[HN Gopher] Section 174 is reversed, mostly
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Section 174 is reversed, mostly
Author : jawns
Score : 122 points
Date : 2025-07-18 18:07 UTC (4 hours ago)
(HTM) web link (newsletter.pragmaticengineer.com)
(TXT) w3m dump (newsletter.pragmaticengineer.com)
| avbanks wrote:
| The effects of Section 174 seem to be understated, it aligns with
| the layoffs and the size of the layoffs.
| bsuvc wrote:
| Interesting.
|
| Is there someplace I can find information about how section 174
| aligns with the frequency and size of layoffs?
| adamors wrote:
| The OP links to a deepdive on section 174
| enjo wrote:
| 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.
| ch33zer wrote:
| 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.
| root_axis wrote:
| 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.
| crackrook wrote:
| 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.
| culi wrote:
| 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
| breakyerself wrote:
| Someone must have made a mistake. This government just broke its
| perfect record of only fucking things up.
| schneems wrote:
| 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).
| em-bee wrote:
| one step forward, two steps back.
| catlover76 wrote:
| 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.
| BryantD wrote:
| 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.
| culi wrote:
| 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...
| randerson wrote:
| Considering this is reversing their own mistake, after damage
| has been done, it is still a net fuckup in aggregate.
| tpetry wrote:
| 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...
| 1auralynn wrote:
| 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.
| leptons wrote:
| > _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.
| culi wrote:
| 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...
| wmf wrote:
| 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.
| throwawaybbq1 wrote:
| 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?
| jesol wrote:
| 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.
| UncleOxidant wrote:
| 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.
| cogman10 wrote:
| > 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"
| aprilthird2021 wrote:
| 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.)
| y-curious wrote:
| 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.
| dingnuts wrote:
| 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.
| coliveira wrote:
| Most people cannot just wait around until this happens,
| there are bills to pay.
| aprilthird2021 wrote:
| 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)
| bcrosby95 wrote:
| 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.
| aprilthird2021 wrote:
| 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
| vineyardmike wrote:
| 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.
| aprilthird2021 wrote:
| > 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.
| jszymborski wrote:
| > (if salaries are equal)
|
| That's rarely the case, right?
| mediaman wrote:
| 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.
| lowbloodsugar wrote:
| Only if the tax advantage more than offsets the difference
| in cost.
| lazide wrote:
| 5 vs 15 year - debatable.
|
| Immediate vs 15 yr? - no where is _that_ cheap.
| lbotos wrote:
| > 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?
| vineyardmike wrote:
| > 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.
| majormajor wrote:
| 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.
| sokoloff wrote:
| 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.
| walterbell wrote:
| 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._
| aprilthird2021 wrote:
| Eh, Indian software wages are no longer 50%+ lower then MCOL
| / LCOL US wages
| ChrisMarshallNY wrote:
| _> 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.
| commandlinefan wrote:
| > 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.
| ChrisMarshallNY wrote:
| ...and usually, cheaper.
|
| I think the main reason is because the CEO wants someone
| that they can grab in-person, at any time.
| Ancalagon wrote:
| 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.
| heyjamesknight wrote:
| 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.
| JeffMcCune wrote:
| These are effectively MSPs and perform the kind of role GP
| describes.
| aprilthird2021 wrote:
| If it's very small services companies using offshore for all
| development, they're not big tech at all
| qkeast wrote:
| Does the 15-year period for non-US developers only apply to
| developers? What about roles like designers, product managers,
| and so on?
| semitones wrote:
| The technical qualification is "everything that qualifies as
| research and development"
| jay_kyburz wrote:
| 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.
| kevmo314 wrote:
| > 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?
| alphazard wrote:
| 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.
| kevmo314 wrote:
| Interesting, that's about what I suspected. Makes sense
| despite the absurdity, thanks!
| analog31 wrote:
| 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.
| tonfa wrote:
| 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."
| kevmo314 wrote:
| 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.
| mertleee wrote:
| Watch them increase the H1b cap after this "win"...
| mlsu wrote:
| 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?
| vineyardmike wrote:
| 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.
| wunused wrote:
| > 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?
| lazide wrote:
| 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.
| culi wrote:
| 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.
| walterbell wrote:
| _" 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
| froggertoaster wrote:
| > 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.
| eweise wrote:
| Same.
| mortenjorck wrote:
| I had to wryly laugh when I read this framed as a bad thing.
| This is _great_ news for American developers and product teams.
| iooi wrote:
| > The regulation especially hurt small businesses, bootstrapped
| companies, and those making a small loss or profit.
|
| How does this affect FAANGs?
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