For over a year, Section 174 of the US tax code cast a shadow over the tech industry. Enacted in 2017 but taking full effect in 2022, this provision treated software development costs like physical capital expenditures, requiring companies to amortize engineer salaries over five years for US-based talent and a staggering 15 years for overseas developers. Unlike servers or real estate, however, software development yields no tangible asset with resale value—turning routine labor costs into long-term financial anchors.

As detailed in The Pragmatic Engineer Newsletter, the impact was severe: bootstrapped startups or companies operating near breakeven suddenly faced massive tax bills. A firm with $1M in revenue and $1M in US developer costs—previously tax-neutral—owed $189,000 in taxes because only 20% of those salaries could be deducted annually. This made hiring engineers prohibitively expensive, especially for smaller players.

The Reversal: A Lifeline for Domestic Tech Hiring

Buried within recent federal legislation, a critical amendment emerged: US-based software development costs can now be fully expensed in the year they occur, reverting to pre-2023 rules. Companies may also retroactively refile 2022-2024 tax returns to reclaim overpayments. This eliminates a major barrier to domestic tech hiring and provides immediate liquidity relief.

"This is an immediate relief to all US companies," notes The Pragmatic Engineer, but cautions: "It’s not all good."

The Unresolved Burden: Global Talent in the Crosshairs

The reform maintains the 15-year amortization requirement for "research and experimental" (R&E) work performed outside the US. This creates a stark incentive structure:
- US-based developers: Full salary deduction in year of payment
- Non-US developers: 6.67% of salary deductible annually for 15 years

This discrepancy could force US tech firms to reconsider offshore development centers, contractor networks, and international hiring pipelines—particularly in tech hubs like Europe and India. The extended amortization period effectively increases the after-tax cost of foreign engineering talent by 20-30%, according to financial analysts.

Implications for Engineering Leaders

  1. Reshored Innovation: Expect increased pressure to consolidate R&D within US borders, potentially accelerating "onshoring" trends already emerging due to geopolitical risks.
  2. Startup Survival: Cash-strapped startups gain breathing room as domestic engineering costs return to normal tax treatment.
  3. Global Team Turbulence: International tech hubs face headwinds as US companies reevaluate offshore investments. Non-US engineers working for American firms may encounter reduced opportunities.

The partial repeal underscores how tax policy remains a silent architect of tech ecosystems. While domestic innovation gets a boost, the lingering 15-year rule for global talent introduces new friction in an industry built on borderless collaboration—proving that regulatory changes can reshape labor markets as profoundly as any algorithm.