This entire tech-layoff wave is about more than AI or plummeting demand. It’s the delayed bomb Congress planted in Section 174 (a stealth tax that reclassified every developer’s salary as R&D amortized over years, not the quick write-off it used to be).
People inside big firms are collateral damage in a tax strategy. The policy also shoved engineers’ families onto the payroll chopping block. Until lawmakers reverse course, U.S. tech is bleeding talent - nail in coffin for innovation here while other countries scoop up the scraps.
Unfortunately, the TCJA was created, modified and passed by Congress. I am not suggesting that people not contact their representatives to voice their concerns. Section 174 tax deductions are not the complete reason for the tech job "meltdown". It is a combination of all the facts above. The explosion of low wage and benefit H1B Visa employees, Section 174 deduction clarifications so that R&D is amortized as other business expenses, the increases in costs and expenses due to changes in the economy, the explosion of AI, businesses/corporations outsourcing operations overseas at a lower cost, businesses/corporations streamlining operations and the ever present and constant evolution of the tech job field. This is a rapidly evolving and changing landscape for businesses and tech employees and more is involved than just a clarification to the loosely interpreted tax code.
I don't think you're likely to get much disagreement that we should do that also. But surely, both? Repairing a strong economy, adding jobs towards a stable middle class (or at very least not subtracting them), and broadly investing in the future rather than sacrificing all that for high income tax breaks... let's face it, it's not actually that hard for the wealthy to engage in a lot of tax mitigation strategies anyway, so policies that grow the economy should be thought of as rather more significantly valuable than ones that just help highly concentrated wealth positions. (And I say that having run a hedge fund!)
Can we have a discussion on the facts and what the author postulates and leave our political beliefs out of this? I'm not sure what democracy needs to be saved since our Country is a Constitutional Republic with democratic elements and not a Democracy. The Federation of States is bound in a Republic with democracy at the local and state levels.
We definitely need to repair the economy and bring our tech jobs back to the US. If we are seeing the TCJA have unintended consequences and impacts, such as Section 174 deductions, then absolutely we need to make our voices known to our representatives in Congress. That is how change is made. It is a difficult line to walk. On one hand, people believe businesses should be paying more in taxes. But making some of those changes impacts people (employees) and the economy. I don't have a complete answer to the solution. But, whatever that answer is, should absolutely improve the economy and grow and stabilize the middle class. I think we are headed in a generally good direction forcing companies to bring operations and jobs back to the US and putting the US tech industry first.
I worked at Google six years until I was laid off early this year. They started rolling random layoffs after the big layoff in 2023 and it absolutely cratered the culture, it became a culture of total obedience or else you’d be in the next rif round. They also shut down / neutered the internal annual survey (googlegeist) to a level where any upwards anonymous feedback was completely quashed. The one time a regional executive mistakenly enabled anonymous questions for an all-hands, he was shocked by the level of employee vitriol and distrust of leadership.
An alternative theory is that tech companies inflated their R&D spend to minimize taxes. In that scenario, all the laid off employees were battery hens laying tax evasion eggs; the moment those eggs became worthless they killed the hens.
Even if this theory isn’t true, nobody can argue that Microsoft or Google doesn’t have enough cash in the bank to pay employees until the heat death of the universe.
It’s worth taking a moment to see if we’re analyzing company finances through the lens of personal economics. “Oh they must have done X lest they run out of $”. When talking about companies with effectively unlimited $ a different lens is required.
(this isn’t a direct refutation of this post or some shit, just ideas that occurred to me while reading. Great post!)
Well, not *literal* cash on hand - Alphabet has at end of FY 2024 roughly 23 and a half billion cash position and what the industry calls "cash on hand" of about 95 billion - this is cash position plus short term instruments that mature within a year - https://www.macrotrends.net/stocks/charts/GOOGL/alphabet/cash-on-hand - that number has dipped a bit over the last couple years. Surely that's enough to run the company forever, right? No, that's actually less than two years R&D expenses - implying that across the 183,000 Alphabet employees, costs are about $250,000 per employee, which is approximately correct. In 2024, Alphabet spent a little over $49 billion on research and development. (It was about $45B in 2023, so Alphabet/Google has still increased R&D spending, the tax change notwithstanding, but you'll find if you go do the deep dive that they have done it differently than they used to; this explanation doesn't fit concisely in a reply window.)
Now I am certainly not saying "Google was suddenly about to run out of money because of this!" Far from it, they're still quite profitable. But the tax shift did require them to shift strategies in order to retain their perceived profit margin. There were other tax mitigation strategies they might have followed (some of which they have). In some cases, many of the Big Tech firms decided to take this as a prompt to go through and clean house. But the "Magnificent Seven" mostly chose to do was layoffs in order to preserve their illustrious profit margins (and stock buybacks), not due to existential risk - but in order to keep their lofty stock prices as a function of the earnings multiple; if this turned out to be an excuse to cut team members, teams, or even business units that were underperforming, that was a different restructuring goal and "efficiency experts" can almost always justify it... reasonably or otherwise.
I suppose what I would say is that if you were just looking for tax mitigation and you didn't otherwise derive value from the engineering talent, you could find that without the difficulty of hiring and managing and directing the R&D staff in the first place. At very least, what they were purchasing was also optionality - not just tax mitigation but also the thought that their R&D might in fact "strike gold" and turn out something new and great.
Worth noting that marketing & sales expenses are generally considered as expensible in current year, rather than required to be capitalized. There are exceptions, but if you run an ad campaign or hire & pay a new sales rep, you'll probably be able to deduct those costs as incurred, even though the ad campaign may have an impact that extends long-term and the sales rep may take a few years to fully develop his territory or industry.
This is an eye-opening deep dive into the real drivers behind the 2023 tech layoffs. The interplay between tax policy changes—especially the Section 174 shift from immediate R&D expensing to mandatory amortization—and macroeconomic factors like rising interest rates and cost of capital is something too few are discussing in detail.
Undoubtedly. But that particular law is a lot more likely to see a lot of monkeying around with it by the current Congress, so it's a bit of a fool's errand to assume it's going to remain unchanged (in fact, it's already been changed a bit and there's various other things in the works to amend it) - it may be too much to expect prudence from very many people in Washington DC these days though. I may do a follow-on article on that, though; there seems to be good interest in this topic.
No formal stock advice here, but in general I would say that bill will be pretty good for many big businesses and (as hinted in the article) the Magnificent Seven likely amongst them. Assuming it gets through without too much in the way of changes. That particular bill is an awfully blunt instrument, and while I understand *why* we currently handle fiscal and legislative policy making this way, I think it's probably not the optimal path. But at least on this front (and most fronts!) it does appear it will be a net positive for US tech jobs.
This entire tech-layoff wave is about more than AI or plummeting demand. It’s the delayed bomb Congress planted in Section 174 (a stealth tax that reclassified every developer’s salary as R&D amortized over years, not the quick write-off it used to be).
People inside big firms are collateral damage in a tax strategy. The policy also shoved engineers’ families onto the payroll chopping block. Until lawmakers reverse course, U.S. tech is bleeding talent - nail in coffin for innovation here while other countries scoop up the scraps.
https://www.kbkg.com/feature/retroactive-and-permanent-rd-expensing-restored-under-proposed-senate-legislation
Help is on the way. Foreign R&D will still be amortized, Domestic will return to full expensing
This needs to be shouted from every rooftop. Everyone needs to write, call, and email their representatives and senators to address this issue.
In case you don't have their contact information readily at hand, it's an easy look-up for both House and Senate:
https://www.house.gov/representatives/find-your-representative
https://www.senate.gov/senators/senators-contact.htm
Unfortunately, the TCJA was created, modified and passed by Congress. I am not suggesting that people not contact their representatives to voice their concerns. Section 174 tax deductions are not the complete reason for the tech job "meltdown". It is a combination of all the facts above. The explosion of low wage and benefit H1B Visa employees, Section 174 deduction clarifications so that R&D is amortized as other business expenses, the increases in costs and expenses due to changes in the economy, the explosion of AI, businesses/corporations outsourcing operations overseas at a lower cost, businesses/corporations streamlining operations and the ever present and constant evolution of the tech job field. This is a rapidly evolving and changing landscape for businesses and tech employees and more is involved than just a clarification to the loosely interpreted tax code.
Ummm... maybe you should worry about saving your democracy first.
I don't think you're likely to get much disagreement that we should do that also. But surely, both? Repairing a strong economy, adding jobs towards a stable middle class (or at very least not subtracting them), and broadly investing in the future rather than sacrificing all that for high income tax breaks... let's face it, it's not actually that hard for the wealthy to engage in a lot of tax mitigation strategies anyway, so policies that grow the economy should be thought of as rather more significantly valuable than ones that just help highly concentrated wealth positions. (And I say that having run a hedge fund!)
Can we have a discussion on the facts and what the author postulates and leave our political beliefs out of this? I'm not sure what democracy needs to be saved since our Country is a Constitutional Republic with democratic elements and not a Democracy. The Federation of States is bound in a Republic with democracy at the local and state levels.
We definitely need to repair the economy and bring our tech jobs back to the US. If we are seeing the TCJA have unintended consequences and impacts, such as Section 174 deductions, then absolutely we need to make our voices known to our representatives in Congress. That is how change is made. It is a difficult line to walk. On one hand, people believe businesses should be paying more in taxes. But making some of those changes impacts people (employees) and the economy. I don't have a complete answer to the solution. But, whatever that answer is, should absolutely improve the economy and grow and stabilize the middle class. I think we are headed in a generally good direction forcing companies to bring operations and jobs back to the US and putting the US tech industry first.
I worked at Google six years until I was laid off early this year. They started rolling random layoffs after the big layoff in 2023 and it absolutely cratered the culture, it became a culture of total obedience or else you’d be in the next rif round. They also shut down / neutered the internal annual survey (googlegeist) to a level where any upwards anonymous feedback was completely quashed. The one time a regional executive mistakenly enabled anonymous questions for an all-hands, he was shocked by the level of employee vitriol and distrust of leadership.
What did he expect 🤷♂️
An alternative theory is that tech companies inflated their R&D spend to minimize taxes. In that scenario, all the laid off employees were battery hens laying tax evasion eggs; the moment those eggs became worthless they killed the hens.
Even if this theory isn’t true, nobody can argue that Microsoft or Google doesn’t have enough cash in the bank to pay employees until the heat death of the universe.
It’s worth taking a moment to see if we’re analyzing company finances through the lens of personal economics. “Oh they must have done X lest they run out of $”. When talking about companies with effectively unlimited $ a different lens is required.
(this isn’t a direct refutation of this post or some shit, just ideas that occurred to me while reading. Great post!)
Well, not *literal* cash on hand - Alphabet has at end of FY 2024 roughly 23 and a half billion cash position and what the industry calls "cash on hand" of about 95 billion - this is cash position plus short term instruments that mature within a year - https://www.macrotrends.net/stocks/charts/GOOGL/alphabet/cash-on-hand - that number has dipped a bit over the last couple years. Surely that's enough to run the company forever, right? No, that's actually less than two years R&D expenses - implying that across the 183,000 Alphabet employees, costs are about $250,000 per employee, which is approximately correct. In 2024, Alphabet spent a little over $49 billion on research and development. (It was about $45B in 2023, so Alphabet/Google has still increased R&D spending, the tax change notwithstanding, but you'll find if you go do the deep dive that they have done it differently than they used to; this explanation doesn't fit concisely in a reply window.)
Now I am certainly not saying "Google was suddenly about to run out of money because of this!" Far from it, they're still quite profitable. But the tax shift did require them to shift strategies in order to retain their perceived profit margin. There were other tax mitigation strategies they might have followed (some of which they have). In some cases, many of the Big Tech firms decided to take this as a prompt to go through and clean house. But the "Magnificent Seven" mostly chose to do was layoffs in order to preserve their illustrious profit margins (and stock buybacks), not due to existential risk - but in order to keep their lofty stock prices as a function of the earnings multiple; if this turned out to be an excuse to cut team members, teams, or even business units that were underperforming, that was a different restructuring goal and "efficiency experts" can almost always justify it... reasonably or otherwise.
I suppose what I would say is that if you were just looking for tax mitigation and you didn't otherwise derive value from the engineering talent, you could find that without the difficulty of hiring and managing and directing the R&D staff in the first place. At very least, what they were purchasing was also optionality - not just tax mitigation but also the thought that their R&D might in fact "strike gold" and turn out something new and great.
Strikes me that the populist impulses of the Trump Reich have had some dire downstream effects. Makes one miss the more fiscally sound right of yore.
Great article!
Some populist tax policies that promote jobs and fit in a neat sound bite would really be Big and Beautiful right about now though
Worth noting that marketing & sales expenses are generally considered as expensible in current year, rather than required to be capitalized. There are exceptions, but if you run an ad campaign or hire & pay a new sales rep, you'll probably be able to deduct those costs as incurred, even though the ad campaign may have an impact that extends long-term and the sales rep may take a few years to fully develop his territory or industry.
This is an eye-opening deep dive into the real drivers behind the 2023 tech layoffs. The interplay between tax policy changes—especially the Section 174 shift from immediate R&D expensing to mandatory amortization—and macroeconomic factors like rising interest rates and cost of capital is something too few are discussing in detail.
Are there some parallels in regards to policy implemented by the Biden Admin.(Like the IRA) that's going to come into effect under Trump 2.0?
Undoubtedly. But that particular law is a lot more likely to see a lot of monkeying around with it by the current Congress, so it's a bit of a fool's errand to assume it's going to remain unchanged (in fact, it's already been changed a bit and there's various other things in the works to amend it) - it may be too much to expect prudence from very many people in Washington DC these days though. I may do a follow-on article on that, though; there seems to be good interest in this topic.
Wow. I never knew this.
Fascinating
https://www.crowell.com/en/insights/client-alerts/house-committee-passes-part-of-big-beautiful-bill-containing-noteworthy-improvements-to-research-and-development-incentives-for-companies
https://www.kbkg.com/feature/retroactive-and-permanent-rd-expensing-restored-under-proposed-senate-legislation
Looks like the "Big Beautiful Bill" is going to bring back full expensing for domestic R&D and keep amortization for foreign R&D. Time for a rebound?
No formal stock advice here, but in general I would say that bill will be pretty good for many big businesses and (as hinted in the article) the Magnificent Seven likely amongst them. Assuming it gets through without too much in the way of changes. That particular bill is an awfully blunt instrument, and while I understand *why* we currently handle fiscal and legislative policy making this way, I think it's probably not the optimal path. But at least on this front (and most fronts!) it does appear it will be a net positive for US tech jobs.
I believe this is the attempt to fix this - https://www.congress.gov/bill/118th-congress/house-bill/2673
We're currently in the 119th congress; that one was proposed but didn't make it.