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

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

#71

Post by mppm »

svara wrote: post #63
wdaher wrote: post #56

Earlier quoted context omitted.

Here's a toy example that hopefully makes this clear: 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 (b…

Is this true even if you don't capitalize the immaterial IP asset generated by the R&D salaries on the balance sheet? Is that required in the US? Otherwise I'm quite amazed that salaries can be carried forward as future expenses.

Elsewhere in the world (under IFRS accounting rules) capitalization of R&D costs has been a firm requirement for a while. The US has been somewhat unique in allowing them to be expensed instead, until recently.

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

#73

Post by demosthanos »

paulcole wrote: post #65
wdaher wrote: post #56

Earlier quoted context omitted.

Here's a toy example that hopefully makes this clear: 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 (b…

But nobody’s forcing you to classify software developers as R&D.

No, that's literally the Section 174 change. You now must count them as R&D.

The relevant paragraph from Section 174:

> (3) Software development

> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.

https://www.law.cornell.edu/uscode/text/26/174

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

#74

Post by kelnos »

Retric wrote: post #45
demosthanos wrote: post #42

Earlier quoted context omitted.

The reason that we require you to deduct an expense over years for some things is because they have a resale value that needs to be accounted for. It's not a pure expense because you have an asset with real value that came out of the purchase. Employee time has no resale value. Once used it's gone, so employee salaries are expenses, not investments. The only possible justification for the Section 174 R&D changes is t…

> I've seen no justification for the government deciding that from 2022 on we should actively discourage R&D, it just seems to be a mistake. Removing a specific tax exemption to create a level playing field isn’t discouraging R&D. That’s the thing, every year such exemptions exist the US taxpayers are handing out money. Just because we subsidize say EV’s or Corn doesn’t mean that’s the baseline forever more.

> Removing a specific tax exemption to create a level playing field isn’t discouraging R&D.

If the end result of removing this exemption is that there is less R&D done in the US, then yes, empirically, removing the exemption discourages R&D. Assuming the mass layoffs were indeed fueled by the removal of this exemption (I don't know if the article is correct or not), then it is reasonable to assert that it is true that removing the exemption has reduced the amount of R&D done.

Or, you could also say that the "default state" is some low level of R&D, and the tax exemption encouraged and incentivized more of it.

Either way you slice it, though, the status quo prior to 2022 was some level of encouraged/incentivized R&D. That status quo changed to encourage/incentivize less R&D, and companies have followed these lack of incentives and have fired a lot of their R&D staff. Is that a good thing for the US? I can't see how it could be.

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

#75

Post by croes »

paulcole wrote: post #65
wdaher wrote: post #56

Earlier quoted context omitted.

Here's a toy example that hopefully makes this clear: 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 (b…

But nobody’s forcing you to classify software developers as R&D.

How would that help? R&D developers helped saving taxes, now they don’t.

Classifying them as non R&D doesn’t help saving taxes again.

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

#76

Post by dmoy »

dang wrote: post #25

Related. Others? The time bomb in the tax code that's fueling mass tech layoffs - https://news.ycombinator.com/item?id=44180533 - June 2025 (927 comments) ( Big Beautiful Bill R&D Tax: Will tech go on a hiring spree again? - https://news.ycombinator.com/item?id=44028106 - May 2025 (19 comments) The Consequences of Limiting the Tax Deductibility of R&D - https://news.ycombinator.com/item?id=43639202 - April 2025 (64 c…

Not a big thread, but a layoff one from a year ago: https://news.ycombinator.com/item?id=38633668

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

#77

Post by lifeisstillgood »

I’m not sure I fully understand the problem here

1. I start “Facebook for dogs” It’s gonna be massive. For the first year me and five guys code away in the garage and I use my savings / credit card / family trust fund to pay them 100k each. Expenses are 500k, revenue is, amazingly, 1.5M and taxes owed is 500k.

At this point turning round and saying the development was R&D, and claiming 500k of tax breaks is just (to me) ripping off the American Taxpayer.

And I’m not even an American Taxpayer.

If the revenue was zero would anyone suggest that the taxpayer give me 500k to help ? (Ok I would because I like free money but most people won’t)

Or am I missing something?

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

#78

Post by demosthanos »

mywittyname wrote: post #64
dtagames wrote: post #2

This doesn't explain the mass tech layoffs. According to the article, the rule applies to R&D. The vast majority of tech workers laid off in the last two years didn't work in research and development. They wrote regular software for sale, like games, for example. The games industry, while hugely profitable and bigger than TV, movies, and music combined, laid off tens of thousands of people. It's unmitigated greed is…

> The vast majority of tech workers laid off in the last two years didn't work in research and development. 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.

> I bet they were classified as R&D for accounting purposes.

It's not just that. Section 174 now explicitly calls out Software as always being an R&D expense:

> (3) Software development

> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.

https://www.law.cornell.edu/uscode/text/26/174

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

#79

Post by [deleted] »

paulcole wrote: post #65
wdaher wrote: post #56

Earlier quoted context omitted.

Here's a toy example that hopefully makes this clear: 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 (b…

But nobody’s forcing you to classify software developers as R&D.

[deleted]

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

#80

Post by jt2190 »

Retric wrote: post #51
demosthanos wrote: post #47

Earlier quoted context omitted.

Level playing field for whom? Who does incentivizing R&D disadvantage? Restaurants weren't competing with R&D-heavy corporations in any way. R&D-heavy corporations competed with each other, on a level playing field where all of them can build new stuff without having to pay taxes on negative income in their early years. The only change this has made is un-level the playing field in favor of old, established corporati…

> Who does incentivizing R&D disadvantage? Taxpayers who end up with the bill and every company is competing for workers, office space, etc. Incentives across decades shift what people study, what business get created, etc. R&D sounds great abstractly, but it’s not some panacea where unlimited funding results in pure gains. The economy is generally more efficient without central planning, and dumping money into anyth…

It sounds like you’re talking about government funding of research? This is about private companies funding the costs of making product ideas into actual sellable products.
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