A hidden time bomb in the tax code fueled mass tech layoffs. Here’s how it works

Quartz published an investigation earlier this month revealing how a tweak to an obscure section of the U.S. tax code helped fuel a wave of mass tech layoffs.

The investigation detailed how the first Trump administration’s signature legislative achievement, the 2017 Tax Cut and Jobs Act (TCJA), included a delayed change to Section 174 of the tax code. Section 174 is a little-known provision that had, for decades, quietly shaped how American companies invest in research and development. The TCJA’s changes to Section 174, which didn’t take effect until 2022, altered the tax treatment of a wide swath of America’s white-collar workforce, from engineers and developers to product managers and even some marketing and administrative staff.

After the tweak went into effect, a tsunami of layoffs followed. Half a million tech workers lost their jobs. But the change to Section 174 drew little notice as a driving factor.

“It did harm productivity,” said Dean Zerbe, a former senior counsel to the Senate Finance Committee and now National Managing Director at the tax consulting firm Alliant. “It did harm hiring. It did harm innovation.”

The blast zone extended well beyond Silicon Valley, rippling across sectors far outside tech. Zerbe emphasized the impact on the agricultural sector, “where you have a huge amount of R&D actually going on when you get out there to the farms. There's just no end of what those folks are doing that's innovative.” Architecture and manufacturing firms were also hard hit, he said, especially small- and medium-sized businesses.

The specific ways that the Section 174 change impacted the white-collar labor force are worth examining in greater detail. How exactly did the change rewire the logic of employing American engineers and developers, among others? Here’s what to know.

Engineers became more expensive than other employees

It’s important to understand how payroll works, in both an accounting and tax sense. For most of modern Corporate America, employee wages — from secretaries to senior engineers — are treated as operating expenses (known as “op-ex”).

This means businesses can deduct salaries, payroll taxes, and benefits from their taxable income in the year those costs are incurred. This system aligns with how salaries function in practice: They’re recurring, essential expenses that support daily operations.

Before 2022, that treatment also applied to technical and product-focused roles that counted as research and development — so long as they qualified under Section 174. Companies could deduct the full cost of R&D payroll, contractor fees, and software development immediately, aligning tax liability with actual cash flow.

The 2017 Trump tax bill disrupted that alignment by requiring companies to spread out R&D expenses – including qualified payroll – over a period of years, five years for domestic work and 15 for foreign work. In doing so, it effectively recast those labor costs as capitalized expenses (known as “capex”), or long-term investments like equipment, factories, and server farms.

That might seem like a wonky bookkeeping nuance. But in practice, it’s an explosive shift: Op-ex changed to capex for tax purposes. But unlike server farms, engineers and product managers don’t sit on a balance sheet. They’re paid regularly, in cash.

This creates a serious mismatch between a business’ cash flow and its taxes.

Under the tweaked system, a single engineer now triggers a significantly bigger near-term tax bill than other kinds of employees, which makes them functionally more expensive to employ.

But it’s not just functional cost. It’s real cost, because those delayed deductions lose value over time — thanks to inflation, interest rates, and the basic math of capital. When companies can’t write off an engineer’s salary immediately, they’re effectively lending money to the IRS, interest-free, and recouping it in depreciated chunks over five or 15 years. That means the present value of the tax benefit shrinks. So even if the salary stays the same on paper, the economics shift: Engineers become more expensive to employ not just in theory, but in actual dollar terms.

At scale, the math gets even worse. The more engineers and technical staff a company employs, the larger the gap between what it pays out and what it can deduct.

For startups and other small businesses that are pre-revenue or otherwise operate close to the bone, management may struggle to eat that cost. A large public company with thousands of R&D employees sees a ballooning tax base, too — even if its operating model hasn’t changed. In effect, the tax code now penalizes investment in human capital at both the small end and among larger, cash-rich companies where you’d otherwise expect investment to accelerate.

Think about it this way: A tech startup hires an engineer with a $150,000 salary. Before 2022, the company could deduct the full $150,000 from its taxable income in the same year, reducing its tax bill accordingly. After the Section 174 change, that same salary must be deducted in $30,000 chunks over five years. The company still pays the full salary that year — in cash — but can only claim a fraction of it on that year’s taxes. The rest of the deduction dribbles in slowly over time, even as the engineer’s cost is immediate. Multiply that mismatch across a team of engineers, and suddenly growth becomes a lot more expensive.

Double whammy: an incentive to fire and a disincentive to hire

The Section 174 changes in the Tax Cut and Jobs Act didn’t just affect existing, qualified payroll. It created an active disincentive to hire. After the changes went into effect in 2022, when a company considered hiring a new engineer, executives understood that that engineer would spark a tax bill. Each engineer they might add would increase the effect and the hit to their cash flow.

Especially for pre-profit or break-even firms, this can flip the logic of expansion: Growth looks less viable, because it comes with delayed benefits and immediate liabilities. Over time, this subtly pushes firms toward keeping headcount to a minimum, or outsourcing abroad where rules and costs may be more favorable. So even as it helped fuel layoffs, the new tax treatment also chilled future hiring — compounding the pressure on tech workers. 

A brutal tax experiment, with real-world consequences

What Section 174’s quiet transformation shows is just how brittle even thriving sectors can be when government policy shifts. What was once a pro-innovation provision became, almost overnight, a hidden tax on ambition — punishing the companies that invest in domestic talent and technical risk-taking.

The fallout didn’t happen in a vacuum. It rippled across startups and giants alike, as hiring plans shrank, product roadmaps were shelved, and engineers found themselves unexpectedly expendable. In a period defined by uncertainty, the worst part may be how few people saw it coming.

Now lawmakers are scrambling to undo the damage. The House-passed version of Republicans’ sweeping domestic policy bill would temporarily restore the full R&D tax break through 2029. But Senate Republicans are pushing for a more durable fix: restoring it permanently and even reimbursing some smaller firms for taxes paid after the tweak went into effect.

 “It’s critical,” North Dakota Republican Sen. Kevin Cramer told Quartz this week. “The opportunity to deduct is huge… deductibility in the year that you purchase something is a clear pro-business, pro-growth policy.”

 Zerbe said a policy change would help improve the job market going forward. It’s not the case, he said, that “Silicon Valley's going to get another case of champagne.” Instead, “there'll be champagne and beer for workers, for everybody. It'll be extremely good news to get this forward.”

 —Joseph Zeballos-Roig contributed to this article.