A Comprehensive Guide for Manufacturers and Distributors on the One Big Beautiful Bill Act’s Impact on the Industry

On July 4, 2025, President Trump signed the Republican budget bill, commonly referred to as the One Big Beautiful Bill Act (OBBBA), into law. Among other provisions, the OBBBA made many of the expiring tax laws from the 2017 Tax Cuts and Jobs Act (TCJA) permanent. As a major stated purpose for the bill was to re-incentivize American manufacturing and investment, it should come as no surprise that the manufacturing and distribution (M&D) industry stands to benefit significantly from the bill.  

Key Takeaways 

• New IRC Sec. 174A revives the ability for businesses to immediately deduct their domestic research and development expenses in the year they are incurred.
• The use of Earnings Before Interest, Taxes, Depreciation and Amortization under IRC Sec. 163(j) will allow highly-leveraged companies to deduct more of the interest they pay on debt.
• Changes to Bonus Depreciation and IRC Sec. 179 Expensing will allow taxpayers greater flexibility and cash-flow opportunities.
• New 168(n) will temporarily incentivize manufacturers to reshore manufacturing to the US.
• Enhancements to the Qualified Small Business Stock (QSBS) Exclusion will make investing in small manufacturing companies more attractive for investors and allow for earlier exits.
• Changes to International Provisions such as GILTI and FDII are designed to further incentivize reshoring jobs and businesses to the US.
• The expiration of certain energy credits requires careful planning to make sure companies still qualify for the credits tied to their projects before time runs out.
• The increase to the Advanced Manufacturing Investment Credit will further incentivize chipmakers to manufacture their chips in the US.
• Additional provisions, such as no tax on overtime, may encourage workers to work more hours or new workers to enter the manufacturing and distribution industry.

Research and Development Deductions Under 174A 

The TCJA made major changes to businesses’ ability to deduct their research and development (R&D) expenditures. For taxable years beginning after December 31, 2021, businesses were required under IRC Sec. 174 to capitalize and amortize their R&D expenditures over five years (15 years for foreign expenditures).

After previous attempts to change this provision stalled out in Congress, the OBBBA created IRC Sec. 174A, which finally brought back the ability to deduct these expenses in the year in which they are incurred, provided they are domestic expenditures.

All businesses, regardless of size, have three options to deduct their unamortized expenses: 

1. Deduct over five years,
2. Take a full deduction in 2025, or
3. Deduct them equally in 2025 and 2026.

Small businesses (that is, businesses with average annual gross receipts of $31 million or less) are able to apply these changes retroactively. However, they must also reduce the amount of R&D credit they took in those years, and preliminary guidance from the IRS seems to require small businesses to amend all three years if they elect to amend.

M&D Considerations: The revival of the deduction for domestic research and development expenses in the year they are incurred has been met with much excitement across a wide range of industries, including manufacturing. Going forward, this change should increase cash flow for businesses that elect to take the immediate deduction. For profitable companies, the ability to deduct all unamortized R&D expenses in 2025 or over 2025 and 2026 may allow for more flexibility in tax and cash flow planning.

Similarly, smaller or unprofitable manufacturers and distributors may have significant planning opportunities given their options. However, given the requirement to reduce the R&D credit and amend 2022, 2023, and 2024, these taxpayers should carefully consider all the options available to them to determine which method will be most beneficial for them.

Additional considerations need to be given to the interplay between this provision and others. For instance, taking the deduction for all unamortized costs in 2025 may create a net operating loss (NOL), particularly for smaller businesses. While this can be carried forward, it can only be used to offset up to 80% of business income. The decrease in amortization expenses could also ultimately reduce companies’ IRC Sec. 163(j) interest deduction (discussed below), though it is currently unclear if the IRS will treat the deduction for unamortized expenses as amortization or as a deduction. Finally, individual taxpayers subject to the alternative minimum tax are still required to capitalize and amortize their allocated R&D expenses over ten years.

Enhancements to Bonus Depreciation & Sec. 179 Expensing

The TCJA introduced 100% bonus depreciation for property with a 15-year life or less, and increased the IRC Sec. 179 expensing amount to $1 million, adjusted annually for inflation. While the IRC Sec. 179 changes were permanent, bonus depreciation was scheduled to phase out (or “sunset”) beginning in 2023. The amount of bonus allowed decreased by 20% each year, with no bonus allowed beginning in 2027.

The OBBBA brought back 100% bonus depreciation and made it permanent, allowing businesses to again immediately deduct certain property in the year in which they are placed in service. This change is effective for property acquired and placed in service after January 19, 2025. (Note: This mid-month effective date may trip up many taxpayers, so it is important to make sure there is substantiation to show that any equipment for which bonus depreciation was claimed was acquired after that date.) Property acquired prior to that date does not qualify and will only be eligible for 40% bonus depreciation. The bill also increased the IRC Sec. 179 limit to $2.5 million, with the phase-out threshold increased to $4 million, retroactive to January 1, 2025.

M&D Considerations: Making 100% bonus depreciation permanent will be beneficial for many taxpayers, but particularly those in the M&D space. Manufacturers will be able to immediately deduct the costs of equipment purchased in 2025, provided it was acquired before January 19, 2025. For assets acquired before January 19, 2025, taxpayers may be able to utilize IRC Sec. 179 instead. IRC Sec. 179 can also be particularly useful for small businesses generally or companies that do significant business in states that do not conform to bonus depreciation.

Newly Created IRC Sec. 168(n) for Qualified Production Property

As part of the effort to encourage the reshoring of manufacturing and production back to the US, the bill contains a temporary provision that allows taxpayers to fully depreciate qualified production property in the year in which it is placed in service, instead of depreciating it over 39 years. To qualify, the property or portion of the property must:

• Be nonresidential property,
• Be used by the taxpayers as an integral part of the 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 US possession),
• Begin its original use with the taxpayer claiming the deduction, and
• Have an affirmative election made by the taxpayer.

Areas used for offices, lodging, parking, research, software development, or engineering, and any other function not related to manufacturing, production, or refining of tangible personal property, will not be considered qualified production property.

M&D Considerations: This provision was written almost directly for the M&D industry, and the industry stands to benefit significantly from it. There could be the potential for the use of a cost segregation study to allocate out the portion of the building that is 168(n) eligible while also identifying any tangible property not eligible for 168(n) that is eligible for bonus depreciation.

Revival of Favorable Calculation Under Sec. 163(j)

Under the TCJA, the ability to deduct interest expenses was limited to 30% of a company’s earnings before taxes, interest, depreciation, and amortization (EBITDA). The TCJA further limited the deduction by restricting the starting point to only EBIT for taxable years beginning after December 31, 2021. The OBBBA revives the use of EBITDA to calculate the limit for taxable years beginning after December 31, 2024. However, the bill also disallows the use of interest capitalization under IRC Sec. 263(a), 263A, and 266 to circumvent the IRC Sec. 163(j) limitation, effective for taxable years beginning on or after January 1, 2026.

M&D Considerations: Like the revival of domestic R&D expensing, the reversion to EBITDA as the starting point for calculating the business interest deduction limitation will help taxpayers increase their cash flow by reducing their taxable income. Companies that have taken on significant debt to purchase equipment or expand their company, such as manufacturers and distributors, will benefit the most from this change. Additionally, companies may need strategic planning to take advantage of interest capitalization before January 1, 2026.

QSBS Exclusion Enhancements

Under IRC Sec. 1202, taxpayers have been able to exclude as much as $10 million or 10 times their basis on the sale of QSBS, provided they held the stock for more than five years. To be considered a qualified small business, the business had to have gross assets no greater than $50 million immediately before and after the issuance of the stock.

The OBBBA made multiple enhancements to IRC Sec. 1202. Effective for stock issued after July 4, 2025, the base exclusion will increase to $15 million ($7.5 million if married filing separately), while the gross assets amount will increase to $75 million. The bill also introduces tiered holding periods:

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

M&D Considerations: The combination of the increased base exclusion, higher gross assets, and a shortened period to begin excluding gain on sale should make investment in small or mid-sized manufacturers and distributors more attractive.

Qualified Business Income (QBI) Deduction

To create parity between the new 21% corporate tax rate and small businesses, the TCJA created a 20% deduction for small businesses with qualified business income (QBI). The OBBBA made this provision permanent and introduced a new minimum deduction of $400 for businesses with at least $1,000 of QBI. It also increased the phase-out threshold to $75,000 ($150,000 if filing jointly), up from $50,000 ($100,000 if filing jointly). The bill kept the limitations on specified services trade or businesses’ (SSTBs) ability to claim the full deduction once its taxable income exceeds the income limits and phase-out threshold.

M&D Considerations: This is a welcome change for the M&D industry. Many manufacturers and distributors are organized as partnerships or S corporations, and manufacturing and distribution are not considered a SSTB, making them eligible for the 20% deduction with fewer restrictions.

State and Local Tax (SALT) Provisions

The TCJA created a new restriction on taxpayers’ ability to deduct their state and local taxes. Taxpayers were limited to $10,000 ($5,000 if married filing separately) as their deduction. The OBBBA temporarily increases the limitation to $40,000 ($20,000 if married filing separately) for taxpayers whose AGI does not exceed $500,000 ($250,000 if married filing separately) beginning in 2025. Both the deduction and AGI limitations with have an annual 1% increase until 2030, at which point the limit will “snap back” to $10,000 ($5,000).

As a result of the SALT deduction limitation, many states introduced election Pass-through entity taxes (PTETs) to allow small business to deduct states taxes at the entity level, effectively circumventing the SALT cap. Early drafts of the bill would have restricted or eliminated this workaround, but the final version left this strategy intact.

M&D Considerations: The increase in the SALT deduction limitation will benefit owners in high-tax states, but the AGI threshold may limit its usefulness. Manufacturers and distributors that are organized as partnerships or S corporations may find more benefit in the use of PTETs to reduce their owners’ state tax burdens.

Excess Business Losses

The TCJA added IRC Sec. 461(l), which disallows a non-corporate taxpayer from taking a deduction for business losses in excess of $250,000 ($500,000 if filing jointly), adjusted annually for inflation. The excess amount will be carried forward as an NOL in future years. The OBBBA made this limitation permanent and reset the starting point for increasing the statutory numbers starting in 2026.

M&D Considerations: Making the limitation permanent and resetting back to the base numbers will have an outsized impact on small or mid-sized manufacturers and distributors who generate significant losses each year.

International Considerations 

The TCJA introduced “Global Intangible Low-Taxed Income” (or GILTI), which taxed the revenue of non-US companies controlled by US corporations and/or US citizens (CFCs). Companies were allowed a deduction against GILTI of 50% and could exclude their qualified business asset income (QBAI). The OBBBA renames GILTI to Net CFC Tested Income (NCTI), decreases the allowable deduction against NCTI to 40%, and repeals the exclusion of QBAI, thus increasing the effective tax rate to 12.6%. However, the bill also increased the deemed paid foreign tax credit to 90% from 80%.

The TCJA also created Foreign-Derived Intangible Income (FDII), which allowed a deduction of 37.5% of such FDII. This resulted in an effective tax rate of 13.125%. The OBBBA renames the provision as Foreign Derived Deduction Eligible Income (FDDEI), and reduces the deduction to 33.34%, resulting in an effective tax rate of approximately 14%.

Finally, the Base Erosion Anti-Abuse Tax (BEAT), which applies to large corporations with over $500 million in average annual gross receipts and a base erosion percentage of 3% or greater, will increase from 10% to 10.5%.

These international provisions are all effective for taxable years beginning after December 31, 2025/

M&D Considerations: A stated focus for the bill is to stimulate an “America First” economy. Accordingly, it is not surprising that the bill changes international provisions in a way that encourages the formation of companies in America and disincentivizes US companies from doing significant business overseas. Manufacturers and distributors should review their structures and supply chains to make sure they are not negatively impacted by these changes.

Acceleration of Energy Credits Expiration Dates

The Inflation Reduction Act created multiple new credits intended to incentivize renewable and/or sustainable energy. While not every credit was repealed, the OBBBA greatly accelerated the expiration of many credits, either in whole or in part. Credits for wind or solar production or investment in particular will be phased out more quickly.

Credit Name	New Policy
Clean Electricity Production Credit (45Y)	Credit repealed for wind or solar projects placed in service after December 31, 2027, or that begin construction after July 4, 2026
Clean Electricity Investment Credit (48E)	Credit 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)	Credit terminated for all facilities that begin construction after December 31, 2027
Advanced Manufacturing Production Credit (45X)	Credit terminated for integrated components sold after December 31, 2026.  Credit terminated for wind components produced or sold after December 31, 2027  Credit fully phased out for eligible components after December 31, 2032

M&D Considerations: Manufacturers in the renewable energy space may need to reevaluate time-tables, particularly for projects related to wind and solar energy.

Increase to the Advanced Manufacturing Investment Credit

The Advanced Manufacturing Investment Credit was created by the Creating Helpful Incentives to Produce Semiconductors for America Fund (CHIPS) Act as part of the appropriations bill for 2022. As originally enacted, the provision created IRC Sec. 48D, which provided a credit of up to 25% of the amount of qualified investment in any advanced manufacturing facility; that is, any facility that is used primarily to manufacture semiconductors or semiconductor manufacturing equipment. The business must reduce their depreciable basis in the property by the amount of credit claimed. The OBBBA increases the maximum credit amount to 35% of the qualified investment.

M&D Considerations: While not as beneficial as the full write-off available for qualified production property, this provision offers flexibility for semiconductor manufacturers before the deduction under 168(n) is available. The credit is scheduled to terminate on December 31, 2026.

No Tax on Overtime

A major cornerstone of President Trump’s campaign was the promise to eliminate taxes on overtime compensation. Under the OBBBA, taxpayers can exclude up to $12,500 ($25,000 if married filing jointly) of their qualified overtime compensation. Only the extra compensation is deductible – that is, the pay in excess of what would be considered “straight time” pay.

M&D Considerations: The deduction for overtime compensation is important for M&D companies for two main reasons. First, the deduction may encourage more employees to work overtime, providing manufacturers and distributors with more time to work on projects. Secondly, it also creates new reporting obligations for M&D employers. Under the bill, employers are required to separately track and report “FLSA overtime” on Form W-2 for employees who earn overtime compensation.

These legislative changes, while generally beneficial, will also create new complexities for taxpayers. The changes do not exist in a vacuum, and many of the above provisions could interact with, complement, or restrict each other. Taxpayers will need to consult with a trusted tax advisor to determine which changes may benefit them the most, and which changes may be more trouble than they are worth. Contact us below to see how we can help you take advantage of all the OBBBA has to offer.