A Breakdown of R&D, Section 179 and Facility Deduction Changes

Key Takeaways:
  • Immediate expensing of domestic R&D costs is reinstated. Under new Section 174A rules, manufactures can once again deduct R&D expenses in the year incurred, creating opportunities for strategic tax planning and improved cash flow.
  • Proactive strategies like precise cash flow forecasting, tight inventory control and optimized AR/AP practices can significantly improve a company’s working capital position.
  • Strong working capital not only helps weather economic challenges but also empowers better strategic decision-making and sustainable growth for manufacturers.

 

Signed into law on July 4, 2025, the One Big Beautiful Bill Act (OBBBA) includes several updates that directly impact how manufacturers can deduct expenses, invest in facilities and plan for growth. You might be asking:

  • Can I fully deduct my R&D expenses again?
  • Should I accelerate equipment purchases to take advantage of bonus depreciation?
  • Is now the right time to build or expand a facility?
  • How do these changes affect my tax planning for this year—and the next five?

The answers depend on your unique business situation, but several provisions in the law offer new tools to help manage tax liability, cash flow and long-term investments. Here’s what manufacturers need to know.

Immediate R&D Expensing Is Back

The first provision of the bill that will have a direct impact on manufacturing development and innovation is the update to research and development (R&D) expenses. Previously, for tax years beginning after Dec. 31, 2021, domestic R&D costs were required to be amortized over five years. Under new Section 174A rules, businesses are now allowed to immediately deduct these expenses in the year they are incurred for tax years beginning after Dec. 31, 2024. Taxpayers are still allowed to capitalize and amortize these costs over a period of at least 60 months if they elect to. Foreign R&D costs are still required to be amortized over 15 years.

All businesses are now allowed to deduct any remaining unamortized 174 expenses incurred during 2022 to 2024 over a one- or two-year period, starting in 2025. Furthermore, if a business qualifies as a small business under Section 448(c), which are businesses with $31 million or less in average gross receipts, they may elect to amend their previously filed 2022 to 2024 tax returns and retroactively apply the expenses to those years. These new options provide many tax planning opportunities and allow manufacturers to manage taxable income in high-income years to align with long-term financial planning. Manufacturers should work with their tax advisors to weigh their options.

For domestic R&D expenses incurred starting in 2025, taxpayers will once again have the choice to take the gross credit and reduce R&D expenses by the amount of the credit or make a 280C election and reduce the credit by the maximum corporate rate of 21%. The tax savings derived from the ability to fully expense these costs will help to offset the capital needed to conduct R&D activities. The ability to amend previously filed returns or expense the unamortized costs in the next 1-2 years can help to increase cash flow and will create tax planning opportunities to determine the best options for a business to recoup these expenses and maximize tax brackets.

100% Bonus Depreciation Reinstated for Equipment Purchases

There are also multiple updates to depreciation within the new tax bill. Under the old provisions of the Tax Cuts & Jobs Act (TCJA), bonus depreciation was set to phase out by 20% in each year after 2022, with no bonus depreciation allowed beginning in tax year 2027. 100% bonus depreciation can now be taken on all assets purchased and placed into service after Jan. 19, 2025. Additionally, the maximum depreciation expense allowed under Section 179 has been increased to $2,500,000 and the phase-out range for purchases has been increased to $4,000,000.

Full Deduction for Qualified Production Facilities

A new deduction was also created that allows for a 100% deduction for qualified production property.

To qualify as qualified production property, the property must:

  • Be nonresidential property that the taxpayer uses as an integral part of their qualified production activity
  • Be placed in service in the U.S. or a U.S. possession
  • Have its original use begin with the taxpayer
  • Have construction begin after Jan. 19, 2025, and before Jan. 1, 2029
  • Be placed into service before Jan. 1, 2031

Property that is purchased instead of being constructed can also qualify as qualified production property if it meets the following qualifications:

  • Acquired after Jan. 19, 2025, and before Jan. 1, 2029
  • Cannot have been used in a previous qualifying production activity between Jan. 1, 2021, and May 12, 2025
  • Cannot have been used by the taxpayer previous to the purchase of the property

Only the portion of the production facility used for manufacturing is allowed to be bonused under these new qualifications. Offices, parking lots, other service areas or departments not related to production are excluded from the deduction. If a building is mixed use, an allocation will need to be done on the portion that is used in production.

Under the previous tax law, commercial buildings were required to be depreciated over a 39-year life. This new provision will encourage expansion and allow business owners to deduct the costs of building or purchasing new production facilities immediately. By planning for equipment and facility expenditures in the upcoming years, manufacturing business owners will be able to take advantage of depreciation much quicker. These accelerated tax savings can help to increase cash flow and help to repay the financing needed for the expansions quicker.

Enhanced Credits for Semiconductor Manufacturing

Also included in the new bill was the increase of the advanced manufacturing credit – the Section 45X credit for domestic manufacturing of semiconductors and semiconductor equipment rises from 25% to 35% for property placed in service after Dec. 31, 2025. Additionally, the investment tax credit under Section 48D for semiconductor “fabs” is enhanced, but facilities must be under construction by the end of 2026. The increase in this credit will incentivize U.S. based production of these products.

Shortened Timeline for Clean Energy Tax Credits

One notable change for manufacturers in the clean energy supply chain is a shortened window for two major credits created by the Inflation Reduction Act:

  • The Clean Electricity Production Credit (Section 45Y) and
  • The Clean Electricity Investment Credit (Section 48E)

Section 45Y and Section 48E for wind and solar projects are repealed for facilities where construction begins after July 4, 2026, or that are placed in service after Dec. 31, 2027. This accelerated phase-out shortens the timeline for manufacturers of wind turbines, solar panels and related components to qualify for these credits. However, there is still time to act and be grand-fathered in under this new timeline.

Questions?

The OBBBA introduces a range of provisions that manufacturers can evaluate in light of upcoming investments or business goals. From flexible treatment of R&D expenses to accelerated depreciation on facilities and equipment, the new rules provide options that could help manage tax exposure and support reinvestment.

With multiple provisions tied to specific start dates and deadlines, early planning will be key. Working closely with a manufacturing tax advisor, like Adams Brown, can help determine how best to apply these changes to your operation and long-term strategy. Contact an Adams Brown manufacturing advisor today.