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A freeze on the implementation of a controversial tax rule in the United States could be beneficial for software developers’ job prospects.
Section 174, a controversial 2022 US tax change that meant salaries paid to software engineers were not tax-deductible in the same year their wages were paid, has been put on ice.
The change required companies to amortize these salaries over five or 15 years, depending on whether the engineers were based in the United States or not.
Now, hidden in Trump’s Big Beautiful Bill is a provision that mostly reverses Section 174, allowing companies to choose not to amortize developers’ salaries – if they’re based in the US. Companies are able to claim developers’ salaries as an R&D expense that can be immediately deducted from their tax bill the year the expense is incurred.
“They made it make sense again,” says Zach Siri. “Companies are supposed to pay tax on profits, and making the R&D expense 100% deductible means companies can correctly pay tax only on profits, not bear the cost and amortize it over time,” he explains.
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A chilling effect on developer hiring
The rising cost of hiring developers since Section 174 went into effect in 2022 has likely resulted in companies laying off talented staff members.
James Patrick Flanagan, the CEO and co-founder of Resonant Cavity, a US-based company that employs 11 people, saw the impact immediately. “We could no longer expense the salaries of software developers,” he says. “Instead, we had to capitalize and amortize developer salaries, as though paying a developer to write code was somehow like buying a truck for the business or an industrial machine.” It was “absolutely insane to me,” he says. “I couldn’t believe what I was hearing.” Flanagan and his cofounder had to borrow $300,000 just to pay taxes in the first year it took place.
“I’m not sure if we’ve been living through a developer bubble but I do think a lot of companies over hired during Covid because of all the money printing,” says Zack Siri, who runs OpsMaru, and is a software developer himself. “A lot of companies died with the old Section 174, and a lot of companies also laid off a lot of people because of the old Section 174.”
Estimates of how significant the impact of the changes were differ: one policy analyst says up to 20,000 jobs were lost as a result. Deedy Das, a venture capitalist at Menlo Ventures, says that the decision cost half a million jobs. Das claims Section 174 was responsible for increasing Microsoft’s tax bill by $4.8 billion alone.
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A potential hiring bounceback
A freeze on Section 174 does reduce the risk of hiring more US-based developers, as companies will no longer be on the hook for a massive tax bill as a result.
Whether it’ll manage to counteract the scale of recent layoffs, Siri is less certain. “I do believe companies will start hiring developers in the US again because it makes sense now with the fix,” he says. “Ultimately the economy is weaker and people are spending more cautiously, so I doubt the hiring numbers will match what we’re seeing with layoffs.”.
But there remain issues with even the repeal of Section 174. The change in the Big Beautiful Bill is time-limited to five years, with the tax rule being reinstated by 2030 unless something changes legislatively. Also, the change doesn’t apply to non-US-based employees – around 30% of whom work outside the country for US companies, according to Revelio Labs. Resonant Cavity’s Flanagan calls this exclusion “absurd”, “unfortunate,” and “a very protectionist measure. I hope that can be changed during some trade negotiations in the future.”
