OBBBA: Boosting US Manufacturing Through Tax Reform

Reinstatement of 100% Bonus Depreciation

One of the most impactful provisions for manufacturers in the One Big Beautiful Bill Act” (OBBBA) is the permanent reinstatement of 100% bonus depreciation for qualified property. This means that businesses can immediately expense the full cost of eligible machinery, equipment, and certain improvements to nonresidential real property in the year they are acquired and placed into service. This immediate deduction provides a substantial cash flow advantage, reducing current year taxable income and freeing up capital for further investment or operational needs. For a sector that relies heavily on capital expenditures, this permanent change offers long-term certainty and encourages accelerated modernization and expansion efforts.

Deduction for Qualified Production Property

Beyond general bonus depreciation, the OBBBA introduces a new, temporary 100% deduction for “Qualified Production Property” (QPP). This specific incentive is tailored to encourage the construction of new manufacturing facilities within the United States. To qualify, the property must be nonresidential real property integral to a “qualified production activity,” meaning it must be directly involved in the substantial transformation of tangible personal property. This deduction applies to construction that begins after January 19, 2025, and before January 1, 2029, with the property needing to be placed in service before January 1, 2031. This provision is a powerful tool for manufacturers considering new plant construction or significant expansions, offering a direct write-off for substantial real estate investments that were previously depreciated over a much longer period.

Immediate Expensing of Domestic R&E Expenditures

Innovation is the lifeblood of manufacturing, and the OBBBA supports this by restoring the immediate expensing of domestic Research & Experimentation (R&E) expenditures. Previously, under the Tax Cuts and Jobs Act (TCJA), businesses were required to capitalize and amortize domestic R&E costs over five years, which created cash flow challenges for many R&D-intensive companies. The OBBBA reverses this, allowing manufacturers to fully deduct their domestic R&E costs in the year they are incurred for tax years beginning after December 31, 2024. This change provides significant relief and encouragement for businesses to invest in new product development, process improvements, and technological advancements, fostering a more competitive and innovative manufacturing landscape in the U.S.

Changes to Business Interest Deduction Limitation

Capital-intensive industries like manufacturing often rely on debt financing for large investments. The OBBBA addresses this by favorably adjusting the business interest deduction limitation. The law restores the calculation of adjusted taxable income (ATI) for the 30% business interest deduction cap to an EBITDA-based approach (Earnings Before Interest, Taxes, Depreciation, and Amortization) for tax years beginning after December 31, 2024. This change reverses the prior EBIT-based limitation that had been in effect since 2022, which excluded depreciation and amortization from the ATI calculation. By including these non-cash expenses in the ATI, manufacturers with significant depreciation will find themselves with a higher threshold for deducting business interest, offering greater flexibility and improving the economics of debt-financed growth strategies.

Adjustments to Clean Energy Tax Incentives

While generally pro-manufacturing, the OBBBA also introduces significant adjustments to certain clean energy tax incentives, which may influence investment priorities within the manufacturing of green technologies. The bill phases out or modifies several clean energy tax credits established under the Inflation Reduction Act of 2022, particularly impacting wind and solar projects with accelerated deadlines for qualification. However, it also offers some modifications to other clean fuel industries. Manufacturers involved in the clean energy supply chain should carefully review these updated provisions, as they could necessitate shifts in investment strategies and project timelines to maximize remaining benefits or adapt to new conditions. Understanding these changes is critical for businesses operating in or considering entry into the evolving clean energy manufacturing sector.

Disclaimer: This article provides general information and should not be considered professional financial or tax advice. Please consult with a qualified CPA or financial advisor for guidance specific to your individual business needs.