With impactful changes to tax policy and capital investment incentives, the One Big Beautiful Bill Act (OBBB), passed on July 4, 2025, reflects a broader shift toward revitalizing domestic industry and encouraging innovation. While the legislation provides considerable benefits for many businesses, it also introduces challenges, particularly for those investing heavily in clean energy technologies. Manufacturing and distribution companies will need to reassess their tax and growth strategies to accommodate new restrictions and phase-outs while also taking advantage of new and improved tax opportunities.
100 Percent Bonus Depreciation Made Permanent
The OBBB reinstated and made permanent 100 percent bonus deprecation for qualifying assets, therefore removing the previous phase-down schedule, which had dropped bonus deprecation to 40 percent. For manufacturing and distribution companies, this translates into immediate tax write-offs for production facilities, equipment, machinery and vehicles.
Immediate Expensing of Qualified Production Property
Within the parameters of 100 percent bonus depreciation, one of the more transformative provisions of the OBBB is the immediate expensing of Qualified Production Property (QPP), allowing businesses to fully deduct the cost of new or renovated production buildings if construction begins before Jan. 1, 2029, and the property is placed in service before Jan. 1, 2031. Ultimately, this means that certain nonresidential real estate, like facilities, factories and warehouses, can qualify for 100 percent bonus depreciation.
Full Expensing of Domestic Research and Development (R&D) Expenses
The OBBB brought the return to full expensing of domestic R&D expenditures, whereas companies had been required to amortize these expenses over five years since 2022 under Section 174A, which diminishes the immediate value of innovation-related investments. The OBBB makes it possible for all qualified domestic R&D expenditures to be fully deducted in the year they are incurred.
The OBBB has different rules for the retroactive treatment of Section 174A R&D expenditures from tax years 2022 through 2024 depending on if they qualify as a “certain small business” with average gross receipts under $31 million for the prior three-taxable-year period for the first taxable year beginning after December 31, 2024. Companies that qualify will be able to expense all expenditures from 2022 through 2024 through a retroactive election; however, all years must be treated the same way. For other companies with gross receipts over $31 million, those that amortized R&D expenses during 2022-2024 can apply accelerated amortization of the remaining capitalized balance in 2025, or they have the option to spread the amortization across 2025 and 2026. Please note that businesses that qualify for retroactive expensing are not required to do so and may still choose the accelerated amortization option for 2025 or 2025/2026.
Section 163(j) Interest Limitation Changes: Greater Flexibility in Financing
Since TCJA in 2017 Section 163(j) has limited the interest expense deduction to 30% of Adjusted Taxable Income (ATI). Since 2022, ATI has been calculated based on EBIT, which does not include an addback for depreciation and amortization. The OBBB revises the limit on business interest expense deductions, basing the cap on earnings before interest, taxes, depreciation and amortization (EBITDA) rather than earnings before interest and taxes (EBIT), which is a significant benefit for capital-intensive firms in the manufacturing and distribution industry. While companies are still subject to a 30 percent ATI limitation, manufacturing and distribution firms will now have a larger ATI base from which to calculate the limitation.
For manufacturing and distribution firms that rely on financing for equipment, facility build-outs and large-scale retooling projects, the previous EBIT-based limit deductions for interest expenses were often insufficient and led to penalizing companies for making necessary long-term investments. The shift to an EBITDA-based limit increases debt-financing capacity by allowing more generous deductions, thereby making it easier to secure and justify borrowing.
The Loss of Clean Energy Incentives
The OBBB brings significant changes and expedites the phase out of some incentives, most notably the 45X advanced manufacturing production credit and the 48C investment tax credit as they relate to wind and solar components. There are still significant benefits for other components within the clean energy industry such as geothermal, hydropower, nuclear and fuel cells that are not subject to the same strict timelines and phase-outs.
While these credits for wind and solar components are still available, businesses will need to revisit current plans to make sure they meet new requirements and timelines to receive the expected credits and incentives. Additionally, companies pursuing environmental, social and governance (ESG) goals should reassess project timelines and financial models against the changes to energy incentives in the OBBB.
What’s Next for Manufacturing and Distribution
The OBBB is meant to incentivize domestic production, capital investment and innovation particularly within traditional and high-tech manufacturing. The provisions for QPP expensing, R&D deductions and improved interest deductibility help to collectively lower the cost of doing business and create immediate tax relief. The withdrawal of clean energy incentives does, however, present a strategic pivot point for manufacturers and distributors that had originally based significant parts of their tax and growth strategy upon these incentives, even more so if they are within the energy sectors. To determine how the OBBB provisions impact the tax strategy of your manufacturing and distribution business, contact your Windham Brannon advisor today, or reach out to Andrew Brandes.
