Tax Effects on Hiring Opportunities of Programmers

  The most significant U.S. tax change affecting software development companies 

is the modification of IRC Section 174, enacted in 2022 (via the 2017 TCJA), which 

ended immediate expensing for R&D costs. Companies are now required to capitalize 

and amortize software development costs—including engineer salaries—over 5 years 

for U.S. research and 15 years for foreign research. 

  Donald Trump was the President of the United States when the Tax Cuts and Jobs 

Act (TCJA) was passed and signed into law on December 22, 2017. 

Key Impacts and Recent Developments:

  Cash Flow Disruption (2022–2024): The rules created significant tax liabilities 

for software companies—even those operating at a loss—by delaying deductions for 

software labor costs.

  Reversal/Relief (2025): The "One Big Beautiful Bill Act" (OBBBA), enacted on 

July 4, 2025, reverses this requirement, restoring full immediate expensing for 

domestic R&D costs for tax years beginning after December 31, 2024.

  Retroactive Changes: For certain small businesses, the 2025 legislation allows 

for retroactive R&D deductions for tax years 2022-2024, providing opportunities 

to amend prior returns and claim refunds.

  Impact on Strategy: During the 2022-2024 period, the capitalization requirement 

led to significant cash flow constraints, hiring freezes, and increased tax burden, 

driving many companies to reconsider hiring in the U.S..

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India provides significant tax incentives for R&D, allowing companies to deduct 

100% of revenue and capital expenditures—including software developer salaries—

incurred for scientific research under Section 35 of the Income Tax Act. Companies 

in biotechnology or manufacturing with DSIR-approved in-house R&D centers can 

claim this 100% deduction. 

Key Aspects of R&D Tax Laws in India

Eligible Expenses: Under Section 35(2AB) in 1997, qualifying expenses include 

salaries paid to software developers, engineers, and scientists engaged in R&D, 

as well as consumables and related technical expenses.

Weighted Deductions: While previously higher, the weighted deduction (super 

deduction) for in-house R&D expenditure has been phased out, returning to a 100% 

standard deduction as of the 2020-21 financial year.

Eligibility Criteria: The company must be engaged in biotechnology or manufacturing 

and have its R&D facility approved by the Department of Scientific and Industrial 

Research (DSIR).

Capital vs. Revenue Expenditure: Section 35 allows for 100% deduction on revenue 

expenditure. Capital expenditure on research (excluding land) is also fully 

deductible.

Sponsored Research: Payments made to approved universities, IITs, or national 

laboratories for scientific research are also eligible for deductions.

Start-ups: Eligible start-ups may get 100% deduction on profits from innovation-

driven businesses for three consecutive years.