The time bomb in the tax code that's fueling mass tech layoffs • Hacker News Board

Re: The time bomb in the tax code that's fueling mass tech layoffs

#31

Post by JamesBarney » Fri, Jun 06, 2025, 7:15 PM UTC

potato3732842 wrote: post #11

yesfitz wrote: post #7

Earlier quoted context omitted.

If you look at the time value of money[1], a $1,00,000 deduction this year is worth more than $200,000 deductions over the next 5 years. 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 multipl…

Sure, but that doesn't account for the allegedly apocalyptic layoffs from companies that don't fit into the "real taxes on imaginary gains" mold. I get that this is bad for the VC monopoly bucks scene, but they were already down for the most part. If the changes are as the article alleges than all these big tech companies that are posting huge layoffs should mostly be fine because it's not a serious change from statu…

Interest rates are bigger motivator of the layoffs than these changes. When interest rates are high that means investors far more heavily prioritize profits today over profits tomorrow.

This tax change just made it worse.

Re: The time bomb in the tax code that's fueling mass tech layoffs

#32

Post by sokoloff » Fri, Jun 06, 2025, 7:16 PM UTC

potamic wrote: post #22

This is insane, how does it make sense? Employee salary expenses are no different from other expenses to run your business. Imagine they did this for raw material instead, a restaurant could only expense 20% of the food that they sell. If they purchased $100 worth of food, but could only sell $50 worth of it, they have to pay tax on that even when making a net loss overall. It just does not make any sense. There woul…

Now imagine that a restaurant buys 100 tables, 500 chairs, kitchen equipment, cutlery for 800 people, signage, a security system, and does a remodeling before opening. (Or an airline buys an airplane. Or a hotel chain builds a hotel.)

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?

Re: The time bomb in the tax code that's fueling mass tech layoffs

#33

Post by [deleted] » Fri, Jun 06, 2025, 7:16 PM UTC

potato3732842 wrote: post #4

>The delayed change to Section 174 — from immediate expensing of R&D to mandatory amortization, meaning that companies must spread the deduction out in smaller chunks over five or even 15-year periods. Doesn't this just amortize out to be roughly the same amount of deduction over the long term? All the big companies mentioned should be relatively unaffected over an N>5 year time period. Also this was something that's…

[deleted]

Re: The time bomb in the tax code that's fueling mass tech layoffs

#34

Post by demosthanos » Fri, Jun 06, 2025, 7:23 PM UTC

dashqueen wrote: post #17

This doesn't quite fit into the article and is probably too inside baseball for a general business audience, but as I see it, there’s a real and serious argument to be made here about how Section 174 changes restructured the cost architecture of tech employment (yes, even for big, cash-rich companies). When salaries could be fully expensed, the effective marginal cost of headcount was lower. Amortization means the sa…

Isn't this literally the content of the article? What you just wrote down is basically this paragraph from TFA:

> 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

Re: The time bomb in the tax code that's fueling mass tech layoffs

#35

Post by snowwrestler » Fri, Jun 06, 2025, 7:26 PM UTC

bigbadfeline wrote: post #21

LiquidSky wrote: post #18

Earlier quoted context omitted.

If this article is accurate it doesn't sound like it. The change was a political tactic to make the tax bill it was part of comply with Senate budget rules on paper. Apparently this is a common tactic with tax bills, with the expectation that the changes will be repealed or altered in a later bill. There is a movement to repeal this change, but the effects have already been felt.

> Apparently this is a common tactic with tax bills, with the expectation that the changes will be repealed or altered in a later bill. None of this adds up. You're saying, the legislators were trying to cheat and because it's a "common tactic" that kind of cheating is somehow good, but it's bad when the cheating doesn't go through? On the other hand, being a common tactic implies that the possibility of it remaining…

In tax policy, every single change looks reasonable to one interest group, and like a cheat to a different interest group. That is just the nature of tax policy. Any change hurts some people, harms others.

Changes to Section 174 happen rarely and are not a “common tactic.” Changes to tax policy in general are common, especially in the reconciliation process. They can have unforeseen side effects. As well as side effects that are foreseen but considered more acceptable than other side effects.

Re: The time bomb in the tax code that's fueling mass tech layoffs

#36

Post by londons_explore » Fri, Jun 06, 2025, 7:27 PM UTC

sokoloff wrote: post #32

potamic wrote: post #22

This is insane, how does it make sense? Employee salary expenses are no different from other expenses to run your business. Imagine they did this for raw material instead, a restaurant could only expense 20% of the food that they sell. If they purchased $100 worth of food, but could only sell $50 worth of it, they have to pay tax on that even when making a net loss overall. It just does not make any sense. There woul…

Now imagine that a restaurant buys 100 tables, 500 chairs, kitchen equipment, cutlery for 800 people, signage, a security system, and does a remodeling before opening. (Or an airline buys an airplane. Or a hotel chain builds a hotel.) 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 o…

It's only shifting what year the government gets its revenue. The government should simply let the company choose how to do it, but if they choose anything other than year 1 interest will be payable at government bond rates.

Re: The time bomb in the tax code that's fueling mass tech layoffs

#37

Post by TheTaytay » Fri, Jun 06, 2025, 7:28 PM UTC

potato3732842 wrote: post #11

yesfitz wrote: post #7

Earlier quoted context omitted.

If you look at the time value of money[1], a $1,00,000 deduction this year is worth more than $200,000 deductions over the next 5 years. 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 multipl…

Sure, but that doesn't account for the allegedly apocalyptic layoffs from companies that don't fit into the "real taxes on imaginary gains" mold. I get that this is bad for the VC monopoly bucks scene, but they were already down for the most part. If the changes are as the article alleges than all these big tech companies that are posting huge layoffs should mostly be fine because it's not a serious change from statu…

My company was affected. The amount of money paid in taxes more than quadrupled from one year to the next.

It hurt small businesses that were slightly profitable. No one else. VC shops aren’t profitable anyway, so no taxes to pay. Microsoft took a 4 or 5 billion dollar write off, but they can literally write a 5 billion dollar check.

The issue is that the IRS wants you to pay them today on profits and cash that literally don’t exist. You make $1M in revenue and pay 5 developers 200k/year? You have no money left at the end of the year, but you pay taxes as if you profited about 900k.

Re: The time bomb in the tax code that's fueling mass tech layoffs

#38

Post by jmyeet » Fri, Jun 06, 2025, 7:28 PM UTC

I reject this framing.

What really changed things was the end of ZIRP [1] and even then it was opportunistic. Labor costs are a massive cost for tech companies. They have continually tried to suppress wages. In the 2000s, it was the anti-poaching agreement between Steve Jobs, Eric Schmidt and others. In the 2010s, high growth ahnd zero interest meant labor costs continued to balloon.

But then Covid came along and was a massive opportunity. A few companies may have needed to do layoffs but that created the opportunity for everyone else. Big Tech just went full Corporate America with a page straight out of Jack Welch: fire the bottom 5-10% every year. Call it "layoffs". It's a direct pay decrease for those who remain (who get assigned the work). Those are still there won't be asking for raises because they're now afraid of their jobs.

Very little of this was ever necessary. None of the big tech companies ever came close to making a loss. They've remaining insanely profitable, in total and on a per-worker basis. At different times Google's per-worker profit has approached or exceeded $1 million.

The other factor is these companies eventually reached their size limits where antitrust stopped them making any more significant acquisitions.

Consider the timing: this change came in 2017. Where were the mass layoffs in 2018? 2019?

Also, the 2017 tax cuts contained a massive tax holiday for the repatriation of foreign profits.

Mass layoffs are simply wage suppression. It's the end state for any company that can't keep growing the way the market demands: eventually it comes down to cutting costs to make those quarterly profit targets. And in that, they sow the seeds of their own demise.

[1]: https://en.wikipedia.org/wiki/Zero_interest-rate_policy

Re: The time bomb in the tax code that's fueling mass tech layoffs

#39

Post by jameshart » Fri, Jun 06, 2025, 7:31 PM UTC

ndriscoll wrote: post #24

robocat wrote: post #20

Earlier quoted context omitted.

Maybe software should be a capital asset, but these depreciation rules don't fix that issue. The rule says if you pay someone $200k to develop software: then you now have a $200k asset that then devalues to value of $0 over 5 years (starting midyear). That's just plain weird . For our example a depreciation table might look like: Year, %Amortized, Amount 2025 10% $20,000 2026 20% $40,000 2027 20% $40,000 2028 20% $40…

Right, that weirdness is why it should be depreciated over the length of the copyright term. You spend $200k this year, and now you have a useful asset for the next 95 years (or 120 years if you never publish it). If it turns out it's not useful, we could then allow companies publish the source and release it into the public domain to immediately "destroy" the asset (the copyright) and claim their deduction. So faile…

I get your thinking here but copyright isn’t the only relevant intellectual property constraint.

Software built by a business is a trade secret independent of its copyrightability. Even after the expiry of copyright a business can continue to exploit it as a proprietary asset.

Re: The time bomb in the tax code that's fueling mass tech layoffs

#40

Post by altairprime » Fri, Jun 06, 2025, 7:32 PM UTC

potamic wrote: post #22

This is insane, how does it make sense? Employee salary expenses are no different from other expenses to run your business. Imagine they did this for raw material instead, a restaurant could only expense 20% of the food that they sell. If they purchased $100 worth of food, but could only sell $50 worth of it, they have to pay tax on that even when making a net loss overall. It just does not make any sense. There woul…

It makes sense when you consider that there is no minimum tax rate on businesses.

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.)