How a little-known tax change sparked a tech layoff surge

The big picture: A subtle but far-reaching shift in US tax law has upended the financial foundation of the technology industry, accelerating a wave of layoffs and reshaping how companies approach innovation. While headlines have pointed to over-hiring, economic volatility, and the rise of artificial intelligence as causes for the mass job losses in tech, a less visible factor has quietly played a pivotal role: a change to Section 174 of the tax code that dramatically altered how research and development costs are treated.

For nearly seventy years, US companies could immediately deduct the full cost of their research and development activities, from engineering salaries to software development and contractor fees. This policy, rooted in Section 174 of the Internal Revenue Code since 1954, encouraged businesses to invest in innovation and keep R&D operations within the United States.

The approach fostered the growth of iconic tech giants and allowed startups and established firms alike to take risks, experiment, and expand rapidly.

That landscape changed in 2022, when a provision from the 2017 Tax Cuts and Jobs Act, which had been delayed, took effect. To offset the cost of lowering the corporate tax rate, lawmakers required that R&D expenses be spread out, or amortized, over five years for domestic activities and fifteen years for foreign ones, rather than being deducted all at once.

This adjustment, designed as a political maneuver to make the tax bill appear fiscally balanced, was largely unknown outside tax and accounting circles until its real-world consequences became impossible to ignore.

The impact was immediate and severe. When companies filed their 2022 tax returns under the new rules, they found themselves unable to offset their R&D spending against taxable income fully. For cash-strapped firms and those not yet profitable, the result was a sudden and painful increase in tax bills, just as venture funding was drying up and borrowing costs were rising. The financial pressure forced companies to make tough decisions, and in many cases, the largest and most flexible expense – headcount – was the first to be reduced.

Since the start of 2023, the tech industry has shed more than half a million jobs, with some of the biggest names in the industry making substantial cuts. Meta reduced its workforce by nearly a quarter, Microsoft trimmed about 7 percent, and Amazon, Alphabet, and Salesforce all eliminated thousands of positions, often in product development and engineering – the very teams most affected by the loss of immediate R&D deductions.

Smaller firms, lacking the financial cushion of industry giants, faced even harsher realities. Twilio, Shopify, and Coinbase each slashed significant portions of their staff, with reductions of 22 percent, nearly 30 percent, and 36 percent, respectively, over the past two years.

R&D operations were particularly hard hit.

The effects have not been limited to traditional tech companies. Throughout the 2010s, a wide array of businesses, ranging from retail to logistics and healthcare, relied on the same tax treatment to justify significant investments in software, data analytics, and internal tools.

The Section 174 change disrupted this model, pushing many companies from a position of taxable loss to taxable income, even when their actual cash flow had not improved. As a result, the layoffs and cutbacks have rippled through the broader digital economy, which, together with core tech, accounts for about 20 percent of US GDP.

The magnitude of the layoffs has been strikingly disproportionate compared to other sectors. While most industries saw job cuts in the low single digits, tech experienced a 60 percent surge in layoffs between 2022 and 2023, with entire divisions – especially in R&D – vanishing almost overnight.

The consequences extend beyond the companies themselves, affecting local economies and service industries that rely on high-paid tech workers to sustain demand for everything from housing to restaurants and transportation.

As Congress debates whether to reverse the Section 174 change, the politics remain complex. Restoring the old rules would reduce tax revenue and could be seen as favoring large corporations, even as the broader economic fallout continues. For many workers and communities already affected, any relief may come too late.

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