IMO the effects of Section 174 are way overstated. Time will tell, but my bet is that the market for software engineers continues to decline indefinitely. Maybe super low interest rates could mitigate the trend but other than that we're probably not going back to the days of high demand software engineering roles.
Why? A dozen different reasons. Of course LLMs are one facet, there's also the commodification of software and infrastructure which means buying something off the shelf is far cheaper than running an engineering org in-house, there's also the fact that the market is extremely oversaturated with software engineers with hundreds of thousands laid off over the last few years, then there's the aggregate effect of advancements in PL and software system design which makes it a lot easier to do more with less, the broader homogenization of runtime systems with modern browsers and mature cross-platform toolkits... and many many other factors. All these trends are converging on downward pressure for demand, and I personally don't see any reason why the trend will reverse.
I don't fundamentally disagree but I feel there's a selection bias at work here. I'm not an economist, but: maybe the things that could have a market bolstering effect are - by nature - harder to identify because they represent growth opportunities that haven't been captured yet? The sector-reinvigorating innovations over the horizon wouldn't be innovations if they were easy to anticipate.
A coincidental combination of economical conditions happened before the layoffs, and I know correlation doesn't imply causation, but these conditions look like a big cause:
* Companies hired like crazy in Covid
* Section 174 got disabled
* Interest rates rose
This made money much more expensive, and employees became a much higher cost due to the fact you hired like crazy, so you have a ton more, and you can't amortize them, also combined with fears of recession in 2023.
In a very short term, this cocktail of conditions made operating a company much more expensive, thus the layoffs and reorgs as an attempt to cut costs.
What you are saying is also true, but I see that taking effect over a longer period of time.
When companies were hiring like crazy, were they really not expecting interest rates to rise in the future? Just how deep was the faith in MMT that printing all that stimulus wouldn't cause inflation? Personally I was surprised it took as long as it did.
In my experience the higher up you get on the corporate ladder, the less you’re going to be held accountable for anything. Executives only stick around until they get bored or can cash out. Five years down the line it might as well be a totally different company.
I feel like we'll get a good feel for this if hiring domestic engineers picks back up without an influx of foreign folks who are not receiving the positive tax treatment.
It seems like this reversion is being paired with changes to 41(d)(1)(A) and 280C(c)(1)
> The domestic research or experimental expenditures . . . otherwise taken into account as a deduction or charged to capital account under this chapter shall be reduced by the amount of the credit allowed under section 41(a). Read in conjunction with Section 41(d)(1)(A), discussed above, it seems that all taxpayers claiming a research tax credit will necessarily have costs which are treated under Section 174A and thus subject to the reduction specified under amended Section 280C(c)(1).
> To our knowledge, many taxpayers have interpreted this language to mean that there is a reduction under 280C(c)(1) only to the extent the research credit exceeds the amortization allowed under Section 174, generally 10% in the year the expense is incurred under the applicable half-year convention. In that case, there would typically be little or no reduction to deductions and capitalized amounts, and correspondingly no reason to elect a reduced credit in lieu of a nonexistent or minimal reduction.
If you think layoffs were bad the last few years then just wait until the costs for all the ai hardware, massively overpriced talent, and acquisitions hit the books for these companies. It's going to be a bloodbath.
Given the wage difference ... what does it matter? You make 200%-300% after tax in the US what you make in high cost areas of Europe (despite that the pre-tax difference is closer to 75% to maybe 125%). Normal US pay is comparable to tax-haven pay elsewhere: Europe (London, Luxembourg), Middle East (UAE), Asia (Singapore).
So in "a few years" (let's say 2-3 years) you'd be able to make between 5 and 10 years' worth of European net pay. If you don't raise your spending, that will easily cover your living expenses during the next recession, even if you spend all of it unemployed.
And that's if you start now. If you've been doing this for 10 years already ... wow.
Without getting into the differences about the benefits you get in many European countries compared to the US, I think it's pretty naive to think you could realistically save enough from a salary alone to live for an extended period of time (something like 1-2+ years) in the US simply because the net salary is higher. Expenses are high, and when you become unemployed they become higher (e.g. you have to pay out of pocket for your health insurance, either from the ACA exchanges or from COBRA), and if you end up having an unexpected expense it could cause a lot of issues since you don't have a regular stream of money coming in. If you're lucky it could be okay, but it's luck dependent.
Besides that, if we assume AI will take many jobs in the coming years, what are you to do if you suddenly become unemployable with your current skill set and need to, for example, go back to school, or find an entry level job in another field with a potentially significantly lower salary? Live off of your savings?
But the damage has been done while the opponentparty was leading the country. Thats the important part. That was always the plan. And is again with the big beautiful bill when the big tax hikes will take effect with the next president…
Agreed, it cost me at least $10,000 because I had to pay fancier accountants to do all the R&D calcs. Not to mention the interest lost, my time spent figuring it all out, etc.
This thing was never meant to kick in. Congress has a loophole where they will pretend a bill is "revenue neutral" if it cuts taxes in the short term but increases them long term. So bills are full of time bombs that go off years in the future. Normally Congress cancels the tax increases before they take effect but they forgot to fix this one in time.
Happy to report that the laws of the universe are still in effect. NPR and PBS were defunded today so I’ll call it a wash.
(This is a joke, I’m happy for this change, but also raising that it’s in the middle of a lot of other crappy stuff and I’m holding space for all of it).
>My understanding is that this provision was originally enacted by Republicans during Trump's first term, so it follows Trump's practice of fixing things he was the one to break in the first place and attempting to claim credit.
My understanding is that this provision was originally enacted by Republicans during Trump's first term, so it follows Trump's practice of fixing things he was the one to break in the first place and attempting to claim credit.
It is slightly worse than that. The provision was changed by Republicans… but set to kick in after Trump’s first term, so the negative effects landed on Biden. Now that Trump’s back in office, it’s safe to improve the economy again without the wrong party getting credit for it.
Googled a bit and it looks like they indeed did try to do so, but, again, didn't have the votes.
The premise of your question is not in good faith though; why is it always the Dems who should be blamed for failing to fix things Republicans fuck up deliberately in the first place?
One thing that I haven’t seen widely reported on, but this article highlights is that the reversal is only for US based employees, so outsourcing jobs overseas will be more expensive compared to American talent (if salaries are equal). This seems good for the US tech industry, and I’m curious how this form protectionism compares to jobs in other sectors.
It’ll also be interesting to watch to see if this has any side-effects on the job market. In my experience in big-tech, a lot of the overseas jobs were historically supporting roles and “keep the lights on” for legacy services. I can imagine these tasks aren’t valuable enough to pay Silicon Valley salaries, and that’s why lower cost talent was used. It’ll be interesting to see if these roles move to low-COL or remote American workers. I can totally imagine that a European or even Indian salary for a senior engineer in big tech would be livable in some parts of the US.
> In my experience in big-tech, a lot of the overseas jobs were historically supporting roles and “keep the lights on” for legacy services.
I know a couple of tech CEOs (very small services companies), and they use offshore for all development. They don't have a single US engineer; only project managers.
> They don't have a single US engineer; only project managers.
That's what I never understood... why not outsource the project managers too? What is it about _project management_ that only onshore Americans can do? Whatever you think of programming, project management is much easier than programming.
PMs in service firms are usually client facing, or at least client oriented. Having them native puts a native face on the team and keeps the language/culture barrier inside the firm.
Communicating across language, culture and timezone barriers takes some effort. Having a native, local, PM means you delegate that work to the PM, instead of putting it on everyone who needs to interact with the PM.
> It’ll be interesting to see if these roles move to low-COL or remote American workers. I can totally imagine that a European or even Indian salary for a senior engineer in big tech would be livable in some parts of the US.
I think they will, Indian salaries for the top top eng are already comparable to decent eng from MCOL or LCOL US, so I could see this happening.
> so outsourcing jobs overseas will be more expensive compared to American talent (if salaries are equal).
I think this very much depends on how companies are "outsourcing"/hiring.
Like, if the devs you are outsourcing to are delivering you a "project-based app with ongoing support". Did you hire "developers" or are you doing business with a development company?
For many large tech cos, they also have local entities or PEOs, where people working for Facebook work for Facebook Ireland, or Facebook India.
So I'm not sure how much impact it has -- probably mostly for smaller shops that might hire 1 guy directly in a different country?
> I think this very much depends on how companies are "outsourcing"/hiring.
Yes and no. Obviously there are a million ways to do business and taxes are really complex, but the law doesn't revolve around actual salaries but "cost of software R&D" so this still applies to hiring contractors and other companies if the deliverable is software.
From the article:
> US companies making foreign software development-related expenditures like hiring staff, or paying for contracts abroad, are still mandated to be expensed over 15 years.
The big impact here seems to be on new companies, then, yeah?
Old established ones can absorb long-term expensing and more likely to be in cost-savings mode anyway.
But if you're a startup you are more incentivized to keep your development local. And I have seen a lot of near-shore, in particular, shops adverting aimed startup/medium-sized companies recently, so that might be significant.
He's not saying it's only true when salaries are equal. It makes a significant difference at the margin: if you're an employer debating whether to employ US talent or offshore talent, weighing time zones, skill and other factors against cost, then introducing a tax advantage for domestic hiring will cause those employers who were otherwise indifferent between the two options to now prefer US labor.
Does this mean a huge hiring uptick in the US/layoff reversal? I do think this law caused some of the bad market. Will undoing it get us back to where we were?
Definitely not. Repealing section 174 (or not extending it, as it were) helped pushed us into a new normal for the market. Adding it back doesn't in and of itself push the market into another new normal, we'd need a lot more. It might take the edge off though, hopefully.
Agreed. Consider that we're in a big tech bubble right now (AI) and have been for at least a couple years. And yet tech layoffs have been way up, and hiring way down. Part of that that could be attributable to 174, but there are other issues that contribute more. One would be that there are vanishingly few people with actual experience in this narrow part of AI (LLMs) - I know people working in AI that have been laid off in the last couple of years because they were in the wrong area of AI (vision & CNNs). Secondly, it turns out that not that many people are needed to work on this stuff (mostly concentrated in large companies like Meta, Google, Microsoft & Amazon). And thirdly, folks in the C suite became convinced that AI is going to replace software engineers so they've quite hiring them.
> And thirdly, folks in the C suite became convinced that AI is going to replace software engineers so they've quite hiring them.
I think this is the real reason for much of the layoffs.
The other reason is simply that the market isn't punishing layoffs. You get rewarded as a CEO for laying off employees and saying "It's because AI makes them obsolete"
A huge uptick / reversal, I'm not sure, that's ultimately far more driven by actual profit / market than taxes.
But as pointed out in the article, US devs now have a tax advantage vs foreign devs. That may lead to some "nearshoring" especially from foreign markets where dev salaries have been jumping up (India, Europe, etc.)
I think what we're seeing is the fossilization of the newest batch of mega tech companies looking to rest on their laurels and prioritize profits over innovation.
Because just anyone in India won't work for $10/hr and ChatGPT doesn't make any difference working in enormous big tech codebases with all in-house technologies
just be patient and wait for the off shore contractor's vibe coded shit pile to burst into flames and come in and fix shit for a big premium while being able to communicate with the customer during their preferred time zone and in the local dialect.
Most US devs are paying their bills. If you can't get a job even freelancing, do something else instead of waiting for the government to give you a handout job. Millions and millions of US devs are worth their salary over foreign ones (in fact many of those millions ARE foreign devs where it was worth paying to bring them here and paying them higher ages)
Basically it's more about cash flow than profit. In the example, you can claim those expenses back eventually so if you survive the initial $1M hit then after the time period has passed you're back to normal.
For a small business this is astronomically harder than for Google.
I have this image in my head that R&D is some boffins in the back room inventing a something new, and then expanding on that idea is execution.
But "and development" covers everything we do in software development. Whether you fix a bug or write some documentation you are developing the product in some small way.
I imagine some business will need to restructure so the US arm is paying a service contract to use the software, and the foreign arm will own and develop the software.
Every year I have to gather documents as evidence of our R&D. The distinction from the accountants was that anything that was not BAU counted. So fixing a bug and supporting a production system did not count but developing a new feature would count.
I think your accounts are running a risk. Fixing a bug is really just "finishing" previous development work. Where do you draw the line. Which is a bug, a button that does something wrong; a button that does nothing; or a missing button?
> "In short, salaries paid to software engineers can no longer be deducted as a cost, like all other employee wages are."
I simply can not accept this as the full story. Here is why:
Google is full of software engineers. If the effect on the bottom line was this big, they have the capacity (together with Oracle, Palantir, Meta depending on the administration) to simply change the government.
They would not have waited for the legislation "to fix it". It would have been changed immediately. Since they haven't done that, I am questioning whether this is the full story. Happy to be proven wrong.
Why, every single time governments want to raise tax, do they target individual people? The explicit goal was to increase tax collection from tech companies, and what do they do? Charge per employee, forcing everyone from startups (especially) to large tech companies, and everyone in between, from your garage to your phone company to really think about if they really need every software engineer they have.
This still effectively means the price difference between US and non-US software engineers (and ancillary, like data engineers) is increased by 1.04^15 (the risk-free interest rate on expenses, over 15 years). This works out to about US-based SWEs being about 33.5% cheaper. TLDR: this is not enough to prevent jobs moving to India. Or should I say, it means the US charges US companies per-employee income tax of 33.5% for every NON-US software engineer on top of their pay.
Unless you are speculating about tax policy, there is basically no case where you would want to do this. Losses now are worth more than losses later in terms of corporate tax. And if you are a startup burning runway, you might not live long enough to actualize the loss if you amortize it. From the perspective of day-to-day operations: the software engineers need to get paid, and that money has to come from somewhere, revenue, a loan, or the bank account. It's very much not spread out over 5 years in terms of your actual cash flow needs.
Typically businesses amortize large capital expenditures, and this allows the business to appear profitable even when they had a significant outbound cash flow. This is just something they're allowed to do with accounting in the US. There's an argument that you should take out a loan for situations like this, because then the cash flow events will more closely match the changing value of the business.
I would not try to make sense of it in terms of business accounting, there's no deeper understanding of business to be had. It's just politics; and it made it objectively harder for startups with revenue to survive and grow.
iirc some companies (google?) had been doing that before section 174 anyway. (which is why it imo isn't super convincing to tie layoffs with section 174 rather than e.g. end of zirp)
ok I read it in https://blog.pragmaticengineer.com/section-174/ "Google: the tax change was minimal, because Google was voluntarily amortizing software development expenses for most staff, already."
If your salaries exceed your sales by more than 5x, then it makes sense to deduct only 1/5 of those salaries this year, and save the rest of the deduction for later. That's in case your business lasts another year.
It's not just that the company is operating at a loss, but it has to be operating at a really big loss, such as a startup with a high burn rate.
I'm really confused as to how Section 174 made it in in the first place. It seems like a carveout specifically to target software engineers, who, despite being a wealthy bloc, still work for their money.
Why was this done? Simple vengeance in 2022 for how high salaries got and how many silicon valley people were bragging about buying a second house by the slopes? Or was there a deeper policy reason?
The 2017 tax cuts were big cuts, but the way the government budget process works, they want to minimize the “appearance” of deficit spending across a decade window. To do this, added a cliff in 2023 that would raise the taxes on tech companies to help offset the cost of their cuts. Side effect is that the next administration gets shitty economic news. Dec 2022 and January 2023 had lots of crazy layoffs, right on schedule.
The reason it was tech companies specifically is that they’re super wealthy and could (ostensibly) afford it. If you’ll notice, the law exempted software development in oil and gas companies. It doesn’t hurt that tech companies and employees leaned strongly democrat in 2017. The conspiracy theorist in me thinks the tech companies accepted the 2022 hiring mania knowing layoffs were eminent.
> Side effect is that the next administration gets shitty economic news.
Doesn't this analysis assume that the 2017 administration expected to lose the 2020 election?
I'm genuinely curious. What would have happened if Donald Trump had won the 2020 election? Do you think that the 2022 changes would still have come into effect, or do you think there would have been an effort to change them?
I don’t really want to dive into politics too much, but no, this doesn’t require losing, but I do think he expected to lose.
I think if trump won in 2020 he would have pushed for a new tax policy which preserved or even added cuts and “restarts” the cliff in the 2024 term. The “big beautiful bill” which recently passed also adds cliffs for additional stuff, and he’s claimed he wants to be elected in 2028.
The effects of Section 174 seem to be understated, it aligns with the layoffs and the size of the layoffs.
IMO the effects of Section 174 are way overstated. Time will tell, but my bet is that the market for software engineers continues to decline indefinitely. Maybe super low interest rates could mitigate the trend but other than that we're probably not going back to the days of high demand software engineering roles.
Why? A dozen different reasons. Of course LLMs are one facet, there's also the commodification of software and infrastructure which means buying something off the shelf is far cheaper than running an engineering org in-house, there's also the fact that the market is extremely oversaturated with software engineers with hundreds of thousands laid off over the last few years, then there's the aggregate effect of advancements in PL and software system design which makes it a lot easier to do more with less, the broader homogenization of runtime systems with modern browsers and mature cross-platform toolkits... and many many other factors. All these trends are converging on downward pressure for demand, and I personally don't see any reason why the trend will reverse.
I don't fundamentally disagree but I feel there's a selection bias at work here. I'm not an economist, but: maybe the things that could have a market bolstering effect are - by nature - harder to identify because they represent growth opportunities that haven't been captured yet? The sector-reinvigorating innovations over the horizon wouldn't be innovations if they were easy to anticipate.
Disclaimer, not an economist.
A coincidental combination of economical conditions happened before the layoffs, and I know correlation doesn't imply causation, but these conditions look like a big cause:
* Companies hired like crazy in Covid * Section 174 got disabled * Interest rates rose
This made money much more expensive, and employees became a much higher cost due to the fact you hired like crazy, so you have a ton more, and you can't amortize them, also combined with fears of recession in 2023.
In a very short term, this cocktail of conditions made operating a company much more expensive, thus the layoffs and reorgs as an attempt to cut costs.
What you are saying is also true, but I see that taking effect over a longer period of time.
When companies were hiring like crazy, were they really not expecting interest rates to rise in the future? Just how deep was the faith in MMT that printing all that stimulus wouldn't cause inflation? Personally I was surprised it took as long as it did.
In my experience the higher up you get on the corporate ladder, the less you’re going to be held accountable for anything. Executives only stick around until they get bored or can cash out. Five years down the line it might as well be a totally different company.
From what I've seen so far, one company does something and the others do the same to not get left behind.
Company A hires like crazy due to Covid, then everyone else does the same because they must be on to something!
I agree, I don't know why they expected covid conditions to be the new normal.
I think the only company who didn't get on the crazy hiring bandwagon was Apple.
Also shift in organizational investment away toward AI and away from earlier hotness.
I feel like we'll get a good feel for this if hiring domestic engineers picks back up without an influx of foreign folks who are not receiving the positive tax treatment.
It seems like this reversion is being paired with changes to 41(d)(1)(A) and 280C(c)(1)
> The domestic research or experimental expenditures . . . otherwise taken into account as a deduction or charged to capital account under this chapter shall be reduced by the amount of the credit allowed under section 41(a). Read in conjunction with Section 41(d)(1)(A), discussed above, it seems that all taxpayers claiming a research tax credit will necessarily have costs which are treated under Section 174A and thus subject to the reduction specified under amended Section 280C(c)(1).
> To our knowledge, many taxpayers have interpreted this language to mean that there is a reduction under 280C(c)(1) only to the extent the research credit exceeds the amortization allowed under Section 174, generally 10% in the year the expense is incurred under the applicable half-year convention. In that case, there would typically be little or no reduction to deductions and capitalized amounts, and correspondingly no reason to elect a reduced credit in lieu of a nonexistent or minimal reduction.
https://www.morganlewis.com/pubs/2025/07/new-section-174a-re...
TL;DR: I don't think we're out of the woods yet
Layoffs were a reaction from capital against labor gains.
If you think layoffs were bad the last few years then just wait until the costs for all the ai hardware, massively overpriced talent, and acquisitions hit the books for these companies. It's going to be a bloodbath.
Given the wage difference ... what does it matter? You make 200%-300% after tax in the US what you make in high cost areas of Europe (despite that the pre-tax difference is closer to 75% to maybe 125%). Normal US pay is comparable to tax-haven pay elsewhere: Europe (London, Luxembourg), Middle East (UAE), Asia (Singapore).
So in "a few years" (let's say 2-3 years) you'd be able to make between 5 and 10 years' worth of European net pay. If you don't raise your spending, that will easily cover your living expenses during the next recession, even if you spend all of it unemployed.
And that's if you start now. If you've been doing this for 10 years already ... wow.
Without getting into the differences about the benefits you get in many European countries compared to the US, I think it's pretty naive to think you could realistically save enough from a salary alone to live for an extended period of time (something like 1-2+ years) in the US simply because the net salary is higher. Expenses are high, and when you become unemployed they become higher (e.g. you have to pay out of pocket for your health insurance, either from the ACA exchanges or from COBRA), and if you end up having an unexpected expense it could cause a lot of issues since you don't have a regular stream of money coming in. If you're lucky it could be okay, but it's luck dependent.
Besides that, if we assume AI will take many jobs in the coming years, what are you to do if you suddenly become unemployable with your current skill set and need to, for example, go back to school, or find an entry level job in another field with a potentially significantly lower salary? Live off of your savings?
Interesting.
Is there someplace I can find information about how section 174 aligns with the frequency and size of layoffs?
The OP links to a deepdive on section 174
Someone must have made a mistake. This government just broke its perfect record of only fucking things up.
Considering this is reversing their own mistake, after damage has been done, it is still a net fuckup in aggregate.
But the damage has been done while the opponentparty was leading the country. Thats the important part. That was always the plan. And is again with the big beautiful bill when the big tax hikes will take effect with the next president…
Agreed, it cost me at least $10,000 because I had to pay fancier accountants to do all the R&D calcs. Not to mention the interest lost, my time spent figuring it all out, etc.
This thing was never meant to kick in. Congress has a loophole where they will pretend a bill is "revenue neutral" if it cuts taxes in the short term but increases them long term. So bills are full of time bombs that go off years in the future. Normally Congress cancels the tax increases before they take effect but they forgot to fix this one in time.
Happy to report that the laws of the universe are still in effect. NPR and PBS were defunded today so I’ll call it a wash.
(This is a joke, I’m happy for this change, but also raising that it’s in the middle of a lot of other crappy stuff and I’m holding space for all of it).
one step forward, two steps back.
The amendments to 41(d)(1)(A) and 280C(c)(1) might cancel this out and mean things are still fucked up
https://www.morganlewis.com/pubs/2025/07/new-section-174a-re...
>My understanding is that this provision was originally enacted by Republicans during Trump's first term, so it follows Trump's practice of fixing things he was the one to break in the first place and attempting to claim credit.
The [dead] comment is absolutely right.
Oh the roads don't work by you? The water? Electricity? Internet?
What?
My understanding is that this provision was originally enacted by Republicans during Trump's first term, so it follows Trump's practice of fixing things he was the one to break in the first place and attempting to claim credit.
It is slightly worse than that. The provision was changed by Republicans… but set to kick in after Trump’s first term, so the negative effects landed on Biden. Now that Trump’s back in office, it’s safe to improve the economy again without the wrong party getting credit for it.
Given the changes to 41(d)(1)(A) and 280C(c)(1) that were paired with this reversion, we might not see things pick back up after all
https://www.morganlewis.com/pubs/2025/07/new-section-174a-re...
So why didn't the Biden admin reverse it? They were able to pass the IRA etc. they could've included this provision.
Maybe the Democrats do deserve the blame.
Seems like it's possible for them to share the blame.
Then why didn't the Democrats fix it when they were in power?
Googled a bit and it looks like they indeed did try to do so, but, again, didn't have the votes.
The premise of your question is not in good faith though; why is it always the Dems who should be blamed for failing to fix things Republicans fuck up deliberately in the first place?
[dead]
"Tell HN: Help restore the tax deduction for software dev in the US (Section 174)", 900+ comments, https://news.ycombinator.com/item?id=44226145
"OBBB signed: Reinstates immediate expensing for U.S.-based R&D", 300+ comments, https://news.ycombinator.com/item?id=44469124
One thing that I haven’t seen widely reported on, but this article highlights is that the reversal is only for US based employees, so outsourcing jobs overseas will be more expensive compared to American talent (if salaries are equal). This seems good for the US tech industry, and I’m curious how this form protectionism compares to jobs in other sectors.
It’ll also be interesting to watch to see if this has any side-effects on the job market. In my experience in big-tech, a lot of the overseas jobs were historically supporting roles and “keep the lights on” for legacy services. I can imagine these tasks aren’t valuable enough to pay Silicon Valley salaries, and that’s why lower cost talent was used. It’ll be interesting to see if these roles move to low-COL or remote American workers. I can totally imagine that a European or even Indian salary for a senior engineer in big tech would be livable in some parts of the US.
> In my experience in big-tech, a lot of the overseas jobs were historically supporting roles and “keep the lights on” for legacy services.
I know a couple of tech CEOs (very small services companies), and they use offshore for all development. They don't have a single US engineer; only project managers.
> They don't have a single US engineer; only project managers.
That's what I never understood... why not outsource the project managers too? What is it about _project management_ that only onshore Americans can do? Whatever you think of programming, project management is much easier than programming.
PMs in service firms are usually client facing, or at least client oriented. Having them native puts a native face on the team and keeps the language/culture barrier inside the firm.
Communicating across language, culture and timezone barriers takes some effort. Having a native, local, PM means you delegate that work to the PM, instead of putting it on everyone who needs to interact with the PM.
...and usually, cheaper.
I think the main reason is because the CEO wants someone that they can grab in-person, at any time.
And - if I'm being honest - the CEO doesn't need to concern themselves with the time differential or language barrier. Those are the PMs' problems.
If it's very small services companies using offshore for all development, they're not big tech at all
These are effectively MSPs and perform the kind of role GP describes.
> It’ll be interesting to see if these roles move to low-COL or remote American workers. I can totally imagine that a European or even Indian salary for a senior engineer in big tech would be livable in some parts of the US.
I think they will, Indian salaries for the top top eng are already comparable to decent eng from MCOL or LCOL US, so I could see this happening.
> so outsourcing jobs overseas will be more expensive compared to American talent (if salaries are equal).
I think this very much depends on how companies are "outsourcing"/hiring.
Like, if the devs you are outsourcing to are delivering you a "project-based app with ongoing support". Did you hire "developers" or are you doing business with a development company?
For many large tech cos, they also have local entities or PEOs, where people working for Facebook work for Facebook Ireland, or Facebook India.
So I'm not sure how much impact it has -- probably mostly for smaller shops that might hire 1 guy directly in a different country?
> I think this very much depends on how companies are "outsourcing"/hiring.
Yes and no. Obviously there are a million ways to do business and taxes are really complex, but the law doesn't revolve around actual salaries but "cost of software R&D" so this still applies to hiring contractors and other companies if the deliverable is software.
From the article:
> US companies making foreign software development-related expenditures like hiring staff, or paying for contracts abroad, are still mandated to be expensed over 15 years.
The big impact here seems to be on new companies, then, yeah?
Old established ones can absorb long-term expensing and more likely to be in cost-savings mode anyway.
But if you're a startup you are more incentivized to keep your development local. And I have seen a lot of near-shore, in particular, shops adverting aimed startup/medium-sized companies recently, so that might be significant.
In this case, is the US company making those foreign software development-related expenditures?
Or are they engaging in an arms-length B2B transaction to buy the finished product?
I suspect pretty strongly that the latter will be claimed and upheld on the facts.
> (if salaries are equal)
That's rarely the case, right?
He's not saying it's only true when salaries are equal. It makes a significant difference at the margin: if you're an employer debating whether to employ US talent or offshore talent, weighing time zones, skill and other factors against cost, then introducing a tax advantage for domestic hiring will cause those employers who were otherwise indifferent between the two options to now prefer US labor.
Only if the tax advantage more than offsets the difference in cost.
5 vs 15 year - debatable.
Immediate vs 15 yr? - no where is that cheap.
If the foreign team is only half as expensive, that still leaves you with $300k instead of $0 in the example given.
Mind breaking out the math?
https://news.ycombinator.com/item?id=44470230
> 15-year amort rule hurts your tax deduction, but 50 %+ lower offshore wages more than make up for it.
Eh, Indian software wages are no longer 50%+ lower then MCOL / LCOL US wages
Watch them increase the H1b cap after this "win"...
> The remaining thing that stings for companies is how foreign devs still need to be amortized for 15 years.
I'm having a hard time seeing the issue with this.
I had to wryly laugh when I read this framed as a bad thing. This is great news for American developers and product teams.
Isn't it just going to lead to more H1B abuse? I assume H1B developers count as U.S. persons for tax purposes.
Agreed! There are so many people in this country with the talent required for those positions.
Same.
Does this mean a huge hiring uptick in the US/layoff reversal? I do think this law caused some of the bad market. Will undoing it get us back to where we were?
Definitely not. Repealing section 174 (or not extending it, as it were) helped pushed us into a new normal for the market. Adding it back doesn't in and of itself push the market into another new normal, we'd need a lot more. It might take the edge off though, hopefully.
Agreed. Consider that we're in a big tech bubble right now (AI) and have been for at least a couple years. And yet tech layoffs have been way up, and hiring way down. Part of that that could be attributable to 174, but there are other issues that contribute more. One would be that there are vanishingly few people with actual experience in this narrow part of AI (LLMs) - I know people working in AI that have been laid off in the last couple of years because they were in the wrong area of AI (vision & CNNs). Secondly, it turns out that not that many people are needed to work on this stuff (mostly concentrated in large companies like Meta, Google, Microsoft & Amazon). And thirdly, folks in the C suite became convinced that AI is going to replace software engineers so they've quite hiring them.
> And thirdly, folks in the C suite became convinced that AI is going to replace software engineers so they've quite hiring them.
I think this is the real reason for much of the layoffs.
The other reason is simply that the market isn't punishing layoffs. You get rewarded as a CEO for laying off employees and saying "It's because AI makes them obsolete"
A huge uptick / reversal, I'm not sure, that's ultimately far more driven by actual profit / market than taxes.
But as pointed out in the article, US devs now have a tax advantage vs foreign devs. That may lead to some "nearshoring" especially from foreign markets where dev salaries have been jumping up (India, Europe, etc.)
I pray this is true. How can an experienced dev in the Bay area compete with someone in India that would work for $10 an hour with chatgpt?
Now that I write this, it's still a hard decision for big companies.
Same thing happened in the '90s...
I think what we're seeing is the fossilization of the newest batch of mega tech companies looking to rest on their laurels and prioritize profits over innovation.
They won't die, they are just the next IBM.
Because just anyone in India won't work for $10/hr and ChatGPT doesn't make any difference working in enormous big tech codebases with all in-house technologies
just be patient and wait for the off shore contractor's vibe coded shit pile to burst into flames and come in and fix shit for a big premium while being able to communicate with the customer during their preferred time zone and in the local dialect.
simple.
Most people cannot just wait around until this happens, there are bills to pay.
Most US devs are paying their bills. If you can't get a job even freelancing, do something else instead of waiting for the government to give you a handout job. Millions and millions of US devs are worth their salary over foreign ones (in fact many of those millions ARE foreign devs where it was worth paying to bring them here and paying them higher ages)
> The regulation especially hurt small businesses, bootstrapped companies, and those making a small loss or profit.
How does this affect FAANGs?
Basically it's more about cash flow than profit. In the example, you can claim those expenses back eventually so if you survive the initial $1M hit then after the time period has passed you're back to normal.
For a small business this is astronomically harder than for Google.
Does the 15-year period for non-US developers only apply to developers? What about roles like designers, product managers, and so on?
The technical qualification is "everything that qualifies as research and development"
I have this image in my head that R&D is some boffins in the back room inventing a something new, and then expanding on that idea is execution.
But "and development" covers everything we do in software development. Whether you fix a bug or write some documentation you are developing the product in some small way.
I imagine some business will need to restructure so the US arm is paying a service contract to use the software, and the foreign arm will own and develop the software.
Every year I have to gather documents as evidence of our R&D. The distinction from the accountants was that anything that was not BAU counted. So fixing a bug and supporting a production system did not count but developing a new feature would count.
I think your accounts are running a risk. Fixing a bug is really just "finishing" previous development work. Where do you draw the line. Which is a bug, a button that does something wrong; a button that does nothing; or a missing button?
> "In short, salaries paid to software engineers can no longer be deducted as a cost, like all other employee wages are."
I simply can not accept this as the full story. Here is why:
Google is full of software engineers. If the effect on the bottom line was this big, they have the capacity (together with Oracle, Palantir, Meta depending on the administration) to simply change the government.
They would not have waited for the legislation "to fix it". It would have been changed immediately. Since they haven't done that, I am questioning whether this is the full story. Happy to be proven wrong.
So glad to see some good news for a change! This gives me some more hope that my career path will still be viable in the future.
Why, every single time governments want to raise tax, do they target individual people? The explicit goal was to increase tax collection from tech companies, and what do they do? Charge per employee, forcing everyone from startups (especially) to large tech companies, and everyone in between, from your garage to your phone company to really think about if they really need every software engineer they have.
This still effectively means the price difference between US and non-US software engineers (and ancillary, like data engineers) is increased by 1.04^15 (the risk-free interest rate on expenses, over 15 years). This works out to about US-based SWEs being about 33.5% cheaper. TLDR: this is not enough to prevent jobs moving to India. Or should I say, it means the US charges US companies per-employee income tax of 33.5% for every NON-US software engineer on top of their pay.
> Companies have the choice to amortize salaries if they want.
I am curious, is there ever a time you would want this? Maybe if you’re operating at a loss?
Unless you are speculating about tax policy, there is basically no case where you would want to do this. Losses now are worth more than losses later in terms of corporate tax. And if you are a startup burning runway, you might not live long enough to actualize the loss if you amortize it. From the perspective of day-to-day operations: the software engineers need to get paid, and that money has to come from somewhere, revenue, a loan, or the bank account. It's very much not spread out over 5 years in terms of your actual cash flow needs.
Typically businesses amortize large capital expenditures, and this allows the business to appear profitable even when they had a significant outbound cash flow. This is just something they're allowed to do with accounting in the US. There's an argument that you should take out a loan for situations like this, because then the cash flow events will more closely match the changing value of the business.
I would not try to make sense of it in terms of business accounting, there's no deeper understanding of business to be had. It's just politics; and it made it objectively harder for startups with revenue to survive and grow.
Interesting, that's about what I suspected. Makes sense despite the absurdity, thanks!
iirc some companies (google?) had been doing that before section 174 anyway. (which is why it imo isn't super convincing to tie layoffs with section 174 rather than e.g. end of zirp)
ok I read it in https://blog.pragmaticengineer.com/section-174/ "Google: the tax change was minimal, because Google was voluntarily amortizing software development expenses for most staff, already."
But why though? That post seems to leave it at
> After five years, there can even be tax benefits to this kind of accounting.
without actually explaining what those benefits are. I'm genuinely curious why one would choose to amortize.
If your salaries exceed your sales by more than 5x, then it makes sense to deduct only 1/5 of those salaries this year, and save the rest of the deduction for later. That's in case your business lasts another year.
It's not just that the company is operating at a loss, but it has to be operating at a really big loss, such as a startup with a high burn rate.
I'm really confused as to how Section 174 made it in in the first place. It seems like a carveout specifically to target software engineers, who, despite being a wealthy bloc, still work for their money.
Why was this done? Simple vengeance in 2022 for how high salaries got and how many silicon valley people were bragging about buying a second house by the slopes? Or was there a deeper policy reason?
Republicans needed to raise taxes to meet their own reconciliation requirements in order to get the bill passed.
Simple as that. It's just raising random taxes to balance the bill.
This law was written in 2017 not 2022.
The 2017 tax cuts were big cuts, but the way the government budget process works, they want to minimize the “appearance” of deficit spending across a decade window. To do this, added a cliff in 2023 that would raise the taxes on tech companies to help offset the cost of their cuts. Side effect is that the next administration gets shitty economic news. Dec 2022 and January 2023 had lots of crazy layoffs, right on schedule.
The reason it was tech companies specifically is that they’re super wealthy and could (ostensibly) afford it. If you’ll notice, the law exempted software development in oil and gas companies. It doesn’t hurt that tech companies and employees leaned strongly democrat in 2017. The conspiracy theorist in me thinks the tech companies accepted the 2022 hiring mania knowing layoffs were eminent.
> Side effect is that the next administration gets shitty economic news.
Doesn't this analysis assume that the 2017 administration expected to lose the 2020 election?
I'm genuinely curious. What would have happened if Donald Trump had won the 2020 election? Do you think that the 2022 changes would still have come into effect, or do you think there would have been an effort to change them?
I don’t really want to dive into politics too much, but no, this doesn’t require losing, but I do think he expected to lose. I think if trump won in 2020 he would have pushed for a new tax policy which preserved or even added cuts and “restarts” the cliff in the 2024 term. The “big beautiful bill” which recently passed also adds cliffs for additional stuff, and he’s claimed he wants to be elected in 2028.
Trump was beating the ‘stolen election’ drum well before the actual election. He definitely expected to lose.
That said, if he hadn’t he could have just kicked the can down the road.
It was a suckers bet for Biden to win, because any attempt to change this (and there wasn’t much) was going to get blocked. Just like Afghanistan.
They would have just extended them without the political baggage of keeping “trump cuts” around
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@dang this appears to be a spam account.