Note, Sep. 2024: I want to point something out: I’ve given few references here besides a couple of Google search results I happen to like. This page gives 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.
I’m also going to add some links at the bottom to interesting references to the issue, as I come across them. —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.
In 2017, changes were made to to the US tax code’s Section 174 which were scheduled to begin taking effect for tax year 2022, which I talk about 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.
How a 2017 procedural move caused a crisis in 2022
A procedural rule called “Budget Reconciliation”, originally passed in 1974, allows the US Senate to put through tax cut bills without the possibility of being blocked by a filibuster. This is accomplished by including tax revenue increases in the bill to balance the cuts, scheduled to take effect later on down the road, so the net effect on tax revenue, years later, is “neutral”.
In 2017, the tax cuts were large, and the shortfall had to be made up for, at least on paper, to get it passed without any possibility of it getting filibustered in the Senate. So, correspondingly large balancing tax revenue increases were included in the tax cut bill, and scheduled to take effect in 2022.
Congress has used the Budget Reconciliation rules to pass filibuster-proof packages many times before. But in the past, before the later draconian increases were due to take effect, they re-legislated it and undid the severe increases before they could begin and do any damage.
This time, however, Congress—and this isn’t a slight against either party, it’s a reflection on 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 effect…
…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.
What the Section 174 overhaul actually changed
The capsule summary of the actual new tax law that took effect in 2022 is this: they made it impossible to deduct tech R&D expenses the same year that they were paid. From tax year 2022 forward, those expenses now had to be amortized out over the following five years.
In other words, if you spent a significant part of your tech company’s gross profit for the year paying your software developers, until 2021, you only had to have enough cash on hand to pay the taxes on your gross profits after deducting the cost of paying your developers.
But, in 2022, suddenly, you still had to pay taxes up front on money you’d spent to pay the salaries of the employees writing your software, even though you didn’t have that money, because, you’d used it to pay them. You only got to deduct the expense of your developers’ salaries later, slowly, over the five following years, 20% a year (“amortization”).
To give an example: if your company did $1.1million a year in gross income, but paid $1,000,000 to your software developers, then in 2021 you paid taxes on the remaining $100,000.
In 2022, in the exact circumstances, Section 174 now said you could only only deduct 1/5 of the $1,000,000, not the whole thing. And so, you paid taxes on $900,000—an immediately-due bill for nine times as much as you would otherwise have owed!
Then in each of the following four years you deducted another $200,000 until, five years later, the whole $1,000,000 was finally deducted. Basically, as of 2022, you were now paying taxes up-front on a huge cost that used to be deductible from your pre-tax profits, and then getting it back as a deduction, gradually, over several following years. (If this doesn’t sound like a problem to you, give me 80% of what’s in your wallet right this minute, and I’ll give it back to you in bits and pieces for the next 4 years. Sound good?)
Add to this that, right through December 2022, a lot of businesses expected Congress to fix this before the law took effect on January 1 2023, as they always had before, so they didn’t keep the cash on hand to pay several times as much tax as they owed last year, even if they could.
This didn’t just affect software companies: many, many businesses have in-house developers building the software they need. All of them suddenly needed a lot more cash on hand because they lost a major same-year deduction and now needed to amortize the cost.
Big companies with a lot of cash resources 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 spent the whole year expecting it to be.
So, to make ends meet for the foreseeable future, companies laid off their in-house software engineers. In-house recruiting staff is considered a major expense and often an early thing to go in cost-cutting, so they went next (and, according to some recruiters I’ve spoken to, mostly were replaced by managers who didn’t really know much about hiring, making the entire hiring process slower and harder, keeping more people out of work for longer.) And the dominoes fell. In-house marketers aren’t a direct profit center. Neither are designers.
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 barely being discussed.
Most recently, in August of 2024, following appeals from the business community, the House of Representatives did overwhelmingly approve a bill (about 350-70) to undo the Section 174 changes, retroactive to tax year 2022. The Senate voted, almost entirely along party lines, not to even allow the bill to come to a vote. (See https://abgi-usa.com/section174/latest-and-greatest.)
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. [Note, this was written in September 2024. As of June 2025, this substantially hasn’t happened. Your guess as to why is as good as mine.]
References:
Here are the sources from which I got my information to form these opinions:
Pragmatic Engineer, The Pulse: Will US companies hire fewer engineers due to Section 174? – the “Pragmatic Engineer” blog, a decent overview and history. This was one of the first pages I saw about the Section 174 changes.
ABGI, Section 174: Latest News & Updates – a pretty good reference keeping a timeline of developments around Section 174.
Quartz, The hidden time bomb in the tax code that’s fueling mass tech layoffs — another decent overview, June 2025.
