The time bomb in the tax code that's fueling mass tech layoffs
qz.com

・

60 points

・

booleanbetrayal

・

2 days ago

23 comments

potamic ・ a day ago

This is insane, how does it make sense? Employee salary expenses are no different from other expenses to run your business. Imagine they did this for raw material instead, a restaurant could only expense 20% of the food that they sell. If they purchased $100 worth of food, but could only sell $50 worth of it, they have to pay tax on that even when making a net loss overall. It just does not make any sense. There would've been a huge uproar if this was done for cost of goods. Why are employee salary expenses any different?

  • UncleMeat ・ 21 hours ago

    There are other expenses that are also amortized.

dashqueen ・ 2 days ago

This doesn't quite fit into the article and is probably too inside baseball for a general business audience, but as I see it, there’s a real and serious argument to be made here about how Section 174 changes restructured the cost architecture of tech employment (yes, even for big, cash-rich companies). When salaries could be fully expensed, the effective marginal cost of headcount was lower. Amortization means the same engineer now triggers a significantly bigger near-term tax bill. At scale, that’s a serious shift in how labor costs flow through the P&L… functionally, op-ex becomes capex, and cash flow implications for big players run into the billions. But maybe it’s me!

mensetmanusman ・ 2 days ago

I wonder if this was an unintended consequence, or if the politicians backed by big business really wanted to disrupt the software infrastructure.

  • glookler ・ a day ago

    Around ~2010 I still had a lot of coworkers who claimed tech was basically incapable of defending its interests against other sectors. Maybe a bit different than today. I don't doubt that they thought they would get this repealed, but I would suspect the risk of the live grenade went to the sector with the least lobbying competence per revenue for the tax equations.

  • LiquidSky ・ 2 days ago

    If this article is accurate it doesn't sound like it. The change was a political tactic to make the tax bill it was part of comply with Senate budget rules on paper. Apparently this is a common tactic with tax bills, with the expectation that the changes will be repealed or altered in a later bill. There is a movement to repeal this change, but the effects have already been felt.

    • bigbadfeline ・ a day ago

      > Apparently this is a common tactic with tax bills, with the expectation that the changes will be repealed or altered in a later bill.

      None of this adds up. You're saying, the legislators were trying to cheat and because it's a "common tactic" that kind of cheating is somehow good, but it's bad when the cheating doesn't go through?

      On the other hand, being a common tactic implies that the possibility of it remaining in the books was well understood, and the declared "expectations" carry zero weight as evidence, even less than zero when coming from politicians.

      Legislation like that has far reaching consequences and pretend "surprise" just confirms the intent behind it. It's only prudent to assume that we have a common tactic case of throwing sheet at the wall to see for how long it'll stick. If there's no backlash the "tactic" will remain there forever.

      As another example of the same common tactic, consider the fact that all popular browsers have been used as Trojan horses into the users' local networks for like forever. At some point back in 2015 somebody objected so the browser makers started talking about fixing the problem but then stopped talking without fixing it because public opinion moved on to other areas affected by abundant sticky materials... Thus, that particular sheet remained on the wall for another 10 years and counting, and the story may repeat itself again.

potato3732842 ・ 2 days ago

>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.

Doesn't this just amortize out to be roughly the same amount of deduction over the long term?

All the big companies mentioned should be relatively unaffected over an N>5 year time period. Also this was something that's been in the works for years so their accountants should have been planning for it so it wasn't a financial shock (and company financials seem to indicate no such shock).

  • yesfitz ・ 2 days ago

    If you look at the time value of money[1], a $1,00,000 deduction this year is worth more than $200,000 deductions over the next 5 years.

    But more importantly, the article claims it was used as a tax shield to grow.

    "Basically, as long as spending counted as R&D, companies could report losses to investors while owing almost nothing to the IRS."

    "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."

    1: https://www.investopedia.com/terms/t/timevalueofmoney.asp

    • potato3732842 ・ 2 days ago

      Sure, but that doesn't account for the allegedly apocalyptic layoffs from companies that don't fit into the "real taxes on imaginary gains" mold.

      I get that this is bad for the VC monopoly bucks scene, but they were already down for the most part. If the changes are as the article alleges than all these big tech companies that are posting huge layoffs should mostly be fine because it's not a serious change from status quo for them.

  • HWR_14 ・ 2 days ago

    > Doesn't this just amortize out to be roughly the same amount of deduction over the long term?

    With steady enough employment numbers, sure. Google has a weird one-time cost where they get hit with extra taxes at 80%, 60%, 40% and 20% of their employee's salaries for five-years and then it's all balanced. You can turn the money Google needs to borrow (or not invest) at some interest rate into a known number.

    Any startup that is cash poor and especially one that is growing struggles. In year 3 you get to write off 20% of year 1's salaries, 20% of year 2's salaries and 20% of year 3's salaries.

dtagames ・ 2 days ago

This doesn't explain the mass tech layoffs. According to the article, the rule applies to R&D. The vast majority of tech workers laid off in the last two years didn't work in research and development. They wrote regular software for sale, like games, for example.

The games industry, while hugely profitable and bigger than TV, movies, and music combined, laid off tens of thousands of people. It's unmitigated greed is all it is.

  • tjchear ・ 2 days ago

    > For almost 70 years, American companies could deduct 100% of qualified research and development spending in the year they incurred the costs. Salaries, software, contractor payments — if it contributed to creating or improving a product, it came off the top of a firm’s taxable income.

    According to the article, as long as the tech workers contribute to improving or creating a product (be it games or apps), they count as R&D cost.

    • gregw2 ・ 2 days ago

      To qualify for R&D tax breaks, IIRC having identified qualifying work for a segment of my firm, there must be elements of hypothesis, experimentation, results, etc that I would consider more science-y 'Research' than just turn the crank software 'Development.' It has to be both. And that has to be documented. And offshore research+development doesn't get you a tax break. The irony is that the R+D tax actually discourages onshore pure development as a 'trade' and encourages a split of onshore R+D and offshore D.

      This sort of thing appears to be self-reported; I don't know if it ever gets audited. I don't know if big tech lies or creatively interprets what counts and that has contributed to the issue. But this article sort of over-represents what qualifies as R&D for US tax purposes.

      • ghc ・ 2 days ago
        ・ 4 more

        Under the new rules, all software development, excluding bug fixes, must be expensed in this manner. "Turn the crank" development is included.

        https://larsco.com/blog/section-174-updates-navigating-the-i...

        • ndriscoll ・ 2 days ago
          ・ 3 more

          Which makes sense. Software is functionally a capital asset, so really it should be depreciated across the length of the copyright term (unless the company wants to release it to the public domain to fully depreciate it early).

          • robocat ・ a day ago
            ・ 2 more

            Maybe software should be a capital asset, but these depreciation rules don't fix that issue.

            The rule says if you pay someone $200k to develop software: then you now have a $200k asset that then devalues to value of $0 over 5 years (starting midyear). That's just plain weird.

            For our example a depreciation table might look like:

              Year, %Amortized, Amount
  2025 10% $20,000
  2026 20% $40,000
  2027 20% $40,000
  2028 20% $40,000
  2029 20% $40,000
  2030 10% $20,000
            The final effect of the 174 rule change is that you still finally end up with a software asset worth $0. However you now have taxable income of $200k in year one and expenses equalling $200k spread over 5 years. The taxes paid could be a lot: although the taxation money is really just being lent to the government for a few years at 0%. The actual financial costs are fucking complicated.

            Understanding accounting and taxes are two absolutely essential skills if you ever wish to be a founder (and useful anyways).

            Finding a solution to dealing with the valuation of assets is difficult. The historical solution of depreciation is broken for software, intellectual property and goodwill. In theory, taxes on dividends and capital gains taxation already deal with the issue (company taxation at x% kinda ends up at $0 because the shareholder pays y% and claims back the x% through imputation).

            And remember that salaries are properly taxed.

            • ndriscoll ・ 20 hours ago

              Right, that weirdness is why it should be depreciated over the length of the copyright term. You spend $200k this year, and now you have a useful asset for the next 95 years (or 120 years if you never publish it).

              If it turns out it's not useful, we could then allow companies publish the source and release it into the public domain to immediately "destroy" the asset (the copyright) and claim their deduction. So failed r&d projects would be deductible right away as long as the public gets them, and ones that result in a useful asset get depreciated based on how long they actually last, which is currently potentially multiple lifetimes.

    • dtagames ・ 2 days ago

      I worked in games 2 years before the studio shutdown. It wasn't because of "R&D" tax breaks. None of the recent layoffs or studio closures are explained by that. Nor are the Microsoft, Dell, or Intel layoffs which aren't game-related.

  • jewelry ・ 2 days ago

    Greed is too easy as a target.. industry space has shifted because of slower innovation and less growth, so cost cutting being more a focus would be a reasonable strategy

    • dtagames ・ 2 days ago

      If your company is already profitable to the tune of billions annually, "cost cutting" isn't necessary. You're just cutting people out of jobs and out of economic participation in society -- which affects a far larger group than just themselves when those folks can't spend their salaries in other businesses.

      There is no justification for "cost cutting" when it hurts the larger economy. If the company were losing money, that would be different, but these mass layoffs are all from firms that make obscene, enviable levels of profit. It's greed.

      • RobGR ・ 2 days ago

        You can call any self-interested decision "greed" if you need to just turn off your brain and emote.

        But they were making high profits for decades, and being greedy for decades. Then there were a lot of layoffs. What changed ?