One Big Beautiful Bill is Shifting Gears for U.S. Manufacturers

Manufacturers should pay close attention to recent developments in Washington, D.C., as sweeping changes in federal tax and spending policy are poised to directly impact the industry. A major catalyst for these changes is H.R. 1, better known as “the One Big Beautiful Bill Act” (OBBBA), signed into law by President Trump on July 4.

The OBBBA introduces a new landscape for business taxation by extending key provisions of the Tax Cuts and Jobs Act (TCJA) that were previously set to expire at the end of this year. In addition to these extensions, the legislation includes several enhancements and new incentives designed to stimulate investment and support U.S. manufacturers.

While the law permanently enacts numerous tax breaks, it also repeals or modifies certain provisions, including some that were scheduled to return after 2025. Below is a breakdown of the most significant tax changes manufacturers should be aware of and begin planning for now.

Section 199A Deduction Made Permanent

Originally introduced under the TCJA, Section 199A allows owners of manufacturing companies structured as S corporations, partnerships, limited liability companies and sole proprietorships a deduction against taxable income equal to 20% of the combined qualified business income (QBI) amount for the taxable year.

Under the new law, this deduction, previously set to expire in 2025, has been made permanent. Additionally, starting in 2026, some streamlined changes to the modified income limitations will enable more high-income business owners to qualify for the deduction.

100 Percent Bonus Depreciation Reinstated and Expanded

Bonus depreciation has long been a valuable tax incentive for manufacturers, allowing them to immediately deduct the full cost of qualifying property rather than depreciating it over time. However, since 2023, the deduction rate has been phasing down by 20 percentage points annually, dropping to 60% in 2024 and scheduled to fully expire by 2027.

The OBBBA reverses this trend by reinstating and making permanent 100 percent bonus deduction for eligible property, which includes tangible property placed in service after January 19, 2025. Eligible property includes most tangible assets with a recovery period of 20 years or less, such as manufacturing equipment, machinery and certain improvements.

Additionally, to incentivize manufacturers to expand production in the U.S., the OBBBA introduces an elective 100% depreciation allowance for “qualified production property.” This includes portions of any U.S. nonresidential real property that is originally used by the taxpayer as an integral part of a “qualified production activity” and placed into service after January 19, 2025 and before January 1, 2029. For capital-intensive manufacturers, the reinstatement of 100 percent bonus depreciation is critical, as it improves cash flow, encourages investment in modern equipment and reduces the tax burden tied to growth.

Research & Experimental Expenditures

The OBBBA brings welcome relief for manufacturers from a costly tax provision created under Code Section 174, which has, since 2022, required companies conducting research and development to capitalize and amortize these costs over a five-year period for research conducted in the United States and a fifteen-year period for research conducted outside the United States. Prior to Section 174’s enactment, qualifying expenditures were permitted to be immediately expensed in the year incurred. This mismatch in timing between the costs incurred and the tax deductions has created a strain on cash flows for manufacturing organizations that perform research and development activities.

Under the OBBBA, new Section 174A no longer requires taxpayers to capitalize and amortize domestic research and development expenses over five years and, instead, allows taxpayers to immediately deduct such expenses for tax years beginning after December 31, 2024. Additionally, special rules would allow small business taxpayers to apply the rules retroactively to tax years beginning after December 31, 2021, while an election would permit all taxpayers to accelerate over a one or two-year period beginning with the taxpayer’s first tax year beginning after December 31, 2024, the deductions for unamortized domestic R&E expenditures that were capitalized after December 31, 2021 and before January 1, 2025. These long-awaited changes to Section 174A aim to restore liquidity and incentivize continued investment in innovation.

Interest Deductions Limits Eased for Capital-Intensive Manufacturers

One tax provision brought on by the TCJA, which has recently become even less taxpayer-friendly, is the limitation on deductible business interest under Code Section 163(j). For large manufacturers with average gross receipts exceeding $30 million over the prior three tax years, the allowable deduction for business interest may be limited if interest expense exceeds 30% of earnings before interest and taxes (EBIT). This change, which took effect in 2022, replaced the more favorable EBITDA-based calculation, significantly tightening the cap on deductible interest for capital-intensive businesses.

The OBBBA addresses this issue by permanently reverting to the EBITDA-based formula for tax years beginning after December 31, 2025. This revision provides significant increases in the ability to benefit from business interest deductions for many large capital-intensive manufacturers who rely on financing for large-scale investments in equipment, facilities, and technology.

Expanded Section 179 Expensing Delivers Bigger Upfront Deductions

Code Section 179 provides manufacturers with a powerful tax incentive by allowing them to deduct (rather than depreciate over a number of years) the cost of purchasing eligible assets, such as equipment, furniture, off-the-shelf computer software and qualified improvement property. However, there is an annual expensing limit that applies, which begins to phase out dollar for dollar when assets exceed the Section 179 phase-out threshold.

Under the OBBBA, these limits are significantly expanded for property placed into service after December 31, 2024. The annual expensing limit increases from $1.25 million to $2.5 million, while the phaseout threshold rises from $3.13 million to $4 million. Both amounts will be adjusted annually for inflation, ensuring the deduction remains relevant in future years.

Planning Ahead

Now that the One Big Beautiful Bill has officially been signed into law, U.S. manufacturers should begin assessing how these new and extended tax provisions will impact their operations and long-term planning. From expanded expensing opportunities to enhanced deductions and immediate R&E write-offs, the legislation represents a significant opportunity to reduce tax burdens and reinvest in growth. To fully capitalize on these benefits and ensure compliance, manufacturers should consult with their tax advisors as soon as possible. Contact us today to evaluate how the new law can support your strategic goals and strengthen your competitive position.

Contributing author: Sean R. Conners, CPA, is a tax partner with nine years of experience in individual and corporate taxation and tax planning. Sean also specializes in multi-state taxation and concentrates on the manufacturing industry. For more information on this topic, you may contact Sean at sconners@dmcpas.com or (315) 472-9127.