Financially savvy manufacturers understand that tax planning
shouldn't take place only at year-end. To make the most of all available tax
breaks, you need to evaluate your manufacturing business's midyear position and
promptly make necessary adjustments. Here are five federal tax-related issues
you should examine.
1. Accelerated depreciation for capital
expenditures
100% first-year bonus depreciation is now permanent for eligible
new and used assets acquired and placed in service after January 19, 2025.
This presents valuable tax-planning opportunities for capital-intensive
industries such as manufacturing.
Bonus depreciation is automatically applied to eligible assets
unless you elect out of it. You can elect out only on an asset class basis, not
for individual assets. For example, you can elect out of bonus depreciation for
all so-called five-year property, but you can't elect out for just one specific
asset in that class.
The Section 179 expensing election also allows manufacturers to
immediately write off the full cost of eligible assets. For 2026, the maximum
deduction is $2.56 million, but it begins phasing out on a
dollar-for-dollar basis when qualifying purchases exceed $4.09 million. In
contrast to bonus depreciation, however, Sec. 179 deductions can't create
an overall business tax loss.
It's easier to take a more thoughtful approach to capital
investments (including machinery and equipment purchases) at this point in the
tax year than to make a rushed purchase in December. You also may be able to
negotiate more favorable terms by shopping around now rather than waiting. But
be sure to plan your rollout of new purchases carefully — that is, when they're
placed in service — to avoid exceeding the Sec. 179 deduction limit.
2. Limited-time tax break for QPP
Manufacturers might also benefit from the new 100% first-year
deduction for qualified production property (QPP). To be eligible, among other
requirements, the property's construction must begin after January 19,
2025, and before January 1, 2029, and it must be placed in service before
2031. This break allows eligible businesses to immediately deduct the cost of
QPP that otherwise would be depreciable over 39 years. Unlike bonus
depreciation, the QPP deduction requires an election.
QPP generally is any portion of nonresidential property you use
as "an integral part" of a qualified production activity. A qualified
production activity involves the manufacturing, production or refining of
qualified products. To cut to the chase, QPP generally means factory buildings.
However, you don't have to construct a new facility to take advantage of this
deduction. Structural building components in eligible production areas may also
qualify as QPP, including:
- Walls,
partitions, floors, ceilings and permanent coverings for them (for
example, paneling or tiling),
- Central air
conditioning or heating system components,
- Plumbing and
plumbing fixtures,
- Electrical
wiring and lighting fixtures,
- Stairs,
escalators and elevators,
- Sprinkler
systems, and
- Other
components related to the operation or maintenance of a building.
Note that you can't claim the deduction for property used for
offices, administrative services, lodging, parking, sales or research
activities, software development or engineering activities, or other functions
unrelated to a qualified production activity.
3. Immediate expensing for domestic
R&E costs
Deductions for domestic
research and experimental (R&E) expenses in the year incurred have been
permanently restored. Foreign R&E costs remain subject to 15-year
amortization.
Sec. 174 R&E expenses also may qualify for the Sec. 41
research tax credit. But manufacturers can't claim both the deduction and the
credit for the same expense. If a manufacturer claims the research credit, the
R&E deduction generally must be reduced by the amount of the credit.
Alternatively, a manufacturer can elect to claim a reduced research credit.
4. Sec. 199A QBI deduction
The Sec. 199A qualified business income (QBI) deduction can free
up significant capital for eligible smaller manufacturers to reinvest in their
businesses through equipment purchases, research and development, and hiring.
The deduction, which is now permanent, generally is available to sole
proprietorships and owners of pass-through business entities, such as
partnerships, S corporations, and limited liability companies that are
treated as sole proprietorships, partnerships or S corporations for tax
purposes.
QBI is defined as the net amount of income, gains, deductions
and losses, excluding reasonable compensation, certain investment items and
payments to partners for services rendered. Qualified taxpayers can deduct up
to 20% of their QBI. The deduction is available regardless of whether you
itemize deductions, and it also applies for alternative minimum tax purposes.
The QBI deduction is subject to several restrictions. First, it
generally can't exceed 20% of your taxable income before the QBI deduction. For
2026, the phase-in range is $201,750 to $276,750 of taxable income ($403,500 to
$553,500 for married couples who file joint tax returns).
Second, if your taxable income exceeds the applicable threshold,
a wage and investment limit begins to phase in. This means that your QBI
deduction may be partially or fully reduced to the greater of your share of:
- 50% of the
amount of W-2 wages paid to employees by the qualified business during the
tax year, or
- The sum of 25%
of W-2 wages plus 2.5% of the undepreciated cost of qualified property.
If your taxable income will be near the phase-in threshold by
year end, consider proactive steps to lower it, such as maximizing retirement
contributions. Another common strategy is to accelerate business expenses into
2026 and push income to 2027.
5. Estimated tax payments
It's not uncommon for manufacturers to base their current-year
quarterly estimated tax payments on the prior year's income or tax obligation.
However, that approach could send you down an unnecessarily costly path.
Instead, consider projecting your actual 2026 tax liability.
Factor in your year-to-date income and expenses, revenue and expense
projections for the rest of the year, and the anticipated effects of applicable
tax deductions and credits.
If your projected taxable income is greater than expected,
you'll want to increase your final estimated tax payments for the year to
reduce the risk of an underpayment penalty. If it's less than originally
estimated, you can trim your payments and improve your cash flow.
