Halfway through 2025, companies in the United States like Microsoft, IBM, PwC, Crowdstrike and other big names have already laid off thousands of employees across their workforce. Notably, Microsoft alone has eliminated 6,000 employees, representing nearly 3% of its workforce.

Some of these companies have pointed to AI as a contributing factor in their decision to reduce staff. 

Although AI’s role has been disputed, several analysts and insiders think other financial and strategic factors might be at play. One possible reason is that these companies may be attempting to reduce their tax burden due to the changes made in 2017 to Section 174 of the US Internal Revenue Code (IRC). 

Recently, a report by Quartz highlighted this. According to the original provision, Section 174 stated that companies could claim full deductions for their research and experimentation (R&E) costs in the same year they incurred these expenses. This included software development, contractor payments, salaries, and other related costs. This was a crucial incentive for companies to continue their expenditure on talent, development, and innovation.

However, the Tax Cuts and Jobs Act (TJCA) modified this in 2017, ending the immediate benefits. The change came into effect in 2022 and stated that companies must now spread their R&D costs over multiple years—five years of domestic R&D expenses and 15 years for international R&D expenses. 

Companies could no longer immediately offset their taxable income with full R&D expenses, leading to a sharp increase in tax bills. This meant that the salaries of engineers, managers, and other staff associated with R&D, which had previously reduced taxable income in the first year, were now spread out across five- or 15-year periods. 

The report from Quartz also stated that immediately after the Section 174 change took effect, companies like Microsoft, Google, Amazon, Salesforce, and Meta began to lay off employees. It is also worth noting that salaries are among the most significant expenses for these large companies. 

A notice published by the Internal Revenue Service (IRS) states that labour costs for full-time, part-time, and contract employees involved in R&E activities, which include basic pay, stock-based compensation, overtime, holiday and vacation pay, and more, also count as expenses that must be capitalised and amortised over the applicable period. 

“Imagine a tech company that is developing a software product and paid its engineers $500,000 in 2022. Previously, that $500,000 would have counted as an expense, reducing the startup’s taxable income by $500,000. Now, that $500,000 has to be amortised over five years starting July 1, 2022, which means that only $50,000 in expenses can be applied to the company’s 2022 taxable income,” said Ben Thompson, an analyst, in a blog post from 2023. 

Thompson added that this is a “big problem” for startups that are not making any profit. “Suppose the software company in question has $300,000 in income: previously, the startup would have had a $200,000 loss, which means it would not owe any taxes.”

“This year [where changes to Section 174 take effect], though, the startup has taxable income of $250,000 [after a 20% deduction over the $300k income], which means it owes $52,500 (21%) in federal corporate income taxes,” he said.

‘No One Talks About the Real Reason Driving Layoffs’

Along with Thompson, who said he was surprised that very few people in tech seemed to know about the issue in 2023, several experts in the industry resonate with a similar feeling even today. 

“No one talks about the real reason driving the ~500k tech layoffs,” Deedy Das, principal at Menlo Venutres, wrote in a post on X. He added that tech companies are now incentivised to hire more offshore, buy products instead of building them, spend less on R&D and opt for more layoffs. “This is death by accounting.”

Jesse Pujji, founder of multiple tech start-ups, spoke about a 200% surge in tax bills caused by this change. “For example, I have a $10 million revenue business with $4 million in R&D expenses and $2 million in net income. My tax rate is 30%. I should pay $600k in taxes,” he said in a post on X. “Post Section 174: My taxable income is now $6 million! At a 30% tax rate, I now pay $1.8 million in taxes, or $1.2 million more. How is this possible?” 

EisnerAmper, a firm that provides audit, accounting, and tax services, said this will continue to cause major headaches for software companies. 

“Many companies have had their taxable income increase dramatically because they can no longer deduct expenses. In fact, some companies have gone from being unprofitable to profitable and liable for federal and state taxes due to the change,” the firm said in a blog post. 

Besides posing a disadvantage to startups and companies inside the United States, the changes to Section 174 may have also made the US less competitive globally. “Key economic rivals offer very lucrative incentives for research and development. China, for instance, offers a super deduction for research and development,” KBKG, a tax consulting firm, stated in a blog post. The firm highlighted that companies in China can deduct 200% of eligible R&D costs from their taxable income. 

Restoration Effects Underway?

On May 22, 2025, the US House of Representatives passed H.R.1-119th Congress (2025-2026), titled the ‘One, Big, Beautiful Bill Act’. 

The act suspends the current requirements to capitalise and amortise domestic-only research and experimental expenses for amounts paid or incurred after 2024, but before 2030. However, the treatment of foreign expenditures will remain unchanged. 

Furthermore, several people in the tech community have petitioned to restore the changes permanently. The petition was shared on Hacker News, a renowned forum for developers and engineers. Several participants voiced their support in the forum, advocating for the restoration. 

As mentioned on Hacker News, Luther Lowe, head of public policy of Y Combinator, is leading an effort to organise Y Combinator’s alumni to “urge lawmakers to support this reversal”. 

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