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

For the past few years, it’s been a ghost in the machine of American tech.

A subtle yet significant alteration to the U.S. tax code has quietly reshaped the financial strategies of American companies, particularly in the tech sector. This change, largely unnoticed outside financial and accounting circles, has had a profound impact on how businesses invest in research and development.

“I work on these tax write-offs and still hadn’t heard about this,” a chief operating officer at a private-equity-backed tech company told Quartz. “It’s just been so weirdly silent.”

This sentiment was echoed by accountants and venture capital investors who described the change as a niche issue with widespread consequences.

Since the beginning of 2023, the tech industry has witnessed over half a million layoffs, according to industry tallies. While public narratives often attribute these job cuts to over-hiring during the pandemic and the rise of AI, a deeper examination reveals a less visible catalyst: the modification of Section 174 of the tax code.

This change has significantly affected in-house software and product development teams across the tech landscape, from industry giants like Microsoft (MSFT) and Meta (META) to smaller, internet-first companies.

Now, as a bipartisan effort to repeal the Section 174 change moves through Congress, bigger questions are surfacing: How did a single line in the tax code help trigger a tsunami of mass layoffs? And why did no one see it coming?

Microsoft was founded in 1975. Apple (AAPL) launched its first computer in 1976. Google (GOOGL) incorporated in 1998. Facebook opened to the general public in 2006. All these companies, now among the most valuable in the world, developed their earliest products — programming tools, hardware, search engines — under a tax system that rewarded building now, not later.

The subsequent rise of smartphones, cloud computing, and mobile apps also happened in an America where companies could immediately write off their investments in engineering, infrastructure, and experimentation. It was a baseline assumption — innovation and risk-taking subsidized by the tax code — that shaped how founders operated and how investors made decisions.

In turn, tech companies largely built their products in the U.S.

Microsoft’s operating systems were coded in Washington state. Apple’s early hardware and software teams were in California. Google’s search engine was born at Stanford and scaled from Mountain View. Facebook’s entire social architecture was developed in Menlo Park. The deduction directly incentivized keeping R&D close to home, rewarding companies for investing in American workers, engineers, and infrastructure.

That’s what makes the politics of Section 174 so revealing. For all the rhetoric about bringing jobs back and making things in America, the Trump administration’s first major tax bill arguably helped accomplish the opposite.

To offset this cost, lawmakers introduced future tax hikes that would not take effect immediately, allowing for potential repeal later. One such provision was the delayed change to Section 174, which transitioned from immediate expensing of R&D to mandatory amortization over five or even 15 years. This change, which took effect in 2022, was designed to make the TCJA appear "deficit neutral" over a 10-year period.

The delay wasn’t a technical necessity. It was a political tactic. Such moves are common in tax legislation. Phase-ins and delayed provisions let lawmakers game how the Congressional Budget Office (CBO) — Congress’ nonpartisan analyst of how bills impact budgets and deficits — scores legislation, pushing costs or revenue losses outside official forecasting windows.

And so, on schedule in 2022, the change to Section 174 went into effect. Companies filed their 2022 tax returns under the new rules in early 2023. And suddenly, R&D wasn’t a full, immediate write-off anymore. The tax benefits of salaries for engineers, product and project managers, data scientists, and even some user experience and marketing staff — all of which had previously reduced taxable income in year one — now had to be spread out over five- or 15-year periods.

To understand the impact, imagine a personal tax code change that allowed you to deduct 100% of your biggest source of expenses, and that becoming a 20% deduction. For cash-strapped companies, especially those not yet profitable, the result was a painful tax bill just as venture funding dried up and interest rates soared.

The layoffs begin

The impact of this change became evident as major tech companies began announcing layoffs. Meta, for instance, declared its "Year of Efficiency" immediately after the Section 174 change took effect. Microsoft laid off 10,000 employees in early 2023, despite strong earnings, while Google's parent company, Alphabet, cut 12,000 jobs. around the same time.

Amazon (AMZN) also laid off nearly 30,000 people, with cuts affecting projects that would have previously qualified as immediately deductible R&D. Salesforce (CRM) eliminated 10% of its staff — 8,000 people — including entire product teams.

Publicly, these companies cited reasons like bloat and AI for the layoffs, but internally, financial spreadsheets told a different story. MD&A notes — management's notes in financial filings — revealed that R&D had become more expensive to maintain, with headcount being the most significant R&D expense across the tech industry. As a result, reducing staff became an easy way to cut costs.

Smaller companies without the financial resilience of tech giants were hit even harder. Twilio (TWLO), for example, slashed its workforce by 22% in 2023, while Shopify (SHOP) — headquartered in Canada but with significant R&D operations in the U.S. — cut nearly 30% of its staff over two years. Coinbase (COIN) reduced headcount by 36% through two rounds of restructuring.

The Section 174 change has affected the very core of America's economic growth engine: the tech sector.

By market cap, tech companies dominate the S&P 500, with the “Magnificent 7” alone accounting for more than a third of the index’s total value. Workforce numbers tell a similar story, with tech employing millions of Americans directly and supporting the employment of tens of millions more. As measured by GDP, capital-T tech contributes about 10% of national output.

It’s not just that tech layoffs were large, it’s that they were massively disproportionate. Across the broader U.S. economy, job cuts hovered around in low single digits across most sectors. But in tech, entire divisions vanished, with a whopping 60% jump in layoffs between 2022 and 2023. While some cuts addressed inefficiencies from over-hiring during a period of low interest rates, many eliminated roles were in R&D and engineering, areas that once benefited from generous tax treatment under Section 174.

Throughout the 2010s, a broad swath of startups, direct-to-consumer brands, and internet-first firms — basically every company you recognize from Instagram or Facebook ads — built their growth models around a kind of engineered break-even.

Throughout the 2010s, startups and internet-first companies built their growth models around aggressive spending on product development, which they could write off as R&D. This allowed them to report losses to investors while minimizing their tax liabilities. However, the change to Section 174 disrupted this model, forcing companies to amortize expenses over multiple years and triggering real tax bills on paper profits. The logic that fueled digital-first growth collapsed, impacting not just tech but a wide range of industries. From retail to healthcare, companies that invested in internal tools and data-driven development could no longer expense these costs immediately. This shift affected a significant portion of the U.S. economy, with the broader digital economy accounting for a substantial share of GDP. The Section 174 change effectively introduced a time bomb into the growth engines of countless companies, undermining incentives to hire American engineers and invest in domestic tech development. As a result, building tech companies in America became less financially viable.

Efforts to repeal the Section 174 change are underway, with bipartisan support and lobbying from business groups and venture capitalists. However, the political landscape is complex, as any repeal would benefit companies perceived as symbols of corporate excess. Moreover, a repeal would come too late for the many workers already affected by layoffs.

The ripple effects of these job losses extend beyond tech campuses, impacting urban economies and various service industries. As Washington considers new tax legislation, the long-term effects of the Section 174 change are still unfolding, raising questions about the future of innovation and competitiveness in the United States

The deduction was guaranteed by Section 174 of the IRS Code of 1954, and under the provision, R&D flourished in the U.S.

Microsoft was founded in 1975. Apple (AAPL) launched its first computer in 1976. Google (GOOGL) incorporated in 1998. Facebook opened to the general public in 2006. All these companies, now among the most valuable in the world, developed their earliest products — programming tools, hardware, search engines — under a tax system that rewarded building now, not later.

The subsequent rise of smartphones, cloud computing, and mobile apps also happened in an America where companies could immediately write off their investments in engineering, infrastructure, and experimentation. It was a baseline assumption — innovation and risk-taking subsidized by the tax code — that shaped how founders operated and how investors made decisions.

In turn, tech companies largely built their products in the U.S.

Microsoft’s operating systems were coded in Washington state. Apple’s early hardware and software teams were in California. Google’s search engine was born at Stanford and scaled from Mountain View. Facebook’s entire social architecture was developed in Menlo Park. The deduction directly incentivized keeping R&D close to home, rewarding companies for investing in American workers, engineers, and infrastructure.

That’s what makes the politics of Section 174 so revealing. For all the rhetoric about bringing jobs back and making things in America, the first Trump administration’s major tax bill arguably helped accomplish the opposite.

To make the 2017 bill comply with Senate budget rules, lawmakers needed to offset the cost. So they added future tax hikes that wouldn’t kick in right away, wouldn’t provoke immediate backlash from businesses, and could, in theory, be quietly repealed later.

The delayed change to Section 174 — from immediate expensing of R&D to mandatory amortization, meaning that companies must spread the deduction out in smaller chunks over five or even 15-year periods — was that kind of provision. It didn’t start affecting the budget until 2022, but it helped the TCJA appear “deficit neutral” over the 10-year window used for legislative scoring.

The delay wasn’t a technical necessity. It was a political tactic. Such moves are common in tax legislation. Phase-ins and delayed provisions let lawmakers game how the Congressional Budget Office (CBO) — Congress’ nonpartisan analyst of how bills impact budgets and deficits — scores legislation, pushing costs or revenue losses outside official forecasting windows.

And so, on schedule in 2022, the change to Section 174 went into effect. Companies filed their 2022 tax returns under the new rules in early 2023. And suddenly, R&D wasn’t a full, immediate write-off anymore. The tax benefits of salaries for engineers, product and project managers, data scientists, and even some user experience and marketing staff — all of which had previously reduced taxable income in year one — now had to be spread out over five- or 15-year periods.

To understand the impact, imagine a personal tax code change that allowed you to deduct 100% of your biggest source of expenses, and that becoming a 20% deduction. For cash-strapped companies, especially those not yet profitable, the result was a painful tax bill just as venture funding dried up and interest rates soared.

Amazon (AMZN) also laid off almost 30,000 people, with cuts focused not just on logistics but on Alexa and internal cloud tools — precisely the kinds of projects that would have once qualified as immediately deductible R&D. Salesforce (CRM) eliminated 10% of its staff, or 8,000 people, including entire product teams.

In public, companies blamed bloat and AI. But inside boardrooms, spreadsheets were telling a quieter story. And MD&A notes — management’s notes on the numbers — buried deep in 10-K filings recorded the change, too. R&D had become more expensive to carry. Headcount, the leading R&D expense across the tech industry, was the easiest thing to cut.

In its 2023 annual report, Meta described salaries as its single biggest R&D expense. Between the first and second years that the Section 174 change began affecting tax returns, Meta cut its total workforce by almost 25%. Over the same period, Microsoft reduced its global headcount by about 7%, with cuts concentrated in product-facing, engineering-heavy roles.

Smaller companies without the fortress-like balance sheets of Big Tech have arguably been hit even harder. Twilio (TWLO) slashed 22% of its workforce in 2023 alone. Shopify (SHOP) (headquartered in Canada but with much of its R&D teams in the U.S.) cut almost 30% of staff in 2022 and 2023. Coinbase (COIN) reduced headcount by 36% across a pair of brutal restructuring waves.

Since going into effect, the provision has hit at the very heart of America’s economic growth engine: the tech sector.

By market cap, tech giants dominate the S&P 500, with the “Magnificent 7” alone accounting for more than a third of the index’s total value. Workforce numbers tell a similar story, with tech employing millions of Americans directly and supporting the employment of tens of millions more. As measured by GDP, capital-T tech contributes about 10% of national output.

It’s not just that tech layoffs were large, it’s that they were massively disproportionate. Across the broader U.S. economy, job cuts hovered around in low single digits across most sectors. But in tech, entire divisions vanished, with a whopping 60% jump in layoffs between 2022 and 2023. Some cuts reflected real inefficiencies — a response to over-hiring during the zero-interest rate boom. At the same time, many of the roles eliminated were in R&D, product, and engineering, precisely the kind of functions that had once benefitted from generous tax treatment under Section 174.

The tax code allowed them to spend aggressively on product and engineering, then write it all off as R&D, keeping their taxable income close to zero by design. It worked because taxable income and actual cash flow were often not quite the same thing under what’s known as GAAP accounting practices. Basically, as long as spending counted as R&D, companies could report losses to investors while owing almost nothing to the IRS.

But the Section 174 change broke that model. Once those same expenses had to be spread out, or amortized, over multiple years, the tax shield vanished. Companies that were still burning cash suddenly looked profitable on paper, triggering real tax bills on imaginary gains.

The logic that fueled digital-first growth collapsed, impacting not just tech but a wide range of industries.

From 1954 until 2022, the U.S. tax code had encouraged businesses of all stripes to behave like tech companies. From retail to logistics, healthcare to media, if firms built internal tools, customized a software stack, or invested in business intelligence and data-driven product development, they could expense those costs. The write-off incentivized in-house builds and fast growth well outside the capital-T tech sector. This lines up with OECD research showing that immediate deductions foster innovation more than spread-out ones.

And American companies ran with that logic. According to government data, U.S. businesses reported about $500 billion in R&D expenditures in 2019 alone, and almost half of that came from industries outside traditional tech. The Bureau of Economic Analysis estimates that this sector, the broader digital economy, accounts for another 10% of GDP.

Add that to core Tech’s contribution, and the Section 174 shift has likely touched at least 20% of the U.S. economy.

The result? A tax policy aimed at raising short-term revenue effectively hid a time bomb inside the growth engines of thousands of companies. And when it detonated, it kneecapped the incentive for hiring American engineers or investing in American-made tech and digital products.

It made building tech companies in America look irrational on a spreadsheet.

And of course, the losses don’t stop at Meta’s or Google’s campus gates. They ripple out. When high-paid tech workers disappear, so do the lunch orders. The house tours. The contract gigs. The spending habits that sustain entire urban economies and thousands of other jobs. Sandwich artists. Rideshare drivers. Realtors. Personal trainers. House cleaners. In tech-heavy cities, the fallout runs deep — and it’s still unfolding.

Washington is now poised to pass a second Trump tax bill — one packed with more obscure provisions, more delayed impacts, more quiet redistribution. And it comes as analysts are only just beginning to understand the real-world effects of the last round.

The Section 174 change “significantly increased the tax burden on companies investing in innovation, potentially stifling economic growth and reducing the United States’ competitiveness on the global stage,” according to the tax consulting firm KBKG.

Whether the U.S. will reverse course — or simply adapt to a new normal — remains to be seen.