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.
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?
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.
> 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...
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.
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.
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.
> 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?
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.
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:
Development costs incurred to remove uncertainty are amortized.
All other costs are deductible during the tax year where they are incurred.
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.
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.
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...
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?
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).
I wonder if this was an unintended consequence, or if the politicians backed by big business really wanted to disrupt the software infrastructure.
Is there a flaw in saying, "salaries should always be considered a business expense and cannot be amortized over many years." ?
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.
https://pro.bloombergtax.com/insights/federal-tax/rd-tax-cre...
https://tax.thomsonreuters.com/news/the-future-of-rd-expensi...
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
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?
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.
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://news.ycombinator.com/item?id=44180533 - June 2025 (927 comments) (<-- you are here)
Big Beautiful Bill R&D Tax: Will tech go on a hiring spree again? - https://news.ycombinator.com/item?id=44028106 - May 2025 (19 comments)
The Consequences of Limiting the Tax Deductibility of R&D - https://news.ycombinator.com/item?id=43639202 - April 2025 (64 comments)
House restores immediate R&D deduction in new tax bill - https://news.ycombinator.com/item?id=39212650 - Feb 2024 (8 comments)
Ask HN: Best country to run a boostrapped startup from? (After Section 174) - https://news.ycombinator.com/item?id=39098371 - Jan 2024 (31 comments)
US tech innovation dreams soured by changed R&D tax laws - https://news.ycombinator.com/item?id=38988129 - Jan 2024 (3 comments)
Ask HN: IRS section 174 – cause of layoffs? - https://news.ycombinator.com/item?id=38957651 - Jan 2024 (21 comments)
Will US companies hire fewer engineers due to Section 174? - https://news.ycombinator.com/item?id=38931860 - Jan 2024 (37 comments)
Will US companies hire fewer engineers due to Section 174? - https://news.ycombinator.com/item?id=38870429 - Jan 2024 (20 comments)
IRS tax code change in Section 174: R&D is an expense - https://news.ycombinator.com/item?id=38642461 - Dec 2023 (23 comments)
New tax rules on R&D expenses may lead to layoffs for devs - https://news.ycombinator.com/item?id=38636866 - Dec 2023 (7 comments)
Tell HN: People laid off in my company due to IRS Section 174 changes - https://news.ycombinator.com/item?id=38633668 - Dec 2023 (6 comments)
Tell HN: Submit comments to IRS re tax treatment of software dev expenses - https://news.ycombinator.com/item?id=38120388 - Nov 2023 (225 comments)
Software firms across US facing tax bills that threaten survival - https://news.ycombinator.com/item?id=35614313 - April 2023 (981 comments)
Ask HN: How are you handling Section 174 changes for bootstrapped companies? - https://news.ycombinator.com/item?id=34627712 - Feb 2023 (187 comments)
https://hn.algolia.com/?dateRange=all&page=0&prefix=true&que...
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?
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.
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.
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.
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?
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?
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?
So why don't they just reclassify the employees as network engineers to get around this?
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?
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.
“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!
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.
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
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?
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