On July 4, 2025, the “One Big Beautiful Bill Act” (OBBBA) was signed into law. This sweeping tax reform package marks the most comprehensive overhaul of the U.S. tax code since the Tax Cuts and Jobs Act (TCJA). This legislation introduces sweeping changes that will affect taxpayers of all types and across industries. This article outlines the key provisions impacting taxpayers in the manufacturing and distribution industries.
Capital Investment & Expensing
The law permanently reinstates 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025. For this purpose, property is treated as “acquired” on the date a binding written contract is entered into, meaning assets subject to such a contract dated before January 20, 2025, will not qualify, even if placed in service after that date.
For tax years beginning after December 31, 2024, the Sec. 179 benefit is expanded to allow expensing of up to $2,500,000 of qualifying property (up from $1,000,000), and the phaseout of the limitation begins when qualifying property placed in service during the year exceeds $4,000,000 (up from $2,500,000).
Additionally, new Section 168(n) provides a unique benefit for manufacturers. This provision allows 100% bonus depreciation for “qualified production property.” This term refers to the portion of any non-residential real property (depreciable under Sec. 168), that meets all of the following criteria:
- It is used as an integral part of a qualified production activity
- A qualified production activity includes the manufacturing, production, or refinement of a qualified product (any tangible personal property if such property is not a food or beverage prepared in the same building as a retail establishment in which property is sold).
- Qualified production activities must result in a substantial transformation of the property comprising the product to qualify.
- It is placed in service in the U.S. or any possession thereof
- The original use of the property begins with the taxpayer
- Construction must begin after January 19, 2025, and before January 1, 2029
- It is placed in service before January 1, 2031
The portion of the property used for offices, administrative services, sales activities, research activities, and other functions unrelated to production, do not qualify. Also, if the qualified production property ceases to be used in qualified production activities within 10 years of being placed into service, Section 1245 recapture applies.
Business Interest
The taxpayer-favorable EBITDA-based calculation of the business interest deduction limit is permanently reinstated for tax years beginning after December 31, 2024. Under the revised Section 163(j), taxpayers may once again add back depreciation, amortization, and depletion when calculating adjusted taxable income (ATI), resulting in a higher threshold for deductible business interest expense. For taxable years beginning after December 31, 2025, the law also provides detailed coordination rules for how the Section 163(j) limitation interacts with other provisions that capitalize interests, such as Section 263A (uniform capitalization rules) and Section 460 (long-term contracts).
Research & Experimentation Costs
The law permanently allows immediate expensing of domestic research & experimentation costs, reversing the TCJA’s amortization requirement. Businesses that capitalized domestic research expenses from 2022 through 2024 can now elect to accelerate recovery of such deductions over either a one year or two-year period, and small businesses with average annual gross receipts under $31 million may apply this change retroactively to tax years beginning after December 31, 2021. Note that this change by small business taxpayers requires the amending of returns for the 2022, 2023, and 2024 years.
These changes do not impact foreign R&E costs, which must still be amortized over 15 years. Furthermore, changes to Sec. 280C now require that deductible domestic research & experimentation expenses are reduced by the amount of the Sec. 41 credit for increasing research activities.
Pass-Through Entities
For manufacturing and distribution businesses operating as pass-through entities, the OBBBA provides specific provisions of interest. These provisions are effective for tax years beginning after December 31, 2025.
First, the Section 199A Qualified Business Income (QBI) deduction is now permanent at the current 20% rate. The phase-in thresholds have been expanded to $75,000 for single filers and $150,000 for joint filers, broadening access without altering the deduction’s mechanics.
Second, the excess business loss rule under Sec. 461(l) is made permanent. Notably, the excess business loss deduction limitation is reset to initial TCJA levels ($250,000/$500,000), with annual inflation adjustments thereafter. The current treatment of disallowed excess business losses as net operating loss (NOL) carryforwards to future years was retained.
Third, the OBBBA preserves the deductibility of state and local taxes paid at the entity level under Pass-Through Entity Tax (PTET) regimes.
Sec. 45D Advanced Manufacturing Credit
For manufacturers of semiconductors or semiconductor manufacturing equipment, beginning in 2026, the Sec. 45D credit is increased from 25% to 35% of qualified investment for the taxable year.
Deduction for Employer-Provided Meals
Starting in 2026, with limited exceptions, the cost of most meals provided to employees will no longer be deductible. The current 50% deduction for meals provided on-site to employees was originally scheduled to sunset at the end of 2025 under the Tax Cuts and Jobs Act.
Employee Deduction for Overtime Pay
Retroactive to January 1, 2025, the bill allows employees to deduct up to $12,500 in overtime pay ($25,000 for joint filers). This provision applies through the end of 2028. While this deduction is claimed by employees, employers will likely have to modify their systems to accurately track and report overtime paid to their workers. Both employees and employers are encouraged to closely follow forthcoming IRS guidance on this topic.
International Tax Provisions
For taxpayers with foreign operations, there are several changes in the international tax arena that may be of interest. These provisions are effective for tax years beginning after December 31, 2025.
For taxpayers owning investments in controlled foreign corporations (CFCs), the GILTI regime (now rebranded as Net CFC Tested Income, or NCTI) remains intact but with changes to amount of the Sec. 250 deduction (reduction from 50% to 40%) and the amount of eligible foreign tax credit on NCTI (from 80% to 90%). Furthermore, the deemed intangible return “floor” has been eliminated. There were also simplifications in the expense allocation rules in the computation of foreign tax credits for the Sec. 951A category (NCTI) to specifically exclude allocation of interest and R&E expenses. These changes are effective for tax years beginning after December 31, 2025. The result of these changes should cause CFC’s with NCTI to be subject to a U.S. federal tax rate of 0%, as long as long as the creditable foreign taxes allocable to NCTI are at an effective rate of at least 14%. A lower rate of creditable foreign tax may result in an incremental U.S. federal tax rate on NCTI of up to 12.6%.
For taxpayers selling qualifying property to foreign markets, the FDII (now rebranded as Foreign-Derived Deduction Eligible Income, or FDDEI) remains. The deduction has been permanently increased to 33.34% (up from 21.625%) for tax years beginning after December 31, 2025. The effect of this change is to lower the effective rate on FDDEI to 14%. Similar to changes within the NCTI regime, there is no longer a “floor” based on the amount of the taxpayer’s fixed asset investment, and simplified expense allocation excludes interest expense and R&E expenses in the computation of FDDEI.
For taxpayers that are foreign-owned and subject to the BEAT, the BEAT rate has been permanently reduced from 12.5% to 10.5%, for tax years beginning after December 31, 2025.
What’s Next?
While the OBBBA falls short of reducing the corporate tax rate to 15% for domestic manufacturers that was touted during President Trump’s campaign last fall, it contains several taxpayer-favorable provisions that should benefit taxpayers in the manufacturing and distribution industries. While many of these benefits allow for the acceleration of deductions, taxpayers are encouraged to be mindful of other provisions that could come into play, such as the excess business loss limitation and the percentage limit on utilization of net operating loss carryovers. Thus, taxpayers are encouraged to work with their tax advisors to evaluate how these provisions will apply in their particular situations.
Keep in mind that the various states will have to assess how these provisions will impact their taxing systems. For instance, many states have historically “decoupled” from bonus depreciation provisions. With the permanent extension of bonus depreciation and the creation of the 168(n) bonus depreciation for qualified production property, it is likely that all or some of these states will decouple from these provisions.
Given the need for agency implementation and guidance, there may be delays and uncertainty in the short term, so it is important that taxpayers should work closely with their tax advisors to monitor developments and prepare for evolving interpretations.
Stay Informed on the OBBBA
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If you need further guidance or have any questions, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
