R&E Blues – Section 174 tax changes with potential further impact on tech sector layoffs...
The 2022 amendment to Section 174 of the US tax code has profound implications for businesses, especially in technology. Previously, companies could immediately deduct research and experimental (R&E) expenses or amortize them over five years; software development costs had similar options. The Tax Cuts and Jobs Act (TCJA) amendments now mandate a five-year amortization for domestic R&E costs and 15 years for international, affecting software development as well.
This shift from immediate deduction to mandatory amortization is significantly increasing tax burdens, impacting cash flow and financial planning for many companies. For the tech sector, where R&E and software development are crucial, this could lead to decreased R&E investment, potential layoffs, and slower growth. While the R&D tax credit under Section 41 remains, the inability to deduct full R&E expenses in the year incurred may diminish its benefits.
Despite bipartisan support to repeal this requirement, legislative progress is slow, posing long-term risks to innovation and employment in the tech industry and beyond.
