INSIGHT

Strategic Tax Planning for Manufacturing Companies 

Yash Shah • March 31, 2026

Services: Tax Industries: Manufacturing and Wholesale, Consumer Business

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Manufacturing companies face unique financial pressures in today’s economy. Rising material costs, labor shortages, and intense competition demand smart fiscal management. Tax planning for manufacturing companies offers a powerful tool to preserve capital, fund growth, and strengthen their competitive position. 

5 Tax Planning Strategies for Manufacturing Companies to Consider 

This article explores effective tax strategies that manufacturing companies can use to reduce their tax burden and improve cash flow.  

1. Maximize Depreciation Deductions 

Manufacturers invest heavily in equipment, machinery, and facilities. These capital expenditures create valuable tax-saving opportunities through several depreciation and expensing provisions—some of which have been significantly enhanced under the One Big Beautiful Bill Act (OBBBA). 

Section 179 Expensing  

Section 179 allows you to immediately deduct the cost of qualifying equipment rather than depreciating it over several years. For 2025, the maximum deduction is $2.5 million, though it phases out dollar-for-dollar once total equipment purchases exceed the applicable threshold for the year. Notably, you can finance equipment purchases and still claim the full deduction. If you put $200,000 down on a $1 million machine and finance the rest, you can deduct the entire $1 million (subject to applicable limits). Your deduction also cannot exceed your company’s taxable income for the year. 

Bonus Depreciation 

Under IRS Notice 2026-11, manufacturers can now claim a permanent 100% additional first-year depreciation deduction for qualified property. To qualify, property must be both acquired and placed in service after January 19, 2025. When combined with Section 179, this makes it possible to write off the full cost of eligible equipment in year one. The interaction between these two provisions can produce substantial first-year tax savings for manufacturers making significant capital investments. 

MACRS  

The Modified Accelerated Cost Recovery System (MACRS) serves as the residual depreciation method—applicable when a company elects out of bonus depreciation for a class of property, or when an asset isn’t eligible for bonus treatment. Under MACRS, deductions are front-loaded, with larger write-offs in the early years of ownership tapering down over time. Most manufacturing equipment qualifies for seven- or fifteen-year recovery periods. 

IRC Section 168(n): Qualified Production Property  

Perhaps the most significant development for manufacturers under the OBBBA is the new IRC Section 168(n), which creates a special 100% expensing election for a new asset class called qualified production property (QPP). This provision allows immediate expensing of certain nonresidential real property—including factory and production buildings—used in a qualified production activity in the United States. That’s a potentially transformative benefit for assets that would otherwise be depreciated over 39 years. 

To qualify under Section 168(n), construction must begin after January 19, 2025, and before January 1, 2029, and the property must be placed in service before January 1, 2031. Given the scale of investment typically involved in new production facilities, this provision deserves close attention from any manufacturer planning a build or significant expansion. 

2. Leverage Research and Development Credits 

 Innovation drives manufacturing success. The federal R&D tax credit rewards companies that develop new products, improve existing ones, or enhance manufacturing processes. 

Many manufacturers overlook this credit because they assume it only applies to cutting-edge technology companies. In reality, activities like developing new production methods, improving product durability, or creating more efficient processes often qualify. 

You must document your R&D activities carefully. Keep detailed records of employee time spent on qualifying projects, supply costs, and contractor expenses. This documentation proves essential if the IRS questions your credit claim. 

IRC Section 174: R&D Expense Capitalization  

Under prior law, IRC Section 174 required businesses to capitalize and amortize domestic research and experimental (R&E) expenditures over five years—a rule that significantly increased tax liability for innovation-driven manufacturers by deferring deductions that were once immediately available. 

IRC Section 174A: Immediate Expensing Under the OBBBA  

The OBBBA changes that calculus with the introduction of IRC Section 174A, which allows businesses to immediately deduct domestic R&E expenditures in the year incurred. For manufacturers with ongoing R&D activity, this restoration of immediate expensing can meaningfully improve cash flow and reduce current-year tax liability. 

For companies that have been capitalizing R&E costs under the old Section 174 rules, the OBBBA also provides a transition path: businesses may elect to expense their remaining unamortized costs, either in full in 2025 or spread evenly—50% in 2025 and 50% in 2026. 

Rev. Proc. 2025-28  

The IRS has issued Revenue Procedure 2025-28, which provides procedures for making elections and accounting method changes related to domestic R&E expenditures under the OBBBA’s new rules. Manufacturers looking to take advantage of Section 174A—or to accelerate deductions on previously capitalized costs—should review this guidance carefully and work with their tax advisor to ensure proper compliance and timing. 

3. Navigate State and Local Tax Obligations 

Manufacturers operating across state lines face complex state and local tax (SALT) obligations. If your business has nexus with a state, you may have filing and payment responsibilities for income and franchise taxes, gross receipts taxes, sales and use taxes, and other state-level levies. 

Understanding Nexus  

Nexus is the level of connection that allows a state to impose tax obligations, and it can arise from both physical presence and economic activity. For manufacturers, physical nexus commonly stems from owning or leasing property, storing inventory, sending employees into a state for sales or service work, or performing installation, training, or warranty work—even when that activity is short-term or carried out through third parties. 

Economic nexus rules add another dimension, extending obligations to businesses without any physical footprint in a state. Many states establish sales tax nexus based on revenue thresholds—commonly $100,000, though some states use higher thresholds such as $500,000—and are steadily simplifying these rules by moving away from transaction-count tests. Alaska repealed its 200-transaction threshold effective January 1, 2025; Utah eliminated its threshold effective July 1, 2025, and Illinois will follow suit effective January 1, 2026. 

Revenue Sourcing  

How you source revenue can be just as consequential as where you have nexus. Many states now apply market-based sourcing for services, meaning receipts are assigned to the state where the customer receives the benefit—not where the work is performed. California has finalized market-based sourcing amendments requiring taxpayers to source service and intangible income based on customer location for tax years beginning on or after January 1, 2026, increasing the importance of well-maintained contracts and business records to support sourcing positions. 

The Value of a Nexus Study  

Because these rules vary by state and change frequently, manufacturers should periodically conduct a nexus study to identify filing obligations, quantify exposure, and surface planning opportunities. A nexus study is a structured review—often modeled on a state nexus questionnaire—designed to map where you have nexus and which taxes are implicated. It can also inform whether remediation steps, such as entering into a voluntary disclosure agreement (VDA), make sense before formally registering in a new state. 

4. Consider Entity Structure 

Your business structure affects how much tax you pay. C corporations face double taxation when they distribute profits to shareholders. S corporations and partnerships generally avoid this problem by passing income directly to owners. 

However, C corporation status offers advantages in certain situations. The current corporate tax rate may be lower than individual rates for high-income owners. C corporations also provide more flexibility for retaining earnings in the business. 

Review your entity structure periodically. Changes in tax law, your business situation, or your personal circumstances may make a different structure more beneficial. 

5. Plan for Equipment Dispositions 

 Manufacturing equipment eventually becomes obsolete or wears out, and how you handle these dispositions can have significant tax consequences—particularly when you’ve claimed accelerated depreciation along the way. 

Understanding the Tax Exposure  

When depreciable equipment is sold or otherwise disposed of, the transaction generally produces Section 1231 gain or loss. However, any gain may be recharacterized as ordinary income under the depreciation recapture rules that apply to Section 1245 property. Because Section 1231 gain includes gain from the sale of depreciable property, the IRS has confirmed that such gain may be subject to Section 1245 recapture, and Section 1245 property typically encompasses the machinery and equipment at the core of most manufacturing operations. 

The practical implication: the more depreciation you’ve taken—including accelerated deductions claimed under bonus depreciation or Section 179—the greater the portion of a future gain on sale that may be exposed to ordinary income rates rather than benefiting from preferential Section 1231 treatment. Aggressive upfront deductions are valuable, but manufacturers should understand the recapture consequences before assuming a future sale will be taxed at lower rates. 

Modeling the Outcome Before You Dispose  

Before disposing of equipment, it’s worth working through the tax math: confirm your adjusted basis and cumulative depreciation claimed, estimate how much of the expected gain may be recharacterized as ordinary income under Section 1245, and assess whether other Section 1231 transactions during the year produce net gains or losses that affect the overall picture. 

A Note on Like-Kind Exchanges  

Like-kind exchanges under Section 1031 can allow you to defer gain recognition when replacing equipment, but the rules governing these transactions are highly technical. Timelines, identification requirements, and qualified intermediary rules all require careful attention. Verify the mechanics with your tax advisor before relying on an exchange as part of your equipment replacement strategy. 

Work With BPM on Tax Planning For Manufacturing Companies

Tax services for manufacturers require specialized knowledge of industry-specific rules and opportunities. The strategies discussed here represent just a starting point. Your unique situation may offer additional planning opportunities or require different approaches. 

BPM’s manufacturing practice team understands the challenges you face. We help find manufacturing industry solutions like identifying tax-saving strategies, maintaining compliance across multiple jurisdictions, and structuring transactions to minimize tax impact. To discuss how we can help your manufacturing business keep more of what it earns, contact us.