Midway by way of 2025, firms in america like Microsoft, IBM, PwC, Crowdstrike and different huge names have already laid off hundreds of workers throughout their workforce. Notably, Microsoft alone has eradicated 6,000 workers, representing almost 3% of its workforce.
A few of these firms have pointed to AI as a contributing issue of their choice to cut back workers.
Though AI’s position has been disputed, a number of analysts and insiders suppose different monetary and strategic components is likely to be at play. One attainable cause is that these firms could also be making an attempt to cut back their tax burden as a result of adjustments made in 2017 to Part 174 of the US Inside Income Code (IRC).
Lately, a report by Quartz highlighted this. In accordance with the unique provision, Part 174 said that firms may declare full deductions for his or her analysis and experimentation (R&E) prices in the identical yr they incurred these bills. This included software program improvement, contractor funds, salaries, and different associated prices. This was an important incentive for firms to proceed their expenditure on expertise, improvement, and innovation.
Nevertheless, the Tax Cuts and Jobs Act (TJCA) modified this in 2017, ending the instant advantages. The change got here into impact in 2022 and said that firms should now unfold their R&D prices over a number of years—5 years of home R&D bills and 15 years for worldwide R&D bills.
Corporations may now not instantly offset their taxable revenue with full R&D bills, resulting in a pointy improve in tax payments. This meant that the salaries of engineers, managers, and different workers related to R&D, which had beforehand diminished taxable revenue within the first yr, had been now unfold out throughout five- or 15-year intervals.
The report from Quartz additionally said that instantly after the Part 174 change took impact, firms like Microsoft, Google, Amazon, Salesforce, and Meta started to put off workers. It is usually price noting that salaries are among the many most vital bills for these massive firms.
A discover printed by the Inside Income Service (IRS) states that labour prices for full-time, part-time, and contract workers concerned in R&E actions, which embody primary pay, stock-based compensation, time beyond regulation, vacation and trip pay, and extra, additionally rely as bills that should be capitalised and amortised over the relevant interval.
“Think about a tech firm that’s growing a software program product and paid its engineers $500,000 in 2022. Beforehand, that $500,000 would have counted as an expense, lowering the startup’s taxable revenue by $500,000. Now, that $500,000 must be amortised over 5 years beginning July 1, 2022, which signifies that solely $50,000 in bills might be utilized to the corporate’s 2022 taxable revenue,” mentioned Ben Thompson, an analyst, in a weblog put up from 2023.
Thompson added that this can be a “huge downside” for startups that aren’t making any revenue. “Suppose the software program firm in query has $300,000 in revenue: beforehand, the startup would have had a $200,000 loss, which suggests it might not owe any taxes.”
“This yr [where changes to Section 174 take effect], although, the startup has taxable revenue of $250,000 [after a 20% deduction over the $300k income], which suggests it owes $52,500 (21%) in federal company revenue taxes,” he mentioned.
‘No One Talks In regards to the Actual Motive Driving Layoffs’
Together with Thompson, who mentioned he was shocked that only a few individuals in tech appeared to know in regards to the challenge in 2023, a number of specialists within the business resonate with an identical feeling even as we speak.
“Nobody talks about the actual cause driving the ~500k tech layoffs,” Deedy Das, principal at Menlo Venutres, wrote in a put up on X. He added that tech firms are actually incentivised to rent extra offshore, purchase merchandise as a substitute of constructing them, spend much less on R&D and go for extra layoffs. “That is dying by accounting.”
Jesse Pujji, founding father of a number of tech start-ups, spoke a couple of 200% surge in tax payments attributable to this alteration. “For instance, I’ve a $10 million income enterprise with $4 million in R&D bills and $2 million in internet revenue. My tax fee is 30%. I ought to pay $600k in taxes,” he mentioned in a put up on X. “Put up Part 174: My taxable revenue is now $6 million! At a 30% tax fee, I now pay $1.8 million in taxes, or $1.2 million extra. How is that this attainable?”
EisnerAmper, a agency that gives audit, accounting, and tax providers, mentioned it will proceed to trigger main complications for software program firms.
“Many firms have had their taxable revenue improve dramatically as a result of they will now not deduct bills. The truth is, some firms have gone from being unprofitable to worthwhile and responsible for federal and state taxes as a result of change,” the agency mentioned in a weblog put up.
In addition to posing a drawback to startups and firms inside america, the adjustments to Part 174 could have additionally made the US much less aggressive globally. “Key financial rivals provide very profitable incentives for analysis and improvement. China, as an illustration, affords an excellent deduction for analysis and improvement,” KBKG, a tax consulting agency, said in a weblog put up. The agency highlighted that firms in China can deduct 200% of eligible R&D prices from their taxable revenue.
Founders 10 minutes after researching the Part 174 tax guidelines pic.twitter.com/Kq5IpPBMGL
— Fondo (@tryfondo) March 25, 2025
Restoration Results Underway?
On Could 22, 2025, the US Home of Representatives handed H.R.1-119th Congress (2025-2026), titled the ‘One, Massive, Stunning Invoice Act’.
The act suspends the present necessities to capitalise and amortise domestic-only analysis and experimental bills for quantities paid or incurred after 2024, however earlier than 2030. Nevertheless, the remedy of overseas expenditures will stay unchanged.
Moreover, a number of individuals within the tech group have petitioned to revive the adjustments completely. The petition was shared on Hacker Information, a famend discussion board for builders and engineers. A number of contributors voiced their help within the discussion board, advocating for the restoration.
As talked about on Hacker Information, Luther Lowe, head of public coverage of Y Combinator, is main an effort to organise Y Combinator’s alumni to “urge lawmakers to help this reversal”.
Observe: The headline has been up to date to enhance readability and reader understanding.
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