Tax Reform Creates Manufacturing Advantages

The budget-reconciliation process is now underway in Congress, with the U.S. House passing its version of the legislation H.R. 1, known as the One Big Beautiful Bill (OBBB). It renews and expands upon the benefits offered to manufacturers in the Tax Cuts and Jobs Act of 2017 (TCJA).

The U.S. Senate is sure to make its mark on the legislation, but a look at the provisions in OBBB impacting the manufacturing sector may provide a glimpse into what may be included in the final legislation. These provisions specifically target the economics of domestic production and could improve manufacturing competitiveness in the United States. The four main benefits:

1. Pass-through entity benefits

The proposed permanent extension of individual tax rates from the TCJA particularly benefits manufacturers organized as S corporations and partnerships. These entities, representing the majority of U.S. manufacturers, pay federal tax at the shareholder or partner level, and the lower rates will favorably impact the tax rate on manufacturing income. 

Additionally, the Section 199A deduction for qualified business income would increase from 20% to 23%, providing manufacturers with an even lower effective tax rate on domestic production activities. This change would make domestic manufacturing more attractive relative to offshore alternatives.

2. Enhanced depreciation and expensing

Manufacturing-equipment investments receive substantial benefits under the proposed tax package, including:

• Bonus depreciation: The renewal of 100% accelerated depreciation would allow manufacturers to immediately deduct equipment costs rather than spreading them over multiple years.
• Section 179 limit increases: Higher expensing limits would enable smaller manufacturers to immediately deduct more equipment purchases.
• Qualified production property: New 100% write-off provisions for factory construction and expansion improve the economics of domestic facility investment.

3. Research and development support

Restoring immediate domestic R&D expensing under Section 174 would eliminate the current requirement to amortize research costs over 5 yr. for tax years 2025 through 2029. Companies still would be required to capitalize their foreign research, amortizing it over 15 yr. This change particularly benefits manufacturers developing new products and production processes.

4. Working capital improvements

The package addresses several cash-flow challenges facing manufacturers, including:

• Interest-expense limitation: Modifications to Section 163(j) would restore manufacturers’ ability to add back depreciation, amortization and depletion in determining adjusted taxable income for tax years 2025 through 2029, thereby increasing the cap on interest-expense deductibility.
• Small manufacturers relief: The House-passed OBBB expands the gross receipts threshold to qualify for specific provisions of the tax code. For tax years beginning after December 31, 2025, the new threshold to be eligible for the cash method of accounting, to be exempt from the interest-expense limitation, to be exempt from the requirement to account for inventories and to be exempt from certain capitalization rules (263A) is increased to $80 million, indexed for inflation.

Strategic Response for Manufacturers

Forward-thinking manufacturers already are positioning themselves to capitalize on these four policy shifts:

1. Investment timing

Companies should evaluate accelerating their capital investments to take advantage of enhanced depreciation benefits. The combination of bonus depreciation and immediate R&D expensing creates compelling economics for domestic facility expansion and modernization.

2. Supply-chain optimization

The protective tariff environment, combined with tax advantages for domestic production, supports supply-chain reshoring activities. Manufacturers should reassess international supply relationships and evaluate opportunities to develop domestic supplier networks.

3. Financial planning

The pass-through entity benefits and working-capital improvements allow for more aggressive growth strategies. Manufacturers should work with tax professionals to optimize entity structures and financing approaches under the new framework.

4. Competitive positioning

Enhanced domestic manufacturing economics create opportunities to compete more effectively against imports while maintaining healthy margins. Companies should evaluate pricing strategies that reflect improved cost structures while building market share.

Implementation Considerations

Manufacturers should take several immediate steps to prepare for these policy changes:

• Tax planning: Engage tax advisors to model the impact of proposed changes on specific business situations, and develop implementation strategies.
• Capital planning: Evaluate equipment- and facility-investment opportunities that could benefit from enhanced depreciation and expensing provisions.
• Supply-chain assessment: Analyze current supplier relationships and identify opportunities for domestic sourcing that could benefit from the new economic environment.
• Financial optimization: Review entity structures, financing arrangements and cash-management strategies to maximize benefits from the new tax framework.

For more information about U.S. tax and tariff policies, tune into The Sound of Automation podcast featuring Wipfli partner Mike Devereux and founder of Inside Beltway Omar Nashashibi.

See also: Wipfli LLC

Technologies: Management

Subscribe to the Newsletter

Start receiving newsletters.