The tax legislation changes under the One Big Beautiful Bill Act (OBBB) could significantly impact capital investment, R&D strategy, and tax planning for manufacturers and distributors. We’ve summarized key highlights and potential planning considerations to help manufacturers take advantage of the changes.

For a more comprehensive overview of tax changes under the OBBB, read our overview.

1. 100% bonus depreciation/full expensing for certain business property

What it is: Full expensing of qualifying property has been permanently reinstated to 100%.

Impact:

• Immediate tax savings: Reinstates and makes permanent an immediate 100% first-year depreciation deduction for qualified property acquired and placed in service after Jan 19, 2025. Qualified property must located be in the U.S.

Action steps:

• Consider cash tax savings in capital expenditure budgeting for long-term projects.

2. Qualified production property (QPP) – Section 168(n)

What it is: Allows for an elective immediate 100% first-year depreciation deduction for newly built “qualified production property.” Under prior law, structural components of a manufacturing facility were depreciated over 39 years. This new law introduces qualified production property, which includes nonresidential real property used as “an integral part” of a qualified production activity, such as “manufacturing, production, or refining” of tangible personal property.

Full eligibility criteria: As outlined in the legislation, qualified production property means any portion of nonresidential real property for which all of the following are true:

• Is used by a taxpayer as an integral part of a qualified production activity (i.e., the manufacturing, production, or refining of a qualified product – defined as any tangible personal property other than a food or beverage prepared in the same building as a retail establishment in which such property is sold).
• Is placed in service in the U.S. or any possession of the U.S.
• The original use commences with the taxpayer.
• Construction begins after Jan. 19, 2025, and before Jan. 1, 2029.
• Is designated by the taxpayer in the election made with the filing of the tax return.
• Is placed in service before Jan. 1, 2031.
• This deduction excludes any portion of nonresidential real estate “used for offices, administrative services, lodging, parking, sales activities, research activities, software development or engineering activities, or other functions unrelated to the manufacturing, production, or refining of tangible personal property.”
• Other rules apply and require an analysis for eligibility.

Impact:

• Immediate tax savings: Taxpayers can fully expense the cost of qualified production property, which encourages domestic facility construction and upgrades over the next few years.

Action steps:

• Consider cash tax savings from capital expenditures spending on current and planned facility investments.
• Consider cost segregation studies (CSS) to determine eligible and non-eligible property. Also, since bonus depreciation is also available, a CSS can minimize the property subject to recapture and adjustments in states that do not follow this new federal rule.
• Make sure that your construction timelines align with the legislation’s construction and placed-in-service windows.

3. Research and development (R&D) expensing – New Section 174A

What it is: Reinstates and permanently allows taxpayers to immediately deduct domestic research or experimental (R&E) expenditures paid or incurred in taxable years beginning after Dec. 31, 2024. Foreign R&E costs will still need to be capitalized and amortized over a 15-year period.

Impact:

• Restored pre-TCJA treatment: Immediate deduction of U.S.-based R&E costs.
• Cash flow boost: Reduces taxable income in the year of expenditure.

Action steps:

• Consider R&D project locations to prioritize domestic activities.
• The new legislation permits taxpayers to deduct in the first tax year beginning after Dec. 31, 2024, the balance of unamortized domestic R&E expenditures that were capitalized after Dec. 31, 2021, under the TCJA. Taxpayers have the option to deduct the unamortized balance either all in the first tax year beginning after Dec. 31, 2024, or over two years.
• Small business taxpayers may amend prior returns to claim the deduction and refund.
• The new law provides for increased flexibility in deducting or amortizing domestic R&E costs, allowing for immediate deductions or various amortization options as well as timing of how to recover previously capitalized costs.

4. Section 163(j)

What it is: Expands the amount of business interest expenses that taxpayers can deduct by removing depreciation, amortization, and depletion deductions from the calculation of adjusted taxable income (ATI). In a sense, it permanently reinstates the EBITDA cap on the deductibility of business interest expenses for taxable years beginning after Dec. 31, 2024. The limitation remains at a 30% rate.

Impact:

• Potential tax savings: Increased interest can be deducted in 2025 and beyond.

Action steps:

• Make sure any interest limitation calculation is updated for quarterly estimates or year-end projections.
• Consider the interaction of this calculation in conjunction with bonus depreciation, qualified production property (QPP), and R&D expensing.
• Review debt agreements.
• Consider an interest capitalization (via Section 263a and/or Section 266) analysis to minimize the interest limitation in 2024 and 2025 (before the new law applies).
• Consider exclusion impact on ATI calculation for Subpart F, GILTI, and Section 78 gross-ups.

5. Section 179 Expansion

What it is: Increased expensing limits for tangible personal property, certain software, qualified improvement property, and certain improvements to non-residential real property purchases ($2.5 million cap, $4 million phaseout).

Impact:

• Improved cash flow: Immediate expensing of capital-intensive upgrades.
• Simplified accounting: Avoids depreciation schedules for many assets.

Action steps:

• Consider capital budgeting for certain fixed assets, including but not limited to machinery and tooling.
• Consider bundling smaller upgrades to maximize expensing thresholds.
• Discuss tax planning to optimize Section 179 vs. bonus depreciation in 2025.

6. Section 199A

What it is: Makes the deduction of qualified business income permanent at 20% and expands the deduction limit phase-in range.

Impact:

• Potential tax savings: Increase in qualified business income (QBI) deduction.

Action steps:

• Discuss long-term tax planning to optimize QBI deduction now that it is permanent.

In conclusion: Assess and plan to maximize benefits

As these provisions evolve, it’s important to assess how they may affect your organization’s tax position and investment strategy. Additionally, given these benefits interact with one another, manufacturers should perform multi-year modeling to understand the optimal elections to maximize cash flow and tax savings.

Let’s talk about how these changes may apply to your business and how we can support you in evaluating your eligibility, modeling potential benefits, implementing planning, and much more.