The One Big Beautiful Bill Act (OBBBA) is a landmark tax reform enacted in 2025, aimed at revitalizing the U.S. manufacturing sector and enhancing American business competitiveness. Central to the bill are targeted tax provisions designed to incentivize domestic production, capital investment and innovation.
1. 100% Bonus Depreciation
A key provision of OBBBA is that it restored and made permanent 100% bonus depreciation for eligible assets of businesses placed in service after January 19, 2025. Eligible assets include new or used tangible property with a recovery period under U.S. tax law of 20 years or less. Prior to OBBBA, bonus depreciation rules had reduced the percentage of eligible property that could be expensed. With full expensing reinstated, this significant tax incentive allows businesses to deduct the full cost of eligible assets in the year they were placed in service, rather depreciating them over several years.. This change significantly improves after-tax cash flow and encouraging reinvestment in operations.
2. Expansion of Qualified Production Property
OBBBA also introduces a new elective 100% expensing regime for “qualified production property” (QPP) under IRC §168(n). QPP has historically included tangible personal property such as machinery, equipment, and certain improvements that are utilized in the manufacturing process. However, OBBBA provides that nonresidential real property used for manufacturing, which typically would have been depreciated over 39 years, can be immediately expensed under the bonus depreciation rules noted above. This benefit should be an enormous incentive for businesses to build manufacturing facilities in the United States.
3. Research and Development (R&D) Deductibility Expansion
Another significant provision of OBBBA is the restoration of full and immediate deductibility of domestic R&D expenses, effective for tax years beginning after December 31, 2024, under new IRC §174A. While domestic R&D expenses can now be fully expensed, expenditures for foreign R&D, must still be capitalized and amortized over 15 years. The law also provides in certain situations for retroactive R&D expensing for R&D costs incurred in tax years 2022 and 2024, allowing those investments to be deducted over one or two years. The expanded deductibility of R&D costs should serve to further motivate manufacturers to operate in the United States.
4. Other Favorable OBBBA Tax Provisions
OBBBA includes several additional provisions aimed at enhancing U.S.-based manufacturing and business activity:
Increased Section 179 Depreciation Deductibility: Increases the maximum Section 179 deduction from $1 million to $2.5 million and boosts the phase-out threshold to $4 million, starting in 2025. This change should be particularly impactful for small businesses.
Increased Interest Expense Deductibility: Permanently reinstates the calculation of interest income based on EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) instead of based on EBIT (Earnings Before Interest and Taxes). Since the income base is broader prior to taking depreciation and amortization into account, the practical impact is that U.S. businesses can take larger deductions for interest expense.
Pass-Through Deduction (Sec. 199A): Permanently extends the 20% Section 199A deduction for qualified pass-through entities. Generally, a pass-through entity will qualify for the deduction if it operates a for profit business in the United States (subject to certain exceptions). Under Section 199A, partners in U.S.-based partnerships can enjoy an additional 20% deduction on income earned from the qualifying business.
It is important to note that not all states automatically conform to federal expensing and depreciation rules, so businesses should review state law to determine the extent of conformity and potential state tax impacts. OBBBA also modifies the foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) regimes, with changes to deduction percentages and allocation of expenses, which may affect multinational manufacturers. Taxpayers must ensure proper allocation of purchase price in asset acquisitions, maintain documentation for QPP and R&D deductions, and comply with new reporting requirements for certain credits and deductions
Conclusion
The tax provisions outlined in OBBBA represent a comprehensive and pro-growth approach to strengthening the U.S. manufacturing and business sector. By making 100% bonus depreciation permanent, expanding immediate expensing to production facilities, restoring full R&D deductibility, and incorporating other favorable provisions, the legislation aims to create a robust manufacturing ecosystem. These efforts strive not only to stimulate economic growth but also to ensure a sustainable future for American manufacturing and business.