New Tax Law Expands Research Tax Breaks for Manufacturers & Distributors

The recent signing of the One Big Beautiful Bill Act (OBBBA) brought a long-awaited change to the tax code for the deduction of research costs. Effective January 1, 2025, the newly created IRC Section 174A repeals the burdensome five-year amortization rule introduced in 2022, allowing businesses to immediately expense all domestic research and experimental (R&E) expenditures. Please note that foreign R&E expenditure must continue to be capitalized and amortized. This change will be in effect permanently for future tax years. The legislation also allows an election for accelerated deductions of previously capitalized amounts and permits certain businesses, specifically small taxpayers with average annual gross receipts of $31 million or less for 2025, to amend prior year returns. The decision to amend should be considered carefully, as it may not be advantageous for taxpayers in all cases. 

Why This Matters

The restoration of immediate expensing for domestic research costs under Section 174A presents a timely opportunity to revisit your innovation strategy and explore R&D tax credits still available under Section 41. Many companies may be conducting R&D activities without recognizing them as such, and some may have scaled back innovation in response to the prior capitalization requirement. If your company develops new manufacturing processes, integrates automation, or innovates in packaging, logistics, or materials handling, you may be eligible for valuable federal and state R&D tax credits. 

Qualifying Activities in Manufacturing & Distribution 

If your company participates in any of the following, you could qualify for valuable R&D tax credits under IRC Sec. 41: 

• Designing or improving production processes or assembly lines 
• Developing or testing new packaging solutions or materials 
• Implementing robotics, AI, or automation to enhance throughput 
• Customizing ERP or warehouse management systems for operational efficiency 
• Engineering new tooling, molds, or fixtures for product lines 
• Evaluating alternative materials for durability, cost, or sustainability 
• Innovating in cold chain logistics, inventory systems, or last-mile delivery 

Such efforts typically involve technical uncertainty, iterative problem-solving, and the application of engineering or scientific principles—core criteria for R&D credit eligibility. 

What’s at Stake 

The federal credit alone can reduce taxes by 6% to 10% of qualified expenses. Many states offer additional R&D credits, amplifying your benefit. With the change to IRC Sec. 174A now in effect, there's no better time to evaluate your eligibility for credits for your innovation in manufacturing processes, materials, or distribution systems. Under the OBBBA, immediate expensing of previously capitalized R&E expenditures is available beginning January 1, 2025. Taxpayers may elect to apply this deduction fully in 2025 or split it between 2025 and 2026. 

Next Steps 

With the passage of the OBBBA and the restoration of immediate expensing for domestic research costs, manufacturers and distributors who scaled back their R&D efforts due to prior limitations may now find it more beneficial to identify and document qualifying activities. This is a good time to reassess your operations and ensure you are capturing the full benefit of the available credits and deductions now available.