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I wonder if the new IRS section 174 rules are intensifying these tech lay offs. As far as I understand it, software engineering salaries are no longer fully tax

I wonder if the new IRS section 174 rules are intensifying these tech lay offs. As far as I understand it, software engineering salaries are no longer fully tax deductible in the year they are paid, instead they can only be depreciated at 20%.

wutangisforever 3y ago
i don't really get why this law was invented, what was it supposed to prevent?
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- badpun 3y ago
  I'm not an accountant, but to me it looks like the IRS was operating at an assumption that the software engineers write is not immediately consumed, but rather has on average 5 years amortization period (meaning, it's producing value for 5 years, on average).
  - dathinab 3y ago
    seems reasonable iff you have a tax system where this deductability is based on the product employees produce which seems strange to be but might be normal if I understand it correctly it means the cost of this year would be written of over 5 year each year 20%, but if you keep your employees it means in the second year you have 20% write off from that year and 20% of the previous years and so one, so 5 years in still 100% write off every year I wonder if that would motivate companies to have a more constant number of employees or more precise a similar income bill every year. Through it would definitely mean if you had considered layoffs this year is the year to go.
    - ethbr1 3y ago
      I am not an accountant, but there wouldn't be a requirement to keep the employees. If you spent $100M on developer salaries in FY2022, you'd create an amortization for that over the next 5 years. And then in FY2023... even if you had fired your entire software department... you'd still get to claim that year's portion of that previously created amortization.
      - hodgesrm 3y ago
        That's correct as I understand the tax law. The credit carries over because it's depreciating the capital investment. Net operating losses (NOLs) work in a similar fashion. You get them as a credit in later tax years. IANAL but have filed corporate taxes many times.
      - bruce511 3y ago
        Yep, it incentivizes getting rid of software staff as soon as you can after they complete the work. It makes downsizing especially profitable in the short term.
      - thinkerswell 3y ago
        Yes because normally, without this absurd law, you’d just deduct employee salaries from your taxable income.
      - dathinab 3y ago
        yes, I didn't try to say there is an requirement to keep them the writeoffs are base on what they are assumed to have produced not them being there so they would go one but when keeping a job position (not necessary the same person tho) through overlapping writeoffs it will lead to a consistent 100% writeoff not doing so can lead to spkies of little writeoff when increasing company size and the opposite when shrinking it. This would make new hires on a limited budged harder and in turn should motivate more long term planing when it comes to head count and that might lead to less head count fluctuations maybe
    - jacobyoder 3y ago
      No more than 10% in the first year is deductible.
  - everforward 3y ago
    5 years is the shortest, 15 is the longest. Their assumption is that 5 years is the minimum time that it provides value. I don't think there's any real logic to it, it's just a way to balance the tax budget. For 1, presuming that all software engineering is "research or experimental" is faulty. The vast majority of software engineers are implementing known things, and the "experimental" status reflects its reliability. Most "experimental" software isn't really doing experiments to answer questions, it's just checking whether an approach works correctly. I don't think anyone could honestly call writing an Okta integration for a SaaS app "experimental". You know that it will work ahead of time, you just aren't sure if your pass implements it correctly. For 2, this would imply insane things if applied to other fields. What is the correct period to amortize a bridge engineer's salary over? 50 years? 100? We still have some Roman bridges around, maybe we need to look in the thousands of years. Patents are good for 20 years, so any salaries that lead to a patent clearly need to be 20 year amortization. Copyright is life + 70 years, so graphical designer salaries should be amortized over at least 100 years. I don't think there's any real logic here, it's just a way to balance the tax budget.
- blihp 3y ago
  Anything that pulls in income and/or pushes out expenses results in a higher tax liability to the IRS. It makes a lot of sense in the world of real estate and equipment expenses (i.e. items which have very long useful lives to a business), less so for labor and other short term expenses.
- bobthepanda 3y ago
  The deficit hawks have routinely included legislation that included automatic ways to reduce the US deficit to be implemented at a future point in time, when hopefully Congress has sorted out whether or not such a thing is actually desirable. It's essentially a budget Sword of Damocles. Of course, Congressional budget negotiations have been an unproductive circus show for a while, so this never actually happened and the thing that was never actually intended to go in place went in effect. With the current razor-thin majority in the House constantly getting derailed over budget negotiations, this is unlikely to resolve any time soon.
  - curtis3389 3y ago
    If they set it in motion and say they'll stop it before it causes pain, they have no intention of stopping it. Sequestration in 2013 was a solution to a political problem. Nobody wants to be blamed.
    - bobthepanda 3y ago
      This particular set of regulations was from the Trump tax cuts, which were passed by reconciliation and had to be "budget neutral" as a result.
      - bcrosby95 3y ago
        Achieving budget neutrality with a policy that won't come into effect for 5 years, that people expect to be negated, is an "interesting" hack.
        fauntle 3y ago
        ...and that will come to fruition during a subsequent administration. It was one of the many time bombs set up to make the opposing party look worse come election time.
  - ojbyrne 3y ago
    As I understand it, it's because they could pass "temporary" tax cuts with only 51% in the Senate through the "budget reconciliation process. The Republicans at the time did not have the 60 votes necessary to defeat a filibuster. Not quite the same. https://en.wikipedia.org/wiki/Tax_Cuts_and_Jobs_Act https://en.wikipedia.org/wiki/Tax_Cuts_and_Jobs_Act
- UncleMeat 3y ago
  The change was part of the trump tax bill, which at least needed to be able to claim that it was revenue-neutral after 10 years to be able to be passed through the budget reconciliation process.
- btown 3y ago
  https://blog.pragmaticengineer.com/section-174/ https://blog.pragmaticengineer.com/section-174/ is a good overview and describes some of the history: > In 2017, then-President, Donald Trump, signed the 2017 Tax Cuts & Jobs act, which overhauled tax codes and reduced tax – for example, it reduced the top tax bracket from 39.6% to 37%. To make the bill pass strict budgetary rules, the Senate used a process called reconciliation: adding in tax code changes that delayed tax increases. These delayed increases “balanced out” the tax reduction. > One of these changes was Section 174, set to come into effect 5 years later, in 2022. These parts deliver the blow by making it clear that software development costs need to be amortized over 5-15 years. Most experts expected Congress to push back the Section 174 amendment to a later date, or simply remove it. But Congressional negotiations to repeal the changes fell apart at the last minute in December 2022, meaning it became law. > Amazon, Microsoft, Intel, Ford, Lockheed Martin, and other US companies created the US R&D Coalition in 2018 to advocate in reversing this change. This group concludes... "By diminishing the near-term value of R&D expenditures, the Tax Cuts and Jobs Act will reduce incentives for companies to invest in the development of new products, ultimately hurting consumers and businesses alike.” > What about VC-funded companies? For loss-making companies this change doesn’t make much of a difference. But the change does impact VC-funded companies near to break even. Most VC-funded companies close to breakeven have big-enough cash buffers with which to pay unexpected tax bills. However, these companies might reduce hiring – or even consider letting go staff. My 2c are that big tech companies with large amounts of cash on hand wanted to be seen optically as fighting against this change... but those with cash on hand would also benefit from being the only ones able to weather the storm relative to their would-be competitors. It's unclear that incentives were aligned here among those companies with lobbying budgets.
- hibikir 3y ago
  You have chunks of the explanation in other responses, let's try to put them together: Since Obama became president, all legislation basically needs 2/3rds of the senate to pass if it's remotely controversial and every tax change is controversial. There is one exception though: if the bill is of a budgetary nature, and is revenue neutral over 10 years. Trump really wanted to pass some tax cuts in 2017. But as you'd expect, claiming that a big tax cut is revenue neutral is far more than the senate parlamentarian would believe. So instead, some tax cuts are made temporary, and some tax changes are made that would gain revenue. Then the whole thing appears to be revenue neutral over a decade, because nobody expects that the poison pills at the end will actually be allowed to happen. They tend to come in 6+ years later, as to make sure that all senators and the president might also claim said increases are not their problem. So the expectation is that a future congress will just undo those tax changes, and push them further into the future, by again making another bill that looks revenue neutral in the long run, but is just kicking the ball down the road. The congress since the midterms, however, is even less functional than in the Obama or Trump years: So the poison pills that are not supposed to happen are starting to happen. Other cuts that occurred, like the increase of the standard deduction, were also marked as temporary, and could come back if congress doesn't do anything. So ultimately it's all side-effects of people trying to bypass congressional rules, because otherwise we'd not see anything other than emergency spending bills passing in congress. Changes to legislation that would make this kind of dysfunction stop happening are even harder to pass. Every incentive pushes politicians of all parties to play with fire. This time we got burned.
  - jemmyw 3y ago
    It's pretty insane. How is the US going to get back to having a functional government? One side or the other needs to win a significant majority or the two sides need to start working together. I can't really see either happening.
  - muzz 3y ago
    > Since Obama became president, all legislation basically needs 2/3rds of the senate to pass if it's remotely controversial and every tax change is controversial. This is an odd way to mention (abuse of) the filibuster
- laidoffamazon 3y ago
  Same reason why the Trump Tax cuts almost made PhD tuition waivers taxable. 1) Tech workers are liberals 2) Liberals being owned is good if you're an administration consumed with punishing your enemies and enriching your allies #2 is also why SALT deduction was curtailed, to punish blue states. While I think that's accidentally good policy, it made people mad enough to flip the House in 2018.
cjbgkagh 3y ago
Wow - that is absolutely insane. I had no idea that existed. Looked it up, section 174 amendment added in Tax Cut and Jobs Act 2017 coming into effect 2022.
- Workaccount2 3y ago
  Worse is that it was fully expected to be repealed before becoming law, but then got stuck in political quagmire. So here we are...
  - cjbgkagh 3y ago
    It makes sense that it was expected to be repealed, it’s a cash grab from small to medium businesses (SMEs) who are growing and are at least making some money. Traditionally tax law would provide breaks for this category as an ‘investment’ because they would get more tax later out of the bigger company these SMEs would turn into. It’s a major drag at already the most difficulty time for a fledging company and would have hit me badly had I stayed in the US.
wait_a_minute 3y ago
I think if you survive(d) layoffs, then that means the company employing you now has a more long-term view of their investment into your onboarding and continued growth. So while the pain at first may be jarring, in the long run it is worth it if the move causes companies to view their developers as long-term team members rather than assets which can be depreciated right away. Especially in vesting environments, where devs need to wait for the vesting to have made their R&D-heavy roles worth it from a monetary point of view. Well, large firms will need to give their devs enough runway now so that they can depreciate the costs over a longer period of time instead of only thinking in the short term. They can still fully deduct the salaries, just over a longer period of time. It is 5 years for domestic R&D / development and 15 years for foreign. I think that is good and will cause better treatment of developers in the long run.
- boringuser2 3y ago
  The problem is that we now have a massive surplus of skilled engineers so good luck getting hired when you're inevitably arbitrarily let go. Your mindset is only valid in the explicit context of a company A) not having cut you B) having cut others prior to you As soon as that context is lost in the next two years when you get fired or find a new job, you're back to square one, except you're also competing against Joe Google Engineer.
  - wait_a_minute 3y ago
    Switching companies frequently increases comp, but it’s less safe from the point of view you brought up around starting from square one in terms of rapport and “safety.” I think this is a normal trade off. You left a team or a company for more money. There is nothing wrong with this, but you necessarily need to start from a new context since it’s a new team. When times are tighter because of economic cycles, this means that you should be more intentional with changing a team so that you are sure you will be able to compete with Joe Google Engineer. It’s still a competition in some ways, and that’s fine. If you find a good place, stay a while in tighter economic cycles in order to build more skills and rapport and then hopefully, and realistically based on experience, you’ll have more runway within that company even if times are bad or if your performance sometimes is low because of life events.
alok99 3y ago
I'm having a hard time understanding how this leads to lay offs. Software engineering salaries being amortized over 5 years leads to an increase in yearly taxable income for the company. So what makes this a bad thing for the company? Are they doing the layoffs just to reduce total income to bring taxable income back down to (or closer to) 0? I.e. is this all just to avoid paying more taxes?
- supportengineer 3y ago
  Small startups who were not anticipating this change may not have the cash available to pay the tax bill due on that taxable income.
  - zooq_ai 3y ago
    Small startups almost make no profit for this to have any meaningful impact
    - klohto 3y ago
      That is the point? They don’t have any means how to pay.
    - supportengineer 3y ago
      All other factors being the same year to year, this accounting change will suddenly show the company making a sizable profit. Because the R&D cost (engineer salaries) can no longer be expensed.
      - jacobyoder 3y ago
        Exactly. How we've thought about what 'profit' is has changed. When I bought a laptop for my business, it was amortized over... 3 years I think. Kinda nuts but, whatever. It's a couple thousand dollars. But the example above (somewhere) with the 5 employees at $200k/each... only being able to deduct $100k of that, even assuming $1m in revenue... meaning 'profit' of $900k.... it's just crazy.
shmatt 3y ago
Discord isn't profitable
UncleOxidant 3y ago
In addition to more layoffs/less hiring it looks like there are a lot of undesirable side effects of this change, especially for small to medium sized companies. Including moving IP out of the US. What were they thinking? https://newsletter.pragmaticengineer.com/p/the-pulse-75 https://newsletter.pragmaticengineer.com/p/the-pulse-75
- redcobra762 3y ago
  The context of the 2017 tax cuts is important; it was/is a major feather in the administration’s cap.
  - UncleOxidant 3y ago
    I've seen some suggestions that this was done specifically to punish blue states where most of these kinds of jobs reside. I'm not sure they were actually thinking that far ahead, but I guess I wouldn't put it past them.
    - nullserver 3y ago
      Or reward states that have lower taxes.
      - addicted 3y ago
        Since those states are receiving funds from the federal government you’re not really rewarding lower taxes. You’re just rewarding poor fiscal management.
    - ojbyrne 3y ago
      The fact that the same legislation capped the SALT deduction lends credence to your argument.
  - cjbgkagh 3y ago
    I knew bracket creep was going to a land mine and did figure they included others to make the numbers work out the way they did. Now the government makes more money with higher inflation which I think is a risky alignment of incentives.
dustingetz 3y ago
Venture capital investment dollars are not revenue and not taxed as revenue – so not sure if discord is profitable or what (edit: article says it's not) but the rule doesn't impact growth stage cos iiuc. Really it just impacts bootstrappers who are royally fucked, good job USA
SirensOfTitan 3y ago
The fact that, as far as I understand, section 174 rules are disliked across the aisle, yet Congress cannot get its act together enough to fix what will wreak the pipeline for arguably the most valuable and dynamic part of the US's economy speaks volumes. The legislative branch of the US federal government is in such dire need of reform.
- pc86 3y ago
  What reforms exactly would fix that?
  - rmrk 3y ago
    Campaign finance reform.
    - EasyMark 3y ago
      This is impossible for the foreseeable future given that we have a conservative super majority in the Supreme Court who see corporations as people but also special people who don't have the full responsibility that regular people have as far as the law goes. This allows PACs to spend unlimited money on elections as long as they don't wink wink nudge nudge cooperate with political candidates/campaigns.
      - kyrra 3y ago
        This doesn't fix the section 174 problem at all. It also doesn't fix how Congress would operate. Our politics have become ridiculously polarized and Congress won't even work behind doors together. Many people go to Congress to become famous, not to get stuff done. We have lost the element of compromise, as everyone just panders to their base. You have yet to make an argument how campaign finance reform would change any of the above.
    - HDThoreaun 3y ago
      Dont see how it would fix this. The donor class absolutely wants this fixed, how would campaign finance reform help get this passed when donors already want it passed?
mensetmanusman 3y ago
Is this just a Biden admin thing? Or were finance people gunning for tech layoffs for a while?
- jacobyoder 3y ago
  This was legislation passed under Trump, but didn't take effect until 2022. Take credit for "lowering taxes"... push the effects of the time bomb on to a future administration. Definition of stable genius... ;)
  - mrguyorama 3y ago
    It's quite literally taking a loan from the future.
  - midasuni 3y ago
    Politically it’s a master piece. Take the credit and move blame to the next guy.
    - dylan604 3y ago
      It wouldn't look like such a master piece if Trump won his re-election. It would have happened during his watch. So, are you saying he's such a master that he knew he wasn't going to win (which is contradicted by the tantrums thrown saying he didn't lose)?
      - KittenInABox 3y ago
        Trump runs on a cult of personality, not real policy. If he had won, he'd either use his cult of personality to ensure the poison pills don't happen or he spin the poison pills as victories because they harm tech companies. Remember, a voter upset with him once said on him "he's not hurting the people he needs to be". If the economy is harmed because of Trump admin's poison pills and Trump isn't president, that's Biden's fault because he's an incompetent leader look how bad the economy is doing under him, but if Trump is president and the economy is harmed from those same poison pills, Trump is just hurting those fat-cats who need to get taken down a peg anyways.
chuckadams 3y ago
I don't get it: a salary is a depreciable asset? I thought that only applied to actual tangible things that needed replacement on a schedule. I'll never understand accounting... and I'm increasingly thinking that's the point.
- gen220 3y ago
  The idea is that you're converting some % of developers' salaries into intellectual property (i.e. code), and that intellectual property is a capital asset that depreciates over time in the same way that a tractor or a widget-making machine would. The salary is not the asset, it's an expense that produces an asset.
  - chuckadams 3y ago
    Ah, that makes sense now. The value of the code itself as an asset would be really subjective, but what you pay someone to write it isn't. Thanks :)
- mdavidn 3y ago
  The reason amortization exists is to reduce taxes in later years: If a company invests $1 million into an asset that earns $250k each year over 5 years, the company would otherwise see a $750k loss the first year followed by $250k profit for 4 years. By following an amortization schedule, they are taxed on a steady $50k profit each year. In other words, the taxable effect of the expense is "spread" through the years in which that asset is expected to earn income.

wutangisforever 3y ago

i don't really get why this law was invented, what was it supposed to prevent?

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badpun 3y ago
I'm not an accountant, but to me it looks like the IRS was operating at an assumption that the software engineers write is not immediately consumed, but rather has on average 5 years amortization period (meaning, it's producing value for 5 years, on average).
- dathinab 3y ago
  seems reasonable iff you have a tax system where this deductability is based on the product employees produce which seems strange to be but might be normal if I understand it correctly it means the cost of this year would be written of over 5 year each year 20%, but if you keep your employees it means in the second year you have 20% write off from that year and 20% of the previous years and so one, so 5 years in still 100% write off every year I wonder if that would motivate companies to have a more constant number of employees or more precise a similar income bill every year. Through it would definitely mean if you had considered layoffs this year is the year to go.
  - ethbr1 3y ago
    I am not an accountant, but there wouldn't be a requirement to keep the employees. If you spent $100M on developer salaries in FY2022, you'd create an amortization for that over the next 5 years. And then in FY2023... even if you had fired your entire software department... you'd still get to claim that year's portion of that previously created amortization.
    - hodgesrm 3y ago
      That's correct as I understand the tax law. The credit carries over because it's depreciating the capital investment. Net operating losses (NOLs) work in a similar fashion. You get them as a credit in later tax years. IANAL but have filed corporate taxes many times.
    - bruce511 3y ago
      Yep, it incentivizes getting rid of software staff as soon as you can after they complete the work. It makes downsizing especially profitable in the short term.
    - thinkerswell 3y ago
      Yes because normally, without this absurd law, you’d just deduct employee salaries from your taxable income.
    - dathinab 3y ago
      yes, I didn't try to say there is an requirement to keep them the writeoffs are base on what they are assumed to have produced not them being there so they would go one but when keeping a job position (not necessary the same person tho) through overlapping writeoffs it will lead to a consistent 100% writeoff not doing so can lead to spkies of little writeoff when increasing company size and the opposite when shrinking it. This would make new hires on a limited budged harder and in turn should motivate more long term planing when it comes to head count and that might lead to less head count fluctuations maybe
  - jacobyoder 3y ago
    No more than 10% in the first year is deductible.
- everforward 3y ago
  5 years is the shortest, 15 is the longest. Their assumption is that 5 years is the minimum time that it provides value. I don't think there's any real logic to it, it's just a way to balance the tax budget. For 1, presuming that all software engineering is "research or experimental" is faulty. The vast majority of software engineers are implementing known things, and the "experimental" status reflects its reliability. Most "experimental" software isn't really doing experiments to answer questions, it's just checking whether an approach works correctly. I don't think anyone could honestly call writing an Okta integration for a SaaS app "experimental". You know that it will work ahead of time, you just aren't sure if your pass implements it correctly. For 2, this would imply insane things if applied to other fields. What is the correct period to amortize a bridge engineer's salary over? 50 years? 100? We still have some Roman bridges around, maybe we need to look in the thousands of years. Patents are good for 20 years, so any salaries that lead to a patent clearly need to be 20 year amortization. Copyright is life + 70 years, so graphical designer salaries should be amortized over at least 100 years. I don't think there's any real logic here, it's just a way to balance the tax budget.
blihp 3y ago
Anything that pulls in income and/or pushes out expenses results in a higher tax liability to the IRS. It makes a lot of sense in the world of real estate and equipment expenses (i.e. items which have very long useful lives to a business), less so for labor and other short term expenses.
bobthepanda 3y ago
The deficit hawks have routinely included legislation that included automatic ways to reduce the US deficit to be implemented at a future point in time, when hopefully Congress has sorted out whether or not such a thing is actually desirable. It's essentially a budget Sword of Damocles. Of course, Congressional budget negotiations have been an unproductive circus show for a while, so this never actually happened and the thing that was never actually intended to go in place went in effect. With the current razor-thin majority in the House constantly getting derailed over budget negotiations, this is unlikely to resolve any time soon.
- curtis3389 3y ago
  If they set it in motion and say they'll stop it before it causes pain, they have no intention of stopping it. Sequestration in 2013 was a solution to a political problem. Nobody wants to be blamed.
  - bobthepanda 3y ago
    This particular set of regulations was from the Trump tax cuts, which were passed by reconciliation and had to be "budget neutral" as a result.
    - bcrosby95 3y ago
      Achieving budget neutrality with a policy that won't come into effect for 5 years, that people expect to be negated, is an "interesting" hack.
      - fauntle 3y ago
        ...and that will come to fruition during a subsequent administration. It was one of the many time bombs set up to make the opposing party look worse come election time.
- ojbyrne 3y ago
  As I understand it, it's because they could pass "temporary" tax cuts with only 51% in the Senate through the "budget reconciliation process. The Republicans at the time did not have the 60 votes necessary to defeat a filibuster. Not quite the same. https://en.wikipedia.org/wiki/Tax_Cuts_and_Jobs_Act https://en.wikipedia.org/wiki/Tax_Cuts_and_Jobs_Act
UncleMeat 3y ago
The change was part of the trump tax bill, which at least needed to be able to claim that it was revenue-neutral after 10 years to be able to be passed through the budget reconciliation process.
btown 3y ago
https://blog.pragmaticengineer.com/section-174/ https://blog.pragmaticengineer.com/section-174/ is a good overview and describes some of the history: > In 2017, then-President, Donald Trump, signed the 2017 Tax Cuts & Jobs act, which overhauled tax codes and reduced tax – for example, it reduced the top tax bracket from 39.6% to 37%. To make the bill pass strict budgetary rules, the Senate used a process called reconciliation: adding in tax code changes that delayed tax increases. These delayed increases “balanced out” the tax reduction. > One of these changes was Section 174, set to come into effect 5 years later, in 2022. These parts deliver the blow by making it clear that software development costs need to be amortized over 5-15 years. Most experts expected Congress to push back the Section 174 amendment to a later date, or simply remove it. But Congressional negotiations to repeal the changes fell apart at the last minute in December 2022, meaning it became law. > Amazon, Microsoft, Intel, Ford, Lockheed Martin, and other US companies created the US R&D Coalition in 2018 to advocate in reversing this change. This group concludes... "By diminishing the near-term value of R&D expenditures, the Tax Cuts and Jobs Act will reduce incentives for companies to invest in the development of new products, ultimately hurting consumers and businesses alike.” > What about VC-funded companies? For loss-making companies this change doesn’t make much of a difference. But the change does impact VC-funded companies near to break even. Most VC-funded companies close to breakeven have big-enough cash buffers with which to pay unexpected tax bills. However, these companies might reduce hiring – or even consider letting go staff. My 2c are that big tech companies with large amounts of cash on hand wanted to be seen optically as fighting against this change... but those with cash on hand would also benefit from being the only ones able to weather the storm relative to their would-be competitors. It's unclear that incentives were aligned here among those companies with lobbying budgets.
hibikir 3y ago
You have chunks of the explanation in other responses, let's try to put them together: Since Obama became president, all legislation basically needs 2/3rds of the senate to pass if it's remotely controversial and every tax change is controversial. There is one exception though: if the bill is of a budgetary nature, and is revenue neutral over 10 years. Trump really wanted to pass some tax cuts in 2017. But as you'd expect, claiming that a big tax cut is revenue neutral is far more than the senate parlamentarian would believe. So instead, some tax cuts are made temporary, and some tax changes are made that would gain revenue. Then the whole thing appears to be revenue neutral over a decade, because nobody expects that the poison pills at the end will actually be allowed to happen. They tend to come in 6+ years later, as to make sure that all senators and the president might also claim said increases are not their problem. So the expectation is that a future congress will just undo those tax changes, and push them further into the future, by again making another bill that looks revenue neutral in the long run, but is just kicking the ball down the road. The congress since the midterms, however, is even less functional than in the Obama or Trump years: So the poison pills that are not supposed to happen are starting to happen. Other cuts that occurred, like the increase of the standard deduction, were also marked as temporary, and could come back if congress doesn't do anything. So ultimately it's all side-effects of people trying to bypass congressional rules, because otherwise we'd not see anything other than emergency spending bills passing in congress. Changes to legislation that would make this kind of dysfunction stop happening are even harder to pass. Every incentive pushes politicians of all parties to play with fire. This time we got burned.
- jemmyw 3y ago
  It's pretty insane. How is the US going to get back to having a functional government? One side or the other needs to win a significant majority or the two sides need to start working together. I can't really see either happening.
- muzz 3y ago
  > Since Obama became president, all legislation basically needs 2/3rds of the senate to pass if it's remotely controversial and every tax change is controversial. This is an odd way to mention (abuse of) the filibuster
laidoffamazon 3y ago
Same reason why the Trump Tax cuts almost made PhD tuition waivers taxable. 1) Tech workers are liberals 2) Liberals being owned is good if you're an administration consumed with punishing your enemies and enriching your allies #2 is also why SALT deduction was curtailed, to punish blue states. While I think that's accidentally good policy, it made people mad enough to flip the House in 2018.

cjbgkagh 3y ago

Wow - that is absolutely insane. I had no idea that existed. Looked it up, section 174 amendment added in Tax Cut and Jobs Act 2017 coming into effect 2022.

Workaccount2 3y ago
Worse is that it was fully expected to be repealed before becoming law, but then got stuck in political quagmire. So here we are...
- cjbgkagh 3y ago
  It makes sense that it was expected to be repealed, it’s a cash grab from small to medium businesses (SMEs) who are growing and are at least making some money. Traditionally tax law would provide breaks for this category as an ‘investment’ because they would get more tax later out of the bigger company these SMEs would turn into. It’s a major drag at already the most difficulty time for a fledging company and would have hit me badly had I stayed in the US.

wait_a_minute 3y ago

I think if you survive(d) layoffs, then that means the company employing you now has a more long-term view of their investment into your onboarding and continued growth. So while the pain at first may be jarring, in the long run it is worth it if the move causes companies to view their developers as long-term team members rather than assets which can be depreciated right away. Especially in vesting environments, where devs need to wait for the vesting to have made their R&D-heavy roles worth it from a monetary point of view. Well, large firms will need to give their devs enough runway now so that they can depreciate the costs over a longer period of time instead of only thinking in the short term. They can still fully deduct the salaries, just over a longer period of time. It is 5 years for domestic R&D / development and 15 years for foreign. I think that is good and will cause better treatment of developers in the long run.

boringuser2 3y ago
The problem is that we now have a massive surplus of skilled engineers so good luck getting hired when you're inevitably arbitrarily let go. Your mindset is only valid in the explicit context of a company A) not having cut you B) having cut others prior to you As soon as that context is lost in the next two years when you get fired or find a new job, you're back to square one, except you're also competing against Joe Google Engineer.
- wait_a_minute 3y ago
  Switching companies frequently increases comp, but it’s less safe from the point of view you brought up around starting from square one in terms of rapport and “safety.” I think this is a normal trade off. You left a team or a company for more money. There is nothing wrong with this, but you necessarily need to start from a new context since it’s a new team. When times are tighter because of economic cycles, this means that you should be more intentional with changing a team so that you are sure you will be able to compete with Joe Google Engineer. It’s still a competition in some ways, and that’s fine. If you find a good place, stay a while in tighter economic cycles in order to build more skills and rapport and then hopefully, and realistically based on experience, you’ll have more runway within that company even if times are bad or if your performance sometimes is low because of life events.

alok99 3y ago

I'm having a hard time understanding how this leads to lay offs. Software engineering salaries being amortized over 5 years leads to an increase in yearly taxable income for the company. So what makes this a bad thing for the company? Are they doing the layoffs just to reduce total income to bring taxable income back down to (or closer to) 0? I.e. is this all just to avoid paying more taxes?

supportengineer 3y ago
Small startups who were not anticipating this change may not have the cash available to pay the tax bill due on that taxable income.
- zooq_ai 3y ago
  Small startups almost make no profit for this to have any meaningful impact
  - klohto 3y ago
    That is the point? They don’t have any means how to pay.
  - supportengineer 3y ago
    All other factors being the same year to year, this accounting change will suddenly show the company making a sizable profit. Because the R&D cost (engineer salaries) can no longer be expensed.
    - jacobyoder 3y ago
      Exactly. How we've thought about what 'profit' is has changed. When I bought a laptop for my business, it was amortized over... 3 years I think. Kinda nuts but, whatever. It's a couple thousand dollars. But the example above (somewhere) with the 5 employees at $200k/each... only being able to deduct $100k of that, even assuming $1m in revenue... meaning 'profit' of $900k.... it's just crazy.

shmatt 3y ago

Discord isn't profitable

UncleOxidant 3y ago

In addition to more layoffs/less hiring it looks like there are a lot of undesirable side effects of this change, especially for small to medium sized companies. Including moving IP out of the US. What were they thinking? https://newsletter.pragmaticengineer.com/p/the-pulse-75 https://newsletter.pragmaticengineer.com/p/the-pulse-75

redcobra762 3y ago
The context of the 2017 tax cuts is important; it was/is a major feather in the administration’s cap.
- UncleOxidant 3y ago
  I've seen some suggestions that this was done specifically to punish blue states where most of these kinds of jobs reside. I'm not sure they were actually thinking that far ahead, but I guess I wouldn't put it past them.
  - nullserver 3y ago
    Or reward states that have lower taxes.
    - addicted 3y ago
      Since those states are receiving funds from the federal government you’re not really rewarding lower taxes. You’re just rewarding poor fiscal management.
  - ojbyrne 3y ago
    The fact that the same legislation capped the SALT deduction lends credence to your argument.
- cjbgkagh 3y ago
  I knew bracket creep was going to a land mine and did figure they included others to make the numbers work out the way they did. Now the government makes more money with higher inflation which I think is a risky alignment of incentives.

dustingetz 3y ago

Venture capital investment dollars are not revenue and not taxed as revenue – so not sure if discord is profitable or what (edit: article says it's not) but the rule doesn't impact growth stage cos iiuc. Really it just impacts bootstrappers who are royally fucked, good job USA

SirensOfTitan 3y ago

The fact that, as far as I understand, section 174 rules are disliked across the aisle, yet Congress cannot get its act together enough to fix what will wreak the pipeline for arguably the most valuable and dynamic part of the US's economy speaks volumes. The legislative branch of the US federal government is in such dire need of reform.

pc86 3y ago
What reforms exactly would fix that?
- rmrk 3y ago
  Campaign finance reform.
  - EasyMark 3y ago
    This is impossible for the foreseeable future given that we have a conservative super majority in the Supreme Court who see corporations as people but also special people who don't have the full responsibility that regular people have as far as the law goes. This allows PACs to spend unlimited money on elections as long as they don't wink wink nudge nudge cooperate with political candidates/campaigns.
    - kyrra 3y ago
      This doesn't fix the section 174 problem at all. It also doesn't fix how Congress would operate. Our politics have become ridiculously polarized and Congress won't even work behind doors together. Many people go to Congress to become famous, not to get stuff done. We have lost the element of compromise, as everyone just panders to their base. You have yet to make an argument how campaign finance reform would change any of the above.
  - HDThoreaun 3y ago
    Dont see how it would fix this. The donor class absolutely wants this fixed, how would campaign finance reform help get this passed when donors already want it passed?

mensetmanusman 3y ago

Is this just a Biden admin thing? Or were finance people gunning for tech layoffs for a while?

jacobyoder 3y ago
This was legislation passed under Trump, but didn't take effect until 2022. Take credit for "lowering taxes"... push the effects of the time bomb on to a future administration. Definition of stable genius... ;)
- mrguyorama 3y ago
  It's quite literally taking a loan from the future.
- midasuni 3y ago
  Politically it’s a master piece. Take the credit and move blame to the next guy.
  - dylan604 3y ago
    It wouldn't look like such a master piece if Trump won his re-election. It would have happened during his watch. So, are you saying he's such a master that he knew he wasn't going to win (which is contradicted by the tantrums thrown saying he didn't lose)?
    - KittenInABox 3y ago
      Trump runs on a cult of personality, not real policy. If he had won, he'd either use his cult of personality to ensure the poison pills don't happen or he spin the poison pills as victories because they harm tech companies. Remember, a voter upset with him once said on him "he's not hurting the people he needs to be". If the economy is harmed because of Trump admin's poison pills and Trump isn't president, that's Biden's fault because he's an incompetent leader look how bad the economy is doing under him, but if Trump is president and the economy is harmed from those same poison pills, Trump is just hurting those fat-cats who need to get taken down a peg anyways.

chuckadams 3y ago

I don't get it: a salary is a depreciable asset? I thought that only applied to actual tangible things that needed replacement on a schedule. I'll never understand accounting... and I'm increasingly thinking that's the point.

gen220 3y ago
The idea is that you're converting some % of developers' salaries into intellectual property (i.e. code), and that intellectual property is a capital asset that depreciates over time in the same way that a tractor or a widget-making machine would. The salary is not the asset, it's an expense that produces an asset.
- chuckadams 3y ago
  Ah, that makes sense now. The value of the code itself as an asset would be really subjective, but what you pay someone to write it isn't. Thanks :)
mdavidn 3y ago
The reason amortization exists is to reduce taxes in later years: If a company invests $1 million into an asset that earns $250k each year over 5 years, the company would otherwise see a $750k loss the first year followed by $250k profit for 4 years. By following an amortization schedule, they are taxed on a steady $50k profit each year. In other words, the taxable effect of the expense is "spread" through the years in which that asset is expected to earn income.