A change in the law in 2017 requires tech companies like Meta to suddenly pay millions more in taxes for research and development areas in the USA. The consequences? Mass layoffs.
What law has changed? Until the end of 2021, US companies were allowed to immediately deduct their research and development costs (R&D) in full (§ 174 of the US tax code). This included salaries, material costs, rent, and much more.
With the Tax Cuts and Jobs Act (TCJA, 2017), a system of mandatory amortization was introduced starting in the 2022 tax year: R&D investments must now be amortized over 5 years, with foreign expenses amortized over 15 years. This is a radical change for research-intensive industries and companies, as ABGI reports.
Rising costs lead to layoffs
What do tech giants have to do with it? Tech giants like Meta and Google invest billions in research and development – especially in AI, new hardware, or software solutions. As a result, their tax burden has been significantly high since 2022.
As reported by 3Djuegos, the previous rules allowed companies to pay high salaries and hiring bonuses to remain attractive in the competition for skilled workers. These costs could be immediately tax-deductible, effectively reducing total expenses.
Due to the new amortization mechanism, the tax burden increased significantly – an effect that likely put considerable financial pressure on companies like Meta (via FastCompany). According to Quartz, the law change hit many tech companies hard. Meta CEO Mark Zuckerberg responded with the declared “Year of Efficiency”, which resulted in large-scale job cuts.
What are the implications of the changes for the future? Major tech companies like Microsoft, Apple, Google, or Meta were able to develop their innovations in an environment that allowed direct tax relief on investments. This environment no longer exists – and that could significantly slow down future innovations.
Microsoft’s operating systems were developed in the state of Washington. Apple’s original hardware and software development took place in California. Google’s search engine started at Stanford and was further developed from Mountain View. The entire social platform of Facebook was conceived in Menlo Park (via qz).
This is likely to change in the future, as the location USA will ultimately become too expensive from a tax perspective. This could lead to relocations abroad.
While companies like Meta lay off their employees for cost reasons, others are turning to AI – only to find that people are indeed irreplaceable. Read here how a company first laid off employees to subsequently rehire them due to AI: A company laid off 7,800 employees to replace them with AI, but it was not expected that many employees would be rehired because of AI
