One Big Beautiful Bill: Strategic tax planning opportunities for most US manufacturers

On July 4th, President Trump signed into law the One Big Beautiful Bill Act (OBBBA), marking the final step of a months-long budget reconciliation process. The bill includes a multitude of provisions impacting tax legislation and affecting virtually all types of U.S. taxpayers, from individuals to large corporations.

With diligent tax planning, manufacturers may reap material benefits from the OBBBA, including reduced future cash tax outlays, immediate access to refunds from taxes paid in prior years, and lower overall effective tax rates. Some of the more notable changes for manufacturers are described below:

1. Interest Deduction Flexibility

Starting in 2025, large manufacturers can deduct more interest by returning to an EBITDA-based limitation under Section 163(j), which excludes depreciation and amortization from the calculation. This change may yield significant cash tax savings by not only allowing taxpayers to increase their annual interest expense deductions, but also to access previously disallowed interest deductions sooner than anticipated. For leveraged businesses, this is a welcome change.

2. Expanded QSBS Gain Exclusion (IRC Section 1202)

C corporation shareholders can now enjoy expanded benefits in exits from Qualified Small Business Stock (QSBS). The OBBBA modified the IRC Section 1202 provisions by:

• Shortening the holding period requirements for gain exclusion eligibility as follows:
  
  • 50% gain exclusion after 3 years
    
  • 75% gain exclusion after 4 years
  • 100% gain exclusion after 5 years
• Permitting a corporation with asset values up to $75,000,000 (an increase of $25,000,000) to issue QSBS
• Allowing up to an additional $5,000,000 of gain to be excluded upon exit (increased to $15,000,000)

3. Section 199A QBI Deduction Extension

The 20% deduction for qualified business income (QBI) is now permanent, offering owners of pass-through manufacturing companies stability in entity selection and structural tax planning.

4. Restoration of Domestic R&D Expensing

The OBBBA reinstates the expensing of domestic R&D spend, retroactive to costs capitalized beginning in 2022. This change offers a future cash flow boost and greater flexibility in recovering previously capitalized R&D costs. Certain small manufacturers can apply these changes with immediate effect, potentially recouping taxes paid as a result of R&D capitalization in past years.

Manufacturers should continue to evaluate their use of foreign R&D, as the 15-year capitalization requirement remains in effect for foreign-based R&D. The ability to immediately expense domestic R&D, plus the overlap with qualifying expenses for the R&D tax credit, make domestic investment particularly appealing.

5. Bonus Depreciation & Section 179

The new legislation restores and makes permanent 100% bonus depreciation, offering manufacturers a powerful opportunity to immediately expense qualifying property, reducing cash taxes paid in the year the asset is activated. Section 179 expensing limits are also increased and indexed for inflation starting in 2026, providing additional flexibility for asset planning and cost recovery.

6. Special Depreciation for Production Property

Notably, manufacturers can now elect 100% first-year depreciation on qualified production property – defined as U.S.-based nonresidential real property used in qualified production activities. This is especially notable, as it can enable taxpayers to recover significant construction costs that were previously depreciated over a lengthy 39-year period.

To qualify for this benefit, the property must:

• Be integral to production activities
• Be owned (not leased)
• Exclude office, sales, or administrative use
• Generally have its original use commencing with the taxpayer (i.e., typically constructed by the taxpayer)

It is vitally important to note that construction of the property must begin between Jan 19, 2025, and December 31, 2028, and it must be placed into service before January 1, 2031.

Coupled with the return to EBITDA thresholds for interest deductibility described above, debt-funded qualified production property investments can result in a substantial tax deduction for manufacturers.

Convergence with International Tax Provisions

Many manufacturers are subject to international tax provisions that have been modified under the OBBBA, especially those that export goods or use foreign subsidiaries to manufacture or distribute products should watch for our upcoming article covering the changes to international tax.

We Can Help

The OBBBA generally offers favorable tax incentives and opportunities for U.S. manufacturers. There is a lot of interplay among these provisions that requires intentional tax planning to balance all of these tax considerations with the strategic plans and needs of the business.  

At Elliott Davis, our Manufacturing and Distribution team is ready to help businesses navigate these changes and maximize strategic tax planning opportunities that align with your goals.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.