Tax-smart manufacturers know tax planning shouldn’t wait until year end. Reviewing your company’s midyear tax position now can help you capture available tax breaks and make timely adjustments. Here are five federal tax issues to consider.
1) Accelerated Depreciation for Capital Expenditures
Eligible new and used assets acquired and placed in service after January 19, 2025, now qualify for permanent 100% first-year bonus depreciation. This creates valuable tax-planning opportunities for capital-intensive industries, including manufacturing.
Bonus depreciation applies automatically to eligible assets unless you elect out. That election can be made only by asset class, not for individual assets. For instance, you may elect out for all five-year property, but not for a single asset within that class.
The Section 179 expensing election also lets manufacturers immediately deduct the full cost of eligible assets. For 2026, the maximum deduction is $2.56 million and begins phasing out dollar for dollar once qualifying purchases exceed $4.09 million. Unlike bonus depreciation, Sec. 179 deductions can’t create an overall business tax loss.
Midyear is a better time to plan capital investments, including machinery and equipment purchases, than making rushed decisions in December. Shopping now may also help you negotiate better terms. Carefully time when new purchases are placed in service to avoid exceeding the Sec. 179 deduction limit.
2) Limited-time QPP Tax Break
Manufacturers may also benefit from the new 100% first-year deduction for qualified production property (QPP). Among other requirements, construction must begin after January 19, 2025, and before January 1, 2029, and the property must be placed in service before 2031. This deduction allows eligible businesses to immediately write off QPP costs that otherwise would be depreciated over 39 years. Unlike bonus depreciation, the QPP deduction requires an election.
QPP generally includes any portion of nonresidential property used as an integral part of a qualified production activity, such as manufacturing, production or refining qualified products. In practical terms, QPP often means factory buildings. A new facility isn’t required; structural components in eligible production areas may also qualify, including:
- Walls, partitions, floors, ceilings and related permanent coverings, such as paneling or tiling,
- Central air conditioning or heating system components,
- Plumbing and plumbing fixtures,
- Electrical wiring and lighting fixtures,
- Stairs, escalators and elevators,
- Sprinkler systems, and
- Other components tied to building operation or maintenance.
The deduction doesn’t apply to property used for offices, administrative services, lodging, parking, sales or research activities, software development or engineering activities, or other functions unrelated to qualified production.
3) Immediate Expensing for Domestic R&E Costs
Deductions for domestic research and experimental (R&E) expenses in the year incurred have been permanently restored. Foreign R&E costs remain subject to 15-year amortization.
Sec. 174 R&E expenses may also qualify for the Sec. 41 research tax credit. However, manufacturers can’t claim both the deduction and the credit for the same expense. If a manufacturer claims the credit, the R&E deduction generally must be reduced by the credit amount. Alternatively, the manufacturer may elect a reduced research credit.
4) Sec. 199A QBI Deduction
The Sec. 199A qualified business income (QBI) deduction can help eligible smaller manufacturers free up capital for equipment purchases, research and development, and hiring. Now permanent, the deduction generally applies to sole proprietors and owners of pass-through entities, including partnerships, S corporations, and limited liability companies taxed as sole proprietorships, partnerships or S corporations.
QBI is the net amount of income, gains, deductions and losses, excluding reasonable compensation, certain investment items and partner payments for services. Qualified taxpayers may deduct up to 20% of QBI. The deduction is available whether or not you itemize and also applies for alternative minimum tax purposes.
The QBI deduction has several limits. First, it generally can’t exceed 20% of taxable income before the QBI deduction. For 2026, the phase-in range is $201,750 to $276,750 of taxable income ($403,500 to $553,500 for married couples filing jointly).
Second, if taxable income exceeds the applicable threshold, a wage and investment limit begins to phase in. As a result, your QBI deduction may be partly or fully reduced to the greater of your share of:
- 50% of W-2 wages paid by the qualified business during the tax year, or
- 25% of W-2 wages plus 2.5% of the undepreciated cost of qualified property.
If your taxable income may be near the phase-in threshold by year end, consider steps to lower it, such as maximizing retirement contributions. Another common approach is to accelerate business expenses into 2026 and defer income to 2027.
5) Estimated Tax Payments
Manufacturers often base current-year quarterly estimated tax payments on the prior year’s income or tax liability. But that approach may be unnecessarily costly.
Instead, consider projecting your actual 2026 tax liability. Include year-to-date income and expenses, revenue and expense forecasts for the rest of the year, and the expected impact of available deductions and credits.
If projected taxable income is higher than expected, increasing your final estimated tax payments can help reduce underpayment penalty risk. If it’s lower than expected, reducing payments may improve cash flow.
Act Now
These are just a few tax-related areas that deserve attention now. We can help you complete a midyear tax assessment and choose the best path for the rest of the year. Don’t wait until year end to discuss tax strategies. Acting now can give you more flexibility to reduce your 2026 federal tax obligation. Contact our Manufacturing Team today.