INSIGHT

Strategic Tax Planning for Manufacturing Companies in 2026: Making the Most of the One Big Beautiful Bill Act 

Vaibhav Tandon, Ryan Musser • February 6, 2026

Industries: Manufacturing and Wholesale, Consumer Business

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As you map out your manufacturing and distribution strategy for 2026, there’s a critical factor that deserves a prominent place in your planning discussions: the tax landscape has fundamentally shifted in ways that could significantly impact your cash flow, investment decisions, and competitive positioning. 

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, introduced sweeping tax changes designed to re-incentivize American manufacturing and investment. Now that these provisions are taking effect, the strategic question isn’t just what changed—it’s how you’ll leverage these changes to strengthen your operations and growth trajectory in the year ahead. 

Why This Matters Now 

While the OBBBA made many provisions from the 2017 Tax Cuts and Jobs Act permanent, it also introduced several time-sensitive opportunities specifically designed for the manufacturing and distribution sector. Some of these provisions come with crucial deadlines, and understanding how different strategic tax planning for manufacturing companies interact will be essential for maximizing your benefits. 

Research and Development Gets a Much-Needed Reset 

Immediate Deduction for Domestic R&D Expenses 

The new IRC Sec. 174A finally addresses one of the most frustrating changes from recent years by restoring your ability to deduct domestic research and development expenses in the year you incur them—rather than capitalizing and amortizing them over five years. 

You now have three options for handling unamortized R&D expenses: 

• Deduct them over five years 
• Take a full deduction on the 2025 tax returns 
• Deduct them equally on the 2025 and 2026 tax returns 

If your business has average annual gross receipts of $31 million or less, you can apply these changes retroactively. However, this requires reducing the R&D credit you took in those years, and based on preliminary IRS guidance, you’ll need to amend all three years (2022, 2023, and 2024) if you choose this route. 

What This Means for Your Tax Planning 

The immediate deduction option will increase cash flow for profitable manufacturers going forward. If you’re sitting on significant unamortized R&D expenses, you have flexibility in how you recognize those deductions, which opens up strategic opportunities for tax and cash flow optimization. 

Keep in mind that taking all unamortized costs in 2025 could create a net operating loss, particularly for smaller operations. While you can carry this forward, it only offsets up to 80% of business income. You’ll also want to consider how this interacts with your IRC Sec. 163(j) interest deduction limits. 

Capital Investment Gets More Attractive 

100% Bonus Depreciation Returns 

The OBBBA brought back 100% bonus depreciation permanently for property with a 15-year life or less—but timing matters. Generally, property acquired and placed in service after January 19, 2025, qualifies for the full deduction. Property acquired before that date only qualifies for 40% bonus depreciation. 

The legislation also increased the IRC Sec. 179 expensing limit to $2.5 million (with a phase-out threshold of $4 million), retroactive to January 1, 2025. This gives you immediate flexibility for equipment purchases made earlier in the year. 

A New Incentive Designed Specifically for Manufacturing Facilities 

Perhaps the most directly targeted provision for your industry is the newly created IRC Sec. 168(n), which allows you to fully depreciate qualified production property in the year it’s placed in service—instead of spreading it over 39 years. 

To qualify, your property must: 

• Be nonresidential property used as an integral part of qualified production activity 
• Begin construction after January 19, 2025, but before January 1, 2029 
• Be placed in service before January 1, 2031 
• Be placed in service in the US or a US possession 
• Begin its original use with you as the taxpayer claiming the deduction 

Important note: Areas used for offices, lodging, parking, research, software development, or engineering won’t qualify as production property. However, cost segregation studies could help you identify which portions of your facility qualify for this accelerated depreciation while allocating other tangible property to bonus depreciation. 

Interest Deduction Limits Get More Generous 

EBITDA Calculation Returns for Section 163(j) 

If your manufacturing operation carries significant debt—whether for equipment purchases, facility expansion, or working capital—this change will directly impact your bottom line. The OBBBA revives the use of EBITDA (rather than just EBIT) to calculate your business interest deduction limitation for taxable years beginning after December 31, 2024. 

This effectively increases the amount of interest you can deduct from 30% of your earnings before interest and taxes to 30% of earnings before interest, taxes, depreciation, and amortization. For highly leveraged manufacturers and distributors, this means more cash flow through reduced taxable income. 

One consideration: Beginning with taxable years on or after January 1, 2026, you won’t be able to use interest capitalization under IRC Sec. 263(a), 263A, and 266 to circumvent the 163(j) limitation. 

However, for tax years after 2025, subpart F income and “net CFC tested income” are excluded from ATI, reducing available interest deductions for US shareholders of foreign corporations. This will reduce the interest deduction capacity for manufacturers with significant foreign operations. 

Small Business Investment Becomes More Attractive 

The OBBBA made significant enhancements to the Qualified Small Business Stock (QSBS) exclusion under IRC Sec. 1202. For stock issued after July 4, 2025: 

• The base exclusion increases from $10 million to $15 million ($7.5 million if married filing separately) 
• The gross assets threshold increases from $50 million to $75 million 
• New tiered holding periods create earlier exit opportunities:  
  • 3 years: 50% exclusion of gain on sale 
  • 4 years: 75% exclusion of gain on sale 
  • 5 years: 100% exclusion of gain on sale 

Both the base exclusion and gross asset amounts will increase annually for inflation starting in 2027. 

For small and mid-sized manufacturers seeking investment capital or planning eventual exits, these changes make your business significantly more attractive to investors who can now access substantial tax benefits with shorter holding periods. 

The expanded QSBS provisions will generally only apply to stock issued after July 4, 2025 (date of enactment). Stock held prior to that date still follows the old $10M / $50M rules. 

Permanent Benefits for Pass-Through Entities 

QBI Deduction Becomes Permanent 

The 20% qualified business income deduction for pass-through entities is now permanent, with enhanced benefits including: 

• A new minimum deduction of $400 for businesses with at least $1,000 of QBI 
• Increased phase-out thresholds: $75,000 ($150,000 if filing jointly), up from $50,000 ($100,000 if filing jointly) 

Since many manufacturers and distributors operate as partnerships or S corporations, and manufacturing isn’t considered a specified services trade or business, you can claim this deduction with fewer restrictions than service-based industries face. 

SALT Deduction Increases (Temporarily) 

The state and local tax deduction limitation temporarily increases to $40,000 ($20,000 if married filing separately) for taxpayers whose AGI doesn’t exceed $500,000 ($250,000 if married filing separately), beginning in 2025. Both limits will increase by 1% annually until 2030, when they’ll revert to $10,000 ($5,000). 

Importantly, the pass-through entity tax (PTET) workaround remains intact, which may provide more benefit for manufacturers and distributors organized as partnerships or S corporations, especially in high-tax states. 

Excess Business Loss Limitations Made Permanent 

The limitation on excess business losses—$250,000 ($500,000 if filing jointly), adjusted for inflation—is now permanent, with the base numbers resetting in 2026. If your manufacturing operation generates significant annual losses, this could have an outsized impact on your tax planning. 

Learn More About our Consumer Business Industry Services

Energy-Related Provisions Require Immediate Attention 

If your manufacturing operations involve renewable energy production or investment, several credits are being phased out more quickly than originally scheduled: 

• Clean Electricity Production Credit (45Y) and Investment Credit (48E): Repealed for wind or solar projects placed in service after December 31, 2027, or that begin construction after July 4, 2026 
• Clean Hydrogen Production Credit (45V): Terminated for facilities beginning construction after December 31, 2027 
• Advanced Manufacturing Production Credit (45X): Credit terminated for integrated components sold after December 31, 2026; wind components after December 31, 2027; and fully phased out for eligible components after December 31, 2032 

On the positive side, the Advanced Manufacturing Investment Credit (IRC Sec. 48D) increases from 25% to 35% for semiconductor manufacturing facilities and equipment. This credit terminates on December 31, 2026. 

Overtime Compensation Gets New Tax Treatment 

Under the new overtime provisions, your employees can exclude up to $12,500 ($25,000 if married filing jointly) of qualified overtime compensation from their taxable income. Only the premium—the pay above straight-time rates—is deductible. The exclusion begins to phase-out if taxpayers MAGI is more than $150,000 ($300,000 jointly filing).  

Aditionally the employers should make sure Box 12  on the W-2 report is correctly coded “TT” for the above amounts, thus payroll systems need to be accordingly updated. 

This creates two important implications: 

1. The exclusion may incentivize employees to work more overtime, giving you additional production capacity 

2. You’ll need to separately track and report “FLSA overtime” on Form W-2 for employees earning overtime compensation 

Trump Accounts: A New Employee Benefit Tool 

Understanding the New Savings Vehicle 

The OBBBA creates a new tax-advantaged savings option called “Trump Accounts” (IRC Sec. 530A) that could become a valuable employee benefit for your workforce. These accounts are designed to help employees build wealth for their children from birth through age 18, when the accounts convert to traditional IRAs. 

Here’s how they work: 

For Employees: 

• Available for any child under 18 with a Social Security number 
• Contributions begin July 4, 2026 
• Annual contribution limit of $5,000 from family members 
• Government pilot program provides a one-time $1,000 contribution for children born between January 1, 2025, and December 31, 2028
• Funds grow tax-deferred and must be invested in broad U.S. equity index funds 
• Generally no withdrawals allowed until age 18, when the account converts to a traditional IRA 
• Contributions are non-deductible, but earnings grow tax-deferred until withdrawal 

For Employers: 

• You can contribute up to $2,500 annually per employee as a fringe benefit 
• Your contributions count toward the employee’s $5,000 annual limit 
• Contributions are generally excluded from the employee’s taxable income 
• Creates a meaningful differentiation in your benefits package 

Strategic Considerations for M&D Companies 

In an industry where attracting and retaining skilled workers remains challenging, Trump Accounts offer a unique opportunity to differentiate your benefits package without the complexity of traditional retirement plans. The accounts could be particularly attractive to younger workers starting families—exactly the demographic many manufacturers struggle to recruit. 

Unlike 529 plans, Trump Account funds aren’t restricted to education expenses once the child reaches 18 and the account converts to an IRA. This flexibility may resonate with employees who value options over restrictions. 

However, you’ll need to establish clear policies around eligibility and administration. Elections are made via IRS Form 4547, and your HR team will need to understand the timing requirements and contribution limits to properly administer this benefit. 

Creating Your Strategic Response 

These tax changes don’t exist in isolation—they interact with each other in complex ways that can either amplify or limit their benefits. For example: 

• Taking an immediate deduction for R&D expenses might affect your interest deduction calculations 
• Bonus depreciation and the new 168(n) provision could both apply to different portions of the same facility investment 
• International restructuring decisions need to account for both NCTI changes and reshoring incentives 

The manufacturers who’ll benefit most from the OBBBA are those who take a strategic, integrated approach to these provisions rather than viewing them as separate opportunities. 

Next Steps for Your Business 

As you develop your 2026 operational and financial strategy, consider: 

• How the timing of equipment purchases and facility construction can maximize depreciation benefits 
• Whether restructuring your R&D expense recognition could improve cash flow 
• If reshoring production makes more financial sense under the new qualified production property rules 
• Whether your international structure still serves your business objectives under the modified NCTI and FDDEI provisions 
• How to take advantage of time-sensitive energy credits before they expire 

The complexity and interplay of these provisions means that one-size-fits-all approaches won’t work. Your optimal strategy will depend on your specific circumstances, growth plans, and current tax position. 

Learn More About our Manufacturing and Wholesale Industry Solutions

Let’s Discuss Your Opportunities 

The manufacturing and distribution landscape is evolving rapidly, and the tax code is finally catching up with policies designed to support American production. BPM’s tax advisors work with manufacturers and distributors across the country to develop customized strategies that align tax planning with broader business objectives. 

Whether you’re evaluating a major capital investment, considering reshoring options, or simply want to understand how these changes affect your specific situation, we’re here to help you navigate these opportunities. Contact our team to start the conversation about your 2026 tax strategy.