By Ruben Ramirez, CPA/ABV/PFS, MSF, CEPA, Senior Manager at Blue & Co.

The One Big Beautiful Bill (“OBBB”) brings sweeping changes to the U.S. tax code, with significant implications for the manufacturing and distribution (“M&D”) industries. This article provides an overview of key tax provisions in OBBB, focusing on their direct and indirect impacts on manufacturers and distributors.

The overview is designed for stakeholders in the M&D industries who seek to understand how these changes impact investments, operations, and competitiveness.

Why OBBB Matters for Manufacturers and Distributors

OBBB is favorable to manufacturers and distributors by providing accelerated deductions to capital-intensive industries, stimulates domestic investment in research and development (“R&D”) activities, and aims to preserve U.S. manufacturing jobs. OBBB extends and enhances many pro-M&D tax provisions, including reinstating full domestic R&D expense deductibility, expanding interest deductibility, and permanently extends the qualified business income (“QBI”) deduction.

Key Tax Provisions in OBBB Impacting Manufacturers

Full Expensing for Certain Capital Investments

This provision restores 100 percent bonus depreciation for qualified property, allowing manufacturers to immediately deduct the full cost of new and used equipment, machinery, and specific improvements acquired and placed in service after January 19, 2025. This reverses the previously scheduled phaseout that would have reduced the benefit to 40 percent in 2025 and eliminated it by 2027.

Additionally, it establishes 100 percent bonus depreciation for qualified production property, specifically targeting new U.S. facilities used for manufacturing or producing qualified products. The deduction applies to the portion of nonresidential real property that functions as an integral part of qualifying production.

Some of the key benefits of these provisions include:

• Increases return on capital investments by providing immediate deductions for 100 percent of qualifying capital expenditures.
• Improves cash flow, enabling faster reinvestment in plant and equipment. This is particularly valuable for capital-intensive manufacturers.
• Encourages domestic investment for the modernization of new or expansion of manufacturing facilities.
• Bonus depreciation for qualified production property significantly reduces the recovery period of property from 39 years to the first year in service.

Section 179 Expensing

Section 179 expensing increases the maximum deduction to $2.5 million, with a phaseout threshold of $4 million, allowing for immediate expensing of qualified purchases. This is particularly valuable for small and mid-sized manufacturers, since it helps simplify tax planning for routine capital investments.

Research and Experimental (“R&E”) Expensing

OBBB permanently restores the immediate deduction of domestic (R&E) costs, enabling businesses to deduct such expenses in the year they are incurred. In contrast, foreign R&E expenses continue to be capitalized and amortized over 15 years. It also provides flexibility for companies with previously capitalized R&E costs, offering an election to recover those expenses through either a single-year or two-year deduction.

Some of the key benefits of this provision include:

• Incentivizes manufacturers to invest in new product development, process improvements, and advanced technologies.
• Immediate expensing increases the return on investment of innovation and supports U.S.-based research and development efforts, which may create jobs in engineering and technical roles.
• Supports competitiveness in high-tech and advanced manufacturing sectors and is particularly impactful for manufacturers with large R&E budgets, such as those in the electronics, pharmaceutical, and chemical sectors.
• The election to deduct previously capitalized domestic R&E helps to effectively make this change retroactive and can accelerate cost recovery for those expenses previously made.

Interest Deduction

The limitation on business interest expense is shifted to 30 percent of taxable income before interest, depreciation, and amortization, from 30 percent of taxable income before interest. This adjustment raises the limitation threshold, allowing businesses to accelerate their deduction for interest.

The change is especially beneficial for manufacturers and other capital-intensive industries with significant depreciation and amortization costs.

Some of the key benefits of this provision include:

• Supports manufacturers that rely on borrowing to fund capital projects or working capital.
• May stimulate leveraged acquisitions.

Qualified Business Income (QBI) Deduction

OBBB makes the 20 percent QBI deduction permanent and applies to pass-through entities (S-corporations, partnerships, sole proprietorships) with qualified income, which are common in manufacturing.

Some of the key benefits of this provision include:

• Reduces effective tax rates for owners of pass-through manufacturing businesses.
• Levels the playing field with C corporations, which benefit from the 21 percent corporate tax rate.
• Rewards domestic manufacturing activity.

International Tax Provisions

OBBB maintained a favorable deduction for income from exports of certain goods and services. It also neutralized the tax policy for investments in foreign tangible and intangible assets. As a result, FDII (foreign-derived intangible income) is replaced by FDDEI (foreign-derived deduction eligible income) in calculating the deduction for income from foreign markets. Likewise, GILTI (global intangible low-taxed income) is replaced by NCTI (net CFC-tested income), and the tax calculations for related foreign entities are generally simplified.

The calculation of the foreign tax credit is modified, and the minimum tax rate and calculations for large multinational manufacturers, are also modified.

The impact of these changes is mixed depending on the manufacturer’s global footprint.

Some of the key benefits of these provisions include:

• Encourages U.S.-based production by incentivizing exports.
• Simplifies calculations and compliance related to investments in foreign assets for some businesses.
• Supports keeping intellectual property and high-value activities in the U.S., and investing in U.S. manufacturing property.

Additional Provisions Relevant to Manufacturers

Advanced Manufacturing Investment Credit

OBBB increases the credit rate for certain advanced manufacturing investments from 25 percent to 35 percent. This credit is generally applicable to those in the semiconductor manufacturing sector.

Estate Tax Exemption

The estate tax exemption maintains a higher exemption, reducing the risk that family-owned manufacturers must liquidate assets to pay estate taxes.

Employee Overtime Compensation Deduction

The employee overtime compensation deduction is a $12,500 ($25,000 for joint filers) federal income tax deduction for employees receiving qualified overtime compensation. This deduction creates additional reporting needs for employers.

Trump Account Contribution Program

Employers can establish a Trump account plan for the exclusive benefit of employees by providing employer contributions to the Trump accounts of employees or their dependent(s). Adopting a Trump account plan may help with employee recruitment and retention.

Strategic Considerations for Manufacturers

1. Review capital investment plans: Take advantage of bonus depreciation and higher section 179 limits.
2. Maximize R&E benefits: Immediate expensing and R&E make innovation more affordable.
3. Evaluate financing strategies: The favorable change to the interest limitation may increase return on investment and make debt financing more attractive.
4. Monitor international operations: Review your global structure to identify tax planning opportunities and changes to your compliance requirements.

Conclusion

OBBB represents a significant legislative effort to reinforce the U.S. manufacturing sector through targeted tax policy. By making permanent provisions such as enhanced depreciation deductions, R&E expensing, and the QBI deduction, the bill aims to increase return on investment, stimulate investment, and preserve U.S. manufacturing jobs. To fully leverage the opportunities that come with the passage of the One Big Beautiful Bill, contact your local Blue & Co. advisor today.