New Tax Incentives for Manufacturers: What OBBBA Means for 2026

Manufacturers have faced many challenges in 2026, including continued supply chain volatility, labor and workforce shortages, and cybersecurity threats. Amid these challenges, the Act commonly referred to as the One Big Beautiful Bill (OBBBA), provides important tax relief to companies with the permanent restoration of 100% bonus depreciation, increased §179 expensing, and a new 100% special depreciation election for real property used in qualified production activities.

OBBBA permanently restores full first-year expensing for qualifying business property acquired and placed in service after January 19, 2025. Companies accelerating the depreciation deduction can significantly reduce taxable income and strengthen cash flow in the year the property is purchased. Beyond the current year, bonus depreciation can be used to create a net operating loss (NOL) to offset taxable income in future profitable years. Bonus depreciation can also be used in combination with §179 expensing, which may yield better results for NOL and state tax planning.

The §179 expensing limit for 2026 is $2.56M with a phaseout beginning at $4.09M. Smaller and mid-sized companies may find this preferable to bonus depreciation due to being able to expense items in addition to tangible personal property, like roofs, HVAC, and security systems. While the §179 deduction is limited to business income, it does provide a mechanism to carry forward any unused expense to subsequent tax years. Since many states do not conform to 100% bonus depreciation but do allow §179 expensing, it is important to evaluate the state tax footprint and whether §179 or bonus depreciation is more beneficial from a combined federal and state tax perspective.

Especially beneficial to certain manufacturers is the addition of §168(n), which allows an elective 100% depreciation deduction for nonresidential real property that is used in domestic manufacturing or production. This includes new construction and facility upgrades that meet the definition of qualified production property. To be qualified production property, it must be located in the United States, used as an integral part of a qualified production activity, and placed in service prior to January 1, 2031. The property must generally be newly constructed with construction beginning after January 19, 2025 and before January 1, 2029, but certain property constructed prior to this window and acquired by the taxpayer may be eligible if such property was not previously used in a qualified production activity at any time on or after January 1, 2021. A qualified production activity is any activity that results in a substantial transformation of the property making up the final product.

While OBBBA restored and expanded the immediate expensing of capital investments, taxpayers are not required to use the accelerated deductions. Companies may prefer to minimize taxable income swings from year to year, have NOLs that need to be used before

they expire, or want to minimize federal and state depreciation differences. If electing out of bonus depreciation, a formal statement must be filed with the tax return for the year the property is placed in service. Taxpayers may elect out on a class-by-class basis so, for example, they can take bonus on 5-year property and elect out of bonus on 7-year property. The election is made on an annual basis which allows for additional planning opportunities around the timing of the deductions.

These provisions provide opportunities to reduce current taxable income, increase cash flow, and align capital investment needs with available tax deductions. Making the most strategic decisions will depend on a taxpayer’s profitability, projected future taxable income, state tax footprint and capital investment needs. Careful coordination of bonus depreciation, §179 expensing, and §168(n) can maximize benefits while avoiding unintended state tax or NOL consequences.