Expanded Expensing and Production Incentives Effective for 2025 Tax Year

Key Takeaways:
  • The One Big Beautiful Bill Act (OBBB) is one of the most consequential tax overhauls for U.S. manufacturers in more than a decade.
  • Key changes include restoration of 100% bonus depreciation and immediate expensing for domestic R&D activities.
  • Bonus depreciation has been expanded to qualified production property.

 

The One Big Beautiful Bill Act (OBBB), enacted in July 2025, is one of the most consequential tax overhauls for U.S. manufacturers in more than a decade. Now that the 2026 tax filing season is here, this is where the rubber will meet the road.

Many of the changes in OBBB are actually extensions or reversals of provisions contained in the 2017 Tax Cuts and Jobs Act (TCJA), chief among them the reinstatement of 100% bonus depreciation and the restoration of immediate expensing of research and development (R&D) costs.

100% Bonus Depreciation

Bonus depreciation at 100% is back for any assets placed in service after Jan. 19, 2025. Any assets placed in service before that date in 2025 still qualifies for 40% bonus depreciation, and manufacturers who want to claim 40% bonus depreciation for the full year may do so if it better aligns with their tax strategy. That may sound counterintuitive, but claiming a lower level of bonus depreciation can benefit a company by smoothing taxable income over multiple years. The optimal approach depends on several factors, including whether assets were financed or purchased with cash. A discussion with an Adams Brown manufacturing advisor can help determine the most effective strategy.

It’s also important to remember that if you have different classes of assets, such as 5-year depreciable or 7-year depreciable assets, you can elect in or out by class life. For instance, if a company purchases 10 new assets, with half in the 5-year depreciable range and half in the 7-year range, the company can elect 100% bonus depreciation on one and 40% on the other for a more refined tax strategy.

Section 179 Expensing

The tax bill increased the limits on Section 179 expensing starting in the 2025 tax year. Companies may expense up to $2.5 million of qualifying property, with a phaseout beginning at $4 million.

Carefully comparing the tax benefits of Section 179 expensing with those of bonus depreciation is essential to ensure you are leveraging the tax laws to your advantage. It also introduces flexibility that can benefit you. For instance, if your company purchased a $60,000 piece of equipment in 2025, depending on your needs, you may decide to claim bonus depreciation at 40% for it and depreciate the rest over the next three years for an extended tax benefit.

Research and Development

To the relief of businesses across many industries, including manufacturing, the 2025 tax bill restored the ability to immediately expense domestic R&D expenditures.

For the past three years, under a provision of the 2017 Tax Cuts and Jobs Act (TCJA), domestic R&D expenditures had to be capitalized and amortized over five years. But the OBBB reinstated the ability to immediately expense domestic R&D costs for tax years beginning after Dec. 31, 2024.

International R&D expenditures must still be capitalized and amortized over 15 years, making the geographic location of R&D activities an increasingly important tax consideration.

Companies with gross receipts less than $31 million are eligible to file amended tax returns for the past three years to deduct their domestic R&D expenses, but it’s essential to first evaluate whether that makes sense. Among other things, you will want to consider whether you or your business were in a higher tax bracket during those years.

If it doesn’t make sense to file amended returns, you have the option to deduct the remaining capitalized R&D costs in 2025 or 2026, split them over 2025 and 2026, or continue capitalizing them over the remainder of their amortizable life.

Qualified Production Property

A significant change in the tax bill allows manufacturers to claim 100% bonus depreciation on qualified production property if construction began after Jan. 19, 2025, and the property is placed in service before Jan. 1, 2031. Before this change in the law, the construction of new property generally had to be depreciated over 39 years, absent any cost segregation study.

In summary, the new tax law brings much flexibility to the depreciation decisions that manufacturers may make and making the change particularly impactful for manufacturers planning facility expansions.

Additional Changes

Additional changes brought about by the OBBB will impact many manufacturers, including:

  • The OBBB eliminated many energy-related tax credits, sunsetting them in late 2025. Construction projects that depend on these credits must begin by mid-2026 to claim them.
  • The OBBB permanently extended the Qualified Business Income (QBI) deduction for pass-through entities.
  • Changes to the business interest expense limitation allow businesses to include more items when calculating their limitations. This is generally increasing the amount of business interest that many businesses can deduct.
  • A new deduction for overtime pay on the individual side, requiring employers to separately report overtime wages so employees can properly claim the deduction. On the individual side, the OBBB has increased the state and local tax (SALT) deduction to $40,000. The TCJA had placed it at $10,000.
  • Individuals may deduct interest paid on loans to buy new cars, minivans, SUVs, pickup trucks and motorcycles under the OBBB. The deduction is subject to many limitations, including that the car must be manufactured in the U.S. and the deduction applies only to purchases, not leases.
Questions?

If you would like to discuss the impact of the OBBB on your manufacturing company, contact an Adams Brown advisor.