these deductions matter unless you are a foreign corporation. I have tried commenting about this in other income tax related threads (this is my alt account), but people here don't like the idea that there is government propaganda in the US, or that most people are wrong and blindly accept the socialization about taxation without verifying what the law says.
I realize this is a disturbing truth to accept, not least because it involves accepting that most people who have been prosecuted for income tax crimes are only guilty of ignorance of the true legal purpose of the forms they signed. You can easily verify that most accountants and tax attorneys do not know what they are talking about by asking them this simple question about direct vs indirect taxation.
Question, if you have to amortise it over 5 years, and you can survive the initial 4, does it break even in year 5 (assuming stable employment)? Ie you amortise the previous 5 years (20% each) which works out to 100% anyway?
This US American idea of paying taxes = giving money away is weird. Especially coming from tech people, as what is preventing other nations from taxing the hell of big/US tech is the US government and its threats.
The America government now has the best socioeconomic footgunning snipers that don't even do the covert job of making the 0.003% richer over the long term properly anymore.
America's balance sheet distribution (not income) breakdown:
so will this incentivize a return to revenue/profit-driven business models? will we start to see a reduction in venture capital burning money on revenue-negative startups?
Higher interest rates were enough to help in that regard.
As it stands, this is an end to innovative startups in the US. Unless bankrolled by very deep pockets. The type of pockets who typically prefer the status quo and are not particularly interested in cost-efficient innovation.
Meta: god articles like this drive me crazy. What ever happened to the inverted pyramid hierarchy of information? I have to read 3 paragraphs of unmitigated filler before they actually tell me what's changed. It's not just this article, it seems like every article on newer media sites is like this. I understand why, but fuck them very much and the incentives that drive this behavior.
So, we want incredibly profitable companies like Google, Microsoft, and Apple to take their software development costs and subtract that from their tax bill?
These are the same companies that file patents so nobody else can use the ideas that they developed at the expense of public services.
How about making it a tax break only for small and medium sized companies?
Let me guess - the keyword here is "Section 174", just from the title alone :)
Dealing with Section 174 amortization in those first one to three years is a real headache (and your tax bill ends up higher than if it didn’t apply). Once your startup survives that the first few years of doing Section 174, things do get easier... but, sadly, most don't make it that far.
Ironically the debate/discourse here is healthier than anything we see from US Congress. Presidents have a limited number of terms they can serve, but there is no limit on the House and Senate and change is hard if not next to impossible because of this. Term limits would be a good start to introducing positive changes, but good luck finding the necessary majority to vote against their power and very cushy and comfortable lifestyles.
Its so funny to me that people freak out about amortization when I spent several years at a public company having to document my work as being R&D to amortize it to make our EBITDA look better.
This doesn't quite fit into the article and is probably too inside baseball for a general business audience, but as I see it, there’s a real and serious argument to be made here about how Section 174 changes restructured the cost architecture of tech employment (yes, even for big, cash-rich companies). When salaries could be fully expensed, the effective marginal cost of headcount was lower. Amortization means the same engineer now triggers a significantly bigger near-term tax bill. At scale, that’s a serious shift in how labor costs flow through the P&L… functionally, op-ex becomes capex, and cash flow implications for big players run into the billions. But maybe it’s me!
Isn't this literally the content of the article? What you just wrote down is basically this paragraph from TFA:
> And so, on schedule in 2022, the change to Section 174 went into effect. Companies filed their 2022 tax returns under the new rules in early 2023. And suddenly, R&D wasn’t a full, immediate write-off anymore. The tax benefits of salaries for engineers, product and project managers, data scientists, and even some user experience and marketing staff — all of which had previously reduced taxable income in year one — now had to be spread out over five- or 15-year periods.
Only external LLM use is ‘always deductable as op-ex’. If you build your own server farm and/or developer your own LLM, those are capital expenses which must be depreciated.
Contractors licking their lips at the prospect of being a clients op-ex. I think you’re right and hence the slow down in hiring top talent for top dollar.
Big Tech companies have a direct line to the US Governments. Whether it’s former Twitter and Biden or Palantir and Trump, they can pick up the phone and change this.
Are you telling me that this law affects these tech companies so much and they just let it stand?
It primarily destroys new startups and hurts small business, which do not have the clout you suggest. BigTech can barely hear the bump in the road while sitting on billions of cash reserves. Still, they had layoffs for this and other reasons.
I have to say I do have some sympathy for what's happening in the US at the moment.
Trump is just getting started. By the time he is finished, your economy will be shot to pieces. The US dollar will no longer be the reserve currency for global trade.
So it’s a tax break for tech companies and the problem is that Trump got rid of the tax break?
What happened to making companies “pay their fair share”?
I have such cognitive dissonance, I am constantly hearing about how Trump is evil because he wants to give tax breaks to companies. Now the problem is that he’s NOT giving tax breaks.
It’s almost like no matter what Trump does the news will cover it negatively.
This doesn't explain the mass tech layoffs. According to the article, the rule applies to R&D. The vast majority of tech workers laid off in the last two years didn't work in research and development. They wrote regular software for sale, like games, for example.
The games industry, while hugely profitable and bigger than TV, movies, and music combined, laid off tens of thousands of people. It's unmitigated greed is all it is.
> For almost 70 years, American companies could deduct 100% of qualified research and development spending in the year they incurred the costs. Salaries, software, contractor payments — if it contributed to creating or improving a product, it came off the top of a firm’s taxable income.
According to the article, as long as the tech workers contribute to improving or creating a product (be it games or apps), they count as R&D cost.
I worked in games 2 years before the studio shutdown. It wasn't because of "R&D" tax breaks. None of the recent layoffs or studio closures are explained by that. Nor are the Microsoft, Dell, or Intel layoffs which aren't game-related.
To qualify for R&D tax breaks, IIRC having identified qualifying work for a segment of my firm, there must be elements of hypothesis, experimentation, results, etc that I would consider more science-y 'Research' than just turn the crank software 'Development.' It has to be both. And that has to be documented. And offshore research+development doesn't get you a tax break. The irony is that the R+D tax actually discourages onshore pure development as a 'trade' and encourages a split of onshore R+D and offshore D.
This sort of thing appears to be self-reported; I don't know if it ever gets audited. I don't know if big tech lies or creatively interprets what counts and that has contributed to the issue. But this article sort of over-represents what qualifies as R&D for US tax purposes.
> The vast majority of tech workers laid off in the last two years didn't work in research and development.
I bet they were classified as R&D for accounting purposes. Product development largely falls into R&D - it doesn't matter what the product being developed is for.
Every job I had at a megacorp was classified as R&D, and I know because I had to track hours against such.
> I bet they were classified as R&D for accounting purposes.
It's not just that. Section 174 now explicitly calls out Software as always being an R&D expense:
> (3) Software development
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
Greed is too easy as a target.. industry space has shifted because of slower innovation and less growth, so cost cutting being more a focus would be a reasonable strategy
If your company is already profitable to the tune of billions annually, "cost cutting" isn't necessary. You're just cutting people out of jobs and out of economic participation in society -- which affects a far larger group than just themselves when those folks can't spend their salaries in other businesses.
There is no justification for "cost cutting" when it hurts the larger economy. If the company were losing money, that would be different, but these mass layoffs are all from firms that make obscene, enviable levels of profit. It's greed.
1. I start “Facebook for dogs” It’s gonna be massive. For the first year me and five guys code away in the garage and I use my savings / credit card / family trust fund to pay them 100k each. Expenses are 500k, revenue is, amazingly, 1.5M and taxes owed is 500k.
At this point turning round and saying the development was R&D, and claiming 500k of tax breaks is just (to me) ripping off the American Taxpayer.
And I’m not even an American Taxpayer.
If the revenue was zero would anyone suggest that the taxpayer give me 500k to help ? (Ok I would because I like free money but most people won’t)
Everything you just said but imagine revenue is $500K, and you spent $500K on salaries for the team.
You can only expense $100K of the salary costs this year, so even though you're break-even, you pay taxes on $400K in income.
Or, even worse, imagine revenue is $250K, and you spent $500K on salaries for the team.
You can only expense $100K of the salary costs this year, you're already -$250K on the year, and now you're paying taxes on $400K in income. You're destroyed.
VC-backed startups aren't designed to get profitable quickly, and I don't see that as a problem for the American taxpayer, and nobody is saying the taxpayer is giving money or helping. A business losing money should not have to pay taxes on income, as if it's not losing money.
the idea is that normal business expense are deductible.
in this case, your taxable income is $1.0M, and cash flow is $500k ($1.5M - $500k salaries - $500k taxes).
now you have to amoritize it over 5 years. so your taxable income is $1.4M ($1.5-500k*20%), taxes are 700k, and cash flow is $300k.
Uncle Sam just reduced your cash flows by 40% by a simple tax change. You eventually make up the difference, but for fast growing tech companies, that's a large shift in current flows and significantly changes their investment strategy.
There are some misunderstandings in the comments that seem to stem from not having read the section, so I thought it was worth referencing the actual text [0]. It's quite short and easy to read.
The most important bits:
* Subsection (a) requires amortizing "Specified research or experimental expenditures" over 5 years (paragraph (2)) instead of deducting them (paragraph (1))
* Paragraph (c)(3) is a Special Rule that requires that all software development expenses be counted as a "research or experimental expenditure".
That's it. All software expenses must be treated as research and experimental expenses, and no research and experimental expense can be deducted instead of amortized. Ergo, all software expenses must be amortized over 5 years.
I strongly recommend reading the section before forming an opinion. It really is quite unambiguous and is unambiguously bad for anyone who builds software and especially for companies that aren't yet thoroughly established in their space (i.e. startups).
Also note that this makes Software a special case of R&D. It's the only form of R&D that Section 174 requires you to categorize as such and therefore amortize.
[0] https://www.law.cornell.edu/uscode/text/26/174
It's pretty bad.
It had a huge impact on my personally, I'm a small R&D shop and basically I have had to end all risky long-term research projects.
In addition to the research costs, I'd also have to pay taxes on the research costs mostly up-front. Significantly, if the project doesn't work out, I'm still out of pocket for the tax money. It's a penalty for taking a risk, and it kneecaps American innovators in a globally competitive technology race.
The rules are even worse than the article notes because it double-dings open source developers. See Section 6.4 of https://www.irs.gov/pub/irs-drop/n-23-63.pdf. The relevant bit is here:
> "However, even if the research provider does not bear financial risk under the terms of the contract with the research recipient, if the research provider has a right to use any resulting SRE product ... costs paid or incurred by the research provider that are incident to the SRE activities performed by the research provider under the contract are SRE expenditures of the research provider for which no deduction is allowed ..."
The rule as written means contractors who write Windows drivers could deduct their expenses (as they would have no residual rights to a closed-source work product), but contractors who write Linux drivers may not (as they would have some rights to open-source Linux drivers).
> In addition to the research costs, I'd also have to pay taxes on the research costs mostly up-front. Significantly, if the project doesn't work out, I'm still out of pocket for the tax money.
That’s how it works for every business! If Jim Bean builds a distillation facility it has to amortize the investment in that over time. If the distillation facility doesn’t pan out, then it doesn’t get a refund for the taxes paid.
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> The rule as written means contractors who write Windows drivers could deduct their expenses (as they would have no residual rights to a closed-source work product), but contractors who write Linux drivers may not (as they would have some rights to open-source Linux drivers).
Is it just me or are you conflating two orthogonal things?
An open-source Windows driver would have the same issue, no? And a closed-source proprietary Linux driver privately written for some company wouldn't have this issue either, right?
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“The power to tax is the power to destroy.”
Just pledge copyright of contributions to eff or something.
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You’re likely overreacting.
It makes software temporarily 16.7% more expensive in year one if you’re operating a profitable company, but you do eventually get to deduct that over time. Pay 8% on a 4 year loan and that drops to ~4%.
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We are small and so have been on a hiring freeze since 2022. I’d like to hire but the upfront cost is high.
For those around when this went into effect many business owners were surprised. Our accountants told us they seriously thought congress would fix this before it went into effect.
... they did that because that's exactly how Trump presented the change. The article points that out: this change was an attempt to lie to the congressional budget office, not intended to be an actual tax change.
And then it suddenly was an actual tax change.
Like so many Trump actions: "oops".
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And if the R&D uses foreign workers, because you can't afford to pay US wages, then the 5 years goes to 15 years!
This hurts small companies (like mine) that were priced out of the US developer market.
I’m not sure this is exactly true. If your foreign workers are a service contract then those are services expenses immediately deductible. Same if you are using local service contracts. My understanding is this creates a drag for companies that want to hire f/t.
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We don't talk about this enough. International R&D is not offshoring of call-centers to India. International R&D is the IP for the next generation of global communication standards being owned by US-based or foreign corporations, because international (e.g. Canadian, European) standards experts/developers become un-affordable for US-based corporations and are forced to work for our "adversaries" instead. Crazy.
What are the implications of this.
As I understand accounting, this means that reported profits would be higher, and therefore incur more corporate income tax liability. Cash flow isn't effected besides tax.
A startup isn't likely to be making a profit yet, under either accounting rule. Is there a benefit to reporting a larger loss?
My first thought is that this effects Google and suchlike, not startups. But... assuming steady state "r&d" expenditure... it's not that much. Everything gets deducted within 5 years anyway.
So... maybe this hinders more modestly profitable, and fast growing companies most. Those that can't afford to carry 5 years worth of paper profits as easily.
Otoh... I am curious about how the difference between r&d expenses and operational ones are determined irl.
This should be quantifiable. How much extra assets are software companies actually booking?
It seems questionable that this "silent killer" had actually affected employment so much.
> A startup isn't likely to be making a profit yet, under either accounting rule. Is there a benefit to reporting a larger loss?
As an example, A two person software startup; both drawing a salary, each making $100,000 per year. Each doing things related to software development.
Startup brings in 200,000K in revenue.
Under pre Section 174 changes, the profit is zero. Both salaries are expensible in the year they were incurred.
Post Section 174, the profit is now $160,000 each year. Now they pay taxes on $160,000, even though they literally have no money left over because revenues equaled expenditures.
At 25% tax rate, that’s $40,000 in taxes, for a business that made literally no money.
That’s why this is so devastating to small software businesses; unless you’re highly profitable and have cash reserves, this change hits hard.
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That was my first thought as well, but on second thought I can see how this might cause problems:
For established profitable software companies there was a cliff edge in 2022 when this change kicked in. Staff costs for previous years had already been fully expensed while only 20% of the current year's costs could be deducted.
Second, any sudden increase in research expenditures is now discouraged. This could make companies less nimble.
For unprofitable startups it could cause issues during a phase of very high revenue growth. They could suddenly be liable to pay corporation tax in spite of the fact that they are not profitable in any reasonable sense of the word. It would smooth out later, but that may be too late for some.
What I do not believe for a second is that this is causing major job losses. Companies like Microsoft or Meta do not reduce research or software development just because there is a temporary tax hit. It could be an extra incentive for an efficiency drive I guess.
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Your analysis is correct, but most software companies were mostly profitable or fast-growing. For every Google, there’s 1000 wordpress vendors you’ve never heard of.
In another year the initial shock will stabilize, but any growth now has a 5-year tax hit attached. And even Facebook doesn’t want to pay that if it doesn’t have to.
Google was reportedly amortizing (by choice) long before this was in effect, so while it might “affect them”, in practice it’s likely business as usual.
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The R&D credits are deducted from Payroll taxes, so they impact pre-revenue startups as well.
I'm not an accountant, but as I understand it, you don't pay taxes on profits, but on revenue.
So previously, some 20% of all revenue would be owned as corporate income tax, and startups would deduct it all as they're spending much more on R&D than they owe in corporate income tax. But with this tax change, the deduction would be much lower (80% lower IIUC).
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Exactly!
The change is very simple. And the predictable impact of the change is very clear.
It shouldn’t impact large companies that are already profitable. But it’s devastating for software companies that are not profitable yet.
And that’s without even getting into the philosophical issues with it.
I worked for a UK company that amortised it’s development costs… it led to the false belief that the company was profitable when it really wasn’t
OK, but you've changed the topic from tax accounting to financial accounting/reporting.
In the US, it remains the case that programmers salaries must be treated as an expense (i.e., cannot be amortized) when calculating the company's income statement, balance sheet, etc. Not following that rule will get the accounting firm signing off on those financial reports in trouble (with the SEC, the Public Company Accounting Oversight Board, and maybe even the Justice Department if the purpose of the violation was to defraud investors).
"Profitable" in an accounting sense has nothing to do with your cash position. This is something that people in tech don't really seem to understand.
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Yes, that is tremendously important aspect here - the US tech would look better on paper - higher paper profits due lower paper expenses - while getting increased cash flow stress due to decreased deductability of the salaries which are among the main expenses in software dev business.
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Exactly. And if you’re more profitable on paper, you have to pay more tax, making you even less profitable in reality.
I thought wages were deductible anyway. Say you pay a developer $250,000 a year. The employee pays the tax on their own wages.
No, not in this case. 250k is an expense for the company. Company had to amortize this expense over 5 or 15 years. (15 for software engineers outside of the US)
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W2 salary is different from fully loaded labor cost.
> All software expenses must be treated as research and experimental expenses
From what I've read, not for software fixes to ongoing products, but for new products and I can't remember for new feature work. Also if you contract for someone else I heard you can still write off expenses without amortization.
I would guess that because in these cases software development costs would be classified as “cost of goods sold” instead of “research and development”
Who sponsored this text in the bill?
Here's the cosponsors of the bill:
https://www.congress.gov/bill/115th-congress/house-bill/1/co...
I think the purpose of the change was to "increase revenue":
> Requiring that certain research or experimental expenditures be amortized over a five-year period or longer, starting in 2023, would increase revenues by $109 billion over the period from 2023 to 2027.
https://www.congress.gov/congressional-report/115th-congress...
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Idk but it was under trump. And the meta issue was balancing the budget after all his tax cuts so he needed to find more tax revenues. Which this accomplishes pretty handily
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What i like about US is that compare to other countries (like for example Russia where i'm originally from) there is almost no lying and cheating here. Instead there is a respect of the law and an army of talented creative accountants and lawyers. Remember that stale "multi-used" sandwich served with the drink which by virtue of its existence converted drinking establishment into a food serving restaurant? Not being an accountant, i'd just speculate, out of sheer fantasy, that some hardware chip/gadget added to your software may similarly convert your software development into hardware/gadget one.
I'm not sure I buy into this. Sure, compared with Russia it's probably a lot less, at least in terms of being something everyday people engage in. But in terms of comparing with countries like Germany or Sweden I don't know.
Here's some food for thought:
* Global financial crises: Banks were paying (bribing) ratings agencies to rate junk bonds AAA.
* Savings & loan crisis: widespread fraud & insider abuse.
* Bernie Madoff: Ran the largest Ponzi scheme ever, with an estimated fraud total of $65B raking in $17.5B in invested cash.
* Enron: straight up accounting fraud sprinkled with intentionally causing brownouts in California to pad their pockets with a side bonus of making Gov Davis unpopular & get him recalled (Enron was closely aligned with the Bush administration).
* Nixon straight up using psy-ops against Democrats & finally trying to burgal the DNC offices.
In terms of stats, the FBI does a few hundred bribery and corruption cases annually. Are they good at catching white collar crime? Well such crimes regularly take more than 5 years to investigate.
And hell, some things that are basically lying and cheating are straight up legal. Usury is legal with minimal to no regulation of payday loans. Pyramid schemes are legal as long as you call it multi-level marketing.
The list goes on and on.
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> What i like about US is that compare to other countries (like for example Russia where i'm originally from) there is almost no lying and cheating here. Instead there is a respect of the law and an army of talented creative accountants and lawyers
I thought you were being sarcastic here at first because, good lord, there is plenty of corruption here in the US (though those doing it used to care more about hiding it). The US, especially in its current state, is certainly not a place I'd describe with "almost no lying or cheating". I do understand that Russia is on another level, though, given the open assassinations and doing things like what was done to Navalny.
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> almost no lying and cheating here
Are you living in an alternate world?
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USA is pretty darn corrupt. Just because worse places exist does not make USA good.
https://en.wikipedia.org/wiki/Corruption_Perceptions_Index#2...
> It really is quite unambiguous and is unambiguously bad for anyone who builds software
Not "anyone". Anyone in America.
I don’t get the big hoopla. Here in Germany I’m opting to turn development costs into assets (I simplify a bit). I need assets on the balance sheet, otherwise we’re over-indebted. As long as the development costs are much higher than income (I.e. as long as you’re not profitable), then it shouldn’t matter. And once you are profitable, you pay some more corporate taxes, but aren’t they kind of not too high in the us anyway?
the big hoopla is this: you're a newish startup. You have $300k/yr revenue and $$270k/yr expenses of which $250k is paying your programmers.
prior to this rule change, what you pay your programmers is just a deductible expense, so you owe taxes (in this very simplified example with no other expenses etc. etc.) on just $50k.
after the rule change, you can deduct only $50k of the labor cost (in this year), so now you owe tax on $250k.
there is a very good chance you do not have the cash available to make this payment.
of course, after 5 years, things all balance out and are effectively "back to normal". but you have to get through those 5 years first.
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This was also a gift to big tech, boxing out competitors.
It might be "quite short" but it's full of click bait style text. This tax law will change everything, but we won't say what it is for 4 or 5 paragraphs, nor what changed for another 3
Edit : sorry I just realised you meant the tax law is short. The article itself is very annoyingly written
Agreed. I think the article's text was responsible for the confusion in the comments prior to me posting this. They could have been much more clear and straightforward.
I have no doubt it's bad, but I can't believe that it's both fueling mass layoffs and also almost nobody has heard of it. Those are unlikely to both be true.
I'm not sure why TFA makes it sound like almost no one has heard of it, but it was extensively discussed on HN in early 2023 as being a primary cause of layoffs, before it was cool to blame AI.
Software firms across US facing tax bills that threaten survival (924 points, 981 comments) April 18, 2023 https://news.ycombinator.com/item?id=34627712
Why the big tech firms that suddenly laid off a bunch of people the instant they started looking at their 2022 tax bill didn't tell everyone explicitly that that's what was happening I can't say, but it's not like this has been happening in secret.
Obviously interest rates also play a role, and probably a larger one. But this is objectively a very very bad contributing factor, far worse than the impact of coding LLMs.
By what logic?
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But where an established company invests steadily in software, whether it is amoritized or deducted year to year is a wash. Rather than harm tech, this would seem to protect established US companies at the expense of startups. Thats probably great for shareholders in publicly traded companies. It seems just another querk of taxation meant to maintain the established order
Only bootstrapped startups, funded startups will get the amortization by the time they need to deduct from earnings.
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It's only a wash if they've been amortizing all along. There's been no advantage to doing so, so established ones have all been deducting, and will have the same five year window of increased taxable income that startups will.
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salary is already counted as an expense right? does that mean we were double billed as two expenses? salary and R&D?
more like triple. do not forget the sales tax when you're spending it.
Excellent summary.
This is one of the worst things MAGA has done. Tech startups are the source of so much of our wealth, and this makes it very challenging to ever build one.
I can’t believe this still exists, and no one has changed it. We truly are governed by morons
for anyone curious, this wasn’t specifically trump, but it was indeed a republican congress bill. texas republican was the initial sponsor and then republicans lined up to cosponsor.
this was done to fuel their tax cuts to a small group of a certain people.
you can see all of the sponsors here: https://www.congress.gov/bill/115th-congress/house-bill/1/co...
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It is being roled back partly https://news.ycombinator.com/item?id=44028106
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A dead post below says it was biden and somehow Obama, but sibling reply link says it passed into law in 2017, not 2022, the first year it went into effect I think.
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But we are great now. What else do we need?
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It's good to know that when the Republicans want to tax companies, people rush to defend those companies against taxation.
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It's not really targeted at tech, insomuch as at Democrats.
Everyone assumed it was a traditional accounting hack. But given the timing and the reinitialization, it's clearly political, not economic.
The code is a strategic time-bomb designed to cause a high-profile economic downturn during a presidential election cycle, specifically when the following president is a Democrat and Republicans have a house majority.
It was used to harm Biden's economy, and it will happen again in 2030 if the next president is a Democrat. While deferred, it will be spun as a major Trump "economic achievement" for the midterms, because companies will be able to afford to hire again.
The tech industry is merely high-profile fodder for extreme politics. It really is that petty.
The Democrats had control of the presidency and the house in 2022 when this provision first went into effect but had 2 fewer senators (1 fewer if you count the tie-breaking VP). Why didn't they try to change it? Is there some reason a change in the tax code like this can't be modified or repealed once its in place?
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If this was passed in 2017 to go into effect during the next presidential term, wouldn't that only work as a time bomb for Biden's presidency if Trump didn't expect to win a second consecutive term?
Given the history of prior presidents winning 2 consecutive terms, it seems like Trump could have reasonably expected a 2022/2023 tax change to be his problem.
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This is just wrong. It was passed in 2017 (during Trump’s presidency). It was to go into effect in 2020 (a presidential election year during Trump’s presidency). He hoped to be re-elected.
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In general, the tax code does not provide immediate deductions for purchase of assets that generate recurring income. Instead, the cost of the asset must be depreciated over time. The provision you point to excludes land, physical property, and software from treatment as R&D expenditures. Because all of those things generate recurring revenue over time. It’s specifically listed in that statute, but it’s not treated as a “special case.”
E.g. If a whiskey maker pays to build a distillation system, it can’t deduct that cost immediately. Because that’s a capital asset that generates recurring revenue. Software is properly treated the same way.
Historically, Section 174 allowed everyone to opt in or out of R&D amortization. That amortization is required from anyone for R&D is new.
Further, software is the only type of R&D explicitly called out as required to count as R&D. Which means it should be taken as a given that most other industries are finding ways to count their R&D as anything else, while we've been intentionally given the short straw for some reason by having our specific field be the only one identified by name so as to leave no wiggle room. I'd say that definitely counts as being a special case. The section is even labeled "Special Rules".
Amortization is bad policy when it comes software. Software is inherently high risk. Every piece of software is unique and does not guarantee steady income over 5 years. Most startups won't survive 5 years to fully realize the deductions. This is the end of US software dominance.
Amortization makes sense for things that have some inherent value. Like a microscope or computer.
A bankrupt company can still sell their computers. Selling you code, lol -- code is more of a liability really :)
> Amortization makes sense for things that have some inherent value. Like a microscope or computer.
I am nitpicking but since a microscope or a computer is a tangible asset, the correct term is depreciation. Amortization applies to intangible assets.
The software that companies make is sold off in bankruptcy all the time.
I have a few friends who specialize in it with 2 ongoing contracts for splitting off pieces of software.
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> Selling you code, lol -- code is more of a liability really :)
It's important to consider that lawmakers (who are not well informed or downright stupid) might think code has intrinsic value because of media married with a lack of real-world experience.
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Realistically that says more about the quality of software that we build than the concept of software as an asset
> code is more of a liability really :)
Mine DEFINITELY is!
Amortization is bad policy, period. If cost is actually incurred, it should be fully deductible immediately. No matter if it's a piece of equipment or software.
i'd disagree heavily with that... let's say you have an expense of an insurance policy that covers you for the next 10 years. You're paying for 10 years of service, that should be amortized over 10 years.
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Is US software dominance because of our startups? Or because of the giant trillion dollar monopolies we have?
Didn't AAPL, GOOG and FB all create products _before_ they had any taxable income? Would this change have had any actual impact on their foundings?
> Is US software dominance because of our startups? Or because of the giant trillion dollar monopolies we have?
Most likely neither: It is its massive trade deficit, the one it strangely wants to get rid of now, that has allowed US consumers to consume more than they produce (i.e. you can take something with no real expectation of having to give anything back in return). Which, as it relates to tech, has enabled offering services for what is effectively free to dominate the market. Nobody else in the world can compete with that.
> Didn't AAPL, GOOG and FB all create products _before_ they had any taxable income?
Wouldn't you say they had no taxable income because of it? If Facebook brought in $100,000, and paid $100,000 to developers, then there would be no taxable income under normal regimes. But if the developers were not tax deductible, then that $100,000 in revenue would be taxable, even though the bank account is empty. This isn't nearly so simple, but it has changed the calculus in a similar way. The business models of old no longer work because of it.
It's worth noting that FB was quite possibly being secretly funded with taxpayer money by national intelligence interests at inception, which would have substantially reduced or eliminated commercial pressure early on.
DARPA was working on Project LifeLog starting in 2003, was to be "an ontology-based (sub)system that captures, stores, and makes accessible the flow of one person's experience in and interactions with the world in order to support a broad spectrum of associates/assistants and other system capabilities". The objective of the LifeLog concept was "to be able to trace the 'threads' of an individual's life in terms of events, states, and relationships", and it has the ability to "take in all of a subject's experience, from phone numbers dialed and e-mail messages viewed to every breath taken, step made and place gone".
The program, at least officially and publicly, was cancelled on February 4th, 2004, the exact same day that Facebook was founded.
https://en.m.wikipedia.org/wiki/DARPA_LifeLog
https://en.m.wikipedia.org/wiki/Facebook
You can call it a coincidence if you want, I just tend to be very skeptical of "coincidences" where massive, powerful, unaccountable, immoral, unethical institutions like the US intelligence community get exactly what they want at the expense of our civil liberties.
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Well, presumably the claim would be that a factor in their not having taxable income was the fact that they didn't have to amortize their development cost.
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I don’t know how it works in the U.S., but we had HMRC in the U.K. write us a cheque every year, as if you have a greater R&D claim than your tax bill, you get a rebate.
It started with small and nimble innovators. Then it was shifted to Big Tech with the squeeze of patent trolling in the 2000's applied. It was capturing massive created value into the hands of few, connected, corrupt shitbags.
I’m not familiar enough with the very early days of Apple which started out as a hardware company to rebut you; but perhaps you mean the current Apple that has re-invented itself?
This impacts deductable expenses, not profits directly. The labor you pay for internally owned IP related to software must be amortorized. This screwed up an enormous number of business plans because software has more risk than many other endeavors. For small businesses, you basically can't do your own software.
It applies to things like configuring your internal tools too. Good luck at audit time.
Hi, I'm just really curious about something. Why write AAPL, GOOG, and FB, and not Apple, Google/Alphabet, and Facebook/Meta?
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HN has taken a sad turn over the last few years where we see genuine curiosity - such as your reply - met with downvotes instead of replies.
I don't have an answer for you. But I support your intrigue.
> end of US software dominance.
What is that? Software sold by companies that have HQ in the US? Or software created by someone in the US? Because if it is only the first, good riddance.
Based on the Shopify example in the article, it's the latter.
Does a machine guarantee steady income during the period of its depreciation?
This is insane, how does it make sense? Employee salary expenses are no different from other expenses to run your business. Imagine they did this for raw material instead, a restaurant could only expense 20% of the food that they sell. If they purchased $100 worth of food, but could only sell $50 worth of it, they have to pay tax on that even when making a net loss overall. It just does not make any sense. There would've been a huge uproar if this was done for cost of goods. Why are employee salary expenses any different?
It makes sense when you consider that there is no minimum tax rate on businesses.
Given the choice, Amazon would rather spend 100% of its profits on itself than allow any of its profits to be paid out in taxes. Section 174 was implemented without a minimum tax on corporate profits before voluntary deductions such as research. Therefore, it’s exploitable and all companies ought to hire and fire staff to ensure their profits show as 0%.
This tax code defect is now closed by accident, but could have been done much more intelligently than it was. Oh well.
(EDIT: My first sentence is potentially confusing when I reread it later. To restate: section 174 was defective as implemented due to the uncapped 100% deduction, but the concept of a significant research exemption is still excellent. Just need to close the effective 0% corporate tax rate loophole.)
The company already pays payroll taxes on those salaries, and the employees pay income taxes. And the people hurt by this aren't the shareholders or top executives, it's the rank and file workers getting laid off, losing benefits, and being asked to work more for the same pay.
What this change effectively did was make software developers significantly more expensive, without increasing the amount those developers get paid.
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> Given the choice, Amazon would rather spend 100% of its profits on itself
And why is this bad, exactly? Money will be spent and will go back into the economy. Amazon will have to use the funds to build new offices, datacenters, do research, whatever.
And even if execs give themselves $10^11 USD in bonuses, they will be taxed as personal income, at even higher rates than corporate income.
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> Given the choice, Amazon would rather spend 100% of its profits on itself than allow any of its profits to be paid out in taxes.
"on itself"???
You mean it would rather spend its profits on hiring more developers than sit on it? That sounds great, doesn't it?
That isn't a loophole. It is working exactly as was intended. Reinvesting is good.
The deal is that you can delay taxes by reinvesting (and either make the government more money at the end or lose it all if you were a fool, but you gain nothing by losing it all) but you cannot skip them when it comes to taking the profit out. The entire point of it was to promote investment into businesses which has kind of been a crucial factor in international competitiveness since the Industrial Revolution. Remember the fall of US Steel? That happened because they didn't reinvest.
after 5 years then every year is deducting a whole year's worth of R&D - as long as that investment is not too lumpy from year to year you are back where you started
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In this theory you should tax revenue and not profit. Welcome to VAT.
There are other expenses that are also amortized.
Employee salary cost isn't always 100% an expense.
Imagine you are BigCarCo, you make cars. The salary for your factory workers that build cars to be sold is an expense, incurred in that year, to be matched against the revenues earned by selling those cars. But the cost to build the factory needs to be amortized over the lifetime of the factory - and that's true whether you buy a factory from BigFactoryCo or hire a bunch of people to build it.
Now, I'd argue that a) most software dev work is closer to the factory worker than the factory builder and b) the lifetime for most software is less than 5 years, but the idea that some cost of developing software should be amortizable is pretty reasonable.
Actually, if the company isn't selling the software they build, what their software devs do is closer to building a factory rather than working in it.
Mostly developing software is about automating things that are expensive and slow to do manually. So, to stick with the factory analogy, it makes the factory a bit better and more efficient. If you stop doing that because it is too expensive, you fall behind with your factory.
Of course the whole issue in the US is that it outsourced much of what happens in factories to China and software has become one of the main things the country runs on.
Now imagine that a restaurant buys 100 tables, 500 chairs, kitchen equipment, cutlery for 800 people, signage, a security system, and does a remodeling before opening. (Or an airline buys an airplane. Or a hotel chain builds a hotel.)
Should they be able to expense all of those items that provide value for multiple years in a single year?
Does software development provide value exclusively in the year it's done? Or over multiple years?
The reason that we require you to deduct an expense over years for some things is because they have a resale value that needs to be accounted for. It's not a pure expense because you have an asset with real value that came out of the purchase. Employee time has no resale value. Once used it's gone, so employee salaries are expenses, not investments.
The only possible justification for the Section 174 R&D changes is that employees working in R&D theoretically are producing something which does have a resale value, so there's a small tax dodge enabled by direct-expensing your R&D costs but then ending up with an infinitely-copyable asset that came out of it.
If that's what you're saying, then I'd reply to that argument by saying that paying humans to design new things has historically been a business strategy that the government has wanted to incentivize in a way that buying and holding physical assets has not been. I've seen no justification for the government deciding that from 2022 on we should actively discourage R&D, it just seems to be a mistake.
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It's only shifting what year the government gets its revenue. The government should simply let the company choose how to do it, but if they choose anything other than year 1 interest will be payable at government bond rates.
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I have seen a lot of software development where what's been done has been changed beyond recognition over the course of less than a year.
Ironically I think they would want to claim that over multiple years unless they have other profitable operations under the same company. E.g. other restaurants.
They should have the choice.
If software lasted longer than 18 months or was otherwise tangible, this could also make sense.
The appropriate analogy is:
Imagine a restaurant spends money on employees to build 100 tables, 500 chairs, etc. Those tangible goods would be capital assets, so the labor costs of building them would also be capitalized.
This change to the tax code is just bringing the tax treatment of software development in line with how every other industry is treated. IOW, it was closing a loophole. A very valuable loophole, whose beneficiaries used it to get filthy rich, and bragged about how their industry was so much more valuable than everything else, even though a lot of that value was due to the exception software was getting in the tax code.
Notably, in the current version of the budget as of 6/6, the loophole is temporarily coming back, though given the Musk-Trump feud, it's very possible it will get pulled again to try to mollify the hardline deficit caucus.
If the restaurant buys e.g. a fancy oven or a delivery truck, it can't expense 100% of that cost in year 1, it has to spread that cost over the lifetime of the oven or truck.
Labor that operates the business day-to-day would be an expense, labor that creates a capital asset is more complicated.
I happen to think most employee time in software dev is more on the day-to-day operation side, and should be expensed, but I can see an argument that some should (or could) be amortized.
> If the restaurant buys e.g. a fancy oven or a delivery truck, it can't expense 100% of that cost in year 1, it has to spread that cost over the lifetime of the oven or truck.
The difference of course is that you'll have a truck or oven that can be sold. If you could count the full value in the first year then you could sell and buy one each year to reduce your taxes without actually changing anything.
Thus if we want to go that route for software the salary of the R&D employees should be counted against the value of the software they created (As in, the value were it to be sold wholesale to another company). The time spent by the employees is not an asset, once you pay the employees for their time it's gone even if they generated nothing of value. The actual value is that of the software, but that's obviously not easily assigned a value.
It's a lot easier to get financing for a tangible asset like an oven or a delivery truck, which mitigates the cash flow issue.
Sure, you can only deduct a certain percentage of the asset's value as an expense each year, but your cash expenditures to pay for it are also spread over a multi year period.
It was literally just a shot at California and New York, that’s all it was. “Own the libs” ya know
“if we aren’t rich then no one else will be”
It’s the same for movies, other intangible assets that are valuable and produce income over several years. And it’s done for many tangible goods, like servers in a datacenter, the kitchen equipment in a restaurant.
I think you may misunderstand. For most of those, you get the choice to amortize if you prefer. In this instance, you must amortize, which is a big problem for startups.
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Worth noting: the version of the Big Beautiful Bill passed by the House ends this particular change, starting in tax year 2025. We'll have to see if this provision makes it through the Senate, and in what form.
That's crazy. We're 3 years into a 5 year depreciation cycle, and now they "change their minds". Sure convenient when you know you are in power to supercharge growth and leave a time bomb for the next admin.
The destructive power of the Section 174 change cannot be overstated. It has been reported on a lot, but its harms are generally poorly articulated.
I do not like many things in BBB, but I am glad to know there is at least something in there that I can be glad for.
Lol only for it to kick back in in 2029 during the next administration. Your employment has now become a bargaining chip in the GOP's handbook.
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Why sent tech companies and tech workers kick up a fuss when this bill passed in 2017. I remember being mad about it
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> ends this particular change
Temporarily, for 5 years.
If remember correctly, this was put in by Trump first round, set to activate when Biden was in office.
Now Trump second round fixes it, but expires in next (presumably) Democrat administration.
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> Fixing 174 would mean handing a tax break to the same companies many voters in both parties see as symbols of corporate excess.
This is frustratingly accurate. Through a zero sum political lens it'd be a handout to "big tech," so many politicians argue for keeping this on the books, but in reality S174 deeply affects small companies, new companies, boutique agencies, and individuals who want to consult or start smaller operations. I worked for a ~20 person shop that was gutted by this tax code change. It completely changed the affordability of talent.
The OBBBA (“Big Beautiful Bill”) suspends amortization requirements for domestic R&D expenditure, and explicitly allows domestic software development as an R&D expenditure eligible for immediate expensing.
The new rules would apply from 2025 to Dec 31, 2029:
https://www.crowell.com/en/insights/client-alerts/house-comm...
Repealing SB174 has bipartisan support. The house already passed its repeal but it died in Senate because a separate took (that also repealed it) took its place but that separate bill stalled out.
174 is so small it can't go through both chambers on its own so it needs to get attached a larger bill like OBBA.
It's unfortunate because it appears both sides want this repealed to allow immediate amortization of domestic R&D expenses.
https://abgi-usa.com/section174/latest-and-greatest
> 174 is so small it can't go through both chambers on its own so it needs to get attached a larger bill like OBBA.
There's a minimum size for laws?
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It's so depressing to hear that congress can't even do small things that everyone agrees upon.
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It's perhaps noteworthy that OBBBA is not the first bill to attempt to revert this tax law. It's simply the latest. There have been other attempts to revert section 174.
Other attempts that come to mind: 1. Tax Relief for American Families and Workers Act of 2024 (H.R. 7024) 2. American Innovation and R&D Competitiveness Act of 2025 (H.R. 1990)
This article is informative: https://www.cebn.org/media_resources/section-174-sign-on-let...
That "suspends" should be understood as "continues to hold-hostage" / "renews as a time-bomb to screw over some other party".
That isn't the reason. They sunset in the bill so it has a lower CBO score (which calculates costs out to 10 years). If you sunset in the bill after 5 years, even if you know it will get renewed, the apparent cost goes down. Get it?
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Removing it would make Congress less powerful, and we can't have that now can we.
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That would be the one positive I have heard regarding OBBB. This should be put into its own bill.
That isn’t how legislation is passed. If anything, it needs a section about acceptable tar shingle application standards for roofs within 6 nautical miles of any heliport operated in a subarctic area on the west cost. Then it’s looking like a bill.
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This is a highlight in an otherwise shitty bill.
I saw let Trump’s ugly bill die and then a small fix up to the tax code could be this. Should be able to pass.
This bill is goated for upper middle class and tech and defense sector
And I’m tired of pretending like we aren’t going to be beneficiaries
Every Congress increases the debt, we can acknowledge that the cuts they picked are going to wreck the lower class especially with the medicaid, we can acknowledge that it won’t meet its goals of cuts
but are you guys just scared to acknowledge its going to super charge things that you are a beneficiary of too? so busy saying it just benefits billionaires as if we’re trying to avoid guillotines. not gonna happen and many people here are going to try to take advantage of new programs
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> domestic software development
So now it seems its like a pseudo tariff against any other freelancers and producers for software outside of US.
As a non-American, it seems strange to me that the cost of regular software development, i.e. that is neither “research” nor “experimental” in a conventional sense, would be deductible in the first place (amortized or not). Isn’t that subsidizing a whole business sector? Maybe I’m misunderstanding something.
We're not talking about a tax deduction in the sense of a special privilege, we're talking about simple calculations of profit.
Before this change, tax for software development was calculated against:
* Profit = Revenue - Expenses
And software developer salaries fell neatly into Expenses unless you were looking for an R&D tax credit.
After this change, tax for software development is calculated against this new equation:
* Profit = Revenue - (1/5 * YearlyExpenses[-1]) - (1/5 * YearlyExpenses[-2]) - (1/5 * YearlyExpenses[-3]) - (1/5 * YearlyExpenses[-4]) - (1/5 * YearlyExpenses[-5])
Which means that if you are in Year 1 of operation, your values for YearlyExpenses[-2:-5] are all 0 and you only get to deduct 1/5 of your actual operating costs for the year from your "profit". So you can be in the hole but still owe taxes on your "profit" for the year because what you spent money on was classified as R&D.
Wasn't there something when this went into effect about the mid-year being the start so it is 10% in years 1 and 6?
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It is a subsidy!
Why should money spent on software _development_ not have to be deprecated over time like other money spent on _development_?
I get that it sucks from a cash flow standpoint but the same is going to be true of other R&D expenses. It's just that we're more exposed to this specific R&D expenditure and not others.
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Salaries in general (not just of software developers) are tax deductible in many countries. This is desirable because we do not want companies to be paying taxes on revenue.
I dunno, I pay taxes on revenue.
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Businesses are taxed on profits, not revenue. Paying people to write code is an expense, so you'd normally deduct that expense (plus all your other expenses) from your revenue to arrive at an amount that should be taxed.
That's the rub. Is it an operational expense, like rent or a capital expense, like buying machinery?
It is sort of between the two in my view and is highly dependant on what the software engineer does each day.
Are they fixing a bug, helping a customer, refactoring? I think that is operational.
Are they building out a new feature? That is capital. But it is not quite like buying equipment because it adds no value to the books. So depreciation seems off.
But the same issue applies to other roles. Is a sales persons day trying to land a sale, or trying to develop the business.
It all comes down to "intangible assets" and whether you are making them.
I think it is easier to just say if you are paying someone to work then you can deduct. There must be better ways to claw it back.
The whole reason for most business to exist is to use operations (operational costs) as a lever to increase the growth and intangible value of the business.
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It stems from the difference in treatment of capital gains and income. Either way it’s deductible, the difference being when it is deductible and how much tax is saved. Capital deductions are typically done later since they require a taxable event.
It’s a fudge to make projections look better to allow congress to pass a budget neutral reconciliation bill with the intent that congress would remove the fudge before the consequences triggered.
Governments in general are pushing for capital gains tax normalization where instead of requiring a taxation event the capital gains tax would be levied yearly. In such a scenario the only difference remaining would stem from the difference taxation rates.
> Governments in general are pushing for capital gains tax normalization where instead of requiring a taxation event the capital gains tax would be levied yearly.
You’re alluding to wealth taxes, right?
Because taxing unrealised gains are wealth taxes.
Or maybe I’ve misunderstood?
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Most businesses let you deduct inputs and capital expenses from your revenue so that tax only applies to profit.
Since this is done on annual buckets it's very common to try to move items in both columns between years to minimize tax.
So if company A pays company B to develop some software, that revenue for company B (or rather, its profit) is still taxable? Then it makes sense I guess.
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> Isn’t that subsidizing a whole business sector?
It is if the only thing your company does is create software. No operations, no sales, no physical assets to purchase sell or manage.
No, you have it right. Software was getting a special exception from the normal rule that salaries spent on creating capitalized assets are capitalized (which is the general rule for most industries, as well as for software development in most of the EU).
Yes and part of the reason America is so rich
I only recently learned about the Section 174 change, and honestly didn’t expect it to have such a big impact.
I used to work at a small startup, and most of our spending went toward engineers’ salaries. If we had to amortize that over several years back then, I don’t think we would’ve made it.
It’s surprising how a single line in the tax code can quietly make it harder for small teams to hire. Makes me wonder how many other policies are silently shaping things behind the scenes.
There is definitely a lot of misunderstanding here.
This provision can and does lead companies to owe significantly more in taxes than they make.
The only reason it hasn't been bigger news, is because most companies are pretending it doesn't exist and just sweeping it under the rug, hoping it will get fixed before enforcement gets serious.
I think the real reason it isn't bigger news is because the second you talk about tax code people start to tune out. It's easier to wind people up over AI taking jobs than it is to try and explain what amortization means.
> The only reason it hasn't been bigger news, is because most companies are pretending it doesn't exist and just sweeping it under the rug, hoping it will get fixed before enforcement gets serious.
Why pretend that it doesn’t exist? Why not vocally lobby for a change in the tax code?
There is bipartisan support to repeal the change. Meanwhile, further changes to the tax code are being prepared by the administration, very probably containing further such time-delayed footguns that will be the problem of the next administration to clean up, making them look like they raise taxes.
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Because then the people we watching might notice you and dig in.
For me the worst things is that they treat all software as R&D. I understand in maybe some situation it could be abused but imagine established company having non innovative software that keeps engineers only for bug fixing and security patching and basic maintenance. In true spirit this is not research for sure. It's equivalent of someone having a hotel and suddenly telling that their cleaners, security, gardeners, receptionist qualify as R&D which would be nuts.
AFAIK it was also affecting more freelancers outside of US since amortisation is 15 years. For EU citizen IMHO this is equivalent of US putting tariffs on outside world. I wish EU at least try to fight back and revenge on US Tech by increasing taxes or also making all US tech bought by EU companies to be 15 years amortised so they have taste of their medicine.
My reaction to learning about this is that it is good news: this explains the weakening of demand for programmers, but unlike the AI explanation, this explanation does not come with a large risk of the demand becoming much weaker than it is now.
Also, finally programmers with the right to live and work in the US catch a break: salaries for US-based programmers can be amortized over only 5 years as opposed to the 15 years of non-US programmers.
I mean, the link not many people have made is that executives want to replace programmers with AI because of Section 174.
It has effectively become a lot more expensive and difficult to employ a programmer. Once this change went into effect we started to see hundreds of thousands of layoffs.
Then tech executives started aggressively talking up how you could use AI to write code instead of having humans write it.
Now of course reducing headcount and the associated expenses and replacing them with a bot sounds tempting to executives no matter what. But it sounds REALLY tempting when you've been on a hiring freeze since 2022 due to the fact that you can no longer deduct employee salaries in the year you pay them out.
Bear in mind that both Republicans and Democrats say they want to fix this and haven't done so due simply to gridlock and government incompetence.
I think most software businesses are taking a wait and see approach. Don't hire until this thing gets fixed. In the meantime, double down as hard as you can on automating those programmer jobs out of existence, in case the law never gets fixed.
Section 174 is the root cause.
> For cash-strapped companies, especially those not yet profitable, the result was a painful tax bill just as venture funding dried up and interest rates soared
Can someone explain this? What taxes do unprofitable US businesses owe that this would be deducted against?
Here's a toy example that hopefully makes this clear:
In 2024, your business has $1m in revenue and has $2m in expenses. 100% of these expenses are R&D salaries (engineers you hire.)
Your company loses $1m/year. (You brought in $1m and spent $2m.)
Under the old rules, you'd owe no tax because you were unprofitable.
After Sec 174, what the IRS now says is:
You had revenues of $1m. But you only had $400k in expenses (because you now have to spread that $2m in R&D expense over 5 years).
So actually you had a profit of $600k! And you owe tax on that $600k profit (~$120k)
So you now have an additional $120k tax expense, making your business even more cash-flow negative.
.
Amusingly, if you're pre-revenue, none of this matters (you have no income at all, so it doesn't matter what your expenses are.) You get hardest hit by this change when you have some revenue and when you do a fair bit of R&D.
> Amusingly, if you're pre-revenue, none of this matters (you have no income at all, so it doesn't matter what your expenses are.)
https://youtu.be/BzAdXyPYKQo
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Wait - they are saying that employee salaries are not expenses?
That is surely wrong? Just because those salaries are for R&D?
I could understand if there was some additional tax break for R&D which was being removed. I can't see how basic operating costs cease to be expenses.
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Is this true even if you don't capitalize the immaterial IP asset generated by the R&D salaries on the balance sheet? Is that required in the US?
Otherwise I'm quite amazed that salaries can be carried forward as future expenses.
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so you are okay, if you start getting revenue when you're five years in?
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[dead]
But nobody’s forcing you to classify software developers as R&D.
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If the business has some revenue, but is not yet profitable after deducting development costs, it can become profitable on paper (and owe tax) if R&D is capitalized instead.
That is kind of strangely worded, but I think I see what they're getting at.
Say you would have been exactly not-profitable ($0) if you could expense all of your R&D as in the old system, therefore avoiding tax. Now with the new rules you may be on-paper profitable because you can only deduct 20% of the R&D as an expense this year. The remaining 80% of that expense tips you over, becomes profit, and that's taxable.
Right. With concrete numbers, say your main expense is $1 million in developer salaries and you have $500k in revenue. Going by the previous rules, you have a loss of $500k and don't owe income tax. With the new rules, you can only deduct $200k of expenses which gives you a "profit" of $300k, on which you'll owe $62k in taxes.
What taxes do unprofitable US businesses owe that this would be deducted against?
An unprofitable business doesn't pay income taxes. Businesses are taxed on their net income (i.e., profit).
People are railing against this as the cause of tech's recent underperformance, but it was a non-factor for the vast majority of tech companies, because most tech companies aren't profitable and wouldn't have paid taxes anyway.
I thought you could carry forward losses or something. i.e. Once profitable you can use your previous losses as 'tax credits'.
So you're essentially giving the government a 0% interest 5 year loan, in the amount of the pre-paid taxes
Yes, but businesses operate on cash, not tax credits.
If you make it that far.
The title of this article implies that it is a major or even the only cause for mass tech layoffs, which I strongly doubt.
For example, rising interest rates I'm sure also independently contributed. I would be interested to if anyone has gotten a sense of exactly how much this has contributed.
agreed, the interest rates and the overestimation on the stickiness of the pandemic’s increase in internet usage post-pandemic are the primary other contributing factors that, imo, represent the lion’s share; even allowing that the tax changes are tertiary is a stretch much less as the primary/secondary reason
It's hurts small businesses the most, and practically destroys startups. Titles are simplified by necessity and I think the phrase "...that's fueling..." doesn't strongly imply exclusivity.
Here's a neat trick: Section 174 US tax code changes make purchasing a SaaS license a better deal than building in house. So do the R&D in a jurisdiction like India where the you can still deduct 100% of R&D under section 35. And purchase the SaaS in the US. (You have to be a non-US company for this to work and there are more details. Talk to your accountant.) Edit: fixed typos
From what I understand, this does not actually affect Google. They were already amortizing their R and D expenses.
Over long time scales (and big company revenue streams), this is sort of a wash. I think this hurts startups a bit more due to the long timescales involved which eats up much needed cash in the short term.
This is about way more than software. It's all R&D
It's effectively 6 years too. You only get to depreciate 10% in 1st year. This might have killed my company if it was around during first years.
See my comments on the previous discussion (Nov 2023) here: https://news.ycombinator.com/item?id=38145630
I think people are misinformed about how to deal with 174. That said, yes, a repeal would be a good idea. Hopefully that happens through BBB in the next month or two.
You do not have to amortize 100% of your engineering costs. Not even close.
Here's the key:
How does this work?
You are going to design a new robot arm.
In January, you spend $100K to "remove uncertainty". In rough strokes, this means discovering all the things you don't know and need to know for this robot arm to become a product. This amount will be amortized over five years under 174.
Now, with uncertainty removed, you spend an additional $1.1MM from January until December for engineering implementation. No uncertainty being removed. Just building a product. This is 100% deductible that tax year.
Analogy: You want to build a new brick wall with specific properties. You spend $100K to develop a new type of brick and $1.1MM to build the wall using that brick. The $100K is amortized, the $1.1MM is deductible in one shot.
BTW, at year 6 the amortization schedule reaches steady-state and you are amortizing the full $100K every year. In other words, the impact of 174, if treated intelligently, is the time value of money until steady state is reached for the engineering costs incurred to remove uncertainty.
That said, I hope the BBB repeals this.
https://www.law.cornell.edu/cfr/text/26/1.174-2
It's not only that, ZIRP[1] contributed.
Also, the 10+ years before the layoffs started tech companies were on a hiring binge. Much of big tech was hiring to keep people off the market and off their competitors payrolls (this is from friends of friends in FANG HR departments). These were high paying jobs, too.
[1] https://news.ycombinator.com/item?id=44141650
We are at a bad inflection point of Zirp, tax changes, and AI.
All of which make hiring engineers unattractive
It should be illegal to post graphs that start in 2020 when talking about tech hiring trends. The relevant comparison is probably the 2014-2019 era, not the peak pandemic craziness.
In knowledge-based white-collar work, there has been a significant increase in productivity in recent times. Tasks that once took days or even weeks—such as research, content creation, and visual generation—can now be completed within minutes. At the same time, both the speed of production and the quality of output are continuously improving. The outcomes are unavoidable.
bit of a self-own it seems. Start-ups and early stage companies might simply decide to start in a more friendly tax jurisdiction. E.g.: Switzerland offers a 135% deduction on R&D-related salaries in the year they are incurred, making it an attractive location for tech development
EU provides a large pool of experienced developers seeking new opportunities on salaries well below SV. Why pay 500K for a burnt out "rockstar" who spends more time on twitter than doing actual work when you can hire highly skilled people in Eastern-EU (or even in Berlin).
Section 174 seems unlikely to progress unless attached to broader legislation.
> "More promising is the Tax Relief for American Families and Workers Act of 2024 (H.R. 7024), which proposes restoring immediate expensing for U.S.-based R&D investments through the end of 2025. " -- https://www.pwc.com/us/en/services/tax/library/tax-committee...
That's a good policy but Switzerland is awful for startups: expensive, strict labour laws, few funding opportunities, risk-averse customers, fragmented European market.
If I could start anywhere in the World, Switzerland would be above all the war-torn and crime-ridden places, but business-wise it's no good for a tech startup.
I made one of the original posts on HN about this years ago after hearing about it from my CPA. Both then and now these changes make zero sense to me as a matter of good policy. I am also still surprised at the number of people in tech who either haven’t heard about this or are willfully ignoring it and likely filing their taxes incorrectly.
The most fascinating question is not "How did a single line in the tax code help trigger a tsunami of mass layoffs?" but how did a single line in the US tax code help trigger a tsunami of mass layoffs in other countries?
There's a 15-year amortization period if a US company hires an offshore developer. It's only a 5-year period if the developer is American.
Did you know that other countries have software companies too?
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Because people make stupid correlations for clicks.
If you didn't know about Section 174 until 2025 you have no business being in a leadership position anywhere, period.
This has been a slow moving disaster for years now and people have repeatedly tried to raise the alarm.
Just crickets and layoffs.
>The delayed change to Section 174 — from immediate expensing of R&D to mandatory amortization, meaning that companies must spread the deduction out in smaller chunks over five or even 15-year periods.
Doesn't this just amortize out to be roughly the same amount of deduction over the long term?
All the big companies mentioned should be relatively unaffected over an N>5 year time period. Also this was something that's been in the works for years so their accountants should have been planning for it so it wasn't a financial shock (and company financials seem to indicate no such shock).
If you look at the time value of money[1], a $1,00,000 deduction this year is worth more than $200,000 deductions over the next 5 years.
But more importantly, the article claims it was used as a tax shield to grow.
"Basically, as long as spending counted as R&D, companies could report losses to investors while owing almost nothing to the IRS."
"Once those same expenses had to be spread out, or amortized, over multiple years, the tax shield vanished. Companies that were still burning cash suddenly looked profitable on paper, triggering real tax bills on imaginary gains."
1: https://www.investopedia.com/terms/t/timevalueofmoney.asp
Sure, but that doesn't account for the allegedly apocalyptic layoffs from companies that don't fit into the "real taxes on imaginary gains" mold.
I get that this is bad for the VC monopoly bucks scene, but they were already down for the most part. If the changes are as the article alleges than all these big tech companies that are posting huge layoffs should mostly be fine because it's not a serious change from status quo for them.
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> Doesn't this just amortize out to be roughly the same amount of deduction over the long term?
With steady enough employment numbers, sure. Google has a weird one-time cost where they get hit with extra taxes at 80%, 60%, 40% and 20% of their employee's salaries for five-years and then it's all balanced. You can turn the money Google needs to borrow (or not invest) at some interest rate into a known number.
Any startup that is cash poor and especially one that is growing struggles. In year 3 you get to write off 20% of year 1's salaries, 20% of year 2's salaries and 20% of year 3's salaries.
> Doesn't this just amortize out to be roughly the same amount of deduction over the long term?
Yes, but if your business is not yet profitable, having to pay tax on money you don't actually have in the bank (because expenses exceeded revenue during the year) will cut into your runway, perhaps to the point that your company might not exist in five years... or even two or three.
Google, Facebook, Microsoft and many other of those old big companies are profitable though and they dont go anywhere in next 5 years (even if first 2 bleed out users)
Yes, if you are a profitable company operating at a steady state and your investors have a time horizon of (in other words, are locked in for) a decade or more.
Most companies in question don't fit these criteria. They are either large public companies subject to the reactions of the market to quarterly earnings, or small private startups that have limited cash (a runway of far less than 5 years) and are facing a perfect storm of a historic rise in the cost of capital coinciding with this change.
In either case, their cost of labor just went up by a lot and will continue to cause layoffs, labor market shrinkage, and diminished ability to develop new products.
Yes, big tech companies are lesser affected and they were already amortizing their expenses as “cap labor”.
It’s a pretty bad article general and to blame the law change on this is all kinds of disingenuous: “It’s no coincidence that Meta announced its ‘Year of Efficiency’ immediately after.”
I wonder if this was an unintended consequence, or if the politicians backed by big business really wanted to disrupt the software infrastructure.
If this article is accurate it doesn't sound like it. The change was a political tactic to make the tax bill it was part of comply with Senate budget rules on paper. Apparently this is a common tactic with tax bills, with the expectation that the changes will be repealed or altered in a later bill. There is a movement to repeal this change, but the effects have already been felt.
> Apparently this is a common tactic with tax bills, with the expectation that the changes will be repealed or altered in a later bill.
None of this adds up. You're saying, the legislators were trying to cheat and because it's a "common tactic" that kind of cheating is somehow good, but it's bad when the cheating doesn't go through?
On the other hand, being a common tactic implies that the possibility of it remaining in the books was well understood, and the declared "expectations" carry zero weight as evidence, even less than zero when coming from politicians.
Legislation like that has far reaching consequences and pretend "surprise" just confirms the intent behind it. It's only prudent to assume that we have a common tactic case of throwing sheet at the wall to see for how long it'll stick. If there's no backlash the "tactic" will remain there forever.
As another example of the same common tactic, consider the fact that all popular browsers have been used as Trojan horses into the users' local networks for like forever. At some point back in 2015 somebody objected so the browser makers started talking about fixing the problem but then stopped talking without fixing it because public opinion moved on to other areas affected by abundant sticky materials... Thus, that particular sheet remained on the wall for another 10 years and counting, and the story may repeat itself again.
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Around ~2010 I still had a lot of coworkers who claimed tech was basically incapable of defending its interests against other sectors. Maybe a bit different than today. I don't doubt that they thought they would get this repealed, but I would suspect the risk of the live grenade went to the sector with the least lobbying competence per revenue for the tax equations.
It was a very explicit change with its own very specific paragraph. Some stuff can be unintentional. This could not.
Is there a flaw in saying, "salaries should always be considered a business expense and cannot be amortized over many years." ?
Yes, I think there are two similar but subtly different flaws in that always.
1) Accounting rules are to match revenue with the expenses responsible for them, which I think is a good principle. If your workers make something now that provides revenue for 5 years, it makes sense to spread that expense over 5 years too. In many cases, you would want to do that as a business, makes it more clear how your business is profitable vs not.
2) Decisions whether to "build vs buy" a capital asset should not have massive tax implications. If I buy CoolSoftwareProduct from someone and resell it for the next 5 years, I'd have to amortize that. Should be similar if I hire a coder to write CoolSoftwareProduct instead.
(This doesn't mean that "salaries should always be amortized" is the right answer, of course, I think it's a very silly law)
Thank you.
I would say, yes there is a flaw there, because salaries are often a huge chunk of R&D expenses, and for the sake of long term growth, we want to disproportionately incentivize R&D spending
I think you inverted your understanding. My phrasing is inline with incentivizing R&D, or not dis-incentivizing it.
How about the salaries of employees being paid to create a new line of business? Say, the business runs restaurants and you decide to break into the tax software business. Can you avoid taxes on restaurant profits right now in order to build your new unrelated venture. ISFICR, tax law allowed outright deducting of costs of the current business, but not costs for starting a new one. Not deducting the new costs against the old profits.
After that, we can nitpick: should the development costs of new software be encouraged the same as maintenance costs of existing software. If you want to encourage startups, then yes they should. If you want to discourage startups or very temporarily increase tax collection, then no.
> restaurant profits
lol
Discouraging starting new businesses would be unconstitutional. All freedom in the US is derived from being able to participate in controlling capital.
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Considering they are probably the largest component of R&D expenses... yes, _if_ you think R&D should be tax-subsidized in some way.
I don't understand how that is a subsidy, are the people paying the employer?
The employer makes less profit due to salaries, but they won't "lose less" or make more money due to salaries.
Under that argument, the government would have a direct incentive to dictate how businesses do business to maximize taxable revenue.
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That's not what the law says. You'll have to take it up with Congress.
I think they're asking whether there would be a flaw with making that change.
If your payroll ends up being about the same, after 5 years it all evens out in the sense that you will be expensing 100% of your payroll each year (but the expensing will be 20% from each of the prior 5 years).
If your payroll is quickly growing You experience the problem on all payroll growth.
If your payroll is decreasing, you get a tax benefit. Your outgoing cash is less, but you are getting deductions from prior year expenses.
Your not taking into account the time value of money. You always want to expense sooner.
Additionally, having to wait 4 additional years to deduct that 80% is a huge drain on capital.
Combine this with higher interest rates and the effect is essentially pouring sand into the gears of the tech industry.
No, it's always strictly worse because you could have bought bonds or deployed the capital in some other way with that money.
Sure if you big enough to ride out 5 years but if your a hungry struggling bootstrapped startup, this can be game over.
Bloomstink has a short article on R&D expenses/tax credits as does Reuters on some of the back and current history.
But just as an accounting note: R&D expense has nothing to do with the company having revenues for an existing product, which already is allowed to deduct cost of goods sold, selling and admin expense. It is a cost related to future business and in that regard, it is not crazy to say it should be amortized. That in the past this did not happen, or that accelerated depreciation for other assets is in the IRS code is a function of the government wanting to effectively subsidize business investment.
https://pro.bloombergtax.com/insights/federal-tax/rd-tax-cre...
https://tax.thomsonreuters.com/news/the-future-of-rd-expensi...
But most employee salaries are deductible right? If you hire a chef at your restaurant, you aren't depreciating their salary.
Doesn't that make software engineers one of the few employees with much worse tax treatment?
I think that is the simplest and best analogy I have read so far in the comments.
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What is "Bloomstink"? Neither of your links references it, there are no references to the thing that makes sense when I do a web search.
Bloomberg
I was part of a small R&D company that had a promising product (can't say more, NDA) and we had to shut down because of this. Thankfully the founders were able to get us acqui-hired or I'd be in a much worse position. But that IP is just lost to history AFAIK, in spite of significant investment of US research $.
I reject this framing.
What really changed things was the end of ZIRP [1] and even then it was opportunistic. Labor costs are a massive cost for tech companies. They have continually tried to suppress wages. In the 2000s, it was the anti-poaching agreement between Steve Jobs, Eric Schmidt and others. In the 2010s, high growth ahnd zero interest meant labor costs continued to balloon.
But then Covid came along and was a massive opportunity. A few companies may have needed to do layoffs but that created the opportunity for everyone else. Big Tech just went full Corporate America with a page straight out of Jack Welch: fire the bottom 5-10% every year. Call it "layoffs". It's a direct pay decrease for those who remain (who get assigned the work). Those are still there won't be asking for raises because they're now afraid of their jobs.
Very little of this was ever necessary. None of the big tech companies ever came close to making a loss. They've remaining insanely profitable, in total and on a per-worker basis. At different times Google's per-worker profit has approached or exceeded $1 million.
The other factor is these companies eventually reached their size limits where antitrust stopped them making any more significant acquisitions.
Consider the timing: this change came in 2017. Where were the mass layoffs in 2018? 2019?
Also, the 2017 tax cuts contained a massive tax holiday for the repatriation of foreign profits.
Mass layoffs are simply wage suppression. It's the end state for any company that can't keep growing the way the market demands: eventually it comes down to cutting costs to make those quarterly profit targets. And in that, they sow the seeds of their own demise.
[1]: https://en.wikipedia.org/wiki/Zero_interest-rate_policy
> Consider the timing: this change came in 2017. Where were the mass layoffs in 2018? 2019?
The bill passed in 2017, but the changes to R&D didn't kick in until 2022.
> Big Tech just went full Corporate America with a page straight out of Jack Welch: fire the bottom 5-10% every year
Plenty of "big tech" already did it. Microsoft could not be more famous for stack ranking dating back to the 90s. Amazon have long had that kind of culture too.
Things can have more than one cause. Even the article only claims this change "has contributed to the loss".
Yes. And I reject that claim.
Big tech companies are both doing mass layoffs AND hiring. How does this fit the narrative that the tax change is at least in part responsible? The new hires still have the same deduction issue, right? So what impact does this really have?
Think of it this way: if this passes, will the layoffs end? Or reduce? Absolutely not. All this does is give line the pockets of shareholders. That's it.
I'm a big fan of tying certain benefits to NOT doing layoffs. This can include:
1. You get this deduction only if you've fired fewer than 1% of your workforce in the last calendar year;
2. You don't get to sponsor for an H1B if you've conducted ANY layoffs in the last calendar year; and
3. The tax deduction only applies to unionized workers.
And while we're at it, let's roll back this ridiculous tax structure where IP can be "sold" to a subsidiary in Ireland and then royalties paid.
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I feel like I'm taking crazy pills reading this article. To me, the most obvious and earliest case of mass tech layoffs was the Twitter 50% layoff by Musk. The whole lines written fiasco. The lack of mention anywhere is gaslighting me. Couldn't that have been the precedent as well? We know the market hanged on his every word (at least in 2022).
Investors and stock holders should be extremely outraged that all of these businesses are knee capping their future profitability. Can't make all those future pension payments if all your investments can't stay relevant in the market.
Some people will point out that AI will fix this, no it won't:
1) The real cost is higher than anything you'd pay for a person an there is not likely any real change there.
2) AI will be lies like Actual Indians that won't scale
3) Here's the kicker: If AI does succeed, now these multi-billion dollar firms will have to compete with multi-billion dollar single person businesses, that eat their lunch
Its a race to the bottom right? That means you need to invest in the business and all these layoffs are exactly not that, and will leave companies unprepared for the next 10 years.
Remind me in 2035.
Honest question, is there a community / grassroots effort I can participate in so that this this section 174 change can be reverted to its pre-2022 state?
I'm wondering, if such a movement doesn't doesn't exist already, do I need to start it myself?
'mjwhansen founded the Small Software Business Alliance specifically to work on this issue: https://ssballiance.org/
- Gather up about 10 million dollars (more will help)
- Bribe the right people
I hate to provide such a cynical and lazy response but we've got until midterms (maybe) before you really have a shot at 'democratically' influencing the system. For the time being you'll have to work with the mafia that's currently running things and outbid whoever wanted this to happen in the first place.
It seems that there is quite a bit of confusion about this. What this does is that it reduce your deductible cost in the tax year.
First you have to make a profit (tax is on profits). Secondly, what this does is to limit your software development expenses for tax purposes in the current year because the development cost is seen as a capital cost that will be amortized over five years opposed to operating expenditure in the same year.
If you are a startup and not make profits, then the loss will be less in the current year, but either way, your tax liability is the same: $ 0.
So software development is moved from opex to capex.
Profit is determined by expenses though.
A simple example to illustrate:
Say you had 100k revenue and 1 software developer you pay 100k per year.
Under the new law, you can only deduct 20k of the developer’s salary, so your profit is 80k, which you have to pay taxes on.
However, you have $0 in the bank because you earned 100k and paid out 100k in salary.
See how that is problematic?
That's a horrible revenue to expense ratio for ditch digging, nevermind software development.
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I totally agree, this change affects cash flow negatively. I don't support it at all. But it seems quite a few people are confused how it works.
I can see why it would affect startups not making a profit but why would it dramatically affect FAANG (e.g. some of the most profitable companies in the world that have been running for decades)? The article contributes all these large layoffs in FAANG, in part, to this tax rule.
Because they are profitable. So the cost is deductible over 5 years, instead of one year.
A very simple example:
Revenue: $ 1 000 All other cost except software: $ 500 Software cost: $ 100
Net profit (if software is allowed as opex): $400
Tax on $400 (@30%): $120
Net profit after tax: $280
However, if it is capex(amortized over 5 years):
Revenue: $ 1 000 Other cost (except software): $500 Software cost: $ 100
Net profit before tax: $ 400
Important: But now for tax purposes you can only deduct $20 this year as a cost ($100 amortized over 5 years)
So now you have to add back $80 to net profit for tax purposes: $480
Tax (@30%): $ 144
Net profit after tax: $400 - $144 = $256
So the difference is $280 - $256 = $24
Just a few notes:
1. I assume tax rate at 30%, it can be something else, principle stay the same
2. That all other expenses are tax deductible
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How this impacted our business is that when you are doing next year planning, and the goal is to grow the business, it made ads and other marketing investments more appealing versus tech hiring to expand product capabilities.
Earlier discussion: https://news.ycombinator.com/item?id=44028106
Related. Others?
The time bomb in the tax code that's fueling mass tech layoffs - https://hn.algolia.com/?dateRange=all&page=0&prefix=true&que...
Not a big thread, but a layoff one from a year ago: https://news.ycombinator.com/item?id=38633668
Added. Thanks!
Can someone qualified answer a couple of quick questions here:
* Hiring a company to do software development is completely deductible or is still considered R&D? And there isn't any difference in regard to where the company is located?
* That company who performs the software development however, they have to pay the taxes since they are doing the development... so they are just going to raise their rates then correct? Or since they are providing a service to the company and it is work for hire does it not count?
* All other R&D expenses are still deductions including hardware development? Where is the line drawn? If you are doing the software side for a hardware product, that would be hardware correct?
* For founders, you would just take a dispersement instead of taking a salary if you are developing software? Or is that irrelevant?
I don't understand why this article is written as though amortization of R&D spending's costs is the same as completely eliminating their tax benefit. It seems that this essentially causes a large spike in tax revenue in year 0, which will revert to the mean in years 5-15. Companies now amortizing R&D essentially just have to build up those years of R&D spending backlog. Once they have reached their amortization threshold, they're essentially receiving the same tax break they had before.
Right?
In the stable state, both situations (immediate writeoff vs. amortization) would indeed be identical (assuming constant salary expenses over time).
The problem is that, when switching from the immediate writeoff regime to the amortization regime, you do not have a backlog of past-year expenses that are in the process of being amortized, so there is a sudden jump from being able to write off 100% of relevant expenses to only 20% of them.
Given that shareholders are notoriously interested in short-term profits, hitting profit targets requires either expanding revenue or slashing expenses.
Yeah, and that cliff is why they put this change into the 2017 tax reform. It'll goose federal tax revenue for 5 years in the back half of the CBO's 10-year projections to make the changes appear revenue neutral overall. In any case, the impact started in 2022 and it's now 2025. We're already over halfway to steady-state.
Oh interesting. In 2022, the company I worked for folded because a primary investor spontaneously pulled out. We were nearly 100% R&D and the sudden change in relationship was surprising.
It seems like most of the "woe is me and my startup" problems people are talking about could be solved with a revenue floor. If this only applied to companies making, say, $50mm+ per year or with software-related R&D expenditures of say $10mm+, it would not hit startups or innovative small companies working on far-flung ideas. I feel bad about those laid off from Meta and MSFT but I will not cry for those companies.
This seems a clear disadvantage to corps with employees but it also works to the advantage of LLC solopreneur types who aren't paying themselves.
> “I work on these tax write-offs and still hadn’t heard about this,” a chief operating officer at a private-equity-backed tech company told Quartz. “It’s just been so weirdly silent.”
Hasn't Ben Thompson of Stratechery spoken about this a number of times? I'm aware of this 'feature' and I'm not even in the USA, let alone a COO at a private-equity-backed yada yada.
Wonder how much of the layoffs were due to the tax deduction change and how much was due to executives being blindsided by their accountants come tax time.
Once asked about this change during an all employee meeting. Even a large software company should care… The executives were not even aware of the policy change…
Note that Trump's Big Beautiful Bill as it passed the House of Reps would bring back 100% expensing of R&D expenses including software development costs/salaries.
If the article is to be believed, though, the damage is already done. Companies have already laid off large portions of their R&D staff, and have canceled lots of forward-looking technical work. Re-hiring those people and restarting those projects can take years, and that's if companies feel confident enough that the exemption will stick around, and not get removed again in a few years.
It's always young companies that hire everyone, so it still helps.
Still, I'll take it
"I'll give you a candy bar if you let me stab you multiple times"
Deferring depreciation and deductions decreases their value as inflation happens. So it is a double whammy-not only is your profit reduced this year (and the impact that has on your stock price or return to your private equity investors) butthe value of that deduction decreases over time. So it is not a 'wash'.
I worked as a network engineer for a software company and had to report how many work hours was R&D. It was very silly.
Indeed. This is only a problem because software companies try to classify most of their expenses as "R&D" only to look more profitable than they really are, but at the same time they don't want to pay taxes on those supposed profits. For honest companies which don't capitalise their wage expenses, nothing substantial changes.
If anyone cares about combatting government propaganda in the US, do this:
Query any search engine for "are US income taxes direct or indirect taxes"
Every one will tell you that they are direct taxes. This is false. The supreme court has exclusively held that income taxes have always been indirect taxes (excises specifically, read about what an excise is in any authoritative source on tax law) in a constitutional sense. (See Brushaber v Union Pacific RR Co. 1916, Moore v U.S. 2024)
The sixteenth amendment did not give congress the power to directly tax citizens (or domestic corporations) and the complexity of the tax code is an attempt to obfuscate this fact, but the code is not inscrutable, it has rules.
Unsure of why this matters? Look up the difference between direct and indirect taxes in US law. None of these deductions matter unless you are a foreign corporation. I have tried commenting about this in other income tax related threads (this is my alt account), but people here don't like the idea that there is government propaganda in the US, or that most people are wrong and blindly accept the socialization about taxation without verifying what the law says.
I realize this is a disturbing truth to accept, not least because it involves accepting that most people who have been prosecuted for income tax crimes are only guilty of ignorance of the true legal purpose of the forms they signed. You can easily verify that most accountants and tax attorneys do not know what they are talking about by asking them this simple question about direct vs indirect taxation.
This is not legal advice, it is a wakeup call.
> This is not legal advice, it is a wakeup call.
The masses are in a persistent state of slumber, so they will never wake up. Depressing but true.
Question, if you have to amortise it over 5 years, and you can survive the initial 4, does it break even in year 5 (assuming stable employment)? Ie you amortise the previous 5 years (20% each) which works out to 100% anyway?
If you give me 1000$ today and I give you back 1000$ in 5 years do you break even?
This US American idea of paying taxes = giving money away is weird. Especially coming from tech people, as what is preventing other nations from taxing the hell of big/US tech is the US government and its threats.
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The America government now has the best socioeconomic footgunning snipers that don't even do the covert job of making the 0.003% richer over the long term properly anymore.
America's balance sheet distribution (not income) breakdown:
8.5% $1M+
1.6% $10M+
0.003% $100M+
0.00026% $1B+
Maybe Shareholders are demanding companies to cut overhired and improve profits
so will this incentivize a return to revenue/profit-driven business models? will we start to see a reduction in venture capital burning money on revenue-negative startups?
Higher interest rates were enough to help in that regard.
As it stands, this is an end to innovative startups in the US. Unless bankrolled by very deep pockets. The type of pockets who typically prefer the status quo and are not particularly interested in cost-efficient innovation.
Could this lead to a new financial product that lends money to companies to pay this tax secured on the future deductions?
This would be a no go for startups though.
This article was so clearly written with AI it hurts.
Why is this the first we’re hearing about this, three years in? The article says these companies blamed other factors for the layoffs - why?
There were a ton of stories around this in 2022 as a bunch of startups scrambled to make ends meet due to this bill taking effect.
It's not the first time many have heard about it.
“We are heavily subsidised by taxpayers” is not great optics.
To head off the likely questions, I downvoted this comment because it is a gross misrepresentation of section 174 and the changes made to it.
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So why don't they just reclassify the employees as network engineers to get around this?
If the difference is nontrivial you'll get a correction letter from the IRS listing the bill and penalties.
Meta: god articles like this drive me crazy. What ever happened to the inverted pyramid hierarchy of information? I have to read 3 paragraphs of unmitigated filler before they actually tell me what's changed. It's not just this article, it seems like every article on newer media sites is like this. I understand why, but fuck them very much and the incentives that drive this behavior.
Manufacturing is affected also it’s not just software. Best way around it is deficit spending for growth
So, we want incredibly profitable companies like Google, Microsoft, and Apple to take their software development costs and subtract that from their tax bill? These are the same companies that file patents so nobody else can use the ideas that they developed at the expense of public services. How about making it a tax break only for small and medium sized companies?
Fix the patent problem. Leave the r&d right off alone.
Love articles that are 39 pages long with one paragraph and 3 ads per page. mmmm.. good journalism.
Let me guess - the keyword here is "Section 174", just from the title alone :)
Dealing with Section 174 amortization in those first one to three years is a real headache (and your tax bill ends up higher than if it didn’t apply). Once your startup survives that the first few years of doing Section 174, things do get easier... but, sadly, most don't make it that far.
Where is the comparison with the "control group" : non-US software companies ?
I thought this was changed in this new spending bill they are trying to pass now?
Ironically the debate/discourse here is healthier than anything we see from US Congress. Presidents have a limited number of terms they can serve, but there is no limit on the House and Senate and change is hard if not next to impossible because of this. Term limits would be a good start to introducing positive changes, but good luck finding the necessary majority to vote against their power and very cushy and comfortable lifestyles.
And there I was wondering why R&D was getting moved to Canada.
Its so funny to me that people freak out about amortization when I spent several years at a public company having to document my work as being R&D to amortize it to make our EBITDA look better.
That’s not what “ghost in the machine” means
The top of the article blames Trump for some reason, when every time this is brought up, everyone sites Biden Admin for messing this up.
Because it was Trump's tax bill. It was a bad tax bill, and not only because of this. It further accelerated inequality.
“Some spoke on condition of anonymity to discuss sensitive political matters.” - yep this is fine.
This doesn't quite fit into the article and is probably too inside baseball for a general business audience, but as I see it, there’s a real and serious argument to be made here about how Section 174 changes restructured the cost architecture of tech employment (yes, even for big, cash-rich companies). When salaries could be fully expensed, the effective marginal cost of headcount was lower. Amortization means the same engineer now triggers a significantly bigger near-term tax bill. At scale, that’s a serious shift in how labor costs flow through the P&L… functionally, op-ex becomes capex, and cash flow implications for big players run into the billions. But maybe it’s me!
Isn't this literally the content of the article? What you just wrote down is basically this paragraph from TFA:
> And so, on schedule in 2022, the change to Section 174 went into effect. Companies filed their 2022 tax returns under the new rules in early 2023. And suddenly, R&D wasn’t a full, immediate write-off anymore. The tax benefits of salaries for engineers, product and project managers, data scientists, and even some user experience and marketing staff — all of which had previously reduced taxable income in year one — now had to be spread out over five- or 15-year periods.
[0] https://news.ycombinator.com/item?id=34627712
Agreed that's literally what the article is about
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> op-ex becomes capex
i.e. some humans get the same tax treatment as humanoid robots, while LLMs ("AI") are always deductible as op-ex, regardless of function.
Draft 2025 spending bill in Congress would revert Section 174 changes for 2026-2029.
Only external LLM use is ‘always deductable as op-ex’. If you build your own server farm and/or developer your own LLM, those are capital expenses which must be depreciated.
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Contractors licking their lips at the prospect of being a clients op-ex. I think you’re right and hence the slow down in hiring top talent for top dollar.
Big Tech companies have a direct line to the US Governments. Whether it’s former Twitter and Biden or Palantir and Trump, they can pick up the phone and change this.
Are you telling me that this law affects these tech companies so much and they just let it stand?
I find this improbable.
It primarily destroys new startups and hurts small business, which do not have the clout you suggest. BigTech can barely hear the bump in the road while sitting on billions of cash reserves. Still, they had layoffs for this and other reasons.
I have to say I do have some sympathy for what's happening in the US at the moment.
Trump is just getting started. By the time he is finished, your economy will be shot to pieces. The US dollar will no longer be the reserve currency for global trade.
everyone in tech saw this coming?
That’s not what “ghost in the machine” means.
Didn't realize this was due to Trump's first term.
Why aren't the All In podcast bros ragging on Sacks about this!?
> A quiet change under Trump helped dismantle it
So it’s a tax break for tech companies and the problem is that Trump got rid of the tax break?
What happened to making companies “pay their fair share”?
I have such cognitive dissonance, I am constantly hearing about how Trump is evil because he wants to give tax breaks to companies. Now the problem is that he’s NOT giving tax breaks.
It’s almost like no matter what Trump does the news will cover it negatively.
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at least all the future expenses will be AI instead of people /s
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This doesn't explain the mass tech layoffs. According to the article, the rule applies to R&D. The vast majority of tech workers laid off in the last two years didn't work in research and development. They wrote regular software for sale, like games, for example.
The games industry, while hugely profitable and bigger than TV, movies, and music combined, laid off tens of thousands of people. It's unmitigated greed is all it is.
> For almost 70 years, American companies could deduct 100% of qualified research and development spending in the year they incurred the costs. Salaries, software, contractor payments — if it contributed to creating or improving a product, it came off the top of a firm’s taxable income.
According to the article, as long as the tech workers contribute to improving or creating a product (be it games or apps), they count as R&D cost.
I worked in games 2 years before the studio shutdown. It wasn't because of "R&D" tax breaks. None of the recent layoffs or studio closures are explained by that. Nor are the Microsoft, Dell, or Intel layoffs which aren't game-related.
To qualify for R&D tax breaks, IIRC having identified qualifying work for a segment of my firm, there must be elements of hypothesis, experimentation, results, etc that I would consider more science-y 'Research' than just turn the crank software 'Development.' It has to be both. And that has to be documented. And offshore research+development doesn't get you a tax break. The irony is that the R+D tax actually discourages onshore pure development as a 'trade' and encourages a split of onshore R+D and offshore D.
This sort of thing appears to be self-reported; I don't know if it ever gets audited. I don't know if big tech lies or creatively interprets what counts and that has contributed to the issue. But this article sort of over-represents what qualifies as R&D for US tax purposes.
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> The vast majority of tech workers laid off in the last two years didn't work in research and development.
I bet they were classified as R&D for accounting purposes. Product development largely falls into R&D - it doesn't matter what the product being developed is for.
Every job I had at a megacorp was classified as R&D, and I know because I had to track hours against such.
> I bet they were classified as R&D for accounting purposes.
It's not just that. Section 174 now explicitly calls out Software as always being an R&D expense:
> (3) Software development
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
https://www.law.cornell.edu/uscode/text/26/174
> They wrote regular software for sale, like games, for example.
Even though it sounds unintuitive, that activity is considered R&D for tax purposes.
Greed is too easy as a target.. industry space has shifted because of slower innovation and less growth, so cost cutting being more a focus would be a reasonable strategy
If your company is already profitable to the tune of billions annually, "cost cutting" isn't necessary. You're just cutting people out of jobs and out of economic participation in society -- which affects a far larger group than just themselves when those folks can't spend their salaries in other businesses.
There is no justification for "cost cutting" when it hurts the larger economy. If the company were losing money, that would be different, but these mass layoffs are all from firms that make obscene, enviable levels of profit. It's greed.
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You are correct saying it's not the R&D deductions.
But it's not "greed": it's the end of zero interest rate policies.
https://newsletter.pragmaticengineer.com/p/zirp
> They wrote regular software for sale, like games, for example.
Wrote software, like, you know, "developed" it?
> For almost 70 years, American companies could deduct 100% of qualified research and development spending in the year they incurred the costs
This is an artificial subsidy. That’s not how the tax code treats other types of investments that generate recurring income.
I’m not sure I fully understand the problem here
1. I start “Facebook for dogs” It’s gonna be massive. For the first year me and five guys code away in the garage and I use my savings / credit card / family trust fund to pay them 100k each. Expenses are 500k, revenue is, amazingly, 1.5M and taxes owed is 500k.
At this point turning round and saying the development was R&D, and claiming 500k of tax breaks is just (to me) ripping off the American Taxpayer.
And I’m not even an American Taxpayer.
If the revenue was zero would anyone suggest that the taxpayer give me 500k to help ? (Ok I would because I like free money but most people won’t)
Or am I missing something?
Everything you just said but imagine revenue is $500K, and you spent $500K on salaries for the team.
You can only expense $100K of the salary costs this year, so even though you're break-even, you pay taxes on $400K in income.
Or, even worse, imagine revenue is $250K, and you spent $500K on salaries for the team.
You can only expense $100K of the salary costs this year, you're already -$250K on the year, and now you're paying taxes on $400K in income. You're destroyed.
VC-backed startups aren't designed to get profitable quickly, and I don't see that as a problem for the American taxpayer, and nobody is saying the taxpayer is giving money or helping. A business losing money should not have to pay taxes on income, as if it's not losing money.
the idea is that normal business expense are deductible.
in this case, your taxable income is $1.0M, and cash flow is $500k ($1.5M - $500k salaries - $500k taxes).
now you have to amoritize it over 5 years. so your taxable income is $1.4M ($1.5-500k*20%), taxes are 700k, and cash flow is $300k.
Uncle Sam just reduced your cash flows by 40% by a simple tax change. You eventually make up the difference, but for fast growing tech companies, that's a large shift in current flows and significantly changes their investment strategy.
See my example here for where it ends up biting you: https://news.ycombinator.com/item?id=44180533#44204246