How Section 174 Helped Trigger Massive Tech Layoffs | VIP Wealth Advisors

For decades, the U.S. tax code rewarded innovation. If you hired engineers, built internal software, or invested in product development, you could write those costs off immediately. Section 174 of the IRS code guaranteed that R&D expenses reduced taxable income in the same year they were incurred.

But that all changed in 2022. ⚠️

Thanks to a delayed provision buried in the 2017 Tax Cuts and Jobs Act (TCJA), companies are no longer allowed to deduct R&D expenses in full during the year they occur. Instead, they must amortize those costs over five years (or 15 years if the work is done outside the U.S.).
🧾 This change didn’t make headlines. It wasn’t explained in earnings calls. Yet its impact has been seismic.

📉 More than 500,000 tech workers have been laid off since the start of 2023.
And while media coverage has blamed over-hiring and the rise of AI, the truth is more nuanced.

🔍 Deep in the spreadsheets and tax filings of companies like Meta, Microsoft, and Google, you’ll find a quiet culprit: Section 174’s amortization requirement.

Before 2022:

• Companies could fully deduct qualified R&D costs like salaries for engineers, cloud infrastructure, and internal development tools, in the year the expenses occurred.

After 2022:

• The same expenses must be capitalized and amortized:
• 5 years for domestic R&D
• 15 years for foreign R&D

This rule affects not only Big Tech but also startups, digital-first businesses, and any company that builds proprietary tools or platforms. Think of e-commerce brands, logistics firms, healthcare platforms, and SaaS startups. If your company develops products or customizes internal systems, this rule hits you.

Here’s where it gets painful: salaries for engineers and developers are real, recurring expenses. Companies pay them every two weeks. But under the new Section 174 regime, they can only deduct a small sliver of those costs each year.

Example: A company pays $1,000,000 in R&D salaries in 2024. Under the new rule:

• Only 10% ($100,000) is deductible in 2024 (due to the half-year convention)
• The remaining $900,000 is spread over 2025–2028

So even if the company is cash-flow negative, it may appear profitable on paper, triggering real tax bills on phantom profits. This distortion is especially detrimental to startups and pre-profit firms that rely on immediate expensing to manage their runway.

From 1954 until 2021, the tax code directly incentivized companies to build in-house and hire U.S.-based talent. Engineers at Microsoft coded in Washington. Apple's early product teams were in Cupertino. Facebook scaled its architecture from Menlo Park.

Immediate expensing didn’t just lower tax bills. It kept R&D and high-paying jobs onshore. Companies could invest aggressively, knowing they’d get a tax shield in the same year.

Now, that math is broken.

To stay lean, companies are:

• Outsourcing more R&D overseas (15-year amortization is still better than the cash cost of U.S. hiring)
• Slashing internal development teams
• Deferring product launches
• Reassessing headcount-heavy innovation strategies

Once Section 174 amortization kicked in, tech giants moved fast:

• Meta laid off 25% of its workforce within two years
• Microsoft cut ~10,000 jobs, focused on product roles
• Google (Alphabet) eliminated 12,000 positions
• Amazon cut nearly 30,000 workers, including Alexa and internal cloud teams

Smaller firms fared worse:

• Twilio: 22% workforce reduction
• Shopify: 30% over two years
• Coinbase: 36% across multiple waves

Internally, CFOs and boards weren’t just reacting to market trends; they were also shaping them. They were facing large, unexpected tax bills, and headcount was the easiest lever to pull.

While tech got the headlines, the rule change hit many industries:

• Retail: E-commerce platforms and DTC brands lost their R&D shield
• Logistics: internal routing and fulfillment tools now face tax drag
• Healthcare: custom patient platforms and software fall under 174

According to BEA data, roughly $500 billion in R&D was reported in 2019, with half of that coming from non-tech sectors. And since much of that investment was built on the expectation of full expensing, amortization has left many companies scrambling.

If you’re a founder, tech exec, or investor, here’s how to approach this:

1. Reevaluate Tax Liability Projections

If your models assume full expensing of R&D, revise them. Expect higher taxable income in the early years of amortization, even with flat or declining revenues.

2. Coordinate GAAP vs. Tax Strategy

Financial statements may show losses while taxable income increases. Coordinate with your CFO and CPA to ensure your tax strategy aligns with your actual cash flow.

3. Claim the R&D Tax Credit

Section 41 still allows for a valuable R&D tax credit, even with amortization. It’s more complicated to calculate now, but still worth pursuing.

4. Model Out Worst-Case Scenarios

If you’re pre-profit and high-burn, model out the impact of taxes under the new rules. Even small unexpected tax bills can harm runway.

5. Plan for Global Hiring and Offshoring Impacts

U.S.-based R&D is now at a relative disadvantage. Tax policy is quietly incentivizing offshoring. Companies should carefully weigh the costs, compliance, and talent retention.

A bipartisan group in Congress is pushing to repeal the Section 174 change, but politics are messy. Any fix may come too late for companies that have already made strategic layoffs.

And let’s be honest: giving Big Tech another tax break is a hard sell politically, even if it’s economically rational.

This isn’t just a story about obscure tax policy. It’s a case study in unintended consequences. A maneuver to make the TCJA appear "deficit neutral" ultimately gutted the very sectors that drive American innovation.

If you’re an entrepreneur, executive, or investor operating in the U.S., you need to understand how Section 174 is changing the calculus of growth, hiring, and capital allocation.

At VIP Wealth Advisors, we help high-income professionals, founders, and engineers understand how tax policy affects their strategy, not just their returns.

Have R&D-heavy income? Building proprietary tech? Let's run the numbers and create a plan that keeps you ahead of the curve, not behind a tax bill you didn't see coming. 📆 Book a Discovery Call Today