>The delayed change to Section 174 — from immediate expensing of R&D to mandatory amortization, meaning that companies must spread the deduction out in smaller chunks over five or even 15-year periods.
Doesn't this just amortize out to be roughly the same amount of deduction over the long term?
All the big companies mentioned should be relatively unaffected over an N>5 year time period. Also this was something that's been in the works for years so their accountants should have been planning for it so it wasn't a financial shock (and company financials seem to indicate no such shock).
If you look at the time value of money[1], a $1,00,000 deduction this year is worth more than $200,000 deductions over the next 5 years.
But more importantly, the article claims it was used as a tax shield to grow.
"Basically, as long as spending counted as R&D, companies could report losses to investors while owing almost nothing to the IRS."
"Once those same expenses had to be spread out, or amortized, over multiple years, the tax shield vanished. Companies that were still burning cash suddenly looked profitable on paper, triggering real tax bills on imaginary gains."
Sure, but that doesn't account for the allegedly apocalyptic layoffs from companies that don't fit into the "real taxes on imaginary gains" mold.
I get that this is bad for the VC monopoly bucks scene, but they were already down for the most part. If the changes are as the article alleges than all these big tech companies that are posting huge layoffs should mostly be fine because it's not a serious change from status quo for them.
My company was affected. The amount of money paid in taxes more than quadrupled from one year to the next.
It hurt small businesses that were slightly profitable. No one else.
VC shops aren’t profitable anyway, so no taxes to pay.
Microsoft took a 4 or 5 billion dollar write off, but they can literally write a 5 billion dollar check.
The issue is that the IRS wants you to pay them today on profits and cash that literally don’t exist. You make $1M in revenue and pay 5 developers 200k/year? You have no money left at the end of the year, but you pay taxes as if you profited about 900k.
From the horror stories I read from other founders, the bank wouldn’t loan on those numbers.
When we asked our accountants what they were seeing from other companies, the answer was “mortgage their house.” That assumes they had enough equity to mortgage.
Interest rates are bigger motivator of the layoffs than these changes. When interest rates are high that means investors far more heavily prioritize profits today over profits tomorrow.
> Doesn't this just amortize out to be roughly the same amount of deduction over the long term?
With steady enough employment numbers, sure. Google has a weird one-time cost where they get hit with extra taxes at 80%, 60%, 40% and 20% of their employee's salaries for five-years and then it's all balanced. You can turn the money Google needs to borrow (or not invest) at some interest rate into a known number.
Any startup that is cash poor and especially one that is growing struggles. In year 3 you get to write off 20% of year 1's salaries, 20% of year 2's salaries and 20% of year 3's salaries.
> Doesn't this just amortize out to be roughly the same amount of deduction over the long term?
Yes, but if your business is not yet profitable, having to pay tax on money you don't actually have in the bank (because expenses exceeded revenue during the year) will cut into your runway, perhaps to the point that your company might not exist in five years... or even two or three.
Google, Facebook, Microsoft and many other of those old big companies are profitable though and they dont go anywhere in next 5 years (even if first 2 bleed out users)
Yes, if you are a profitable company operating at a steady state and your investors have a time horizon of (in other words, are locked in for) a decade or more.
Most companies in question don't fit these criteria. They are either large public companies subject to the reactions of the market to quarterly earnings, or small private startups that have limited cash (a runway of far less than 5 years) and are facing a perfect storm of a historic rise in the cost of capital coinciding with this change.
In either case, their cost of labor just went up by a lot and will continue to cause layoffs, labor market shrinkage, and diminished ability to develop new products.
Yes, big tech companies are lesser affected and they were already amortizing their expenses as “cap labor”.
It’s a pretty bad article general and to blame the law change on this is all kinds of disingenuous:
“It’s no coincidence that Meta announced its ‘Year of Efficiency’ immediately after.”
Doesn't this just amortize out to be roughly the same amount of deduction over the long term?
All the big companies mentioned should be relatively unaffected over an N>5 year time period. Also this was something that's been in the works for years so their accountants should have been planning for it so it wasn't a financial shock (and company financials seem to indicate no such shock).