As manufacturers take on debt to fund capital investments and expansions, an unfavorable limit on deducting interest expense has handcuffed their ability to pursue crucial initiatives, such as investing in smart factory technologies, upgrading and automating production lines, optimizing supply chains, investing in product development and new business ventures, and hiring and retraining talent.

How the OBBBA could affect debt financing for manufacturers

The OBBBA returns to the original Tax Cuts and Jobs Act calculation for business interest expense limitations. It allows the addback for depreciation, depletion, and amortization to the adjusted taxable income calculation, effectively allowing deductions up to 30% of earnings before interest, taxes, depreciation and amortization (EBITDA). It also expands floor plan financing rules and modifies elective interest capitalization rules, with phased effective dates starting after 2024 and 2025.

Learn more about the technical changes to the business interest expense limit under section 163(j) and the implications for businesses.

Deduction for business interest under section 163(j)​

Prior law

• Deduction limited to 30% of EBIT

One Big Beautiful Bill Act

• Deduction limited to 30% of EBITDA for tax years beginning in 2025. Does not expire.
• Modifies ordering rules for elective interest capitalization for tax years beginning in 2026.

Manufacturers should consider:

• How more favorable deductibility of business interest affect their investment and financing strategies.
• Modeling multiyear impacts of this provision to optimize tax outcomes, considering the staggered effective dates, economic changes, refinancing schedules, and elective capitalization of research costs.

The U.S. tax system incentivizes innovation and promotes global competitiveness through credits and cost recovery mechanisms intended to reduce the financial burden companies take on when they invest in new products and technologies.

Greater or more immediate deductions could free up capital to give manufacturers more leeway to focus on innovation, including automation and artificial intelligence. For many manufacturers, innovation as a priority may have been overshadowed recently by margin pressures and supply chain disruptions, which have forced businesses to pay greater attention to finding efficiencies, cutting costs and carefully allocating capital.

How the OBBBA could affect R&D for manufacturers

Tax treatment of R&D expenses

The OBBBA reinstates the ability for taxpayers to immediately recover costs of R&D (including software development) conducted domestically beginning in 2025, while keeping the 15-year amortization requirement for R&D performed outside the United States.

Small business taxpayers have the option to electively apply the law retroactively and amend prior tax returns or elect to treat as a method change, while other taxpayers must make an election to accelerate the costs over a one- or two-tax year period in the first tax year beginning after Dec. 31, 2024. The provision to expense domestic research costs is permanent.

U.S. international tax reform: Foreign-derived deduction eligible income (FDDEI)

The foreign-derived intangible income (FDII) regime—now known as FDDEI—was designed to incentivize businesses to conduct R&D in the U.S. by offering lower tax rates on income from U.S.-held intellectual property used abroad. Under the current framework, U.S. corporations conducting R&D domestically can benefit from two layers of incentives: the R&D credit and the FDII deduction.

The OBBBA includes changes that could increase the amount of foreign-derived income eligible for the FDDEI deduction, and it makes the FDDEI deduction more favorable for R&D-heavy companies.

Learn more about U.S. international tax reforms in the OBBBA.

R&D expensing under section 174

• Capitalize and amortize R&D expenses over five years (15 for R&D conducted abroad).

One Big Beautiful Bill Act

• U.S. R&D: Immediate expensing beginning in 2025. Does not expire.
• May accelerate remaining unamortized domestic R&D costs incurred between 2022-2024
• Foreign R&D: Requirement to capitalize and amortize over 15 years remains

Foreign-derived intangible income (FDII)

Prior law

• 37.5% of deduction rate, scheduled to reduce to 21.875% after 12/31/25
• Effective tax rate (ETR) of 13.125% increasing to 16.4% after 12/31/25

One Big Beautiful Bill Act

• Permanently decreases deduction to 33.34% (effective 2026), leading to ETR of 14%
• Renames FDII to foreign-derived deduction eligible income (FDDEI); removes deemed tangible income return (DTIR) from calculation
• Excludes from deduction eligible income (DEI) gain or other income from the sale or disposition (including deemed dispositions under section 367(d)) from intangible, depreciable, or depletable property
• Interest expense and R&E are not allocable to DEI

Manufacturing businesses should consider:

• How their approach to R&D may change, given the immediate expensing of domestic R&D costs, including whether it makes financial sense to outsource R&D.
• Whether it makes sense to transition R&D to the U.S. from abroad, given that the OBBBA did not change the required 15-year recovery period for R&D conducted outside the U.S.
• Whether it makes sense for eligible small businesses to amend returns to claim immediate domestic R&D expensing or to deduct these costs over a one- or two-year period.
• The completeness and accuracy of their reporting for R&D tax credit claims. The IRS is requiring additional detailed project reporting on future tax returns and has announced it is more heavily scrutinizing R&D tax credits.
• How technology-enabled tax planning tools can help minimize the cost of capital deployment and R&D strategies by ensuring all OBBBA benefits are maximized, reducing administrative friction while maximizing the long-term value of available incentives.
• That accelerating the amortization of prior-year R&D expenses for federal tax purposes may not immediately reduce or eliminate significant state taxable income. After the Tax Cuts and Jobs Act was enacted in December 2017, the tax treatment of R&D expenses didn’t change until 2022. Now, with an immediate federal change, it remains to be seen how quickly states will react.
• Whether corporations would benefit from keeping or moving IP to the United States to achieve a lower effective tax rate on their export sales and services.

Entity choice directly affects enterprise value because it helps determine how a business is taxed, as well as the amounts of after-tax cash the business retains and owners receive. Business owners should be sure their priorities align with the cash flow and tax implications of being structured as a C corporation versus a pass-through entity (S corporation or partnership).

How the OBBBA could affect entity structuring for manufacturers

As corporate, individual and U.S. international tax laws change for domestic and global entities, so may the tax-efficiency of different entity types. The OBBBA does not modify corporate or individual rates, but it does reform U.S. international taxation, which may alter how companies’ entity structures align with their global tax strategy. The OBBBA also modifies some domestic tax benefits that depend partly on a company’s entity structure.

American competitiveness

Tax rates for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) were designed to encourage U.S. companies to keep intangible assets within the United States. Together, they aimed to balance American competitiveness globally with the federal government’s need for revenue. The OBBBA maintains the concepts but modifies FDII and GILTI by:

• Modifying the calculations
• Renaming to foreign-derived deduction eligible income (FDDEI) and net CFC tested income (NCTI), respectively
• Slightly increasing the corresponding ETRs and changing the foreign tax credit limitation

FDII, now FDDEI: The FDDEI regime continues to offer preferential tax treatment to C corporations engaged in foreign sales of U.S.-developed goods and services. While the OBBBA reduces the extent of this benefit, FDDEI still provides a meaningful incentive to structure export-facing operations through U.S. corporations, particularly for companies with high-margin business models.

GILTI, now NCTI: Entity classification affects the treatment of foreign earnings under NCTI and may produce different tax outcomes depending on the owner’s status and applicable provisions.

Learn more about U.S. international tax reforms in the OBBBA

Exclusions for small business stock

The OBBBA expands the scope and benefits of this provision designed to incentivize investment in startups and small businesses. The provision allows noncorporate taxpayers (generally individuals and in certain cases pass-through businesses and their owners) to potentially exclude from federal tax up to 100% of capital gains from the sale of qualified small business stock if certain requirements are met.

The expanded scope and benefits should drive investments in critical new technologies being created and developed by small businesses in the U.S., and it will increase the number of companies exploring C corporation status when considering entity choice.

Learn more about the technical changes to the exclusions for small business stock and the implications for businesses.

Qualified business income (QBI) deduction

For noncorporate taxpayers (i.e. pass-throughs), the OBBBA makes permanent the 20% qualified business income deduction. Owners with material amounts of qualifying business income will find this change a welcome relief from the potential tax increases that would have come had the provision expired at the end of 2025.

Learn more about the technical changes to the QBI deduction and the implications for businesses.

Global intangible low-taxed income (GILTI)

Prior law

• 50% of deduction rate, scheduled to reduce to 37.5% after 12/31/25
• Effective tax rate (ETR) of 10.5% increasing to 13.125% after 12/31/25

One Big Beautiful Bill Act

• Permanently decreases deduction to 40%, leading to ETR of 12.6%, or 14% if the 12.6% U.S. tax is fully offset by the 90% foreign tax credit.
• Renames GILTI to “net CFC tested income” (NCTI)
• Removes net deemed tangible income return (DTIR) from calculation
• Limits expenses allocable to foreign-source income in NCTI category

Foreign-derived intangible income (FDII)

Prior law

• 37.5% of deduction rate, scheduled to reduce to 21.875% after 12/31/25
• Effective tax rate (ETR) of 13.125% increasing to 16.4% after 12/31/25

One Big Beautiful Bill Act

• Permanently decreases deduction to 33.34% (effective 2026), leading to ETR of 14%
• Renames FDII to foreign-derived deduction eligible income (FDDEI); removes deemed tangible income return (DTIR) from calculation
• Excludes from deduction eligible income (DEI) gain or other income from the sale or disposition (including deemed dispositions under section 367(d)) from intangible, depreciable, or depletable property
• Interest expense and R&E are not allocable to DEI

Exclusions for small business stock under section 1202

Prior law

• 100% exclusion of gain on the sale of qualified small business stock (QSBS) held more than 5 years
• 75%/50% exclusion if stock was originally issued on or before certain dates before 2011

One Big Beautiful Bill Act

• Adds partial exclusion for gain on stock held ≤5 years
  • 50%: >3 yrs
  • 75%: >4 years
• Remainder taxed at 28%
• Increases per-shareholder/taxpayer exclusion ceiling from $10M to $15M
• Increases corporate-level gross assets ceiling from $50M to $75M

Deduction for qualified business income (QBI)

Prior law

• 20% deduction for QBI (expires Dec. 31, 2025)

One Big Beautiful Bill Act

• Makes deduction permanent
• Rate stays at 20%
• Increases phase-in thresholds

Manufacturers should consider:

• Whether the range of changes made by the OBBBA, in conjunction with updated business planning, moves the needle to make a particular entity type more attractive.
• How entity classification affects the treatment of foreign earnings under NCTI and may produce different tax outcomes depending on the owner’s status and applicable provisions. Model how restructuring their legal entities might minimize adverse tax consequences.
• Revisiting their operating structure. With greater certainty around the FDDEI and NCTI reduced tax rates, using a corporation could provide a tax benefit on export sales and services and a lower ETR on NCTI.

Adapting to OBBBA changes: Next steps for manufacturers

OBBBA tax provisions represent significant opportunities for manufacturers, but they come with eligibility rules and planning considerations. Companies can align their business objectives to OBBBA changes by taking the corresponding actions suggested above.

More generally, manufacturers can take the following steps to adapt to the OBBBA:

• Talk to your tax advisor to assess how business tax provisions align with your business objectives.
• Review your capital investment, R&D and financing plans to align with the new incentives.
• Examine your global structure to understand how U.S. international tax reforms could change how your global tax profile aligns with your business objectives.
• Model your tax position under the new rules to identify savings opportunities. Leveraging tax technology can enhance modeling precision, streamline compliance workflows, and improve visibility across capital, R&D, and international tax positions—ultimately supporting more agile and informed decision-making.