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.

This hurts small companies (like mine) that were priced out of the US developer market.

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.

I can’t believe this still exists, and no one has changed it. We truly are governed by morons

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It's unfortunate because it appears both sides want this repealed to allow immediate amortization of domestic R&D expenses.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

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...

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.

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.

Temporarily, for 5 years.

A bankrupt company can still sell their computers. Selling you code, lol -- code is more of a liability really :)

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?

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.)

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.

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 we aren’t rich then no one else will be”

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?

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.

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.

Since this is done on annual buckets it's very common to try to move items in both columns between years to minimize tax.

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.

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.

All of which make hiring engineers unattractive

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.

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

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.

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, 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.

- 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.

Doesn't that make software engineers one of the few employees with much worse tax treatment?

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.

The bill passed in 2017, but the changes to R&D didn't kick in until 2022.

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.

> 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

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.

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 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.

Even though it sounds unintuitive, that activity is considered R&D for tax purposes.

But it's not "greed": it's the end of zero interest rate policies.

https://newsletter.pragmaticengineer.com/p/zirp

Wrote software, like, you know, "developed" it?

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.

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.