The One Big Beautiful Bill Act, commonly referred to as the OBBBA or OB3, delivers meaningful tax relief for manufacturers through Section 174A. For manufacturing companies investing in automation, process innovation and product development, this change directly impacts cash flow and tax planning strategy.
Here’s what operational leaders need to know about research and experimental (R&E) expense recovery and how to take advantage of the new rules.
What Changed for R&E Expenses Under the OBBBA?
Since 2022, manufacturers have been required to capitalize and amortize R&E expenses over five years instead of deducting them immediately. For companies investing heavily in automation, robotics, process optimization and product innovation, this created a cash tax burden at exactly the wrong time.
Section 174A of the OBBBA provides relief to all taxpayers who elect to deduct remaining unamortized R&E expenses from 2022-2024 immediately or defer them to future years. It also provides relief to small businesses (under $31 million in gross receipts) that apply Section 174A retroactively to years beginning after December 31, 2021, potentially creating refund opportunities. Foreign R&E expenses remain subject to 15-year amortization and cannot be accelerated.
What Qualifies as R&E Expenses?
Many companies underestimate qualifying R&E expenses. Common activities include:
- Process innovation: Developing lean manufacturing processes, reducing cycle times, improving yield rates or implementing waste reduction technologies.
- Automation and robotics: Designing, testing and integrating automated production lines, robotic assembly or AI-driven quality control.
- Product design and development: Engineering new products, improving designs, integrating new materials and components or developing food formulations.
- Technology integration: Building proprietary software for tracking, routing, supply chain optimization or predictive maintenance.
These costs often represent 20-40% of operating expenses. Accelerating their deduction can significantly reduce current-year tax liability and improve working capital.
Tax Planning Considerations
Manufacturing and food and beverage businesses operate on tight margins with significant working capital needs. Reducing cash tax through accelerated R&E deductions frees up capital for inventory, equipment purchases or debt reduction. If you have strong 2025 income, pulling forward deductions can deliver immediate value.
Accelerating R&E deductions reduces taxable income, which affects net operating loss utilization, interest expense limitations under Section 163(j) and qualified business income deductions for pass-through entities. The optimal approach depends on your multi-year tax position and requires scenario modeling.
Several states (including California, New Jersey, Pennsylvania and Michigan) have decoupled from Section 174. Multi-state manufacturers must continue to capitalize and amortize R&E expenses for state purposes – even while taking federal deductions.
What to Do Next
- Quantify your R&E expenses. Identify all qualifying costs from 2022-2024, including process development, automation and technology integration.
- Model election scenarios. Analyze the impact of accelerating deductions versus deferring them, considering NOLs, interest limitations and cash flow needs.
- Understand state conformity. If you operate in states that decoupled from Section 174, prepare for continued state-level amortization and increased compliance requirements.
- Adjust estimated payments. Recalculate quarterly tax payments if you're accelerating deductions to avoid overpaying.
- Work with experienced advisors. These rules interact with multiple tax provisions. Professional guidance ensures you optimize outcomes without unintended consequences.
Section 174A delivers real relief after three years of unfavorable tax treatment. The companies that take time to make informed elections will capture the greatest benefit.
Authors: Syam Krishna | [email protected] and David Poillucci, CPA, Partner | [email protected]
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How much could your company save through Section 174A elections? Connect with a member of our Industrial and Consumer Products Services Team to evaluate your eligibility and optimize your tax position.
