New tax rules on R&D expenses may lead to layoffs for devs

900+ comments, "Software firms across US facing tax bills that threaten survival", https://news.ycombinator.com/item?id=35614313

200+ comments, "Tell HN: Submit comments to IRS re tax treatment of software dev expenses", https://news.ycombinator.com/item?id=38120388

"A thing that is causing huge pain at many tech companies in the US - with little talk about it:

An IRS tax code change in Section 174. This change eliminates the ability for businesses to deduct R&D as an expense.

Hear of lots of layoffs directly because of this, as a start. ... The tax code change means that R&D (basically, employing devs) can be amortized over 5 years. 15 with overseas costs.

US companies without large cash buffers to take this sudden hit are thus firing overseas developers... as well as in the US.

Very bad time for this tax change. ... There are so few mentions of any of this in the news. If your company is impacted, feel free to DM. Plan to potentially cover this.

One article I found was from the WSJ, but it doesn't look at tech companies: ... From an engineer:

"My company is going to let go 40 people in India just because their runway has been blown away by the tax bill for 2023."

"Runway blown away" meaning much higher expenses as R&D costs in India need to be amortized over 15 years: not the same year as before. ... From a bootstrapped founder:

"This change makes bootstrapped software businesses unsustainable... it's insane. I'm talking with other founders, and everybody says the same thing.

My lawyers and accountants offer no workaround. How are other US businesses dealing with this?" ... A dev at a business where layoffs are coming b/c of Section 174:

"It’s like the whole internet is silent on this tax change as if it’s a non issue or as if there’s an easy workaround for tech companies (where most expense IS R&D) but nobody is sharing what it is..."

The first tax year that the modified Section 174 was active is for the 2022 one. Tax bills for that year came in earlier in 2023: which is when many tech companies realized just how bad this is. Hence the reaction (e.g. layoffs).

Via https://eisneramper.com/insights/blogs/tax-blog/changes-re-e...

Unless a tech company has large amounts of cash stashed away, this is likely what they also need to do:

Freeze (or reduce costs), and borrow. Except borrowing is expensive these days.

A very bad time for this change to come to tech.

Patrick Flanagan: My tax bill exceeds 100% of my actual income. 174 hits my business especially hard because we are bootstrapped (no VC cash cushion) and we're an LLC. My personal tax rate is higher than the corporate tax rate.

We froze salaries, cut headcount, and borrowed. ... An example:

A company has $1.2M in revenue; and $1M in costs (let's assume all costs are employing devs fulltime).

Before 2022: the profit of the company is $200K. Pays corporate tax on this.

In 2022: the profit of the company is $1M (of the $1M in salaries paid for devs, this needs to be amortized over 5 years: so $200K can be amortized for the year). Need to pay corproate tax on this. But the business might not have this much cash on hand, and so needs to borrow at a high interest rate. MASSIVE change!

... and so now companies are incentivized to have as little R&D expenses as possible (aka fire fulltime devs doing R&D, unless they can front the 5-year spread). ... Another software engineer:

"I was laid off largely because of the Section 174 changes. Instead of costs being 1 they were 1/5 [less deduction possible] and that caused short-term cash flow constraints [needing to pay much more corporate tax] that required staff reduction." ... This tax change is a HUGE benefit for one entity:

The IRS!