The newly enacted One Big Beautiful Bill (OBBB) marks a major shift in U.S. tax policy—particularly for manufacturers. This landmark legislation introduces a suite of powerful incentives designed to stimulate domestic production, modernize capital investment strategies, and enhance global competitiveness.
This alert outlines the most impactful changes and how they reshape the tax landscape for U.S.-based manufacturing businesses.
Immediate R&E Expensing Restored
Research & Experimental (R&E) expenditures generally refer to costs incurred in the development or improvement of products, processes, or technologies.
Under prior law implemented as part of the Tax Cuts and Jobs Act of 2017, businesses were required to capitalize and amortize R&E expenditures over a period of five years for domestic costs or 15 years for foreign expenditures.
As a result of the OBBB, businesses can now immediately deduct domestic R&E expenditures paid or incurred in tax years that begin after December 31, 2024.
Key Details:
- Domestic R&E expenses are fully deductible in the year incurred
- Foreign R&E expenses must still be capitalized and amortized over 15 years
- Small businesses with average gross receipts of $31 million or less will generally be permitted to apply this change retroactively to tax years beginning after December 31, 2021, by filing amended return(s)
- All other taxpayers that incurred R&E expenditures between December 31, 2021, and January 1, 2025 will be permitted to elect to accelerate the remaining deductions for those expenditures over a one- or two-year period, for the first tax year beginning after December 31, 2024, via a change in accounting method
- Procedural guidance is expected to be released by the IRS on handling prior year capitalized expenditures
Impact:
This provision effectively rolls back the amortization rules introduced under the Tax Cuts and Jobs Act, restoring the ability to immediately deduct domestic R&E expenses. It’s a meaningful shift that encourages manufacturers to invest in innovation, process improvements, and sustainable technologies—while benefiting from immediate tax savings.
The opportunity is especially valuable for small and mid-sized businesses. Companies should assess whether to apply the change retroactively or use catch-up deductions to maximize their tax benefits. If applying retroactively, immediate action may allow taxpayers to recoup tax dollars previously paid.
It’s worth noting that the R&D tax credit—which directly reduces tax liability dollar for dollar—remains available as a valuable incentive for companies investing in research and development.
100% Bonus Depreciation Permanently Extended
Effective immediately, manufacturing companies can now fully expense qualifying equipment and property in the year of purchase. This provision is not only retroactive to January 19, 2025, but has also been made permanent, eliminating the previous phase-out schedule.
Impact:
This change provides long-term certainty for capital planning, improves cash flow, and encourages immediate investment in machinery, vehicles, and other short-lived assets. By removing the sunset provision, businesses can now confidently structure multi-year investment strategies without concern for shifting depreciation rules.
In addition to traditional equipment, this provision may apply to a wide range of qualifying property—including certain software, manufacturing tools, and improvements to existing facilities—making it especially valuable for companies modernizing their operations.
Special Depreciation for Nonresidential Real Property Used in U.S. Production
The new legislation introduces a special depreciation allowance for qualified production property (QPP), allowing full and immediate expensing for certain nonresidential real estate used in manufacturing or production.
To be eligible, the property must meet all of the following:
- It must be nonresidential real property (e.g., factories, refineries, or production facilities),
- It must be used as an integral part of qualified production activity (QPA), such as manufacturing, production, or refining of a qualified product,
- Construction must begin between January 20, 2025 and December 31, 2028, and
- The property must be placed in service before January 1, 2031.
QPP does not include property used for purposes unrelated to qualified production activity, such as office space dedicated to sales, administrative functions, or research operations.
While QPP is subject to an “original use” requirement, an exception applies for acquired property that was not previously used by the taxpayer and was not previously used in a QPA by another person, subject to additional restrictions.
Impact:
Bonus depreciation has been around for years, however QPP is a new opportunity created by the OBBB. Taxpayers that want to take advantage of it will need to segregate costs on new facilities to identify qualifying expenses eligible for immediate expensing.
This provision provides a powerful incentive for manufacturers involved in building or upgrading U.S.-based production facilities.
It supports long-term investment in domestic industrial infrastructure and offers immediate tax benefits for qualifying projects.
Section 179 Expensing Expanded
The maximum amount a taxpayer may expense under Section 179 has been increased to $2.5 million (from $1.2 million), with the phase-out threshold beginning at $4 million (instead of $3 million). The deduction is reduced dollar-for-dollar by the amount by which the cost of qualifying property exceeds $4 million.
Impact:
This expansion allows manufacturers—especially small to mid-sized businesses—to immediately deduct the full cost of qualifying property, such as equipment, vehicles, and software, up to the new limits.
The permanence of this provision offers valuable predictability, enabling firms to confidently plan and execute capital investments without concern for shifting tax treatment.
20% Deduction Made Permanent for Pass-Through Businesses (S Corporations, Partnerships, Sole Proprietors)
The 20% deduction for Qualified Business Income (QBI)—originally enacted under the Tax Cuts and Jobs Act—was previously set to expire at the end of 2025. The new law makes this deduction permanent for pass-through businesses, including S corporations, partnerships, and sole proprietors.
Impact:
This provision ensures continued tax relief for a broad range of manufacturing companies that operate outside the C corporation structure.
With the deduction now permanently set at 20%, the highest effective federal tax rate for owners of these businesses is reduced from 37% to 29.6%.
This helps maintain parity with the 21% corporate tax rate for C corporations and allows business owners to plan with confidence, reinforcing the long-term viability of pass-through structures.
More Interest Expense Now Deductible for Capital-Intensive Businesses
The new law makes a permanent and favorable change to the limitation on business interest expense deductions. Previously, the deduction was limited to 30% of a business’s taxable income before interest and taxes (EBIT). Under the new rule, the limitation is now based on 30% of taxable EBITDA—which means businesses can add back depreciation, amortization, and depletion when calculating their deduction threshold. The expanded limitation is available for tax years beginning after December 31, 2024.
Impact:
This change allows businesses to deduct a larger portion of their interest expense, especially those that are capital-intensive and highly leveraged, like companies with significant equipment or real estate investments.
By permanently shifting to an EBITDA-based threshold, the law provides greater flexibility and tax relief for firms that rely on financing to grow and operate.
Increased Use of Foreign Tax Credits for U.S. Producers
Under prior law, income attributable to goods produced in the U.S. and sold abroad was considered U.S. source income (based on production site) which substantially restricted the use of applicable foreign tax credits. Beginning with tax years after December 31, 2025, income from the sale of U.S. produced inventory attributable to a fixed place of business outside the U.S. will be considered 50% foreign source income.
Impact:
The utilization of foreign tax credits to reduce U.S. taxes is largely based on the volume of foreign-source income. Increasing the foreign-source income available will effectively increase the foreign tax credits claimed and reduce any potential double-taxation impacts.
IC-DISC Remains a Valuable Tool for Export Tax Savings
An IC-DISC (Interest Charge Domestic International Sales Corporation) is a U.S. tax incentive for exporters. It allows companies that export U.S.-made products to reduce their federal income tax liability by shifting a portion of export profits to a lower tax rate (i.e., the qualified dividend rate).
Impact:
The OBBB did not alter the existing tax bracket structure, the 20% Qualified Business Income (QBI) deduction for pass-through entities, or the qualified dividend rate. As a result, manufacturers can continue to benefit from permanent tax savings by leveraging the rate differential between ordinary income and qualified dividends. The IC-DISC remains a powerful planning tool for companies seeking to enhance after-tax profitability on export sales.
Kreischer Miller’s Tax Strategies Team Is Ready to Support Your Manufacturing Business
With the sweeping changes introduced by the One Big Beautiful Bill, manufacturers now have greater clarity and confidence in planning for growth within the U.S. tax landscape. These reforms offer powerful incentives—but also require thoughtful planning to fully capitalize on them.
Our Tax Strategies team is here to help you navigate the new rules and tailor a strategy that aligns with your business goals. We encourage you to contact your Kreischer Miller relationship professional or connect with any member of our team to explore how these changes can benefit your operations.