The headlines have been relentless: Thousands of developers laid off at Microsoft. Deep cuts at Google. Restructuring at Intel’s core engineering teams. The tech industry, once a symbol of endless growth and opportunity, is facing a stark new reality. While companies often cite economic “bloat” and a shift towards AI, a lesser-known but powerful force is at play—a change to the U.S. tax code that is quietly and dramatically increasing the cost of innovation.
This isn’t about market corrections or a post-pandemic reckoning. It’s about Section 174 of the Internal Revenue Code, a provision that has, for decades, been the bedrock of American R&D. And now, it’s a hidden time bomb that has exploded on corporate balance sheets.
The Old Rule: Fueling the Innovation Engine
For nearly 70 years, Section 174 allowed companies to immediately deduct 100% of their qualified Research and Development (R&D) expenses in the year they were incurred. Think of it as a supercharger for innovation. Every dollar spent on a developer’s salary, a new software tool, or a research project was a direct, immediate tax write-off.
This “immediate expensing” was a massive incentive. It encouraged companies to invest heavily in developing new products, improving existing ones, and building the technology that would define the next generation. For a tech company, where the primary assets are often people and code, this was an incredibly powerful tool for managing taxable income and cash flow. It meant that a company could pour millions into a cutting-edge, long-term project and see the tax benefit right away, even if the product was years from generating revenue.
The New Reality: Amortization and the “Tax on People”
The 2017 Tax Cuts and Jobs Act (TCJA) quietly changed everything. Starting with the 2025 tax year, immediate expensing of R&D costs was eliminated. Instead, companies are now required to capitalize and amortize these expenses over a period of five years for domestic R&D and a staggering 15 years for foreign R&D.
Let’s break down what this means in practice:
Imagine a tech company that spends $10 million on developer salaries and other R&D costs in a single year.
- Before 2022: The company could deduct the full $10 million, immediately reducing their taxable income.
- After 2025: They can now only deduct a fraction of that amount each year. For domestic R&D, they get to deduct $2 million a year for five years. This means in the first year, their taxable income is a full $8 million higher than it would have been under the old rule, leading to a massive spike in their tax bill.
This isn’t a tax on profits; it’s a tax on investment and people. It turns R&D costs—the very engine of a tech company—from a short-term deduction into a long-term liability. This shift creates a significant cash flow crunch, especially for companies that are still in a growth phase or have high R&D spending relative to their revenue.
The Layoff Connection: A Perfect Storm
While companies often cite “bloat” and a focus on AI, a clear pattern has emerged since this tax provision took effect. The layoffs have disproportionately affected product, engineering, and R&D teams—the very departments whose salaries and expenses fall under Section 174.
Here’s a look at how this has played out across the industry:
- Microsoft: In the past year, Microsoft has announced multiple rounds of layoffs, affecting thousands of employees, including those in its Xbox, HoloLens, and other core engineering divisions. While the company is pouring billions into AI infrastructure, it has also restructured teams and cut roles that are at the heart of traditional R&D. The increased tax burden on developer salaries makes every hire a more expensive proposition.
- Google: Alphabet has also implemented significant workforce reductions across its core teams, from Google’s hardware division to its ad sales teams and its “Other Bets” like Waymo. The company has explicitly stated a focus on efficiency, and this tax change provides a powerful financial incentive to scrutinize every dollar spent on R&D staff.
- Intel: As a cornerstone of American semiconductor R&D, Intel has been particularly vocal about the change. The company has announced significant layoffs, including cuts to its Foundry team. As Intel competes in a capital-intensive industry with long R&D cycles, the inability to immediately expense billions in development costs creates an immense financial challenge, putting a direct squeeze on its ability to hire and retain top engineering talent.
In public, executives may speak of “right-sizing” their teams or a “shift in priorities.” But behind closed doors, CFOs and tax accountants are grappling with a dramatically increased tax bill. For a company that spends hundreds of millions or even billions on R&D annually, the difference in tax liability can be enormous, potentially forcing them to make difficult choices about headcount.
The Bigger Picture: A Blow to American Competitiveness
The change to Section 174 is a self-inflicted wound. It makes the United States a less attractive place to conduct R&D compared to other countries that offer immediate expensing or other lucrative R&D tax incentives. The 15-year amortization for foreign R&D is a strong disincentive for companies to move their research out of the country, but the new domestic rule still makes it more financially appealing to do R&D in a jurisdiction with more favorable tax laws.
While there is bipartisan support to repeal or amend this provision, political gridlock has so far prevented a solution. The debate continues in Washington, D.C., but for the thousands of developers and engineers who have been laid off, the damage has already been done.
The next time you read a headline about tech layoffs, remember that it’s not just about a shifting market or the rise of AI. It’s about a quiet, powerful change to a decades-old tax code—a change that is fundamentally altering the economics of innovation and putting a hefty price tag on the very talent that drives the tech industry forward.
