Why IRC §174—Not AI—Killed Tech Jobs
Tech workers have faced a brutal reckoning in the past few years. Over 500,000 employees in the sector were laid off since early 2023 alone. Many headlines blamed over-hiring or the rise of artificial intelligence (AI) as the cause of this downturn. But that narrative misses the mark.
“How did a single line in the tax code help trigger a tsunami of mass layoffs? And why did no one see it coming?”
In reality, a hidden time bomb in the U.S. tax code is the true culprit behind the tech job purge: the expiration of IRC §174. This post breaks down what really happened and explains why AI isn’t the villain it’s made out to be.
A Tax Break That Built Tech—Until It Expired
From 1954 to 2021, Section 174 of the Internal Revenue Code allowed companies to immediately deduct 100% of research and development (R&D) expenses, including salaries of engineers and developers. But a clause in the 2017 Tax Cuts and Jobs Act (TCJA) changed that. Starting in 2022, businesses were forced to amortize domestic R&D over 5 years, and foreign R&D over 15 years.
“In 2022, a startup that spent \(5M on R&D could only deduct \)500K.” — Cooley LLP
This led to surprise tax bills, reduced hiring, and a direct increase in taxable income—especially devastating for startups and R&D-heavy tech companies.
Innovation on Ice
Companies suddenly had to pay taxes on expenses they couldn’t deduct, leaving less capital for hiring and product development. It hit hardest where innovation was most active.
- Startups operating at a loss still owed taxes
- Tech giants slashed experimental projects
- Investors demanded profitability, pressuring teams to cut R&D
“I can deduct my salespeople, but I can’t deduct my engineers.” — Cybersecurity Lab CEO via CNBC
The U.S. became 1 of only 2 developed nations that requires amortizing R&D. Meanwhile, 17 countries now offer super-deductions (greater than 100%).
Tech’s Great Downsizing: IRC §174 Triggered It
In 2023, mass layoffs began—many firms slashing 10-25% of their workforce. While AI was blamed, internal reports and earnings statements pointed to something else: R&D became too expensive to carry.
- Meta cut 21,000+ jobs citing “efficiency” after amortization rules took effect
- Google, Microsoft, Amazon, Salesforce all cut 6–30% of staff
- VC-backed startups paused hiring or revoked offers due to tax liability
“Headcount—the leading R&D expense—was the easiest thing to cut.” — Quartz
The AI Scapegoat
AI became the public face of job fears, but it’s not what caused the layoffs.
- AI boosts productivity: engineers complete work faster
- Most AI tools assist rather than replace developers
- AI has created new jobs: prompt engineers, model integrators, trainers
“AI enhances productivity by automating the mundane, not replacing creativity.” — Sundar Pichai, Google CEO
A study by MIT & Stanford showed 14% average productivity gains with AI assistants. And yet, AI is still blamed for layoffs caused by a tax policy no one talks about.
Legislative Fixes Are in Motion
Congress is aware of the damage:
- Bipartisan bills introduced in 2023, 2024, 2025
- H.R. 7024 passed in the House to pause amortization, but stalled in Senate
- H.R. 1990 (2025) aims to restore immediate expensing retroactively
Even the White House’s Council of Economic Advisers supports bringing back full expensing.
“Expensing R&D is key to innovation, jobs, and competitiveness.” — CEA
Final Thoughts
The real story behind the tech job market collapse isn’t AI. It’s bad policy—a stealth tax hike that punished innovation. The good news? It can be reversed.
Meanwhile, AI is a force multiplier. The companies that succeed in the next cycle will be those that:
- Fight for better tax treatment of innovation
- Use AI to supercharge their teams, not shrink them
- Invest in human+AI workflows for long-term leverage
Need Help?
If you’re looking to integrate AI into your engineering org, streamline development, or upskill your team with real AI leverage Reach out.
Sources: