Ben Waldron

Help restore the tax deduction for software dev in the US (Section 174) news.ycombinator.com/item?id=442261…

Here's what I think it is. Preliminary context: By law, all software engineer salaries must be classified as R&D expenditure Summary: -In 2022, a—change in tax policy to section 174 made within the 2017 TCJA—came into effect which requires that all R&D expenditure be amortized over a 5 or 15 year period in the way that real estate is (the logic being that software is an asset, like real estate, and that the R&D expenditure is the price of building it) [1]. -Scenario: A company pulls $1M in revenue at the price of $900K in salaries with no other expenses. Before, the $100K profit would be taxed at the 21% corporate tax rate. Now, only 20% ($180K) of the $900K can be written off, making such a company look on paper like it produced $820K in profit; 21% of this is $172K, this being larger than actual profit. Obviously this scenario is a bit unrealistic, but you get the point how this can have terrible effects. -Of course, in the second year the company would write off 20% of their current year's wages on top of 20% of the previous year's wages, so in the long term this would break even for large firms. Still, this permanently catastrophic for startups, temporarily catastrophic for any low-cash firms, and in the short term, also highly inconvenient for the large firms blindsided by this. Anybody with cash lying around probably had pre-existing reason to do so rather than shelling it out as dividends or investing it, and those kinds of needs don’t just vanish. The result? Mass layoffs [2, see also 3 & 4], companies outsourcing to Germany, senior engineers competing for junior positions, workers bleeding into irrelevant fields, hundreds of applications per position, and so on. 2022 - 165,269 layoffs from 1,064 companies 2023 - 264,220 layoffs from 1,193 companies 2024 - 149,006 layoffs so far from 519 companies Total so far: 578,495 layoffs since 2022. For context [5]: the U.S. software industry employed only 5.2 million people in 2022. A bill [6] to revert the change passed in the house but hasn't been approved by the senate yet. I've heard other speculation about what might be causal from overhiring during covid, to the closing of silicon valley bank, to ai automation, and to the hike in Japanese interest rates affecting carry trades around the globe. While causality is a tricky thing, the alternative conjectures I've heard just don't seem plausible to me. For one, I'm just not very impressed with ai in general. ChatGPT was only released in late November 2022 so it doesn't align well with the timeline (and imo it also only got good to use around march 2023 before falling off again). For the other more-punctuated events people talk about (SVB, etc), I’d expect only short-term effects, but the people who credit them for current pains keep on predicting ends to the layoffs which never materialize. Meanwhile, the change to section 174 lines up well with the crisis starting in 2022 and staying steady since then. As for H1B visas, these should generally have a negative effect on the labor market, but these haven’t seen any kind of punctuated uptick that might explain why things are particularly bad right now. 2023 and 2024 did see a large uptick in H1B *applications*, but this didn’t translate into much of an increased number of visas being granted to applicants [7]: References: [1] blog.pragmaticengineer.com/section-174/ [2] layoffs.fyi [3] news.crunchbase.com/startups/tech-… [4] yellowtail.tech/wp-content/upl… [5] statista.com/statistics/674… [6] congress.gov/bill/118th-con… [7] redbus2us.com/h1b-visa-cap-r…

@ruima There’s a temptation to attribute the slowdown to something more interesting like AI or macro economic trends because those ideas are more intellectually stimulating than idiotic tax policy that was hacked together to game the CBO score of the TCJA, but that’s what happened.

Yo. gsb.stanford.edu/faculty-resear…

.@ChrisMurphyCT says he hasn’t made up his mind about his vote on the Wyden-Smith tax bill. He’s among Dems w/ concerns about how much it does for biz compared to families Says he shares concerns of @rosadelauro, a fellow member of CT delegation & lead child tax credit advocate

Still lots of GOP opposition to the Wyden-Smith tax bill, which will finally get a cloture vote in the Senate this week. Vote is expected to fail But the bill still has some R backing. @SenToddYoung, who previously voiced his support, tells me he’ll still vote for the tax bill

R&D expensing goes away and R&D spending jumps a record $96 billion in one year. taxnotes.com/tax-notes-toda… @TaxNotes