Capitalizing on Change: Key Provisions of P.L. 119-21 That Affect Manufacturers’ Tax Planning

Article

August 7, 2025

For manufacturers navigating global competition, rising input costs and evolving supply chains, the Republican-led budget reconciliation package, P.L. 119-21, widely known as the “One Big Beautiful Bill Act,” presents both strategic opportunities and challenges.

The bill introduces several provisions that directly affect the operational and financial strategies of industrial manufacturers, from capital investment incentives to international tax adjustments.

1. 100% Bonus Depreciation Made Permanent

The 2025 tax reform bill made 100% bonus depreciation permanent for qualified property placed in service after January 19, 2025, effectively removing the phase-down scheduled under the Tax Cuts and Jobs Act (TCJA), which provided for 40% bonus in 2025, 20% bonus in 2026, and eliminated bonus depreciation thereafter. For manufacturers, this means immediate expensing of eligible capital investments such as:

Machinery and Production Equipment
Robotics and Automation Systems
Facility Upgrades and Energy-efficient Retrofits

This provision is expected to accelerate modernization across the sector.

2. New 100% Deduction for Certain Qualified Production Property

A notable addition to our tax regime is the introduction of a 100% first-year depreciation deduction for certain commercial real property used in qualified production activities.

The 2025 deduction for qualified production property (QPP), depreciable real property that meets certain criteria for use in manufacturing, producing or refining personal tangible property.

QPP must meet certain requirements, including (but not limited to):

It must be nonresidential real property used by the taxpayer “as an integral part of a qualified production activity”
The “activity” must involve a “substantial transformation” of the property comprising the product”
It must be placed in service within the U.S. or any possession of the United States
Its original use must begin with the taxpayer
Construction must commence after January 19, 2025, and before January 1, 2029
Assets acquired after January 19, 2025, may qualify (written binding contract stipulations will apply when determining in-service date)
The property must be placed in service before 2031
Taxpayer must make the QPP election

QPP exclusions include:

Real property used for offices, administrative services, sales activities, R&D activities or other functions unrelated to manufacturing, production or refining of tangible personal property
In cases where the taxpayer is a lessor, property used by the lessee is not considered QPP for the lessor
Qualified product does not include food or beverage prepared in the same building as a retail establishment in which such property is sold (restaurant, brewery, etc.)
QPP treatment is not available to assets depreciated under ADS lives

QPP will be fully deductible in the year in which it is placed in service, accelerating the depreciation timeline from 39 years to one year. This provision incentivizes taxpayers to expand manufacturing capacity in the U.S. with the possibility of improved project return on investment (ROI), enhanced cash flow and greater flexibility for reinvestment. However, it must be noted that guidance is needed from the IRS or Treasury regarding many of the provision’s nuances.

3. Domestic R&E Expensing Reinstated

The bill changes the treatment of research and experimental (R&E) costs beginning with the 2025 tax year. Rather than capitalizing and amortizing domestic R&E expenditures, manufacturers can once again fully deduct them in the year in which they are incurred.

In addition, taxpayers have the option of deducting remaining capitalized costs over one year (2025), ratably over two years (2025 and 2026), or continuing to amortize them on their current schedule. See below regarding an opportunity available to eligible small manufacturers to take advantage of these favorable changes retroactively.

The ability to immediately deduct R&E expenditures is meant to incentivize domestic innovation by improving after-tax cash flow.

4. Retroactive R&E Deductions for Small Manufacturers

Eligible small manufacturers — those with $31 million or less in average annual gross receipts — have the option of retroactively deducting domestic R&E expenses from tax years 2022 through 2024, in addition to the expensing options discussed above. This option may increase the efficiency of R&E deductions and timing of the return of capital; however, it will not be the best option available for all eligible companies.

There are significant complexities involved in analyzing the options, which depend on the facts and circumstances of each taxpayer and increase substantially if there has been a change in ownership after 2021 or if the taxpayer is leveraged and subject to section 163(j).

5. Business Interest Expense Limitation (Section 163(j)) Adjustments

Starting in 2025, the calculation of adjusted taxable income (ATI) under Section 163(j) will revert to an earnings before interest, taxes, depreciation and amortization (EBITDA) basis — replacing the more restrictive earnings before interest and taxes (EBIT) standard in place since 2022. This change will generally increase the amount of interest businesses can deduct, particularly manufacturers that are highly leveraged.

In addition, there were two other key changes to the business interest limitation provision:

Ordering Rule: Beginning in 2026, the Section 163(j) limitation is required to be applied before capitalizing or deducting interest under most other provisions.
Foreign Income Exclusion: Beginning in 2026, certain foreign income is excluded from ATI, potentially reducing deductible interest for multinational manufacturers.

6. International Tax Shifts: GILTI and FDII

P.L. 119-21 modifies key international tax provisions that affect global manufacturers, including, Global Intangible Low-taxed Income (GILTI) and Foreign-derived Intangible Income (FDII).

GILTI

The U.S.’ global minimum tax regime is now called Net CFC Tested Income (NCTI), and the new regime could impact companies differently than experienced under the GILTI regime. The new regime’s elimination of the defined QBAI exclusion coupled with the elimination of U.S. expense apportionment when determining companies’ ability to monetize foreign tax credits associated with NCTI call for companies to take a fresh look at their global tax planning and offshore structures.

FDII

The U.S. federal income tax export tax benefit is now called Foreign Derived Deduction Eligible Income (FDDEI) and is positioned to provide greater benefits for manufacturers than were available under the former FDII regime. Although the amount of the deduction was reduced, the elimination of the exclusion of a defined rate of profit for companies’ tangible property, coupled with the elimination of the apportionment of certain U.S.-based expenses, could increase the amount of export income eligible for the lower effective rate under the new FDDEI regime.

Manufacturers should take a fresh look at the benefits provided under the new FDDEI regime, as the enhancements should be net favorable for manufacturers. These provisions may prompt a reevaluation of global supply chains, intellectual property (IP) ownership structures and transfer pricing strategies.

7. Energy Incentives Rolled Back

One of the most notable shifts is the rollback of certain clean energy tax incentives that were enhanced, expanded or introduced under the Inflation Reduction Act (IRA). For industrial manufacturers, the impact of the expedited termination of certain clean energy incentives means reduced federal support for investments in:

Solar and Wind
Energy-efficient Facility Upgrades
Electrification of Industrial Fleets and Equipment

Manufacturers contemplating an investment in clean energy technologies to power their operations should consider the implications of the bill and consult with a tax professional on best practices. The ability to purchase transferable credits was not materially altered by the bill; however, the reduced scope of qualifying technologies and FEOC restrictions may impact the supply of credits available in future years.

Strategic Tax Reform Considerations for Industrial Manufacturing Leaders

To fully capitalize on the tax reforms introduced by P.L. 119-21, manufacturers should take a proactive and strategic approach with the assistance of their tax advisors.

The following actions may help businesses optimize tax positions, improve operational efficiency and maintain a competitive edge in a rapidly evolving economic environment:

Accelerate Capital Projects: This strategy not only reduces taxable income but also enhances productivity and positions firms for long-term growth.
Reassess Financing Structures: This is especially important for capital-intensive firms or those undergoing expansion through leveraged financing.
Leverage R&D Incentives: Identify all R&D activities and consider other opportunities around amended returns and changes in methods. These opportunities can unlock liquidity and support ongoing innovation initiatives.
Reevaluate Global Operations: Changes to GILTI and FDII may alter the tax efficiency of global supply chains and IP strategies. A proactive international tax strategy can reduce risk and improve after-tax profitability.
Monitor State-level Incentives: With federal clean energy incentives curtailed, state and local programs will play a larger role in supporting sustainability and innovation. This is particularly important for manufacturers pursuing environmental, social and governance (ESG) goals or investing in green technologies.

How Cherry Bekaert Can Help

Cherry Bekaert’s Industrial Manufacturing team is ready to help you navigate the complexities Contact us today to learn how we can help your business adapt and thrive under the new tax regime.

To dive deeper into the provisions of the 2025 final budget reconciliation bill, explore our detailed analysis.

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