How tax changes in the One Big Beautiful Bill Act could affect manufacturers

In an era of relatively expensive capital, when financial engineering can no longer drive performance, manufacturing companies are focused more on optimizing business operations and value-driven capital allocation. As businesses look to improve their strategic and operating levers to maximize their market share and profitability, they should continue to invest in machinery, equipment and intellectual property that enhances productivity, advances products and efficiency, and generates value beyond the cost of capital.

When it comes to acquiring fixed assets and placing them into service, accelerated deductions can widen avenues for companies to expand their production capabilities, strengthen their supply chain and distribution channels.

Meanwhile, clean energy tax credits and incentives—particularly those introduced or extended by the Inflation Reduction Act of 2022—have reduced the cost of capital for manufacturers by offsetting upfront investment costs and enabling credit monetization strategies. Those incentives have made it more financially viable for manufacturers to pursue decarbonization and energy-efficiency projects, especially when paired with transferability provisions that allow companies to monetize their earned credits by selling to others.

How the OBBBA could affect the cost of capital for manufacturers

Bonus depreciation

The OBBBA introduces significant changes to 100% bonus depreciation, making it permanent for most property acquired after January 19, 2025, and establishing a new temporary allowance for qualified production property.

Qualified production property is defined as non-residential building property with a depreciable life of 39 years that is used integrally in qualified production activities and placed in service in the U.S.

The construction of such property must generally begin after Jan. 19, 2025, and before Jan. 1, 2029, with a placed-in-service date before Jan. 1, 2031. There is an ability for used property to qualify, but such property must not have been used in a manufacturing or production activity by any taxpayer between Jan. 1, 2021, and May 12, 2025.

Learn more about the technical changes to bonus depreciation and implications for businesses.

Clean energy tax credits and incentives

On the other hand, the OBBBA curbs many clean energy tax credits and incentives associated with wind and solar power and electric vehicles, and it limits the transferability of credits. 

Learn more about the technical changes to clean energy tax credits and incentives and the implications for businesses.

Manufacturing businesses should consider:

• Reviewing planned expansions and determining whether construction or acquisition timelines coincide with qualified production property eligibility dates.
• Performing a cost segregation study and repairs study concurrently with any planned improvement projects in order to properly classify shorter-lived property. Properly identifying asset classes and deductible repair costs is the best way to ensure the fastest recovery of capital expenditures.
• Making various depreciation-related elections (e.g., an election not to claim bonus depreciation) that can be used to increase taxable income in one year without imposing similar treatment in a future year. If used correctly, these types of elections can minimize current-year taxable income while preserving future deductions not limited by the 80% net-operating loss (NOL) utilization restriction.
• Modeling how various elections and the interplay of various business tax relief provisions would affect their tax positions in 2025 and future years. This could help a company determine whether it needs to update cash tax forecasts to take into account potentially smaller estimated payments in 2025.
• State and local tax incentives for capital expenditures that may be available for one jurisdiction over another. To the extent the expenditures create new jobs, there may be hiring or training grants/credits available.
• How phaseout dates and modified eligibility rules for clean energy projects affect their credit forecasting.
• State-level clean energy tax incentives that could be attractive alternatives to the curbed federal incentives.
• Carefully reviewing their organizational chart to determine whether influence or control by certain foreign entities renders them ineligible for various energy credits.
• Whether to accelerate certain clean energy projects to obtain the corresponding credit before it phases out.

As manufacturers take on debt to fund capital investments and expansions, an unfavorable limit on deducting interest expense has handcuffed their ability to pursue crucial initiatives, such as investing in smart factory technologies, upgrading and automating production lines, optimizing supply chains, investing in product development and new business ventures, and hiring and retraining talent.

How the OBBBA could affect debt financing for manufacturers

The OBBBA returns to the original Tax Cuts and Jobs Act calculation for business interest expense limitations. It allows the addback for depreciation, depletion, and amortization to the adjusted taxable income calculation, effectively allowing deductions up to 30% of earnings before interest, taxes, depreciation and amortization (EBITDA). It also expands floor plan financing rules and modifies elective interest capitalization rules, with phased effective dates starting after 2024 and 2025.

Learn more about the technical changes to the business interest expense limit under section 163(j) and the implications for businesses.

Manufacturers should consider:

• How more favorable deductibility of business interest affect their investment and financing strategies.
• Modeling multiyear impacts of this provision to optimize tax outcomes, considering the staggered effective dates, economic changes, refinancing schedules, and elective capitalization of research costs.

The U.S. tax system incentivizes innovation and promotes global competitiveness through credits and cost recovery mechanisms intended to reduce the financial burden companies take on when they invest in new products and technologies.

Greater or more immediate deductions could free up capital to give manufacturers more leeway to focus on innovation, including automation and artificial intelligence. For many manufacturers, innovation as a priority may have been overshadowed recently by margin pressures and supply chain disruptions, which have forced businesses to pay greater attention to finding efficiencies, cutting costs and carefully allocating capital.

How the OBBBA could affect R&D for manufacturers

Tax treatment of R&D expenses

The OBBBA reinstates the ability for taxpayers to immediately recover costs of R&D (including software development) conducted domestically beginning in 2025, while keeping the 15-year amortization requirement for R&D performed outside the United States.

Small business taxpayers have the option to electively apply the law retroactively and amend prior tax returns or elect to treat as a method change, while other taxpayers must make an election to accelerate the costs over a one- or two-tax year period in the first tax year beginning after Dec. 31, 2024. The provision to expense domestic research costs is permanent.

U.S. international tax reform: Foreign-derived deduction eligible income (FDDEI)

The foreign-derived intangible income (FDII) regime—now known as FDDEI—was designed to incentivize businesses to conduct R&D in the U.S. by offering lower tax rates on income from U.S.-held intellectual property used abroad. Under the current framework, U.S. corporations conducting R&D domestically can benefit from two layers of incentives: the R&D credit and the FDII deduction.

The OBBBA includes changes that could increase the amount of foreign-derived income eligible for the FDDEI deduction, and it makes the FDDEI deduction more favorable for R&D-heavy companies.

Learn more about U.S. international tax reforms in the OBBBA.

Manufacturing businesses should consider:

• How their approach to R&D may change, given the immediate expensing of domestic R&D costs, including whether it makes financial sense to outsource R&D.
• Whether it makes sense to transition R&D to the U.S. from abroad, given that the OBBBA did not change the required 15-year recovery period for R&D conducted outside the U.S.
• Whether it makes sense for eligible small businesses to amend returns to claim immediate domestic R&D expensing or to deduct these costs over a one- or two-year period.
• The completeness and accuracy of their reporting for R&D tax credit claims. The IRS is requiring additional detailed project reporting on future tax returns and has announced it is more heavily scrutinizing R&D tax credits.
• How technology-enabled tax planning tools can help minimize the cost of capital deployment and R&D strategies by ensuring all OBBBA benefits are maximized, reducing administrative friction while maximizing the long-term value of available incentives.
• That accelerating the amortization of prior-year R&D expenses for federal tax purposes may not immediately reduce or eliminate significant state taxable income. After the Tax Cuts and Jobs Act was enacted in December 2017, the tax treatment of R&D expenses didn’t change until 2022. Now, with an immediate federal change, it remains to be seen how quickly states will react.
• Whether corporations would benefit from keeping or moving IP to the United States to achieve a lower effective tax rate on their export sales and services.

Entity choice directly affects enterprise value because it helps determine how a business is taxed, as well as the amounts of after-tax cash the business retains and owners receive. Business owners should be sure their priorities align with the cash flow and tax implications of being structured as a C corporation versus a pass-through entity (S corporation or partnership).

How the OBBBA could affect entity structuring for manufacturers

As corporate, individual and U.S. international tax laws change for domestic and global entities, so may the tax-efficiency of different entity types. The OBBBA does not modify corporate or individual rates, but it does reform U.S. international taxation, which may alter how companies’ entity structures align with their global tax strategy. The OBBBA also modifies some domestic tax benefits that depend partly on a company’s entity structure.

American competitiveness

Tax rates for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) were designed to encourage U.S. companies to keep intangible assets within the United States. Together, they aimed to balance American competitiveness globally with the federal government’s need for revenue. The OBBBA maintains the concepts but modifies FDII and GILTI by:

• Modifying the calculations
• Renaming to foreign-derived deduction eligible income (FDDEI) and net CFC tested income (NCTI), respectively
• Slightly increasing the corresponding ETRs and changing the foreign tax credit limitation

FDII, now FDDEI: The FDDEI regime continues to offer preferential tax treatment to C corporations engaged in foreign sales of U.S.-developed goods and services. While the OBBBA reduces the extent of this benefit, FDDEI still provides a meaningful incentive to structure export-facing operations through U.S. corporations, particularly for companies with high-margin business models.

GILTI, now NCTI: Entity classification affects the treatment of foreign earnings under NCTI and may produce different tax outcomes depending on the owner’s status and applicable provisions.

Learn more about U.S. international tax reforms in the OBBBA                               

Exclusions for small business stock

The OBBBA expands the scope and benefits of this provision designed to incentivize investment in startups and small businesses. The provision allows noncorporate taxpayers (generally individuals and in certain cases pass-through businesses and their owners) to potentially exclude from federal tax up to 100% of capital gains from the sale of qualified small business stock if certain requirements are met.

The expanded scope and benefits should drive investments in critical new technologies being created and developed by small businesses in the U.S., and it will increase the number of companies exploring C corporation status when considering entity choice. 

Learn more about the technical changes to the exclusions for small business stock and the implications for businesses.

Qualified business income (QBI) deduction

For noncorporate taxpayers (i.e. pass-throughs), the OBBBA makes permanent the 20% qualified business income deduction. Owners with material amounts of qualifying business income will find this change a welcome relief from the potential tax increases that would have come had the provision expired at the end of 2025.

Learn more about the technical changes to the QBI deduction and the implications for businesses.

Manufacturers should consider:

• Whether the range of changes made by the OBBBA, in conjunction with updated business planning, moves the needle to make a particular entity type more attractive.
• How entity classification affects the treatment of foreign earnings under NCTI and may produce different tax outcomes depending on the owner’s status and applicable provisions. Model how restructuring their legal entities might minimize adverse tax consequences.
• Revisiting their operating structure. With greater certainty around the FDDEI and NCTI reduced tax rates, using a corporation could provide a tax benefit on export sales and services and a lower ETR on NCTI.

Events and market factors in recent years have exposed vulnerabilities in global supply chains, prompting companies to rethink their sourcing and manufacturing strategies and diversify their suppliers and manufacturing locations. In addition, ongoing trade tensions, shifts in U.S. tariff frameworks, and changes in industrial policies across jurisdictions are leading to a realignment of global trade flows.

Determining where to locate new distribution centers or factories, or how to optimize global footprint, is a complex and multidisciplinary process. Anticipating and responding to the tax and tariff impacts on existing business models and new scenarios are key to business strategy and decision-making.

How international tax reforms in the OBBBA could affect manufacturers’ global footprint and supply chain

American competitiveness

Tax rates for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) were designed to encourage U.S. companies to keep intangible assets within the United States. Together, they aimed to balance American competitiveness globally with the federal government’s need for revenue. The OBBBA maintains the concepts but modifies FDII and GILTI by:

• Modifying the calculations
• Renaming to foreign-derived deduction eligible income (FDDEI) and net CFC tested income (NCTI), respectively
• Slightly increasing the corresponding effective tax rates (ETRs) and changing the foreign tax credit limitation

FDII, now FDDEI: The FDII deduction regime was designed to encourage U.S. corporations to retain high-value functions, such as intellectual property ownership and sales operations within the U.S. by offering a reduced ETR on income earned from exporting goods and services to foreign markets.

GILTI, now NCTI: NCTI is the closest domestic tax regime to an income inclusion rule (IIR) under the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two framework. On June 28, 2025, the G7 recognized that the U.S. minimum tax architecture, namely the NCTI regime and the corporate alternative minimum tax (CAMT), provides a functionally equivalent response to the OECD’s Pillar Two tax, sufficiently close in substance to avoid additional top-up taxes under OECD rules.

Profit shifting and base erosion

The base-erosion and anti-abuse tax (BEAT) is a minimum tax designed to prevent large multinational corporations from avoiding U.S. tax liability by shifting profits abroad. The OBBBA permanently lowered the scheduled BEAT rate from 12.5% to 10.5% and eliminated the unfavorable treatment of certain credits that could be applied against regular tax liabilities after Dec. 31, 2025. 

Learn more about U.S. international tax reforms in the OBBBA.

Tariffs

Tariffs are separate from the OBBBA, but as they continue to be applied, they could have profound implications for U.S. importers specifically and the economy in general. Depending on the details, increased tariffs could increase companies’ sourcing costs, impact export revenues if trading partners retaliate, and compel companies to further reconfigure their supply chains.

Manufacturers should consider:

• U.S. international tax changes and the corresponding implications on their global footprint. Manufacturers should pay particular attention to their supply chain and economic presence in foreign jurisdictions, as tariffs could significantly limit their cash flows. Additionally, they should be mindful of the global minimum tax.
• That an increase in the ETR on GILTI (i.e. NCTI) could affect the overall ETR on foreign activity and the company’s cash position.
• Although the United States has not adopted Pillar Two rules, U.S. multinational manufacturers operating in countries that have adopted Pillar Two are subject to the GLoBE rules. They need to assess their exposure to the top-up tax and establish a robust reporting process. Compliance with Pillar Two will necessitate the aggregation of extensive global data and the execution of complex calculations.
• Importers may be able to capitalize on several well-established customs and trade programs to mitigate the effects of increased tariffs.
• Manufacturers that source certain machinery from China should consider filing for a tariff exclusion.
• Importers should confirm the tariff classification codes they use are precise, as imprecise codes commonly result in unnecessary costs.
• Setting up foreign sales offices and distribution centers that participate in the sales of their export products. Such income could potentially increase their ability to utilize foreign tax credits.