While the widespread adoption of artificial intelligence has often been cited as a key factor behind the massive tech layoffs in 2025, industry experts are now drawing attention to a less visible but potentially more impactful force: changes to Section 174 of the U.S. Internal Revenue Code.
In the first half of 2025, major U.S. corporations such as Microsoft, IBM, PwC, CrowdStrike, and other tech heavyweights have reportedly laid off hundreds of thousands of employees. While the rise of automation has fueled speculation, insiders believe a significant portion of these cuts can be traced to a silent accounting shift stemming from the 2017 Tax Cuts and Jobs Act, which came into effect in 2022.
Under the revised law, companies can no longer immediately deduct research and development (R&D) expenses. Instead, these costs must be amortised over five years for domestic R&D and fifteen years for foreign R&D, a change that has had profound implications for companies that rely heavily on innovation and software development.
“This is a big problem for startups,” said tech analyst Ben Thompson, explaining how a previously tax-neutral $500,000 salary expense can now trigger a $52,500 tax bill under the new code. Jesse Pujji, founder of multiple tech ventures, described the impact as a “200% increase in taxes”, a burden many early-stage companies are unprepared to bear.
The repercussions extend beyond startups. Deedy Das, Principal at Menlo Ventures, pointed out, “No one talks about the real reason driving the ~500k tech layoffs,” blaming the shift in tax treatment for forcing companies to offshore talent, cut back on R&D, and implement mass layoffs. According to EisnerAmper, a leading tax advisory firm, some businesses have even shifted from appearing unprofitable to profitable overnight—on paper—resulting in unexpected tax liabilities and cash flow challenges.
Amid mounting criticism, the U.S. House of Representatives passed the ‘One, Big, Beautiful Bill Act’ on May 22, 2025, temporarily suspending the amortisation rule for domestic R&D through 2030. However, the relief does not extend to foreign R&D, maintaining pressure on global operations and further encouraging cost-cutting measures.
The tech community is not taking the issue lightly. Y Combinator’s Luther Lowe is rallying alumni and industry leaders to lobby for a permanent repeal, warning that the current framework threatens to undermine America’s innovation edge. He called the situation a “make-or-break moment” for U.S. competitiveness in science and technology.
As the debate intensifies, many in the tech and startup sectors are closely watching whether lawmakers will act decisively to fix what some are calling the “stealth tax bomb” that could reshape the future of the U.S. innovation economy.
