I’m keeping my eyes on the tech job market, and what I’m seeing isn’t just a normal economic cycle; it’s a perfect storm that’s fundamentally reshaping the software development industry.
Let me walk you through what’s happening behind the headlines, because this affects every tech professional I know.
The COVID Overhiring Hangover
Remember running home after seeing the COVID-19 infection rate curve reach for the stars? Shortly after companies told their employees to work from home, they went into panic mode, hiring developers rapidly to build digital experiences to replace in-person interactions. It made sense; we needed remote work tools, e-commerce platforms, and digital services to keep businesses alive.
But here’s where it went sideways. Companies didn’t just hire for immediate needs; they hired like they were preparing for a permanent digital-first world. And they hired people who might not have been the best fit.
Now we’re still seeing the fallout. Those same companies realized they had overestimated their long-term digital needs, and they are now stuck with teams that aren’t as productive as they had hoped. It’s not the developers’ fault; it’s the result of panic hiring during unprecedented times executed by overzealous leadership.
The Tax Law That Nobody Talked About
DISCLAIMER: I Am Not A Lawyer (IANAL), so check with a legal counsel to confirm the details if you’re interested in proving me wrong. Also, please drop a comment with any corrections.
This is where it got “fun”. The 2017 Tax Cuts and Jobs Act (TCJA) made a change that was quietly devastating to investment in software development.
After TCJA (2022-2024), companies had to capitalize and amortize R&D expenses over 5 years for domestic work or 15 years for foreign work.
Think about what this meant for a moment. A company that spent $1 million on software development in a given year couldn’t write off that expense until 2030. That was a massive cash flow problem that made hiring developers much more expensive in the short term.
This tax change created a perverse incentive to offshore development work. Why? Domestic R&D was amortized over 5 years, whereas foreign R&D was stretched over 15 years. Companies were being told, “If you want to develop software in America, you’ll pay more taxes upfront. If you send it overseas, you can spread the pain out longer.” It was a tax policy that was actively pushing jobs offshore while claiming to protect domestic innovation.
Companies responded by cutting costs wherever possible, and unfortunately, that often meant laying off the very people who could help them innovate their way out of this mess.
Update (July 2025): Congress enacted the One Big Beautiful Bill Act (Pub. L. 119-21), which created IRC §174A. For tax years beginning after Dec 31, 2024, businesses may immediately deduct domestic R&D (including software development) instead of five-year amortization. Foreign R&D remains subject to a 15-year amortization period. The IRS detailed elections and transition relief in Rev. Proc. 2025-28, including options to accelerate remaining domestic R&D amounts from 2022 to 2024 into 2025 or spread them over 2025 to 2026.
However, the damage is done, and recovery will take time.
The AI Waiting Game
Here’s what’s happening that’s impacting the software development industry: Companies are delaying hiring as they await the impact of generative AI on software development.
They’re betting AI tools will boost team productivity, removing the need to grow headcount.
Here’s the reality: AI isn’t replacing developers but changing what they need to know. Those who thrive are the ones who judiciously integrate AI tools into their workflows.
Companies laying off staff now are making a mistake by losing institutional knowledge and experience when they need it most for effective AI implementation.
The Uncomfortable Truth About Cost Reduction
I’m going to say something that might sound conspiratorial, but hear me out. Some business leaders believe software development has become too expensive and use this to justify cost cuts.
Here’s what actually happened: COVID normalized overhiring, but it wasn’t just about headcount. Many companies that adopted agile methodologies like SCRUM ended up overstaffing their teams. In 2020, a typical development team might have had a Scrum Master, Product Owner, Technical Program Manager, and Engineering Manager, each reporting through separate managerial silos. Twenty years earlier, those same teams had just an Engineering Manager with a few TPMs floating around. The velocity didn’t increase proportionally with the added roles.
The tax law increased R&D costs, and AI offers a narrative of “doing more with less.” It’s a perfect storm for cutting software development expenses.
But here’s what they’re missing: cutting development costs now leads to slower innovation, less competitiveness, and lower long-term profits. This short-term thinking will hurt them in the future. Expect thousands of startups to compete fiercely with Big Tech incumbents like Microsoft, Google, and Facebook. Good luck facing the storm…
What This Means for Developers
If you’re a developer reading this, you’re likely feeling anxious. I understand, we’re facing uncertainty. But here’s what I’ve learned from these cycles:
- Versatility and adaptability are your superpowers. Being able to work across technologies and understand their connection provides a unique perspective often missed by specialists.
- Continuous learning isn’t optional. The tech landscape evolves rapidly, and staying current is your best defense.
The Path Forward
I’m not going to sugarcoat this: the next few years will be challenging for many developers. But here’s what gives me hope:
- Companies that cut too deeply will later need more talent, not less.
- The AI revolution will create new opportunities for developers who can harness its power.
- Economic cycles turn, increasing demand for skilled developers.
What You Can Do Right Now
- Build your AI skills. Learn how to use generative AI tools.
- Network aggressively. The people you know will be more critical than ever.
- Consider alternative paths. Freelancing, consulting, or starting your own business may be more viable than traditional jobs.
- Stay visible. Build your personal brand and showcase your skills.
The Bottom Line
What we’re seeing isn’t just a temporary downturn; it’s a fundamental shift in how companies think about software development and IT talent. COVID created the conditions, tax law changes made it more expensive, and AI provides the narrative for cost-cutting.
Developers who adapt to this new reality, work effectively with AI tools, and demonstrate clear value will not just survive but thrive. Generative AI will also create new, unimagined jobs.
The tech industry has always been about disruption and adaptation, and this is just the latest chapter. The question isn’t if you’ll be affected by these changes, but how you’ll respond. 💪🏻
References
- Tax Policy Changes: Tax Cuts and Jobs Act Section 174 Changes - IRS Notice 2023-63 on mandatory capitalization of R&D expenditures under Section 174 passed in 2023
- Current R&D Tax Status: ITIF Analysis of R&D Amortization Provision - Information Technology and Innovation Foundation analysis of TCJA’s R&D amortization requirements and their impact
- TCJA Section 174 Analysis: KPMG Tax Management Memorandum on TCJA Changes to R&E-Related Costs - Comprehensive analysis of mandatory R&D expense capitalization and amortization requirements effective 2022
- COVID Impact Studies: Remote Work and Digital Transformation Trends - McKinsey analysis of pandemic-driven digital adoption and remote work trends
- AI Workforce Impact: Generative AI and the Future of Work - McKinsey research on AI’s impact on workforce productivity and economic potential
- Tech Job Market Analysis: Software Development Employment Trends - Bureau of Labor Statistics data on software developer employment outlook
- Business Cost-Cutting Strategies: The Narrative Fallacy in Business Decision Making - Research on how companies use narratives to justify cost-cutting decisions
- Corporate Layoff Justification Patterns: Is AI Coming For Your Team Next? How AI Hype Is Becoming The Hot Layoff Excuse — Analysis of how executives are increasingly invoking AI hype as a justification for workforce reductions, even when many don’t believe AI actually replaces jobs (Forrester, July 17, 2025)
- COVID Tech Hiring and Layoff Patterns: Tech Layoffs in 2024: A Complete List — Comprehensive tracking of tech industry layoffs showing the aftermath of pandemic-era hiring, with over 400,000 tech workers laid off since 2022, including major companies like Google, Meta, and Microsoft that aggressively hired during COVID-19
- 2025 R&D Tax Law Changes: H.R.1 - One Big Beautiful Bill Act (119th Congress) — Public Law 119-21 creating IRC §174A for immediate domestic R&D expensing effective tax years beginning after December 31, 2024
- Section 174A Implementation: Section 174 Repeal: R&E Expensing in 2025 — CBH analysis of the new domestic R&D expensing rules and foreign R&D amortization requirements
- IRS Transition Guidance: Rev. Proc. 2025-28 — IRS procedural guidance on elections and transition relief for previously capitalized R&D costs from 2022-2024
- Tax Policy Impact Analysis: New Section 174A Restores Domestic R&E Deductibility — Morgan Lewis analysis of the tax incentive changes and their impact on domestic vs. foreign R&D investment
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