How manufacturers can prepare for tax changes under Trump in 2025

In an era of higher capital costs, when financial engineering can no longer drive performance, manufacturing companies are focused more on optimizing business operations and value-driven capital allocation. As central banks continue to reduce policy rates, the capital-intensive manufacturing sector will benefit from easing financial conditions and should invest in equipment and intellectual property.. that enhances productivity 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.

The tax policy crossroads

Companies’ ability to deduct the entire cost of qualified assets the year they are acquired and placed in service—a provision known as bonus depreciation—began to phase out in 2023, under the TCJA. Trump and Congressional Republicans support restoring this notion of bonus depreciation as a tax incentive for capital expenditures that drive infrastructure and business growth.

However, the nonpartisan Congressional Budget Office (CBO) estimated in May that reinstating full bonus depreciation retroactively to 2023 would cost the federal government $378 billion through 2034. That estimate would likely invoke a broader discussion around the need for revenue raisers.

As manufacturers take on debt to fund capital investments and expansions, the unfavorable limit on deducting interest expense handcuffs 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.

The tax policy crossroads

The business interest deduction limitation under section 163(j) became less favorable in 2022, as required by the TCJA. The current limitation does not expire.

There is some Republican support for a more favorable deduction limit, but it was not a top priority for either party in negotiations that produced the ill-fated Tax Relief for American Families and Workers Act early in 2024. It remains to be seen whether Republican support is strong enough to result in a change. The cost of more favorable tax treatment will factor heavily in what Congress does. 

Manufacturers should consider:

• How more favorable deductibility of business interest would affect their investment and financing strategies
• Opportunities to electively capitalize interest expense to inventory or shorter-lived tangible or intangible assets. By capitalizing interest to property with a short turn, the interest expense is no longer subject to the deduction limits and is instead recovered through cost of goods sold or depreciation.

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 has been overshadowed over the last two years by margin pressures, which have forced businesses to pay greater attention to finding efficiencies, cutting costs and carefully allocating capital.

The tax policy crossroads

The tax treatment of R&D expenses under section 174 became less favorable, as required by the TCJA. Beginning in 2022, companies are no longer able to fully deduct R&D expenses in the year they are incurred; instead, they have to capitalize and amortize them over five years (15 years for R&D conducted abroad).

There is bipartisan support for reinstating immediate R&D expensing. But it’s uncertain how much it would cost the government to implement more favorable R&D expensing rules and how that cost would factor into a broader tax package.

Notably, in some prior attempts to restore full expensing for R&D expenditures, Congress has also reinstated a requirement for taxpayers to either take a reduced R&D credit or include the credit into income, reducing its value.

U.S. multinationals should also monitor the foreign-derived intangible income (FDII) provision. It was enacted as part of the TCJA and 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.

Manufacturing businesses should consider:

• How their approach to R&D would change if Congress reinstated immediate expensing of R&D costs, including whether it makes financial sense to outsource R&D.
• Their future R&D spending and whether it makes sense to conduct R&D in the U.S. or abroad. Costs for R&D conducted outside of the U.S. are currently subject to a 15-year recovery period instead of five, regardless of whether the taxpayer is located in the U.S.
• The completeness and accuracy of their reporting for R&D tax credit claims and R&D expenses. The IRS is requiring additional detailed project reporting on future tax returns and is heavily scrutinizing R&D tax items.