The manufacturing sector has long operated under a tax framework shaped by the 2017 Tax Cuts and Jobs Act (TCJA). With many of those provisions set to expire in 2025, uncertainty loomed. Enter the One Big Beautiful Bill Act (OBBBA)—a sweeping tax reform package signed into law on July 4, 2025. While the bill affects nearly every taxpayer, its implications for manufacturers are particularly profound. From restoring full expensing of capital investments to introducing a new manufacturing facility deduction, OBBBA offers both clarity and complexity. This article explores the most impactful income tax provisions for manufacturers, how they work, and what they mean for strategic planning.
100% Bonus Depreciation Restored
OBBBA permanently restores 100% bonus depreciation for qualified property placed in service after December 31, 2021. Manufacturers can immediately deduct the full cost of machinery, equipment, and certain improvements rather than depreciating them over time. This encourages capital investment and modernization, improves cash flow by front-loading deductions, and is particularly beneficial for asset-heavy operations like fabrication and assembly.
Full Expensing of Domestic R&D
OBBBA reverses the TCJA’s amortization rule under IRC §174, allowing immediate expensing of domestic research and experimentation (R&E) costs. This applies retroactively for small businesses (those with average annual gross receipts of $31 million or less) and prospectively for all others starting in 2025. It boosts innovation by freeing up capital, simplifies tax reporting for R&D-heavy manufacturers, and requires careful tracking of qualifying expenditures.
New Manufacturing Facility Deduction
A brand-new deduction for qualified manufacturing facilities based on square footage and payroll thresholds. It applies to facilities used primarily for domestic production. The deduction scales with employment and capital investment, incentivizing reshoring and domestic expansion. It may influence site selection and facility upgrades and requires coordination with cost segregation studies.
EBITDA-Based Interest Deduction Cap
OBBBA restores the EBITDA-based limitation for business interest expense deductions. Beginning in 2026, interest deductions are capped at 30% of EBITDA rather than EBIT. This expands deductibility for capital-intensive manufacturers, encourages debt-financed growth, and requires modeling to optimize capital structure.
Section 179 Expensing Limit Increased
OBBBA raises the Section 179 expensing limit to $2.5 million, with phase-outs beginning at $4 million. This applies to tangible personal property and certain improvements. It supports small and mid-sized manufacturers, simplifies asset accounting, and offers flexibility for year-end tax planning.
Permanent 20% Pass-Through Deduction
OBBBA makes the 20% Qualified Business Income Deduction (QBID) under Section 199A permanent. It applies to pass-through entities like S corps and partnerships, subject to wage and asset limitations. This reduces the effective tax rate for owners, encourages pass-through structures over C corps, and requires planning to stay under income thresholds.
International Tax Adjustments
OBBBA modifies global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII) rules to align U.S. rules more closely with OECD Pillar Two standards. This affects multinational manufacturers with foreign subsidiaries, may require restructuring of IP ownership and supply chains, and increases compliance complexity.
SALT Deduction Cap Raised
OBBBA raises the state and local tax (SALT) deduction cap to $40,000, indexed for inflation. This benefits manufacturers in high-tax states, improves after-tax income for owners, and may influence entity selection and compensation strategies.
New Reporting for Overtime and 1099s
OBBBA requires separate reporting of overtime premiums and certain contractor payments on W-2s and 1099s. IRS guidance is pending, with transition relief available for 2025. This adds complexity to payroll systems, requires coordination across HR, tax, and IT, and may trigger software upgrades or vendor changes.
Transition Rules for R&D Amortization
OBBBA allows flush-out of previously capitalized R&D via Section 481(a) adjustments. This applies to firms that capitalized R&D under TCJA but now qualify for immediate expensing. It offers a one-time deduction boost, requires careful documentation and timing, and may affect financial statement presentation.
Conclusion
The OBBB Act delivers long-awaited clarity and opportunity for manufacturers. By restoring and expanding key deductions, simplifying R&D treatment, and introducing new incentives for domestic production, the law positions the sector for growth. But with opportunity comes complexity. Manufacturers must act quickly to align their tax strategies, upgrade systems, and educate stakeholders. The OBBB Act isn’t just a tax bill—it’s a strategic blueprint for the next decade of American manufacturing.
To learn more about these provisions and how they can impact you manufacturing entity, please contact Tim Reynolds at 828.322.207 or tim@dhw.cpa.