Strategic Tax Planning for Manufacturing and Distribution Under OBBBA

By Derrick Rebello, CPA
Gray, Gray & Gray, LLP

The signing of the One Big Beautiful Bill Act on July 4, 2025 represents a watershed moment for financial leaders in the manufacturing and distribution sectors. This sweeping tax legislation fundamentally reshapes the strategic tax planning landscape, creating both substantial opportunities and new complexities that demand immediate attention from CFOs and Controllers. For businesses that move physical goods through production facilities and distribution networks, the implications extend far beyond simple compliance. They touch every aspect of capital planning, cash flow management, and competitive positioning. Here’s what you need to know.

The Return of Full Expensing is a Game-Changer for Capital-Intensive Operations

The permanent restoration of 100% bonus depreciation stands as the centerpiece of the OBBBA’s impact on manufacturing and distribution businesses. After watching this benefit phase down to 60% in 2024 and 40% for the first three weeks of 2025, companies can once again immediately deduct the full cost of qualifying equipment and machinery placed in service after January 19, 2025. This provision alone transforms the economics of capital investment decisions that have been on hold during the phase-down period.

For manufacturing operations, this means that production equipment, industrial machinery, material handling systems, and transportation assets all qualify for immediate expensing rather than depreciation over a five- to seven-year period. Distribution centers benefit equally, with forklifts, conveyor systems, warehouse automation equipment, and delivery vehicles all eligible for the same treatment. The cash flow implications are profound. A manufacturer investing $5 million in new production equipment can reduce current-year taxable income by the full amount, potentially generating tax savings exceeding $1 million in the year of acquisition.

The legislation takes this concept even further with the introduction of qualified production property provisions. Between now and the end of 2030, businesses can immediately expense the entire cost of newly constructed manufacturing facilities, production plants, and refining operations. This represents a dramatic departure from the traditional 39-year depreciation schedule for nonresidential real property, effectively transforming building investments that once provided modest annual deductions into immediate, substantial tax benefits.

Reframing the Capital Investment Decision Process

Finance leaders must now reconsider the entire framework for evaluating capital expenditures. The traditional net present value calculations, which assumed gradual depreciation schedules, no longer accurately reflect economic reality. Instead, the after-tax cost of qualifying equipment drops dramatically in year first year, fundamentally altering both the return on investment metrics and the opportunity cost of delaying purchases.

This shift demands a comprehensive reassessment of multi-year capital plans. Projects that appeared marginally attractive under 40% or 60% bonus depreciation may now clear hurdle rates comfortably. Conversely, the permanent nature of 100% bonus depreciation eliminates the time pressure that previously drove year-end acquisition rushes. Strategic timing now depends more on operational readiness, supplier availability, and integration capacity than on depreciation phase-outs.

The qualified production property provisions add another dimension to facility planning decisions. Companies considering new manufacturing capacity, production line expansions, or facility modernization must now evaluate whether to accelerate these projects to capture immediate expensing benefits before the December 31, 2030 deadline. The provision requires that construction begin after January 19, 2025, and before January 1, 2029, with the property placed in service by the end of 2030. These dates create a clear window for major capital projects that finance leaders should incorporate into strategic planning cycles.

Section 179 Enhancements Unlock Value for Mid-Sized Operations

While 100% bonus depreciation captures headlines, the OBBBA’s expansion of Section 179 expensing deserves equal attention from manufacturing and distribution CFOs. The legislation increases the immediate expensing cap from $1 million to $2.5 million, with the phase-out threshold rising to $4 million in annual equipment purchases. For businesses that don’t exceed these thresholds, Section 179 offers advantages that bonus depreciation cannot match.

The strategic value emerges most clearly in state tax planning. Many states conform to Section 179 provisions while rejecting or limiting bonus depreciation. Companies operating in states like California, which has historically been hostile to federal bonus depreciation rules, may find Section 179 provides the only path to immediate expensing. This creates planning opportunities where the selective use of Section 179 on certain asset classes optimizes the combined federal and state tax position.

Section 179 also remains valuable for property types excluded from bonus depreciation, particularly certain improvements to nonresidential real property such as HVAC systems, roofs, security systems, and fire protection equipment. Manufacturing facilities often require these improvements alongside production equipment purchases, and the enhanced Section 179 limits now accommodate more comprehensive facility upgrades within a single tax year.

Research and Development Shifts from Capitalization Back to Immediate Deduction

For manufacturing companies with active product development programs, the OBBBA restores immediate deductibility for domestic research and experimental expenditures incurred after December 31, 2024. This reverses the capitalization requirement that took effect in 2022 and eliminates the need to amortize R&D costs over five years for domestic activities or fifteen years for foreign activities.

The impact on effective tax rates and cash flow can be substantial for innovation-driven manufacturers. A company spending $3 million annually on domestic R&D that was previously capitalizing these costs over five years can now deduct the full amount currently, potentially saving $630,000 in federal taxes in the deduction year while eliminating complex tracking requirements for amortization schedules.

Smaller manufacturers benefit from a special provision that allows for retroactive application to tax years beginning after December 31, 2021, provided their average annual gross receipts remain at or below $31 million. This creates potential refund opportunities for eligible businesses that have been capitalizing R&D costs for the past three years and should trigger an immediate review of amended return possibilities.

Business Interest Deduction Calculation Restored

The return to an EBITDA-based calculation for the business interest deduction limitation provides welcome relief for capital-intensive manufacturers and distribution businesses carrying significant debt. Under the restrictive calculation in effect during the phase-down period, depreciation and amortization reduced the income base against which interest expense was measured, often creating significant limitations on deductibility.

The restoration of the EBITDA calculation means depreciation, amortization, and depletion no longer reduce the base for measuring the 30% interest expense limitation. Combined with the return of 100% bonus depreciation, this creates a favorable interaction. Businesses can claim immediate expensing on equipment purchases without reducing their capacity to deduct interest on the debt used to finance those purchases.

For companies with significant debt service obligations, this change materially improves cash flow projections and may open opportunities to refinance or restructure debt more favorably. Distribution businesses operating on thin margins and high leverage particularly benefit, as the expanded interest deduction capacity can make the difference between profitability and loss in highly competitive markets.

Permanent Relief for Privately Held Businesses

The OBBBA makes permanent and enhances the Section 199A qualified business income deduction, which benefits partnerships, S corporations, and sole proprietorships —the dominant ownership structures in mid-sized manufacturing and distribution. Beyond making the 20% deduction permanent, the legislation expands the phase-in ranges for limitations and introduces a minimum $400 deduction for active business owners with at least $1,000 in qualified business income.

For manufacturing and distribution businesses operating as pass-through entities, this permanence eliminates years of uncertainty about tax planning. Owners can now structure compensation, capital investments, and business expenses with confidence in the long-term availability of the deduction. The expanded phase-in ranges provide additional relief for businesses experiencing growth or volatility in taxable income.

The legislation eliminates the pass-through entity tax workaround for businesses ineligible for Section 199A, particularly professional services firms. While this doesn’t directly impact most manufacturers and distributors, it reinforces the relative advantage these industries enjoy under the tax code and may influence decisions about business line expansion or acquisition targets.

State and Local Tax Considerations

While the increase in the state and local tax deduction cap from $10,000 to $40,000 for tax years 2025 through 2029 primarily benefits individual taxpayers, it has strategic implications for privately held manufacturers and distributors. Business owners who have been managing their total compensation and distribution strategies around the SALT cap limitation now have additional flexibility.

For owners in high-tax states operating pass-through entities, the expanded SALT deduction may influence decisions about salary versus distribution mix, timing of income recognition, and even business location choices. While $40,000 remains a cap rather than unlimited deductibility, it provides meaningful relief for mid-level executives and business owners who previously bumped against the $10,000 ceiling.

What Finance Leaders Must Address Now

The transition to these new rules creates immediate operational challenges that extend beyond tax calculation. Finance systems must be configured to properly track acquisition dates, construction commencement dates, and placed-in-service dates with precision not previously required. The January 19, 2025 cutoff for 100% bonus depreciation eligibility means that equipment purchased or under contract before that date may only qualify for 40% depreciation under the old phase-down rules.

Cost segregation studies take on renewed importance for businesses constructing or acquiring production facilities. These studies identify building components that qualify for accelerated depreciation as personal property rather than real property, allowing for the immediate expensing of components such as specialized electrical systems, process piping, and dedicated HVAC systems, even within buildings that may not qualify as qualified production property. For a $10 million manufacturing facility, proper cost segregation can often identify $2-3 million in immediately expensible components, generating substantial first-year tax benefits.

State tax conformity issues demand careful analysis, as most states do not automatically adopt federal bonus depreciation rules. Companies must track federal and state basis differences, prepare state addback schedules, and consider whether to elect out of bonus depreciation federally in situations where state benefits from conformity to Section 179 outweigh federal benefits from bonus depreciation. This analysis often varies by state and requires jurisdiction-by-jurisdiction evaluation for multi-state operations.

Immediate Planning Tips

Finance leaders should immediately undertake several critical planning initiatives. First, revisit the capital expenditure budget for the remainder of 2025 and into 2026, identifying projects that become more attractive under the new rules. Consider whether to accelerate or delay planned equipment purchases to better align with operational needs, now that permanent 100% bonus depreciation has removed the timing pressure.

Second, evaluate whether major facility projects should be initiated to capture qualified production property benefits before the December 31, 2028 construction commencement deadline. For companies already contemplating capacity expansion or facility modernization, this timeline creates a compelling incentive to move forward with planning and design work.

Third, model the interaction between bonus depreciation, Section 179, business interest limitations, and state tax rules to optimize the tax position across all jurisdictions. This requires sophisticated tax projection models that account for multi-year implications and can evaluate various acquisition timing scenarios.

Fourth, review financing strategies for capital investments. The combination of immediate expensing and restored EBITDA-based interest limitations may make debt financing more attractive relative to equity for certain projects. Companies should assess whether their current financing arrangements remain optimal under the new rules or whether refinancing or restructuring could unlock additional value.

Long-Term Strategic Considerations

Beyond immediate planning, the OBBBA’s provisions create long-term strategic considerations for manufacturing and distribution businesses. The permanent nature of 100% bonus depreciation fundamentally changes the economics of domestic manufacturing versus outsourcing. Companies that previously found offshore production attractive due to lower labor costs must now factor in the tax benefits of domestic equipment investment when making location decisions.

The qualified production property provisions create a time-limited window for facility investment that savvy businesses will exploit. Companies that can identify and initiate qualifying projects before the deadline position themselves for significant competitive advantages through both the immediate tax benefits and the operational improvements that new facilities enable.

For privately held businesses, the permanent extension of favorable pass-through provisions, combined with enhanced capital investment incentives, creates a compelling case for reinvesting in the business rather than distributing profits to owners. The tax code now strongly encourages building productive capacity and modernizing operations over extracting profits, a shift that should influence strategic planning for growth-oriented manufacturers and distributors.

Move Fast, Benefit More

The One Big Beautiful Bill Act represents the most significant change to the tax landscape for manufacturing and distribution businesses since the Tax Cuts and Jobs Act of 2017. The restoration of 100% bonus depreciation, introduction of qualified production property expensing, enhanced Section 179 limits, and restoration of immediate R&D deductibility collectively create powerful incentives for capital investment and domestic production.

For CFOs and Controllers in these industries, the legislation demands immediate action on multiple fronts: recalibrating capital budgets, modeling tax scenarios, evaluating facility projects, and ensuring accounting systems can properly track the complex rules. The companies that move quickly to understand and leverage these provisions will gain significant competitive advantages through improved cash flow, reduced tax burdens, and enhanced capacity for growth.

The complexity of these provisions and their interactions with state tax rules, business interest limitations, and pass-through entity calculations means that close collaboration with qualified tax advisors has never been more critical. The opportunities are substantial, but capturing them requires sophisticated planning, precise execution, and ongoing monitoring as the IRS issues implementation guidance over the coming months. For businesses willing to invest the resources in understanding and optimizing under the new rules, the rewards will be measured not just in tax savings but in competitive positioning for the remainder of the decade.

For specific guidance on implementing these provisions for your manufacturing operation, consult with qualified tax professionals who specialize in the manufacturing and distribution industry.