12 ways to turn manufacturing tax policy into a competitive advantage

In a U.S. manufacturing industry environment – defined by labor and energy volatility, supply chain fragility, cost inflation, technological change, and regulatory updates – leveraging tax policy can meaningfully impact business success or failure.

Recent legislation such as the One Big Beautiful Bill Act (OBBBA) has added both complexity and opportunity. Manufacturers and their advisors must determine how to turn the former into the latter.Here are 12 ways manufacturers can integrate tax strategy into their businesses – not just during tax season – but whenever and wherever it counts.

Dynamic tax modeling

Modeling must be utilized to map out one’s current and projected tax situation. Inputs for this modeling exercise can include income projections, capital expenditures (CapEx), cash flows, expected tax liabilities, distributions, and debt covenants. Further, ideal business entity type should be modeled for maximum tax efficiency, liquidity, and possible exit events.

Accounting method optimization

Accounting method changes are often overlooked but can unlock immediate and sustainable tax benefits. These methods can include various inventory accounting strategies, inventory write-offs, prepaid costs, repair and maintenance expenditures, CapEx amounts, warranty arrangements, accrued expenses, and financing arrangements. Now is an important time for manufacturers to assess if their current accounting methods still reflect their business operations, or if alternative methods are more suitable.

100% bonus depreciation

The new OBBBA deduction, known as “qualified production property” (QPP), found in IRC Section 168(n), allows certain non-residential real estate to qualify for 100% bonus depreciation, instead of the traditional 39-year straight-line approach. As a result, qualifying businesses can immediately write off a significant portion of eligible facilities in the year they’re placed in service. 

QPP is available to manufacturers, chemical producers, and agricultural producers. This significant tax benefit could reshape how these businesses plan expansions, structure real estate ownership, and finance growth. However, they must conform to strict QPP eligibility requirements, specific effective dates, and avoid recapture issues. QPP facilities must be built in the U.S., aligning with the federal administration’s broader objective of encouraging domestic investment by both U.S.-based and foreign-owned businesses. State-level tax compliance varies with QPP, and this presents a planning challenge for manufacturers. 

CapEx

For manufacturers – who generally invest heavily in machinery and equipment – the OBBBA expands IRC Section 179 expensing. Section 179 allows businesses to immediately deduct the full cost of qualifying equipment and property in the year it was placed in service. In 2025, Congress doubled the statute’s expensing limit to $2.5 million (from $1.22 million) with a phase-out threshold beginning at $4 million. This change, along with the return of 100% bonus depreciation, has created meaningful tax benefit optimization opportunities. The IRS has also issued some transition guidance on these CapEx changes, including how they apply to 2025 tax returns.

Research expenditures

Research expenditures offer manufacturers both a competitive advantage and a meaningful tax incentive. The Tax Cuts and Jobs Act (TCJA), enacted in 2017, required businesses to capitalize research expenditures beginning in 2022 and amortize these amounts over five years rather than immediately expensing them. This created significant challenges for many manufacturers.

The OBBBA restored the current deduction for research expenditures. For the 2025 tax year, several transition rules apply for businesses to determine how to treat research expenditures incurred between 2022 and 2024. We previously analyzed these rules in our September 2025 and February 2026 tax articles.

Manufacturers can also benefit from the research tax credit. These incentives work together, providing both a current deduction and a current tax credit. To qualify for the research credit, a manufacturer’s research must focus on new and improved components to the company itself, not to the overall industry.

Proper documentation of research activities and related expenses is essential to support the research credit. A research tax credit study is often obtained and recommended as the amount of research credit increases.

Inventory, LIFO, and IPIC

The last-in, first-out (LIFO) inventory method can reduce tax liability when inventory costs rise. With LIFO, a manufacturer deducts higher current costs while older, lower costs remain on its balance sheet. Although LIFO can provide significant tax savings over time, a key requirement is that a manufacturer must use LIFO for both financial reporting purposes and tax purposes.

The Inventory Price Index Computation (IPIC) method is a specialized form of LIFO that incorporates a broad-based inflation index. The index, determined monthly by the Department of Labor (DOL), can often show higher inflation rates than what manufacturers actually experience. As a result, IPIC can simplify LIFO calculations and potentially increase tax savings.

LIFO has become more attractive in the current macroeconomic environment. Supply chain issues, higher energy prices, tariffs, and more have increased costs for consumers and businesses alike. However, with this tax-savings strategy, there are other non-tax factors and costs to consider.

UNICAP

Uniform capitalization (UNICAP) rules require certain selling, general, and administration costs to be capitalized into a manufacturer’s inventory for tax purposes. While these UNICAP rules are complex and costly to comply with, smaller manufacturers may be exempt. For 2025, businesses with less than $31 million in average receipts over the prior three years can elect not to be subject to UNICAP. This threshold increases in 2026 to $32 million for the average of the prior three years’ receipts.

Advance payments on orders

Some manufacturers receive advance payments before beginning work on an order, triggering unique tax consequences. Companies must determine whether these payments are taxable upon receipt, deferred until the order is completed, or recognized as the work is being performed. While certain tax deferral opportunities are available, specific rules and reporting must be adhered to.

Gains and losses

In the past, manufacturers could defer tax gains from the sale or disposal of property through a like-kind exchange by reinvesting in similar property. Current tax law no longer allows deferral for personal property, but it remains for real property. If a disposal would result in a deductible tax loss, a manufacturer may be better off selling the property.

Nexus

Manufacturers often seek to expand their businesses into new markets, while state taxing agencies look for new businesses to tax. These goals often collide when a state asserts that a manufacturer is doing business within its borders – creating “nexus” and potentially triggering tax filing and payment obligations. 

Manufacturers should carefully evaluate their operations to determine where nexus exists and ensure compliance with proper filing requirements in each state. In some cases, voluntary disclosure agreements (VDAs) may provide an opportunity to come into compliance while limiting prior tax liability exposure. State-level nexus exposure is a significant compliance risk and should be evaluated on an annual basis as the business expands into new markets.

As filing requirements arise in new states, manufacturers should also evaluate the state’s conformity to federal tax law, including those related to the OBBBA. There is variation in state conformity practices, resulting in state-specific adjustments that may impact business decisions.

Foreign activity

Many manufacturers are expanding into global markets, and recent international tax changes under the OBBBA introduce important considerations. Notably, the OBBBA increases the effective corporate tax rate of net CFC taxable income (NCFCTI, formerly GILTI) from 10.5% to 12.6%. Although higher beginning in 2026, the rate is lower than it would have been without the OBBBA. 

The OBBBA further eliminates the net deemed tangible income return (NDTIR), which had allowed a 10% return on qualified business asset investment (QBAI). 

Manufacturers with substantial foreign sales should evaluate the benefits of establishing an Interest Charge Domestic International Sales Corporation (IC-DISC). This is a tax-exempt corporate structure that allows exporters to reduce their overall federal tax burden by classifying a portion of export profits as qualified dividends. Generally, approximately $2 million or more of foreign sales are needed to make the IC-DISC practical. This complex strategy has specific limitations.

These changes, along with other provisions, generally take effect in tax years beginning in 2026 and each warrant careful evaluation.

Transitioning ownership tax-efficiently

Manufacturers, like other businesses, must deal with not only day-to-day challenges but also long-term succession planning. Will the business be transferred to the next generation, or possibly to its management team? Will it be sold to a strategic partner or private equity buyer? Could it be transitioned through an ESOP or, perhaps, a different approach? Transition planning is important for all businesses but presents unique considerations for manufacturers.

An Intentionally Defective Grantor Trust, an irrevocable trust allowing the grantor to remove the asset from their estate but maintain income tax liability, can be a great way to tax-efficiently transition the business to the next generation. This method can remove future price appreciation for tax purposes, while still enabling the grantor to maintain control of company decision-making.

For transitions to the existing management team, an ESOP is a tax-efficient solution. The gain on the sale to a properly structured ESOP can be excluded from federal income tax, under Section 1042, but this provision is generally only available in a C Corporation (C Corp) structure. In an S Corporation (S Corp), while Section 1042 is not available now, the ESOP is not taxed on its share of S Corp income, providing a significant current tax benefit.  

If selling to a third-party, performing a Section 1202 analysis may facilitate full or partial exclusion of the gain from federal income taxation. Generally, Section 1202 allows shareholders of C Corp stock with initial gross assets under $75 million to exclude up to $15 million of gain on the sale of stock. This provision is limited if the entity is operating as an S Corp or a Partnership, but some tax planning strategies are available to permit Section 1202 savings in the future. Careful entity selection and planning is required in these cases.

With a comprehensive understanding of available tax opportunities, CPAs can play a vital role in identifying meaningful tax savings for manufacturers. Contact your Sikich tax advisor for assistance maximizing these strategies for your business.

About our authors

Neil Keller, CPA, has been in public practice since 1994. He has experience working with closely held businesses in tax, business valuations, cost segregation, and consulting. He supports clients in decision-making such as corporate entity structuring or M&A considerations. Neil.keller@sikich.com

Jim Brandenburg, CPA, MST, possesses extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions, and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies. Jim.bradenburg@sikich.com

Bailey Martenson, CPA, is a Tax Manager at Sikich, serving businesses and their shareholders in the professional services and construction and real estate sectors. Her tax and advisory experience focuses on supporting business growth and ongoing federal and state tax compliance. Bailey.martenson@sikich.com

Jerry Murphy, CPA, CMA, CGMA, has more than 30 years of experience and is the leader of Sikich’s Manufacturing and Distribution Services team. He specializes in assurance services and provides business advisory solutions in areas such as operations improvement, strategic planning, and mergers and acquisitions. Jerry.murphy@sikich.com