Note: I want to point something out: I’ve given no references here. This is my current understanding. I’m still researching it, and you should research it yourself, don’t take my word as gospel truth. But this is how I understand it right now.

Googling section 174 layoffs will point you to a lot of information. —Mike

Sep. 4, 2024

Ok, this needs to be fleshed out. But I find myself repeating this to a lot of people lately, so I’m going to stick a summary here, until I can flesh it out into a full essay.

I talk up Section 174 pretty frequently online because I really think it’s the root cause of the white collar job crash that started at the beginning of 2023, and most people who followed up and read up on it have come back and agreed with me, but it’s incredible how many people don’t know anything about it.

It has to do with the tax changes passed in 2017. A procedural rule called “Budget Reconciliation”, originally passed in 1974, allows Congress to put through tax cuts without the possibility of a filibuster by including really draconian changes to balance the cuts, scheduled to take effect later on, down the road. In 2017, these balancing changes were included and scheduled to take effect in June of 2022.

Congress has used the Budget Reconcialiation rules to pass filibuster-proof packages many times before, but in the past, before the cuts actually took affect, they re-legislated it and fixed the later draconian measures before they could take effect do any damage. This time, however, Congress — and this isn’t a slight against either party, it’s a slight against both — they all just sat on their hands for five years and did nothing. Right through Dec 2022, everybody assumed that Congress would pass a law preventing the changes from taking affect…

…And they didn’t.

So, this is just my pet theory, but I believe it’s politically radioactive for either party to talk about the fact that it happened, it makes them both look bad, because nobody did anything for five years, and now so many people are suffering.

The capsule summary of the actual new law that took effect in June 2022 is this: they made it impossible to deduct software R&D expenses the same year that they were paid, and those expenses now had to be amortized out over the following five years.

So if you spent a significant part of your tech company’s gross profit for the year paying your software developers, suddenly you still had to pay taxes up front on the entire gross profit, even though you didn’t have the money, because you’d used it to pay the salaries of the employees writing your software. You only got to deduct the expense later, slowly over time, much later on.

Big companies had an easier time taking the up-front tax hit, but according to some sources (such as this fairly comprehensive overview by The Pragmatic Engineer) this wreaked havoc with the finances of any company who didn’t have enough cash on hand to suddenly pay a tax bill several times higher than they had expected.

So, to make ends meet for the foreseeable future, companies laid off their in-house software engineers. Then they laid off their in-house recruiting staff (and, according to some recruiters I’ve spoken to, mostly put managers who didn’t really know much about hiring in charge of hiring.) And the dominoes fell.

Apparently, within the tech startup industry this is all well-known (you are going to google like I suggested, right?) but most media and politicians just won’t seem to go near it. It really bothers me that it’s not being discussed.

I wouldn’t be surprised if, after the election, someone with national visibility suddenly “discovers” that section 174 is a problem and something needs to be done about it. We’ll see what happens.