New Tax Incentives Enable Longer-Term Growth Plans

Year end is a time for manufacturers to plan and make financial and operational projections for the coming year. This year, several new tax incentives contained in the “One Big Beautiful Bill” (OBBB) give manufacturers a lot to consider as they close out 2025 and prepare for 2026.

Bonus Depreciation

The OBBB’s restoration of 100% bonus depreciation gives manufacturers a major tax incentive to support capital purchases. Before the OBBB, the percentage of purchases that qualified for bonus depreciation was phasing out, and was scheduled to expire in 2027 under the Tax Cuts and Jobs Act (TCJA) of 2017. But the OBBB restored bonus depreciation to 100% permanently, and made it retroactive to January 19, 2025. Consequently, businesses that had already made capital purchases in 2025 anticipating bonus depreciation of only 40% will see a beneficial impact on their 2025 tax returns.

Manufacturers have an opportunity now to not only plan for 2026, but to engage in long-term planning to determine how permanent 100% bonus depreciation can benefit their companies. This is a rare opportunity to create an integrated plan for growth and expansion with the confidence that full bonus depreciation will be available to help see a multi-year plan through to the end.

Expanded Sec. 179 Limits

A first cousin to bonus depreciation, the two tax incentives often work in tandem as a strategy to accelerate depreciation deductions and potentially reduce taxable income in the year assets are placed in service. The Sec. 179 deduction applies to qualifying machinery, equipment and vehicle purchases. There are limits to the amount that can be deducted. Businesses can deduct up to $2.5 million for qualifying equipment and assets placed in service during the tax year, and the deduction begins to phase out when total qualifying purchases exceed $4 million. It fully phases out at $6.5 million. Special vehicle limits apply, and the maximum first-year deduction is a maximum of $31,300 for heavy SUVs, trucks and vans between 6,000 and 14,000 pounds.

Manufacturers can now beat the effects of inflation by expensing the costs of qualifying machinery, equipment and vehicles at higher amounts.

Qualified Production Property Deduction

Introduced by the OBBB, the QPP deduction allows taxpayers to take bonus depreciation for a newly constructed manufacturing facility, instead of writing it off over 39 years. To qualify, a building must be used for production, and construction must have begun after January 19, 2025, and the facility placed in service before January 1, 2031.

If expansion into a new facility is in your manufacturing company’s five-year plan, factoring this valuable new deduction into the financial projections is a plus.

Restoration of Research and Development (R&D) Expensing

The ability to expense R&D activities was severely curtailed in 2022 when it was revoked by the TCJA. Companies with R&D expenses were then required to capitalize and amortize such expenses over 5 years (domestic activities) or 15 years (international activities). This significantly diminished the tax incentives available for innovative activities. The OBBB restored the ability to expense R&D costs in the first year.  Businesses with gross receipts under $31 million averaged over the past three years can file amended tax returns to recoup taxes savings related to R&D activities in 2022 through 2024.

Energy Credits

Certain energy tax credits available to businesses are scheduled to expire in 2026. If your company depends on any energy tax credits, or is considering investing in new energy-efficient projects, be aware that the timing is critical. Reach out to your Adams Brown tax advisor or your energy credit advisor for guidance.

Not all year-end planning for manufacturers revolves around the OBBB. The standard factors of day-to-day management still matter. Here are a few that often fly under the radar during the busy year-end season:

  • Look at any uncollectible debts you have and, to the degree possible, get them off the books.
  • Look at inventories and make sure their numbers are updated and accurate. If you have obsolete inventory, make sure you adjust your reserve or write it off, depending on whether you are on a cash or accrual basis.
  • On the personal side, make sure you are maxing out contributions to your retirement plan.
  • On the state taxation side, particularly in Kansas and Arkansas, which both have pass-through entity tax rules, make sure you have state taxes paid before December 31, 2025, since that creates a deduction at the federal level.

If you have any questions about additional year-end planning for your manufacturing company, contact an Adams Brown advisor.