The One Big Beautiful Bill Act (OBBBA) introduces significant updates to the way manufacturing companies approach Research and Development (R&D) costs, bringing broad implications for the sector. Thanks to this legislation, manufacturers and innovators can now immediately write off expenses associated with developing new products, implementing automation systems, and improving efficiency on the shop floor.
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Key Changes & Opportunities
Immediate Expensing Of Domestic R&D Costs
Starting in 2025, manufacturing companies will be able to fully deduct domestic R&D costs in the same year they are incurred, providing immediate financial benefits when investing in innovation.
Continued Capitalization Of Foreign R&D Costs
R&D expenditures made outside the United States will remain subject to capitalization and must be amortized over a 15-year period. Manufacturers with substantial overseas R&D should review how this impacts their cash flow and weigh the advantages of domestic versus international research investment.
Options For Previously Capitalized R&D Costs
For R&D costs capitalized between 2022 and 2024, manufacturers have several choices:
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- Elect to deduct all remaining unamortized R&D costs in the first tax year beginning after December 31, 2024.
- Choose to spread out deductions for unamortized costs over a two-year period.
- Qualified small businesses (those with average annual gross receipts under $31 million) may amend their 2022, 2023, and 2024 tax returns to deduct R&D costs in full in the year those costs were incurred.
Although amending prior returns may be attractive for some smaller manufacturers, it’s advisable to perform a cash flow analysis to determine if it’s better to amend three previous years’ returns or take the deduction in the first taxable year after December 31, 2024.
R&D Tax Credit
Manufacturers can continue to benefit from the R&D tax credit, which generally provides tax savings equal to 7-10% of qualified R&D costs, supporting ongoing investment in research and innovation.
Example Scenario: Accelerated R&D Deductions For Manufacturers
Let’s look at how a manufacturing business spending $1 million per year on R&D since 2022 could benefit from the OBBBA changes. In 2025, the company may deduct $2.1 million in unamortized R&D expenses covering 2022 through 2024. On top of that, the manufacturer can also deduct the current year’s R&D costs of $1 million. This combined approach delivers net R&D credits and deductions that could amount to over $500,000 in after-tax benefit for 2025, significantly improving cash flow for the business.
Strategic Implications For Manufacturing Businesses
The OBBBA brings back immediate deductibility for manufacturers investing in R&D. By allowing quicker deductions for previously capitalized costs, the law creates a direct cash flow advantage and encourages further innovation within the manufacturing sector. Manufacturers should consider how these accelerated deductions can support their long-term growth and competitiveness.
Conclusion: Maximizing R&D Tax Benefits
Manufacturing companies are encouraged to work closely with their tax advisors to determine the specific impact of the OBBBA on their operations. Understanding the details of recent law changes can help manufacturers identify the best strategies for maximizing R&D tax credits and deductions. For tailored guidance, reach out to your GBQ tax advisor to discuss how these updates may benefit your manufacturing business.
By Jeff Waldeck, CPA, Tax & Advisory
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