How a little-known tax change in the US caused a wave of layoffs in IT in recent years

Tax policy plays a huge and, unfortunately, often unpredictable role in stimulating certain activities. This important change in the U.S. seems to have become a real global disaster for IT.

A subtle but far-reaching shift in tax law has upended the financial foundation of the tech industry, triggered massive layoffs, and significantly hampered innovation. Observers pointed to overstaffing and economic instability as reasons for the layoffs, application of artificial intelligence and so on. But, according to TechSpot, the amendment to Section 174 of the U.S. Internal Revenue Code, which dramatically changed the treatment of research and development expenses, played a key role.

For nearly 70 years, U.S. companies have been able to immediately deduct the full cost of research and development activities — from engineer salaries to software development and contractor fees. This policy, based on Section 174 since 1954, encouraged businesses to invest in innovation and keep R&D operations within the United States. This approach has fostered the growth of iconic tech giants and allowed both startups and established firms to take risks, experiment, and expand rapidly.

That changed in 2022, when a provision of the Tax Cuts and Jobs Act of 2017 went into effect that had been delayed. To offset the cost of the corporate tax cut, lawmakers required that R&D expenses be allocated or amortized over five years for domestic activities and fifteen years for foreign activities, rather than deducted all at once.

This adjustment, intended as a political maneuver to create the impression of fiscal balance in the tax bill, was largely unknown outside of tax and accounting circles — until its real consequences became impossible to ignore.

The consequences were swift and severe. When companies filed their 2022 tax returns under the new rules, they found that they could not fully offset their R&D expenses with their taxable income. For companies in financial distress, and those not yet intended to be profitable, the result was a sudden and painful increase in tax charges — just as venture capital funding was drying up and borrowing costs were rising. Financial pressures forced companies to make difficult decisions, and in many cases, the largest and most flexible expense item, namely staffing, was the first to be cut.

Since the beginning of 2023, the tech industry has lost more than half a million jobs, with some of the industry’s largest companies making significant cuts Meta has reduced its staff by almost a quarter, Microsoft — by about 7%. Alphabet, Salesforce and Amazon canceled thousands of positionsproduct development and engineering departments are the teams that have been most affected by this tax change.

Smaller firms, lacking the financial cushion of industry giants, have faced even harsher realities. Twilio, Shopify, and Coinbase have all cut a significant portion of their staff over the past two years — by 22%, 30%, and 36%, respectively.

The consequences were not limited to IT. Throughout the 2010s, a wide range of businesses, from retail to logistics to healthcare, relied on the same tax regime to attract significant investments in software, data analytics, and internal tools.

The change to Section 174 disrupted this model, moving many companies from a taxable loss position to a taxable income position, even when their actual cash flow did not improve. As a result, layoffs and downsizing have spread to a broader industry that, together with major tech companies, accounts for about 20% of US GDP.

The scale of layoffs was strikingly disproportionate compared to other sectors. While most industries have seen modest job cuts, the tech industry saw a 60% increase in layoffs between 2022 and 2023. Entire departments, primarily in research and development, disappeared almost overnight.