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A little-noticed adjustment to the U.S. tax code, implemented in 2022, has quietly disrupted the financial strategies of American tech companies, contributing to significant job losses.
The Silent Killer: Section 174
Buried within the 2017 Tax Cuts and Jobs Act (TCJA), a change to Section 174 of the IRS code has had a profound impact. This alteration, which mandated the amortization of research and development (R&D) costs, rather than allowing for immediate expensing, has been cited as a contributing factor in the layoffs of hundreds of thousands of tech workers.
Previously, companies could deduct 100% of qualified R&D spending in the year the costs were incurred. This incentivized innovation and kept R&D activities within the U.S. The change meant those deductions had to be spread out over five or even 15-year periods.
How Did This Happen?
The TCJA aimed to cut the corporate tax rate but needed offsets to comply with budget rules. Delaying the Section 174 change seemed like a politically expedient solution, but its effects rippled through the tech sector.
As venture funding dried up and interest rates soared, many companies faced a painful tax bill. This led to significant workforce reductions, with companies like Meta, Microsoft, Amazon, and Salesforce announcing major layoffs shortly after the change took effect.
Beyond Big Tech
The impact extends beyond the tech giants. Startups and direct-to-consumer brands, which had built their growth models around immediate R&D write-offs, suddenly faced unexpected tax liabilities. This policy shift hit the broader digital economy, affecting various industries.
A Bipartisan Effort to Undo the Damage
There’s now a bipartisan push in Congress to repeal the Section 174 change. However, any relief may come too late for many workers who have already lost their jobs. The repercussions of these layoffs extend beyond the tech sector, affecting local economies and related industries.
The Broader Implications
The Section 174 change “significantly increased the tax burden on companies investing in innovation, potentially stifling economic growth and reducing the United States’ competitiveness on the global stage,” according to tax consulting firm KBKG.
The long-term effects of this policy shift remain to be seen, but its impact on the U.S. tech industry and the broader economy is undeniable.