As year-end approaches, manufacturers should review their tax
position before the books close and identify opportunities to reduce their tax
burden. Here are some common strategies — including both tried-and-true and
more recently available — that you can execute before year end to minimize your
business's tax liability.
Purchase assets by year end
Bonus depreciation and the Section 179 expensing election have
been valuable tax-cutting tools for manufacturers for years, allowing hefty
deductions for eligible purchases placed in service during the tax year. The
One Big Beautiful Bill Act (OBBBA) enhanced their potential value. For example,
it made permanent the 100% first-year depreciation deduction for new and used
assets acquired and placed in service after January 19, 2025.
The OBBBA also increased the limits on Sec. 179 expensing.
For 2026, you can deduct up to $2.56 million. The deduction begins to
phase out dollar for dollar when qualifying purchases exceed
$4.09 million. Remember that you can claim the Sec. 179 election only
to offset net income, not to reduce it below zero to create a net operating
loss.
Take advantage of the deduction for
qualified production property
If you built a new plant or expanded your existing manufacturing
facilities in 2026, you may be eligible for a 100% first-year deduction for
qualified production property (QPP). Eligible QPP must be placed in service
before year end to qualify, so consider wrapping up any projects that are
nearing completion by December 31. If facility upgrades or expansions are
part of your long-term plans, keep this new tax break in mind for future tax
years — it's a limited-time opportunity.
To qualify for the QPP deduction, 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 lets eligible businesses
immediately deduct the cost of QPP that would otherwise be depreciated over 39
years. Unlike bonus depreciation, the QPP deduction requires an election.
Among other requirements, QPP must be used as an "integral part"
of a qualified production activity (QPA) — meaning the QPA occurs in the
physical space of the property. Property used for offices, administrative
services, lodging, parking, sales activities, research activities, software
development or engineering activities, or storage of finished products isn't
ineligible. Additional rules and restrictions may apply.
Leverage research costs
Manufacturers may not realize they're eligible for the
Sec. 174 deduction for research and experimental (R&E) expenses. The
deduction isn't limited to only taxpayers conducting scientific, technological
or similar types of research. Qualified R&E expenses include costs related
to activities intended to discover information that would eliminate uncertainty
about the development or improvement of a product, including wages, regardless
of the industry.
The OBBBA permanently restored the pre-Tax Cuts and Jobs Act
treatment of these costs. As a result, you can deduct qualified domestic
research expenses in the year the expenses are incurred or paid. (Foreign
R&E costs must be amortized over 15 years.) It doesn't matter if the
project hasn't been completed by year end.
Your research expenses might also qualify for the Sec. 41
research credit (often called the "research and development" credit).
Generally, qualifying activities must involve efforts to develop or improve a
product, process, technique, formula, invention or software and satisfy
statutory requirements related to technological research and experimentation.
The credit is generally based on certain qualified research
expenses, including eligible employee wages, supplies and contract research
costs. For manufacturers, activities such as developing new products, improving
production processes, testing prototypes or experimenting with materials may
qualify. (Costs that are eligible for the research credit are generally
narrower than those that qualify for the R&E deduction.)
Note: 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.
Maximize your QBI deduction
The Sec. 199A qualified business income (QBI) deduction was made
permanent under the OBBBA. This break is available for sole proprietors, as
well as owners of pass-through entities, such as partnerships, S corporations,
and limited liability companies that are treated as sole proprietorships,
partnerships or S corporations for tax purposes. It isn't allowed when
calculating the owner's adjusted gross income, but it reduces taxable income.
In effect, it's treated the same as an allowable itemized deduction (though you
don't have to itemize to claim it).
You may already be claiming the QBI deduction for as much as 20%
of your QBI. But if your taxable income exceeded the eligibility limit in
previous tax years, you should take a second look. The OBBBA expanded the
phase-in ranges, so you might qualify for at least a partial deduction this
year.
The 2026 phase-in range is $201,750 to $276,750 ($403,500 to
$553,500 for joint filers). When taxable income is within the range, a wage and
investment limit starts to phase in, partially or fully reducing your QBI
deduction to the greater 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 cost (not
reduced by depreciation taken) 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.
Begin your year-end tax planning now
You may need to act quickly to make the most of these
tax-reduction opportunities. Contact us for help putting these and other
strategies to work for you.
