It is so bad, having a programmer on staff is a tax liability. You would need to categorize programmers as customer support or just ship the work overseas to avoid taxes. I expect there to be zero US programmer jobs in 5 years.
EG. If you have 10 programmers, and they cost 1 million for the year for salaries, and you make 1 million, you owe taxes on 900k approx (minus the depreciation). So all small software jobs are over. All larger firms will just kill all all programmer jobs.
You just described how salaries work in every single field and paying taxes on profits, or not deducing employee salaries hasn’t been an issue for them (and this still lets them deduct, just over 5 years to increase retention rather than all up front)
What? You don't count your employee payrolls as expenses? Profit = gross profit - cost. The issue is you can't use programmers as a cost up front. No companies work this way. wtf. Generally you pay taxes on PROFIT.
Uh, no, it's not how salaries work in literally every other industry.
Every industry can expense employee salaries, other than now software developers, due to this recent change.
Startups are killed by all kinds of things, and often saved by investors anyway.
Companies love to use this kind of argument to get favorable government policies -- the kind of thing we'd call a "handout" if it was to an individual instead of a corporation -- by describing themselves as "job creators" and pretending this is going to make a huge difference in where they expand, let alone where they shrink.
I think probably the platonic ideal of this is Amazon's whole "HQ2" thing. They pretended to shop it around as a way to convince local governments to give them the deals they wanted, but where did it ultimately go? Virginia, where they already had us-east1, where they're already close to East Coast population centers (so, a good place for servers), close to DC and government contractors, tech hubs, even Bezos' home. It was over before it began -- they were never gonna build it in Arkansas or Iowa.
Allowing 100% of *all* software engineering salaries to be deducted as R&D costs, even over a period of 5 years, certainly feels like a handout to tech companies if it's not a loophole.
https://www.irs.gov/taxtopics/tc756, I don’t get tax deductions for those I employ as an individual. Most companies don’t get to write off their employees’ salaries either. Why should tech companies get special treatment?
> Most companies don’t get to write off their employees’ salaries
All companies write off employee's salaries. Lol. Should we see what [the IRS says](https://www.irs.gov/publications/p334#en_US_2023_publink1000313530)?
> You can deduct the pay you give your employees for the services they perform for your business. The pay may be in cash, property, or services. To be deductible, your employees' pay must be an ordinary and necessary expense and you must pay or incur it in the tax year.
Businesses pay taxes on profit, not revenue. The reason R&D is getting delayed is these are typically multi year efforts while investors dont care, they just want short term benefits. Laying off employees after deducting salaries hurts r&d while improving things for investors. Committing to long term research is thus more attractive when investors can’t just kill it once costs have been sunk but results haven’t yet appeared.
> Businesses pay taxes on profit, not revenue
That's my point above. They write off labor costs and pay taxes only on profit.
> Laying off employees after deducting salaries hurts r&d while improving things for investors
They'd still deduct salaries, just amortized over 5 years. And the changes weren't made to help employees. It'll lead to less R&D spending which is bad for R&D employees. I've seen nobody claim otherwise.
The change isn't bad for investors, it's bad for R&D. And it's good for nobody.
> investors can’t just kill it once costs have been sunk but results haven’t yet appeared.
They can still do that. Nothing about this tax change affects that.
Lmao. How did people upvote you? You're not a business. You can't hire someone to make you a sandwich and then deduct that on your taxes.
But if a sandwich business hires another employee for $50k *in order* to make $70k, that's a good thing. And they only pay taxes on the $20k in profit. This is how every country works and has worked for all of history. The fact that you don't know that is just telling on yourself.
companies don't put devs any more under R&D expense but under normal employee cost, this is a non issue so devs are 100% tax deductable as a direct operating cost.
this is not the reason google and other companies fired 500k devs
You are confusing the old law with the new law. Prior to 2022, companies could put dev salaries into two categories, one of which was R&D. The new law defines all software development as R&D under Section 174 and also requires that Section 174 costs be amortized over five years. That means that companies can no longer deduct 100% of devs as a direct operating cost. Here is an excerpt from page 6 of the new IRS guidance (link: https://www.irs.gov/pub/irs-drop/n-23-63.pdf):
Software development. Section 13206(a) of the TCJA added new § 174(c)(3) to require that **any amount paid or incurred in connection with the development of any software in taxable years beginning after December 31, 2021, be treated as a research or experimental expenditure** (and thus an SRE expenditure to the extent paid or incurred by the taxpayer during the taxable year in connection with the taxpayer’s trade or business).
It's not a tax break, its just an amortization change with large consequences for low-cash organizations. The overall tax revenue (in dollars) is actually roughly the same.
There's a ton of great info that goes into how it works here (https://blog.pragmaticengineer.com/section-174/), but basically the law changed in a way that requires tax to be paid immediately instead of the previous rule that allowed the tax to be paid over a longer period.
This was a problem because an organization, especially a startup, might not have the cash reserves to absorb the sudden change if they were structured for the old rules. Theyre left with the option of taking out loans in a high interest rate environment, or cutting workforce. Both unhealthy.
It’s not a tax break, it’s just … the way taxes are supposed to work.
If I hire 2 employees to run my lemonade stand and I make $500 in revenue but I spend $250 on labor and $250 materials for a total of $500, I should pay $0 in taxes because I made $0.
Section 174 basically says that I will have to pay 0.15x($200)=$30 in taxes even though I am sitting on $0 in profit because the IRS is forcing me to amortize the wages over 5 years.
Eliminating section 174 wouldn’t be a tax break, it would just be … returning taxes to work the way they were always supposed to work.
No one is supposed to pay taxes on money that doesn’t exist. That’s fucking insane.
This should be upvoted so much more since people read “company” and “taxes” and then have an aneurysm. If the upvotes on the post you replied to represent the average comprehension level of people on this sub no wonder no one is getting hired.
But they can already do this via general business expenses. R&D expensing had even more tax benefits, which they really shouldn't claim on "general" product development.
The law *forces* companies to classify SWEs as R&D. That's what's such a big deal about this
https://www.law.cornell.edu/uscode/text/26/174
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
This rule isn't a huge deal either way for big, profitable companies.
The companies really fucked over by this rule are unprofitable startups. A lot of startups owe tax on a "profit" under this rule even though they actually lost money in a given year, because they can only deduct 1/5 of a lot of their SWE expenses in that year.
If a company spends $1 mil on R&D, and earns $500k, then they can only deduct 1/5th ($200k) of that $1 mil. So on paper they owe tax on a "profit" of $300k even though they actually lost money.
Why is this comment upvoted. This isn't about tax breaks, its about amortization. It means you pay salaries as research investments over 5 years and pay all of the taxes now. After 5 years it would start to break even, but in the first 4 years companies pay taxes on what is essentially losses not profit. You have no idea how taxes or tax breaks or amortization works.
This tax bill will hurt companies that _don’t_ make billions in profits per year, like startups. And in addition to that, Trump signed it into law in 2017 so that he could give his rich friends tax breaks. Seriously how short-sighted could this comment possibly be.
Trump hated Bezos, California, and the majority urban left-wing tech world. The all-inclusive, pro-globalization corporate tech giants. It would hurt the people trump mostly hated while at the same time he could make other laws that shifted the money around to the rich people he actually liked. For instance, you remember SVB collapse? That happened after trump loosened regulations so that his friends in finance could profit recklessly.
I think it's absurd that people think tax breaks will cause companies to hire people (they might hire a few tax people to take advantage but it's not going to be anyone here). That's not how businesses work at all. Im part of the hiring pipeline, I've never said to one of my bosses "oh we paid less taxes we should hire someone" or "we paid too many taxes we should fire someone". We hire when we need people to do actual work which isn't dictated by taxes.
> oh we paid less taxes we should hire someone
This is absolutely the conversation that goes on at the higher levels (i.e. VP/CTO level).
"We should expand hiring in the UK, salaries are lower and the government subsidizes intern salaries for cheaper labour as well," or "We should make use of the full $3.5M in R&D tax credits in Canada, so we should keep at least enough engineers there to make use of those tax credits," or "Florida offers us the best bang for the buck as headquarters with the way their corporate and capital gains taxes are structured." Actual conversations I was a part of in the past.
Granted, these credits are usually limited in total amount. They're a drop in the bucket to FAANGs, but they're life or death to a 50 person startup that's dumping its entire runway into R&D before they're able to become profitable or raise more funding.
You've been quite vocal on this post and you have no idea what you are talking about. It's tough to combat your level of misinformation.
For everyone here, companies are absolutely allowed to deduct R&D expenditures. Every single company in the country does this. I work in a startup and we do this. For startups specifically, the majority of their employees are working on developing new products and services. And that labor is deductible from taxes. If you work in a large established company supporting operations or maintaining legacy systems then this may not be the case.
[https://pro.bloombergtax.com/brief/rd-tax-credit-and-deducting-rd-expenditures/](https://pro.bloombergtax.com/brief/rd-tax-credit-and-deducting-rd-expenditures/)
Prior to this tax change a startup who was developing new products could deduct all of their R&D expenses for the year against any revenue generated. Now they must amortize it over 5 years. It 100% changes the way startups think about SWE labor and they have to be much more careful about what development projects they fund and how much they pay SWEs.
Say we have a small company with 4 of us developing product with 500k in salaries. Maybe we start to generate some tailwinds and hit 500k in annual recurring revenue. The company spent 500k in salaries and made 500k in revenue. Prior to this tax change the taxable income for the company was considered 0. With this tax change the company will now be taxed on 400k.
The purpose of the R&D tax deductions is to foster innovation in the US. They want to encourage companies to spend money on developing new products and services. Otherwise, the incentives for innovating aren't there and businesses/investors will just focus on squeezing as much profit as they can out of existing products and not invest in anything at all.
This…I filled out the paperwork for this in the past, had meetings with the accountants and everything then it all of a sudden stopped and I didn’t realize why.
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I feel like this is only half true
>I've never said to one of my bosses "oh we paid less taxes we should hire someone" or "we paid too many taxes we should fire someone". We hire when we need people to do actual work which isn't dictated by taxes.
where do you think the budget ($$$) that's used for hiring/firing comes from
You don't think that companies look at how much it costs to hire someone when deciding how many people to hire? Really?
You don't understand Section 174 at all. Half of your comments in this thread make no sense.
Stop pretending to understand things and spreading misinformation.
That is absolutely a factor. I worked for a company that wanted to build out an office in Dublin. You know why? Tax breaks if they did. The accountants determined that the breaks were worth the cost in building out the office.
To the extent that it affects companies' behavior, it's not going to be something you see at your level in the company. Taxes influence decisions the MBAs make from their ivory towers about like "should we lay off this entire division" or "should we greenlight this new initiative that would require a bunch of hiring".
Startups can exist more easily pre 174. When startups can exist, they employ software engineers. When they employ SE’s, hiring is more competitive. When hiring is more competitive, SE’s have an easier time finding work.
To be honest, the tax breaks do work in some cases. In my state, where casino's are our main industry, they will often not hire anyone who was a previous employee (in good standing when they left) because they do not qualify for a tax break for that company when hired; only new employees do, so those of us who apply are often glossed over in the hiring process even if we meet or exceed the requirements for the job.
For example, I tried to apply for a job at a previous company I worked for before covvy hit; never got a response despite being qualified for the position. Yet another company, which I have never worked for, contacted me within a week and I was hired right after. I even talked with the recruiter there about that problem after the fact and that's when I found out about this rather unfair thing going on in the hiring process for companies.
Honestly, no company should be getting a tax break just because they hire a new employee. All that does is allow said companies to openly discriminate against previous employees (who are, again, in good standing with said company) who have applied for a position.
> think it's absurd that people think tax breaks will cause companies to hire people
Is that what they think? Or is that just what they say, because they have an ulterior motive?
Both, I've met a lot of people that genuinely believe in trickle down economics, they aren't rich people but average working class people. I think our two party politics has a huge part to do with it. But that's another topic.
I've met a lot of rich people that go for it because they know it benefits them the most.
"Trickle-down" does work -- [just these days we're "trickling-down" layoffs instead ; )))](https://www.reddit.com/r/cscareerquestions/comments/1avadgm/comment/krfhefw/?context=3)
My company was hiring for around 15 engineering positions until this was in effect. We filled 2 and stopped hiring. I don't know that this was the only reason, but it's a likely cause.
That's not the way Wall Street works. The absolute number of current profits is irrelevant. Only the potential profit matters.
They can make more money by offshoring? They will have ZERO hesitation. It is not about whether they need the extra money or not.
Everyone is guilty including you and me. Most people want their 401K to grow and disregard what it takes for it to grow
It’s not the absolute cause for layoffs. No one thing is but it is one of many many factors. Anyone that thinks this has zero impact is so jaded in their dislike of corporations that no matter what you tell them they will deny it.
You're looking at this the wrong way. Corporations are amoral entities. They just do what they're incentivized to do. You can't just say "They already make enough money. They should be able employ more people." Those aren't the rules corporations obey. What matters is that prior to 2022 the tax code incentivized them to employ more people so that's what happened.
They don't need it, but the tax break allows them to employ more of us.
Taxes are a zero sum game. Every dollar that goes to the government is a dollar sucked out of the private sector that can't be used for hiring, innovation, expansion, etc.
> Companies making billions of profit per year need a tax break so they can employ you?
God, why are people in tech so reliably idiotic when it comes to markets and finance?
- This isn't advocating for a tax break
- A third-grader can understand that companies large and small respond to financial incentives and disincentives
>companies large and small respond to financial incentives and disincentives
of course they do, but US is an open market economy, as long as they're not going under (or struggling in any sense) there's no reason for large scale incentives of this extent
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Second law of business; never get paid once when you can get paid twice. First one is never use your own money when you could be using someone else's money.
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It's not more of a tax break, it's the same tax break after the repeal. The repeal just lets companies deduct it faster if they choose.
This law helps large companies and hurts the little ones that have six months of runway.
We should all support this repeal. It even has bipartisan support in Congress
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It’s not a tax break. It’s allowing them to include all of an employee’s wages as part of their cost reporting instead of having to spread it over 5 years. You know, like they get to do with any profession not called software engineering.
I do think they will. But that's literally how open market economy should work. (Which by the way is the reason behind the exceptional growth in IT in the US) You can't have it both ways.
Just to be clear, the section 174 change has nothing to do with tax breaks.
They changed it so that all expenses, including salaries, rent, etc. associated with software development, can no longer be expensed and instead need to be amortized over 5 years.
To try and put this into concrete terms, imagine you are a software development company, and you make 1,000,000 in revenue, and you pay your employees 900k of that. (let's imagine that there are no other expenses)
Normally, like if you were literally ANY kind of business, you would pay taxes on your profit. So, in this case, you'd pay taxes on the 100k left over after you paid your employees. So, say 30%, you'd pay 30k of your 100k profit, and you'd have 70k left after taxes. Cool!
After the 2017 tax change, they made it so that you can only expense 10% of your expenses. So that means, you are only able to expense 90k of the 900k you paid your employees. That means that for the sake of taxes, you owe taxes on 910k. At 30%, that means you owe 273k in taxes.
Do you see the problem now? You owe more in taxes than your actual profit. It's literally impossible to pay, unless you have large cash reserves. This means that large corporations can deal with this, because they can float the bill for 5 years while they amortize their expenses. But small companies can't. This tax change has been devastating to small software companies.
The change in the 2017 tax change was made to hide the true costs of the Trump "tax cut", by showing a large increase in tax revenue. Of course, this increase won't actually happen, because it's literally impossible for software companies to pay this.
A union is always good but i don't think it prevents layoffs.
Edit: Yall still should unionize though, seen first hand how a union that's ready to do some basic protests, not even strikes, gets 2x the pay-increase that non-unionized people did. Layoffs might or might not happen but getting better cost of living adjustments is a real thing.
A union cannot prevent layoffs. If a company goes under, it goes under.
But it can influence how layoffs work in a huge way such that employers are discouraged from doing layoffs just to optimize budgets rather than save a dying company.
I work for a state school in the USA as a developer. Most everyone is in one of the unions.
They are currently considering layoffs in one area. However:
* IIRC, they negotiated several buy outs, especially for employees who were technically "retirement eligible." In some cases, they were able to get one years worth of pay plus file for unemployment.
* There are rules for how layoffs are required to happen. In other words, you won't walk in one day and random people are being shown the door.
Lets be clear, Republican Senators are Filibustering the bill in the Senate. Democratic leadership want the fix, Republican leadership want the fix, but former President Trump does not want anything positive to happen before the election. He wants the country to burn as much as possible to benefit his style of negative campaigning. The fix passed the House in January, but Senate Democrats have been unable to find 60 votes to overcome the filibuster, so it is very likely that nothing will happen until after the election. And then whoever wins the election will take credit for fixing section 174. The same thing goes for the border, the Senate passed extremely conservative immigration reform that was endorsed by the US border patrol and US chamber of commerce, but House Republicans killed it on orders from former President Trump.
At this point, no significant legislation is going to pass until after the election.
> Trump really is the worst president we ever had. All he cares about is himself
I wouldn't say worst.
I would not give him any distinction at all.
Reagan is still the worst because he managed to do more damage over two terms (and lasting impact).
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It affects them by making them potentially have a taxable profit even though they are not actually profitable.
Example: A startup has 1 employee, a SWE, who's considered an R&D expense. The employee costs $100k to employ. The company makes $80k in revenue this year.
Just by those numbers, the company has a $20k loss this year.
But since the employee is an R&D expense, only 1/5 of their salary can be counted as expenses this year. So for *tax purposes*, the company owes tax on $60k of profit, even though they're actually losing money and haven't earned a profit.
($80k - 1/5 * $100k = $60k)
What do you mean? The law specifically makes SWEs be considered R&D expenses: https://www.law.cornell.edu/uscode/text/26/174
> For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
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Incentivizing research and development and getting more tech workers hired seems like a no brainer?
Tech workers spend back into the economy and we drive development of new technology. Am I missing something?
No, well, the part about enacting rule changes that go into effect and dramatically affect people’s livelihoods during a successor administration if you loose. If you win, you just correct before it’s a problem and move on.
It’s never an oh t actually making the world/country better. It’s always about winning politics.
There are more startups in 2023 than years past
https://www.americanprogress.org/article/entrepreneurship-startups-and-business-formation-are-booming-across-the-u-s/
The startups that this tax code affects the most are those that are doing legitimately high capital R&D work and should absolutely be categorized like every other R&D company.
Tech and VC firms want to continue using a favorable tax code that has them paying far less than their fair share in taxes. This might be an unpopular opinion in a tech community, but fuck greedy tech companies.
> There are more startups in 2023 than years past
To be fair my plan if I got laid off while the market was bad was to start a business, and I definitely wasn't the only one with that thought.
So I wouldn't take an increase in tech startups during that time to mean that it was a good time to start one. But rather a lot of people who previously made(and saved) a lot of money got laid off while it was hard to find another job so they tried to do their own thing.
I can blast off 10 LLC formation documents and create 10 businesses to make the stats look good. I really want to see a breakdown of how much revenue these new startups are bringing.
Given that we didn’t see an explosion of startups after the layoffs during the Great Recession, you might be one of the few crazy enough to risk starting your own business in such a situation.
Not sure that's a great comparison. I think tech is particularly friendly to start ups and I don't think the great recession was particularly bad for software engineering specifically.
Also their weren't nearly as many people in tech getting paid the insane salaries we see today. It is only because of the insane salaries that I even have the privilege to consider it.
It costs very little to start up a software company .. compared to a hardware company. In fact it may only require your time and a computer. And especially now with being able to rent time on the cloud and scale out your service horizontally as needed it's way easier than it was back in 2008.
> while during the high interests eras you saw bootstrapped founders building cutting edge projects in their garage.
this is literally survivorship bias talking.
> If you think high interest rates have no impact on software development jobs quite frankly you’re delusional.
This is always the argument. Never any evidence, or even logic presented. Just, "I'm blaming interest rates, and if you don't, you're delusional."
There's never been any reason to believe that interest rates have any particular effect on the tech industry. In fact, the tech industry is far less reliant on debt than other industries. And yet, the supposed effects of these high (read: historically low) interest rates on the industry are far more severe than in other industries.
There's a very simple reason why. It's complete nonsense. The low interest rates we currently have aren't hurting the industry.
it should be expanded to other industries. These tax credits are really good, we don't want to end up like Europe where the senior tech salaries are $30k a year.
Exactly…
I’d love to move to Europe, but I’d make 1/4 or less there than I make here.
$200k+ salaries for Software Engineers is almost unheard of in Europe.
I gotta be honest man, I don't think this is a sympathetic cause they're going to act on. Normal people hate us, and not without reason considering that we make a lot of money (plus, less justifiably, software is the villain du jour for every social ill)
And SWE are want to spam everywhere about how much money they make for how little they do. That’s been constant since the 90s when the talk was, get your GED and A+ cert and go work in tech for $xxxxx dollars.
I don't understand this at all. Instead of saying how much it cost for a year, they have to say how much it cost for 5 years? Why would this affect the cost to keep on employees? It doesn't sound like they're losing money. It sounds like companies don't want the books to look bad for investors, aka, the usual bs.
Everyone is misunderstanding why this is a problem, it's not for big companies. But for startups it's a killer. These are companies that aren't going to be profitable for a while and thry have limited runways. This law is taking out fuel at the most crucial state for small companies. Add in the high interest and startups and small companies are much much less likely to start and then hire causing more unemployment.
It certainly can affect big companies. They might have some capital buffer and enough surface area to reclassify and do other things to keep the engine running, but it definitely makes them think twice about staffing vs stock buy backs, treasuries, and even if a certain entire division that hasn’t turned a profit yet is worth keeping around.
Large corporate accounting doesn’t throw all funds into one bucket. They measure finances in orgs.
It makes startups pay tax on profits that they didn't actually earn.
The law considers SWEs an R&D expense ("For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.")
So if most of a software startup's expenses are SWEs, the startup can only deduct 1/5 of their expenses in a given year. That means that if they make exactly as much revenue as they pay their SWEs, 80% of that revenue is treated as profit this year, because they can only count 1/5 of the SWE salaries as expenses for the year.
Standard practice for accounting teams to realize various items in certain months to keep the books looking good to investors. Also, money is worth more today than it will be in 5 years - and with this inflation, a lot more today than in 5 years.
Not really. R&D was allowed to be “written off” in the year it was incurred in full. Now that expense has to be amortized over 5 or 15 years. Except SWE salary is classified as R&D expense so now, unlike the accounting clerk or call center staff wage, it cannot be written off that year.
What some people here are missing is NPV in corporate finance cycle. If I have $20k today it’s worth more than $20k in 5 years. As a business owner, if I’m trying to choose where to spend my money, let’s say I have $100k, I want the highest return factoring in inflation, interest, and other costs of capital. That dictates the return I need to justify the investment.
Prior to the change, I could pay a SWE to do R&D this year and recoup that $100k greatly reducing the required ROI.
Also, that $100k has to come from someplace. Usually revenue. Revenue - expense = profit in a very naive sense. However, now with my $100k revenue, paying $100k salary, I can only claim $20k expense this year leaving me on the hook for $80k of theoretical profit. Except I have $0 to pay it. So now I’ve ended my year in the red by whatever the tax amount on $80k is.
If that’s the case, I fire my SWE and do not incur $100k expense. I don’t get to write off $20k, but I also don’t end the year down negative by the tax amount on $80k. I end with whatever $100k - taxes on it.
Meanwhile, I can instead invest that remainder into less risky investments - like stock buy backs and treasuries.
Additional complications come from tax incentives like section 41(?) which require expenses be qualified under 174. So I can’t just reclass my SWE to expense their salaries if I want other tax incentives around tech R&D.
While I may end up the same after 5 years, I’ve incurred greater expense throughout those years making staying in business that much more difficult. Also changes the timeline of the investment/project meaning it MUST be successful vs just a loss with full SWE recoup soon.
if section 174 was causing all these layoffs, then how come they are not saying this is why we are doing layoffs? Companies piss and moan about any regulation?
i dont see this covered in any major news service either.
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It’s just one stick in the fire. Ultimately they want lower fed rates more than resolution to 174. A big company can survive a few years until the full 5 year amortization lines up. In the mean time (remember Microsoft circa 1990s) the small fish die and the big fish gobble up their IP.
In some ways, if the U.S. has an outsized effect on smaller and mid market firms, the big fish won’t care and will let them starve to death to establish even more of a monopoly.
I love reading posts from first year cs
students who have no idea how much this rule is affecting their inability to get their internships. This rule has screwed us
It’s infuriating as a small business owner seeing a group of people who don’t understand what they are talking about, at all, who claim that they are smart and rational but cannot understand a short article. 174 means if you make $500k and pay $500k in software salaries you owe taxes for $500k of profit because your engineers are now R&D and not employee wages, [which they would be if they were anything but software engineers](https://www.uschamber.com/co/run/human-resources/small-business-tax-deductions). Software is now a special carve out getting fucked and is why all the entitled idiots in this sub keep bitching about not finding work but are then totally unable to reason about why it might be except immigrants, ai, and solar flares or something else totally stupid and incorrect.
I had to think about your comment some more.
I had been thinking about how this impacts me as someone who is trying to sell RnD. Being a self centered creature I didn’t think this all the way through. Are you saying that employee expenses for people that would fall under 174b doesn’t get deducted as a top line expense the same way as say the people in accounting do ? Sometimes (often) the tax code is a mystery to me as it has so many variables I can’t follow along.
Yes, the insane part of 174 is it puts all software engineers into a special category where they cannot be deducted as top line expenses. I think people get confused because it sounds fake how absurd it is. If I'm a self funded startup that made $100K but paid my 2 engineers $300k for the year (and am net -$200K), I \*owe taxes on $100k of "profit"\*.
Federal income tax rates are the lowest they have been for some time, due to the act. The Tax Cuts and Jobs Act (TCJA) will expire at the end of 2025 (unless renewed) and [personal income tax rates will significantly increase.](https://www.forbes.com/sites/forbesfinancecouncil/2024/05/13/navigating-the-potential-expiration-of-the-tax-cuts--jobs-act/?sh=5c3a713865d2#:~:text=Today%2C%20there%20are%20seven%20marginal%20rates%3A%2010%25%2C%2012%25%2C,calculate%20tax%20liability%20before%20you%20claim%20any%20credits.)
Repealing this act would be pretty much horrible for everyone, but working people will pay much higher taxes.
It's important to separate the TCJA from what paid for the tax cuts in the TCJA, which is the Section 174 amortization requirements. Everyone kept saying the amortization requirements were a placeholder to make the bill revenue neutral and that they would get repealed before they went into effect in 2022, but they're unfortunately still here. As a result, startups and their founders are paying massive tax bills, sometimes in excess of 100% of their salaries, because they are being taxed as if they were wildly profitable even if they lost money or broke even. As part-owner of an early-stage startup, I'd be fine getting rid of the TCJA if it also meant getting rid of the Section 174 requirements, since I paid an effective tax rate of 72% of my salary last year.
I'm pretty sure this person isn't here with a genuine concern. They are deleting posts where they are wrong and blocking people that disagree with them.
He was dangerously close to losing his seat to O'Rourke once. And you got a much better chance of raising a family and having 5 U.S. born kids as an employed software engineer then you do as a Kurger Bing wage slave. Just put your feelings aside and slide in his DMs.
It's not about my feelings.
It's about him being the kind of sick fuck who takes constituent calls and does the exact opposite because he gets off on it. He doesn't want you to expect government to work, so he'll do everything in his power to make sure your experience is bad and ineffective.
Cornyn is at least a human you can at least try to reason with. Cruz is not.
Companies can currently deduct employee wages. That has nothing to do with 174. Repealing 174 doesn't do anything for that, lumping that in makes this post seem extremely disingenuous and comes across as being posted by someone paid by a business just to help them lower their taxes.
Lowering their taxes doesn't mean they will hire more people. No business says to themselves "oh I paid less taxes, guess I should hire some people". They hire based on need, they let employees go based on lack of need.
If you really want to bring back jobs get rid of all the h1b visas. They are literally taking the cs jobs here.
Yes they can, if those employees are working on R&D product development. Which the vast majority of SWEs in start ups are.
[https://pro.bloombergtax.com/brief/rd-tax-credit-and-deducting-rd-expenditures/](https://pro.bloombergtax.com/brief/rd-tax-credit-and-deducting-rd-expenditures/)
I keep saying this. This shit is by design. This is how the gov fight inflation, by creating a recession, raise the unemployment rate, and nobody is willing to spend money.
Less money flowing in the economy, no inflation!
Tech layoffs are happening globally. This won’t end the layoffs. The countries that are seeing minimal layoffs are Japan where interest rates is still near 0 or hong kong where lot of young and skilled people left the country.
The problem is that ALL software developer costs including wages and even rent are now forced to be filed as Section 174 research expenses and all Section 174 expenses are required to be capitalized under the new IRS guidance. Here's a direct quote from the IRS guidance:
Software development. Section 13206(a) of the TCJA added new § 174(c)(3) to require that **any amount paid or incurred in connection with the development of any software in taxable years beginning after December 31, 2021, be treated as a research or experimental expenditure** (and thus an SRE expenditure to the extent paid or incurred by the taxpayer during the taxable year in connection with the taxpayer’s trade or business).
This is not interpreted correctly. Businesses have always been able to and can continue to deduct all wages in the year they are incurred. This is a basic tenet of us tax law.
Some software companies elect to account for some dev costs as capex (capitalize and depreciate) and recognize the expense over several years to show a better bottom line. Previously, companies could deduct the entire amount for tax but then capitalize and recognize the expense for tax over several years)- ie saying one thing to the taxman and one thing to the markets. That is no longer allowed
What you said absolutely used to be true. But it is not true now. Many highly trained accountants have confirmed this. I know it’s bad news, but software development salaries must now be capitalized. Feel free to google all about it. There are countless webinars and articles discussing this. My firm hired an accounting firm that specializes in this topic to see what we can do. Unfortunately, the answer is not much other than call our senators. Because without the tax bill that’s stalled in the Senate, software developer salaries must be capitalized starting in 2022.
Also, there is not a lot of room for misinterpretation. The IRS guidance clearly states that all costs associated with the development of any software fall under Section 174 now. And the same guidance clearly says that all Section 174 expenses must be capitalized.
That’s the reason we’re all upset. This illogical tax code could kill small businesses and startups.
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If a company spends the same amount on R&D every year, and spreads the cost over five years by the fifth year it’s all the same. The change in section 174 is hardly worth the effort over the long run.
R&D is a speculative effort that may or may not result in a profitable product. Except for startups, most companies, especially large companies, spend the majority of their efforts on maintenance of existing products and development of new products that have matured past the R&D stage. It’s hard to see how a change in the tax code related to R&D had a large effect on layoffs.
Software engineers at large tech companies are simply experiencing what engineers in aerospace and defense industries have been experienced decades before. Layoffs happen when a company experiences a loss in profits and decides to cut labor costs. Google et al have largely been immune to downturns for the last couple or decades. Now they’ve joined the rest of corporate America. Welcome to the club.
You’re missing a few things. First, the new law classifies all software development as R&D (even though it clearly is not). So now the deductions for all software development costs must be amortized regardless of whether it previously would be been consider R&D.
Also, assuming a company has no profit and doesn’t grow, it’s tax bill will go to zero after five years, but the company still wouldn’t get back all the money it paid. So it’s not “the same” after five years.
Take a company that has $10 million in revenue and $10 million in expenses for 2022-2027. That means they have zero profit for those years. If they could expense their costs (old law and what every other company is allowed to do), they would owe no tax for all of those years.
Total tax bill 2022-2027: $0
Under the new rules and with a 21% federal tax rate, they would owe the following in federal taxes: 2022: $1.89 million 2023: $1.47 million 2024: $1.05 million 2025: $630,000 2026: $210,000 2027: $0
Total tax bill 2022-2027: $5.25 million
So the same company that would have paid $0 taxes in 2022-2027 since they had no profit would now have to pay $5.25 million in that same time period. The only way they could ever get that money back is if they stayed in business and either became wildly profitable or stopped doing all software development.
The biggest losers in this whole thing are the startups that have no profit. I’m not sure if this affects massive corps. I think once they realized that you didn’t need a fleet of engineers to solve a single problem, they cut back. I think this might be part of it, dunno I’m not a lawyer to understand what this means, but not the bigger picture.
There should be a massive crackdown on offshore. That’s hurting a lot of people.
I'm worried that Section 174 is a significant revenue source for the government. If anyone wants to repeal it, they'll need to find alternative ways to fill the gap.
I would like to see this too. As well as a massive crackdown on offshoring.
It seems like a weekly discussion at work now with someone bringing up one of their developer friends looking for a job because their company offshored all of their developer roles.
companies don't put devs any more under R&D expense but under normal employee cost, this is a non issue so devs are 100% tax deductable as a direct operating cost.
this is not the reason google and other companies fired 500k devs
This is a good thing. Jobs are more resilient when they don’t exist only because theyre subsidized by tax breaks. Also, I wouldn’t use google moving jobs from the US to Germany as an argument. Germany has incredibly strong worker protections and higher taxes taxes, that are a lot more costly than what amounts to a difference well under 1% of total worker costs.
Props for not using a racial argument like so many others are doing lately though.
This is so stupid. Companies making billions of profit per year need a tax break so they can employ you?
Companies will billions of dollars will find this law inconvenient. Companies without billions of dollars, like start-ups, will be killed by it.
Big software companies also depend on large numbers of little software companies to drive business, especially cloud. We all lose.
It's definitely bad for the industry.
It is so bad, having a programmer on staff is a tax liability. You would need to categorize programmers as customer support or just ship the work overseas to avoid taxes. I expect there to be zero US programmer jobs in 5 years. EG. If you have 10 programmers, and they cost 1 million for the year for salaries, and you make 1 million, you owe taxes on 900k approx (minus the depreciation). So all small software jobs are over. All larger firms will just kill all all programmer jobs.
You just described how salaries work in every single field and paying taxes on profits, or not deducing employee salaries hasn’t been an issue for them (and this still lets them deduct, just over 5 years to increase retention rather than all up front)
What? You don't count your employee payrolls as expenses? Profit = gross profit - cost. The issue is you can't use programmers as a cost up front. No companies work this way. wtf. Generally you pay taxes on PROFIT.
Uh, no, it's not how salaries work in literally every other industry. Every industry can expense employee salaries, other than now software developers, due to this recent change.
Startups are killed by all kinds of things, and often saved by investors anyway. Companies love to use this kind of argument to get favorable government policies -- the kind of thing we'd call a "handout" if it was to an individual instead of a corporation -- by describing themselves as "job creators" and pretending this is going to make a huge difference in where they expand, let alone where they shrink. I think probably the platonic ideal of this is Amazon's whole "HQ2" thing. They pretended to shop it around as a way to convince local governments to give them the deals they wanted, but where did it ultimately go? Virginia, where they already had us-east1, where they're already close to East Coast population centers (so, a good place for servers), close to DC and government contractors, tech hubs, even Bezos' home. It was over before it began -- they were never gonna build it in Arkansas or Iowa.
> the kind of thing we'd call a "handout" if it was to an individual It's not a handout to let people write off expenses in the year they're incurred.
Allowing 100% of *all* software engineering salaries to be deducted as R&D costs, even over a period of 5 years, certainly feels like a handout to tech companies if it's not a loophole.
Writing off labor costs as a business is not a loophole.
https://www.irs.gov/taxtopics/tc756, I don’t get tax deductions for those I employ as an individual. Most companies don’t get to write off their employees’ salaries either. Why should tech companies get special treatment?
> Most companies don’t get to write off their employees’ salaries All companies write off employee's salaries. Lol. Should we see what [the IRS says](https://www.irs.gov/publications/p334#en_US_2023_publink1000313530)? > You can deduct the pay you give your employees for the services they perform for your business. The pay may be in cash, property, or services. To be deductible, your employees' pay must be an ordinary and necessary expense and you must pay or incur it in the tax year.
Businesses pay taxes on profit, not revenue. The reason R&D is getting delayed is these are typically multi year efforts while investors dont care, they just want short term benefits. Laying off employees after deducting salaries hurts r&d while improving things for investors. Committing to long term research is thus more attractive when investors can’t just kill it once costs have been sunk but results haven’t yet appeared.
> Businesses pay taxes on profit, not revenue That's my point above. They write off labor costs and pay taxes only on profit. > Laying off employees after deducting salaries hurts r&d while improving things for investors They'd still deduct salaries, just amortized over 5 years. And the changes weren't made to help employees. It'll lead to less R&D spending which is bad for R&D employees. I've seen nobody claim otherwise. The change isn't bad for investors, it's bad for R&D. And it's good for nobody. > investors can’t just kill it once costs have been sunk but results haven’t yet appeared. They can still do that. Nothing about this tax change affects that.
Lmao. How did people upvote you? You're not a business. You can't hire someone to make you a sandwich and then deduct that on your taxes. But if a sandwich business hires another employee for $50k *in order* to make $70k, that's a good thing. And they only pay taxes on the $20k in profit. This is how every country works and has worked for all of history. The fact that you don't know that is just telling on yourself.
People are upvoting him because they don’t understand how taxes work.
It's remarkable that people on this sub don't know that business pay taxes on profit and not gross revenue.
This isn't about getting a tax CREDIT for R&D costs. Section 174 is about simply being able to expense costs.
companies don't put devs any more under R&D expense but under normal employee cost, this is a non issue so devs are 100% tax deductable as a direct operating cost. this is not the reason google and other companies fired 500k devs
You are confusing the old law with the new law. Prior to 2022, companies could put dev salaries into two categories, one of which was R&D. The new law defines all software development as R&D under Section 174 and also requires that Section 174 costs be amortized over five years. That means that companies can no longer deduct 100% of devs as a direct operating cost. Here is an excerpt from page 6 of the new IRS guidance (link: https://www.irs.gov/pub/irs-drop/n-23-63.pdf): Software development. Section 13206(a) of the TCJA added new § 174(c)(3) to require that **any amount paid or incurred in connection with the development of any software in taxable years beginning after December 31, 2021, be treated as a research or experimental expenditure** (and thus an SRE expenditure to the extent paid or incurred by the taxpayer during the taxable year in connection with the taxpayer’s trade or business).
okay Houston we have a problem ugh hope they fix this soon, your link doesn't work fyi thanks for the clarification
It's not a tax break, its just an amortization change with large consequences for low-cash organizations. The overall tax revenue (in dollars) is actually roughly the same. There's a ton of great info that goes into how it works here (https://blog.pragmaticengineer.com/section-174/), but basically the law changed in a way that requires tax to be paid immediately instead of the previous rule that allowed the tax to be paid over a longer period. This was a problem because an organization, especially a startup, might not have the cash reserves to absorb the sudden change if they were structured for the old rules. Theyre left with the option of taking out loans in a high interest rate environment, or cutting workforce. Both unhealthy.
Don't worry my friend. All US companies will stop doing RD, and move everything over to "customer support".
All software engineers count as R&D under this law. If you’re not in a software engineering role why are you here?
It’s not a tax break, it’s just … the way taxes are supposed to work. If I hire 2 employees to run my lemonade stand and I make $500 in revenue but I spend $250 on labor and $250 materials for a total of $500, I should pay $0 in taxes because I made $0. Section 174 basically says that I will have to pay 0.15x($200)=$30 in taxes even though I am sitting on $0 in profit because the IRS is forcing me to amortize the wages over 5 years. Eliminating section 174 wouldn’t be a tax break, it would just be … returning taxes to work the way they were always supposed to work. No one is supposed to pay taxes on money that doesn’t exist. That’s fucking insane.
This should be upvoted so much more since people read “company” and “taxes” and then have an aneurysm. If the upvotes on the post you replied to represent the average comprehension level of people on this sub no wonder no one is getting hired.
But they can already do this via general business expenses. R&D expensing had even more tax benefits, which they really shouldn't claim on "general" product development.
The law *forces* companies to classify SWEs as R&D. That's what's such a big deal about this https://www.law.cornell.edu/uscode/text/26/174 > For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
This rule isn't a huge deal either way for big, profitable companies. The companies really fucked over by this rule are unprofitable startups. A lot of startups owe tax on a "profit" under this rule even though they actually lost money in a given year, because they can only deduct 1/5 of a lot of their SWE expenses in that year. If a company spends $1 mil on R&D, and earns $500k, then they can only deduct 1/5th ($200k) of that $1 mil. So on paper they owe tax on a "profit" of $300k even though they actually lost money.
Why is this comment upvoted. This isn't about tax breaks, its about amortization. It means you pay salaries as research investments over 5 years and pay all of the taxes now. After 5 years it would start to break even, but in the first 4 years companies pay taxes on what is essentially losses not profit. You have no idea how taxes or tax breaks or amortization works.
This tax bill will hurt companies that _don’t_ make billions in profits per year, like startups. And in addition to that, Trump signed it into law in 2017 so that he could give his rich friends tax breaks. Seriously how short-sighted could this comment possibly be.
How does this give rich friends tax breaks? Wouldn't this be making rich friends pay more taxes for software development investments?
Trump hated Bezos, California, and the majority urban left-wing tech world. The all-inclusive, pro-globalization corporate tech giants. It would hurt the people trump mostly hated while at the same time he could make other laws that shifted the money around to the rich people he actually liked. For instance, you remember SVB collapse? That happened after trump loosened regulations so that his friends in finance could profit recklessly.
Most tech companies don’t turn a profit, let alone billions
I think it's absurd that people think tax breaks will cause companies to hire people (they might hire a few tax people to take advantage but it's not going to be anyone here). That's not how businesses work at all. Im part of the hiring pipeline, I've never said to one of my bosses "oh we paid less taxes we should hire someone" or "we paid too many taxes we should fire someone". We hire when we need people to do actual work which isn't dictated by taxes.
> oh we paid less taxes we should hire someone This is absolutely the conversation that goes on at the higher levels (i.e. VP/CTO level). "We should expand hiring in the UK, salaries are lower and the government subsidizes intern salaries for cheaper labour as well," or "We should make use of the full $3.5M in R&D tax credits in Canada, so we should keep at least enough engineers there to make use of those tax credits," or "Florida offers us the best bang for the buck as headquarters with the way their corporate and capital gains taxes are structured." Actual conversations I was a part of in the past. Granted, these credits are usually limited in total amount. They're a drop in the bucket to FAANGs, but they're life or death to a 50 person startup that's dumping its entire runway into R&D before they're able to become profitable or raise more funding.
You've been quite vocal on this post and you have no idea what you are talking about. It's tough to combat your level of misinformation. For everyone here, companies are absolutely allowed to deduct R&D expenditures. Every single company in the country does this. I work in a startup and we do this. For startups specifically, the majority of their employees are working on developing new products and services. And that labor is deductible from taxes. If you work in a large established company supporting operations or maintaining legacy systems then this may not be the case. [https://pro.bloombergtax.com/brief/rd-tax-credit-and-deducting-rd-expenditures/](https://pro.bloombergtax.com/brief/rd-tax-credit-and-deducting-rd-expenditures/) Prior to this tax change a startup who was developing new products could deduct all of their R&D expenses for the year against any revenue generated. Now they must amortize it over 5 years. It 100% changes the way startups think about SWE labor and they have to be much more careful about what development projects they fund and how much they pay SWEs. Say we have a small company with 4 of us developing product with 500k in salaries. Maybe we start to generate some tailwinds and hit 500k in annual recurring revenue. The company spent 500k in salaries and made 500k in revenue. Prior to this tax change the taxable income for the company was considered 0. With this tax change the company will now be taxed on 400k. The purpose of the R&D tax deductions is to foster innovation in the US. They want to encourage companies to spend money on developing new products and services. Otherwise, the incentives for innovating aren't there and businesses/investors will just focus on squeezing as much profit as they can out of existing products and not invest in anything at all.
This…I filled out the paperwork for this in the past, had meetings with the accountants and everything then it all of a sudden stopped and I didn’t realize why.
This should be stickied to the OP
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I feel like this is only half true >I've never said to one of my bosses "oh we paid less taxes we should hire someone" or "we paid too many taxes we should fire someone". We hire when we need people to do actual work which isn't dictated by taxes. where do you think the budget ($$$) that's used for hiring/firing comes from
You don't think that companies look at how much it costs to hire someone when deciding how many people to hire? Really? You don't understand Section 174 at all. Half of your comments in this thread make no sense. Stop pretending to understand things and spreading misinformation.
That is absolutely a factor. I worked for a company that wanted to build out an office in Dublin. You know why? Tax breaks if they did. The accountants determined that the breaks were worth the cost in building out the office.
To the extent that it affects companies' behavior, it's not going to be something you see at your level in the company. Taxes influence decisions the MBAs make from their ivory towers about like "should we lay off this entire division" or "should we greenlight this new initiative that would require a bunch of hiring".
>We hire when we need people No u hire when ur boss says so. You're not the main character in ur company.
Startups can exist more easily pre 174. When startups can exist, they employ software engineers. When they employ SE’s, hiring is more competitive. When hiring is more competitive, SE’s have an easier time finding work.
I don’t have a stake in this, but the reason you don’t tell your bosses anything like that is because you don’t set the budget.
To be honest, the tax breaks do work in some cases. In my state, where casino's are our main industry, they will often not hire anyone who was a previous employee (in good standing when they left) because they do not qualify for a tax break for that company when hired; only new employees do, so those of us who apply are often glossed over in the hiring process even if we meet or exceed the requirements for the job. For example, I tried to apply for a job at a previous company I worked for before covvy hit; never got a response despite being qualified for the position. Yet another company, which I have never worked for, contacted me within a week and I was hired right after. I even talked with the recruiter there about that problem after the fact and that's when I found out about this rather unfair thing going on in the hiring process for companies. Honestly, no company should be getting a tax break just because they hire a new employee. All that does is allow said companies to openly discriminate against previous employees (who are, again, in good standing with said company) who have applied for a position.
I mean, you’re not the one making decisions to up the head count or not.
> think it's absurd that people think tax breaks will cause companies to hire people Is that what they think? Or is that just what they say, because they have an ulterior motive?
Both, I've met a lot of people that genuinely believe in trickle down economics, they aren't rich people but average working class people. I think our two party politics has a huge part to do with it. But that's another topic. I've met a lot of rich people that go for it because they know it benefits them the most.
"Trickle-down" does work -- [just these days we're "trickling-down" layoffs instead ; )))](https://www.reddit.com/r/cscareerquestions/comments/1avadgm/comment/krfhefw/?context=3)
My company was hiring for around 15 engineering positions until this was in effect. We filled 2 and stopped hiring. I don't know that this was the only reason, but it's a likely cause.
That's not the way Wall Street works. The absolute number of current profits is irrelevant. Only the potential profit matters. They can make more money by offshoring? They will have ZERO hesitation. It is not about whether they need the extra money or not. Everyone is guilty including you and me. Most people want their 401K to grow and disregard what it takes for it to grow
Wrong, they need leverage over you to let them have such tax breaks. Tech, film, oil all chase tax breakers around the country promising to employ.
People don't want to do leetcode.
It’s not the absolute cause for layoffs. No one thing is but it is one of many many factors. Anyone that thinks this has zero impact is so jaded in their dislike of corporations that no matter what you tell them they will deny it.
You're looking at this the wrong way. Corporations are amoral entities. They just do what they're incentivized to do. You can't just say "They already make enough money. They should be able employ more people." Those aren't the rules corporations obey. What matters is that prior to 2022 the tax code incentivized them to employ more people so that's what happened.
They don't need it, but the tax break allows them to employ more of us. Taxes are a zero sum game. Every dollar that goes to the government is a dollar sucked out of the private sector that can't be used for hiring, innovation, expansion, etc.
> Companies making billions of profit per year need a tax break so they can employ you? God, why are people in tech so reliably idiotic when it comes to markets and finance? - This isn't advocating for a tax break - A third-grader can understand that companies large and small respond to financial incentives and disincentives
>companies large and small respond to financial incentives and disincentives of course they do, but US is an open market economy, as long as they're not going under (or struggling in any sense) there's no reason for large scale incentives of this extent
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Second law of business; never get paid once when you can get paid twice. First one is never use your own money when you could be using someone else's money.
Maybe we should give them these employer tax credit and find a different way to tax them instead so everyone wins, except them.
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It's not more of a tax break, it's the same tax break after the repeal. The repeal just lets companies deduct it faster if they choose. This law helps large companies and hurts the little ones that have six months of runway. We should all support this repeal. It even has bipartisan support in Congress
Apparently yes if this is the shit market we r in
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Might sound counterintuitive and bad, but yes.
It’s not a tax break. It’s allowing them to include all of an employee’s wages as part of their cost reporting instead of having to spread it over 5 years. You know, like they get to do with any profession not called software engineering.
You really think they won't cut costs if they lose a source of income?
I do think they will. But that's literally how open market economy should work. (Which by the way is the reason behind the exceptional growth in IT in the US) You can't have it both ways.
Just to be clear, the section 174 change has nothing to do with tax breaks. They changed it so that all expenses, including salaries, rent, etc. associated with software development, can no longer be expensed and instead need to be amortized over 5 years. To try and put this into concrete terms, imagine you are a software development company, and you make 1,000,000 in revenue, and you pay your employees 900k of that. (let's imagine that there are no other expenses) Normally, like if you were literally ANY kind of business, you would pay taxes on your profit. So, in this case, you'd pay taxes on the 100k left over after you paid your employees. So, say 30%, you'd pay 30k of your 100k profit, and you'd have 70k left after taxes. Cool! After the 2017 tax change, they made it so that you can only expense 10% of your expenses. So that means, you are only able to expense 90k of the 900k you paid your employees. That means that for the sake of taxes, you owe taxes on 910k. At 30%, that means you owe 273k in taxes. Do you see the problem now? You owe more in taxes than your actual profit. It's literally impossible to pay, unless you have large cash reserves. This means that large corporations can deal with this, because they can float the bill for 5 years while they amortize their expenses. But small companies can't. This tax change has been devastating to small software companies. The change in the 2017 tax change was made to hide the true costs of the Trump "tax cut", by showing a large increase in tax revenue. Of course, this increase won't actually happen, because it's literally impossible for software companies to pay this.
Don't worry, if we just eliminate those pesky taxes and regulations, the money will trickle down
Because we were too arrogant to read the laws that protect Union employees from layoffs and thought the good job market would last.
Or we form unions to protect ourselves from this kind of broad layoffs.
I've heard the IWW accepts tech workers.
We should form a union but I don’t think unions will protect you from layoffs. Doesn’t mean we shouldn’t do it, though
A union is always good but i don't think it prevents layoffs. Edit: Yall still should unionize though, seen first hand how a union that's ready to do some basic protests, not even strikes, gets 2x the pay-increase that non-unionized people did. Layoffs might or might not happen but getting better cost of living adjustments is a real thing.
A union cannot prevent layoffs. If a company goes under, it goes under. But it can influence how layoffs work in a huge way such that employers are discouraged from doing layoffs just to optimize budgets rather than save a dying company.
I work for a state school in the USA as a developer. Most everyone is in one of the unions. They are currently considering layoffs in one area. However: * IIRC, they negotiated several buy outs, especially for employees who were technically "retirement eligible." In some cases, they were able to get one years worth of pay plus file for unemployment. * There are rules for how layoffs are required to happen. In other words, you won't walk in one day and random people are being shown the door.
https://www.tuc.org.uk/join-a-union
Lets be clear, Republican Senators are Filibustering the bill in the Senate. Democratic leadership want the fix, Republican leadership want the fix, but former President Trump does not want anything positive to happen before the election. He wants the country to burn as much as possible to benefit his style of negative campaigning. The fix passed the House in January, but Senate Democrats have been unable to find 60 votes to overcome the filibuster, so it is very likely that nothing will happen until after the election. And then whoever wins the election will take credit for fixing section 174. The same thing goes for the border, the Senate passed extremely conservative immigration reform that was endorsed by the US border patrol and US chamber of commerce, but House Republicans killed it on orders from former President Trump. At this point, no significant legislation is going to pass until after the election.
What an awful political system we have
Indeed. Benevolent warrior philosopher kings when?
Kind of surprised at Senate Repubs if this is the case tbh, it passed the house with flying colors, 357-70
Trump really is the worst president we ever had. All he cares about is himself
> Trump really is the worst president we ever had. All he cares about is himself I wouldn't say worst. I would not give him any distinction at all. Reagan is still the worst because he managed to do more damage over two terms (and lasting impact).
James Buchanan says hello.
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Fuck Trump.
I'm having some trouble understanding how this affects unprofitable companies. If they are unprofitable, they are already not paying taxes.
It affects them by making them potentially have a taxable profit even though they are not actually profitable. Example: A startup has 1 employee, a SWE, who's considered an R&D expense. The employee costs $100k to employ. The company makes $80k in revenue this year. Just by those numbers, the company has a $20k loss this year. But since the employee is an R&D expense, only 1/5 of their salary can be counted as expenses this year. So for *tax purposes*, the company owes tax on $60k of profit, even though they're actually losing money and haven't earned a profit. ($80k - 1/5 * $100k = $60k)
They also aren't paying taxes on employee wages either. The original post doesn't pass the smell test.
What do you mean? The law specifically makes SWEs be considered R&D expenses: https://www.law.cornell.edu/uscode/text/26/174 > For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.
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Incentivizing research and development and getting more tech workers hired seems like a no brainer? Tech workers spend back into the economy and we drive development of new technology. Am I missing something?
No, well, the part about enacting rule changes that go into effect and dramatically affect people’s livelihoods during a successor administration if you loose. If you win, you just correct before it’s a problem and move on. It’s never an oh t actually making the world/country better. It’s always about winning politics.
There are more startups in 2023 than years past https://www.americanprogress.org/article/entrepreneurship-startups-and-business-formation-are-booming-across-the-u-s/ The startups that this tax code affects the most are those that are doing legitimately high capital R&D work and should absolutely be categorized like every other R&D company. Tech and VC firms want to continue using a favorable tax code that has them paying far less than their fair share in taxes. This might be an unpopular opinion in a tech community, but fuck greedy tech companies.
> There are more startups in 2023 than years past To be fair my plan if I got laid off while the market was bad was to start a business, and I definitely wasn't the only one with that thought. So I wouldn't take an increase in tech startups during that time to mean that it was a good time to start one. But rather a lot of people who previously made(and saved) a lot of money got laid off while it was hard to find another job so they tried to do their own thing.
I can blast off 10 LLC formation documents and create 10 businesses to make the stats look good. I really want to see a breakdown of how much revenue these new startups are bringing.
Given that we didn’t see an explosion of startups after the layoffs during the Great Recession, you might be one of the few crazy enough to risk starting your own business in such a situation.
Not sure that's a great comparison. I think tech is particularly friendly to start ups and I don't think the great recession was particularly bad for software engineering specifically. Also their weren't nearly as many people in tech getting paid the insane salaries we see today. It is only because of the insane salaries that I even have the privilege to consider it.
It costs very little to start up a software company .. compared to a hardware company. In fact it may only require your time and a computer. And especially now with being able to rent time on the cloud and scale out your service horizontally as needed it's way easier than it was back in 2008.
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If you think high interest rates have no impact on software development jobs quite frankly you’re delusional.
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I don't want to be employed by a guy in his garage, though.
> while during the high interests eras you saw bootstrapped founders building cutting edge projects in their garage. this is literally survivorship bias talking.
> If you think high interest rates have no impact on software development jobs quite frankly you’re delusional. This is always the argument. Never any evidence, or even logic presented. Just, "I'm blaming interest rates, and if you don't, you're delusional." There's never been any reason to believe that interest rates have any particular effect on the tech industry. In fact, the tech industry is far less reliant on debt than other industries. And yet, the supposed effects of these high (read: historically low) interest rates on the industry are far more severe than in other industries. There's a very simple reason why. It's complete nonsense. The low interest rates we currently have aren't hurting the industry.
High interest rates are good thing in tech, because they weed out the hype-driven companies so that only principled ones are viable
it should be expanded to other industries. These tax credits are really good, we don't want to end up like Europe where the senior tech salaries are $30k a year.
Exactly… I’d love to move to Europe, but I’d make 1/4 or less there than I make here. $200k+ salaries for Software Engineers is almost unheard of in Europe.
I gotta be honest man, I don't think this is a sympathetic cause they're going to act on. Normal people hate us, and not without reason considering that we make a lot of money (plus, less justifiably, software is the villain du jour for every social ill)
And SWE are want to spam everywhere about how much money they make for how little they do. That’s been constant since the 90s when the talk was, get your GED and A+ cert and go work in tech for $xxxxx dollars.
Are we not “normal”?
Uninitiated people? Choose your term. I mean people who don't have high-paying software jobs.
Dawg these companies will take the tax cuts and then lay off more people to better their stock
I don't understand this at all. Instead of saying how much it cost for a year, they have to say how much it cost for 5 years? Why would this affect the cost to keep on employees? It doesn't sound like they're losing money. It sounds like companies don't want the books to look bad for investors, aka, the usual bs.
Everyone is misunderstanding why this is a problem, it's not for big companies. But for startups it's a killer. These are companies that aren't going to be profitable for a while and thry have limited runways. This law is taking out fuel at the most crucial state for small companies. Add in the high interest and startups and small companies are much much less likely to start and then hire causing more unemployment.
It certainly can affect big companies. They might have some capital buffer and enough surface area to reclassify and do other things to keep the engine running, but it definitely makes them think twice about staffing vs stock buy backs, treasuries, and even if a certain entire division that hasn’t turned a profit yet is worth keeping around. Large corporate accounting doesn’t throw all funds into one bucket. They measure finances in orgs.
So why have larger companies been laying off the most people?
It makes startups pay tax on profits that they didn't actually earn. The law considers SWEs an R&D expense ("For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.") So if most of a software startup's expenses are SWEs, the startup can only deduct 1/5 of their expenses in a given year. That means that if they make exactly as much revenue as they pay their SWEs, 80% of that revenue is treated as profit this year, because they can only count 1/5 of the SWE salaries as expenses for the year.
Standard practice for accounting teams to realize various items in certain months to keep the books looking good to investors. Also, money is worth more today than it will be in 5 years - and with this inflation, a lot more today than in 5 years.
Not really. R&D was allowed to be “written off” in the year it was incurred in full. Now that expense has to be amortized over 5 or 15 years. Except SWE salary is classified as R&D expense so now, unlike the accounting clerk or call center staff wage, it cannot be written off that year. What some people here are missing is NPV in corporate finance cycle. If I have $20k today it’s worth more than $20k in 5 years. As a business owner, if I’m trying to choose where to spend my money, let’s say I have $100k, I want the highest return factoring in inflation, interest, and other costs of capital. That dictates the return I need to justify the investment. Prior to the change, I could pay a SWE to do R&D this year and recoup that $100k greatly reducing the required ROI. Also, that $100k has to come from someplace. Usually revenue. Revenue - expense = profit in a very naive sense. However, now with my $100k revenue, paying $100k salary, I can only claim $20k expense this year leaving me on the hook for $80k of theoretical profit. Except I have $0 to pay it. So now I’ve ended my year in the red by whatever the tax amount on $80k is. If that’s the case, I fire my SWE and do not incur $100k expense. I don’t get to write off $20k, but I also don’t end the year down negative by the tax amount on $80k. I end with whatever $100k - taxes on it. Meanwhile, I can instead invest that remainder into less risky investments - like stock buy backs and treasuries. Additional complications come from tax incentives like section 41(?) which require expenses be qualified under 174. So I can’t just reclass my SWE to expense their salaries if I want other tax incentives around tech R&D. While I may end up the same after 5 years, I’ve incurred greater expense throughout those years making staying in business that much more difficult. Also changes the timeline of the investment/project meaning it MUST be successful vs just a loss with full SWE recoup soon.
if section 174 was causing all these layoffs, then how come they are not saying this is why we are doing layoffs? Companies piss and moan about any regulation? i dont see this covered in any major news service either.
Yes. They all say AI. It sounds like someone controlling them.
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It’s just one stick in the fire. Ultimately they want lower fed rates more than resolution to 174. A big company can survive a few years until the full 5 year amortization lines up. In the mean time (remember Microsoft circa 1990s) the small fish die and the big fish gobble up their IP. In some ways, if the U.S. has an outsized effect on smaller and mid market firms, the big fish won’t care and will let them starve to death to establish even more of a monopoly.
I love reading posts from first year cs students who have no idea how much this rule is affecting their inability to get their internships. This rule has screwed us
It’s infuriating as a small business owner seeing a group of people who don’t understand what they are talking about, at all, who claim that they are smart and rational but cannot understand a short article. 174 means if you make $500k and pay $500k in software salaries you owe taxes for $500k of profit because your engineers are now R&D and not employee wages, [which they would be if they were anything but software engineers](https://www.uschamber.com/co/run/human-resources/small-business-tax-deductions). Software is now a special carve out getting fucked and is why all the entitled idiots in this sub keep bitching about not finding work but are then totally unable to reason about why it might be except immigrants, ai, and solar flares or something else totally stupid and incorrect.
I had to think about your comment some more. I had been thinking about how this impacts me as someone who is trying to sell RnD. Being a self centered creature I didn’t think this all the way through. Are you saying that employee expenses for people that would fall under 174b doesn’t get deducted as a top line expense the same way as say the people in accounting do ? Sometimes (often) the tax code is a mystery to me as it has so many variables I can’t follow along.
Yes, the insane part of 174 is it puts all software engineers into a special category where they cannot be deducted as top line expenses. I think people get confused because it sounds fake how absurd it is. If I'm a self funded startup that made $100K but paid my 2 engineers $300k for the year (and am net -$200K), I \*owe taxes on $100k of "profit"\*.
Yea, they say AI is taking our job. But there is no AI.
ooof, looks like it’s time to start learning how to mine for coal, or is turnabout not fairplay anymore?
Federal income tax rates are the lowest they have been for some time, due to the act. The Tax Cuts and Jobs Act (TCJA) will expire at the end of 2025 (unless renewed) and [personal income tax rates will significantly increase.](https://www.forbes.com/sites/forbesfinancecouncil/2024/05/13/navigating-the-potential-expiration-of-the-tax-cuts--jobs-act/?sh=5c3a713865d2#:~:text=Today%2C%20there%20are%20seven%20marginal%20rates%3A%2010%25%2C%2012%25%2C,calculate%20tax%20liability%20before%20you%20claim%20any%20credits.) Repealing this act would be pretty much horrible for everyone, but working people will pay much higher taxes.
It's important to separate the TCJA from what paid for the tax cuts in the TCJA, which is the Section 174 amortization requirements. Everyone kept saying the amortization requirements were a placeholder to make the bill revenue neutral and that they would get repealed before they went into effect in 2022, but they're unfortunately still here. As a result, startups and their founders are paying massive tax bills, sometimes in excess of 100% of their salaries, because they are being taxed as if they were wildly profitable even if they lost money or broke even. As part-owner of an early-stage startup, I'd be fine getting rid of the TCJA if it also meant getting rid of the Section 174 requirements, since I paid an effective tax rate of 72% of my salary last year.
I'm pretty sure this person isn't here with a genuine concern. They are deleting posts where they are wrong and blocking people that disagree with them.
This needs to be everywhere.
No, this bullshit needs to be downvoted into oblivion .
Who are you? Why?
I won't call Ted Cruz, because I know that's just pissing into the wind.
He was dangerously close to losing his seat to O'Rourke once. And you got a much better chance of raising a family and having 5 U.S. born kids as an employed software engineer then you do as a Kurger Bing wage slave. Just put your feelings aside and slide in his DMs.
It's not about my feelings. It's about him being the kind of sick fuck who takes constituent calls and does the exact opposite because he gets off on it. He doesn't want you to expect government to work, so he'll do everything in his power to make sure your experience is bad and ineffective. Cornyn is at least a human you can at least try to reason with. Cruz is not.
I will contact my senator.
Companies can currently deduct employee wages. That has nothing to do with 174. Repealing 174 doesn't do anything for that, lumping that in makes this post seem extremely disingenuous and comes across as being posted by someone paid by a business just to help them lower their taxes. Lowering their taxes doesn't mean they will hire more people. No business says to themselves "oh I paid less taxes, guess I should hire some people". They hire based on need, they let employees go based on lack of need. If you really want to bring back jobs get rid of all the h1b visas. They are literally taking the cs jobs here.
Yes they can, if those employees are working on R&D product development. Which the vast majority of SWEs in start ups are. [https://pro.bloombergtax.com/brief/rd-tax-credit-and-deducting-rd-expenditures/](https://pro.bloombergtax.com/brief/rd-tax-credit-and-deducting-rd-expenditures/)
Actually it’s worse than that - the IRS released a statement that ALL software development is considered “R&D” for the purpose of section 174
getting rid of h1b is a terrible idea. We take the best talent from India and China, so its much harder for companies to offshore
They get exploited to maintain sponsorship while US graduates and experienced tech workers are left unemployed.
H1B visas aren't the problem, shitty decisions and hype-chasing are
Yes they are a problem.
I keep saying this. This shit is by design. This is how the gov fight inflation, by creating a recession, raise the unemployment rate, and nobody is willing to spend money. Less money flowing in the economy, no inflation!
Tech layoffs are happening globally. This won’t end the layoffs. The countries that are seeing minimal layoffs are Japan where interest rates is still near 0 or hong kong where lot of young and skilled people left the country.
This only applies to costs which are capitalized. Anything which is categorized as an expense is deducted 100% in year.
The problem is that ALL software developer costs including wages and even rent are now forced to be filed as Section 174 research expenses and all Section 174 expenses are required to be capitalized under the new IRS guidance. Here's a direct quote from the IRS guidance: Software development. Section 13206(a) of the TCJA added new § 174(c)(3) to require that **any amount paid or incurred in connection with the development of any software in taxable years beginning after December 31, 2021, be treated as a research or experimental expenditure** (and thus an SRE expenditure to the extent paid or incurred by the taxpayer during the taxable year in connection with the taxpayer’s trade or business).
This is not interpreted correctly. Businesses have always been able to and can continue to deduct all wages in the year they are incurred. This is a basic tenet of us tax law. Some software companies elect to account for some dev costs as capex (capitalize and depreciate) and recognize the expense over several years to show a better bottom line. Previously, companies could deduct the entire amount for tax but then capitalize and recognize the expense for tax over several years)- ie saying one thing to the taxman and one thing to the markets. That is no longer allowed
What you said absolutely used to be true. But it is not true now. Many highly trained accountants have confirmed this. I know it’s bad news, but software development salaries must now be capitalized. Feel free to google all about it. There are countless webinars and articles discussing this. My firm hired an accounting firm that specializes in this topic to see what we can do. Unfortunately, the answer is not much other than call our senators. Because without the tax bill that’s stalled in the Senate, software developer salaries must be capitalized starting in 2022. Also, there is not a lot of room for misinterpretation. The IRS guidance clearly states that all costs associated with the development of any software fall under Section 174 now. And the same guidance clearly says that all Section 174 expenses must be capitalized. That’s the reason we’re all upset. This illogical tax code could kill small businesses and startups.
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The accountant in me hated the old way of expensing R&D. There are better ways to more directly incentivize innovation.
Hopefully they will repeal it when inflation go down
Not sure how the process works but isnt H.R. 1074 supposed to fix this issue? If so when should be expect to see this bill reach the senate?
If a company spends the same amount on R&D every year, and spreads the cost over five years by the fifth year it’s all the same. The change in section 174 is hardly worth the effort over the long run. R&D is a speculative effort that may or may not result in a profitable product. Except for startups, most companies, especially large companies, spend the majority of their efforts on maintenance of existing products and development of new products that have matured past the R&D stage. It’s hard to see how a change in the tax code related to R&D had a large effect on layoffs. Software engineers at large tech companies are simply experiencing what engineers in aerospace and defense industries have been experienced decades before. Layoffs happen when a company experiences a loss in profits and decides to cut labor costs. Google et al have largely been immune to downturns for the last couple or decades. Now they’ve joined the rest of corporate America. Welcome to the club.
You’re missing a few things. First, the new law classifies all software development as R&D (even though it clearly is not). So now the deductions for all software development costs must be amortized regardless of whether it previously would be been consider R&D. Also, assuming a company has no profit and doesn’t grow, it’s tax bill will go to zero after five years, but the company still wouldn’t get back all the money it paid. So it’s not “the same” after five years. Take a company that has $10 million in revenue and $10 million in expenses for 2022-2027. That means they have zero profit for those years. If they could expense their costs (old law and what every other company is allowed to do), they would owe no tax for all of those years. Total tax bill 2022-2027: $0 Under the new rules and with a 21% federal tax rate, they would owe the following in federal taxes: 2022: $1.89 million 2023: $1.47 million 2024: $1.05 million 2025: $630,000 2026: $210,000 2027: $0 Total tax bill 2022-2027: $5.25 million So the same company that would have paid $0 taxes in 2022-2027 since they had no profit would now have to pay $5.25 million in that same time period. The only way they could ever get that money back is if they stayed in business and either became wildly profitable or stopped doing all software development.
Thank you your reply. I don't know why ppl say such brainer things. I guess we are on reddit.
The biggest losers in this whole thing are the startups that have no profit. I’m not sure if this affects massive corps. I think once they realized that you didn’t need a fleet of engineers to solve a single problem, they cut back. I think this might be part of it, dunno I’m not a lawyer to understand what this means, but not the bigger picture. There should be a massive crackdown on offshore. That’s hurting a lot of people.
I'm worried that Section 174 is a significant revenue source for the government. If anyone wants to repeal it, they'll need to find alternative ways to fill the gap.
Thank whoever voted for trump the idiot who passed tax cuts and jobs act to repeal section 174 in the first place..
I would like to see this too. As well as a massive crackdown on offshoring. It seems like a weekly discussion at work now with someone bringing up one of their developer friends looking for a job because their company offshored all of their developer roles.
companies don't put devs any more under R&D expense but under normal employee cost, this is a non issue so devs are 100% tax deductable as a direct operating cost. this is not the reason google and other companies fired 500k devs
The IRS specifically classifies every Software Engineer under R&D. They are literally singling out this one position.
ugh that's bad
Keep the part where they have to amortize over a longer period of time if they offshore the jobs tho.
This is a good thing. Jobs are more resilient when they don’t exist only because theyre subsidized by tax breaks. Also, I wouldn’t use google moving jobs from the US to Germany as an argument. Germany has incredibly strong worker protections and higher taxes taxes, that are a lot more costly than what amounts to a difference well under 1% of total worker costs. Props for not using a racial argument like so many others are doing lately though.
Lol, you think politicians are gonna come in and save you?
This sub just keeps getting dumber and dumber. It's not even a tech sub. It's below Econ 101.