Tax planning for manufacturers in 2026 centers on four federal rules reshaped by the One Big Beautiful Bill Act (P.L. 119-21): permanent 100% bonus depreciation, a new 100% deduction for factory buildings, immediate expensing of domestic research costs, and a friendlier cap on business interest. The size test that decides which inventory and capitalization rules apply also rose to $32 million of average gross receipts for 2026.
Each of those rules depends on numbers that come out of the manufacturer's own books: when an asset was acquired, how much of a building is used for production, which engineering hours are research, and what the last three years of gross receipts were. That is why good tax planning for manufacturers starts with clean accounting during the year. A plant whose fixed asset register, cost records and payroll coding are current can model the options in the fall and act before December 31. A plant that reconciles once a year usually finds out what it could have done after the year has closed. If the reporting side is the gap, our guide to outsourced financial reporting for manufacturing companies covers the monthly package that supports these decisions.
The table below summarizes the federal provisions that matter most for a US manufacturer filing a 2026 return. State rules can differ, so each item also needs a state conformity check.
| Provision | 2026 rule | Where it shows up in the books |
|---|---|---|
| Bonus depreciation, Section 168(k) | 100% for qualified property acquired after January 19, 2025, made permanent | Fixed asset register, purchase contracts |
| Section 179 expensing | Up to $2,560,000, reduced dollar for dollar once 2026 purchases exceed $4,090,000 | Fixed asset additions by tax year |
| Qualified production property, Section 168(n) | Elective 100% deduction for the production portion of a new factory building | Construction records, floor plan allocations |
| Domestic research costs, Section 174A | Deductible in the year paid or incurred for tax years beginning after December 31, 2024 | Engineering payroll, project coding |
| Business interest, Section 163(j) | Depreciation, amortization and depletion added back to adjusted taxable income again | Debt schedules, depreciation totals |
| Small business gross receipts test, Section 448(c) | $32,000,000 average annual gross receipts | Three prior years of revenue |
The IRS summary of the business provisions in the new law confirms the bonus depreciation and Section 179 changes, and the 2026 inflation figures come from Revenue Procedure 2025-32.
Before looking at deductions, a manufacturer should confirm whether it is a small business taxpayer for the year. Under Revenue Procedure 2025-32, an entity meets the Section 448(c) test for a 2026 tax year if its average annual gross receipts for the three tax years ending with the preceding year do not exceed $32,000,000.
Passing the test opens several simplifications that matter to a plant:
A machine shop reports gross receipts of $29,400,000 for 2023, $31,100,000 for 2024 and $35,200,000 for 2025. For its 2026 tax year, the average is ($29,400,000 + $31,100,000 + $35,200,000) / 3 = $31,900,000. That is below $32,000,000, so the shop qualifies as a small business taxpayer for 2026 even though its 2025 revenue alone was above the threshold.
The margin here is $100,000. A single misposted customer deposit or an unreconciled intercompany sale could flip the answer, which is why the revenue figures used for this test should come from closed, reconciled books. Once a manufacturer crosses the threshold, it will need capitalized cost calculations, so the inventory accounting for manufacturers and the overhead pools behind it have to be ready before year end.
For machinery, tooling and other personal property, the new law gives a permanent 100% additional first year depreciation deduction for qualified property acquired after January 19, 2025. The acquisition date matters, so purchase orders and binding contracts should be filed with the asset record. Our article on Notice 2026-11 and the bonus depreciation transition rules covers the transition rules for contracts and elections.
Section 179 is the second tool. For tax years beginning in 2026, Revenue Procedure 2025-32 sets the expensing limit at $2,560,000 and reduces it by the amount by which Section 179 property placed in service during the year exceeds $4,090,000. A manufacturer that places $4,500,000 of qualifying equipment in service in 2026 has its limit cut by $410,000, to $2,150,000. At $6,650,000 of purchases, the Section 179 limit reaches zero.
With 100% bonus depreciation available, many manufacturers will use bonus as the default and keep Section 179 for situations where they want to choose asset by asset. Some states decouple from federal bonus depreciation, so the state return belongs in the same model as the federal one.
The most significant new item for manufacturers is Section 168(n). Under the statute as amended, a taxpayer can elect a depreciation allowance equal to 100 percent of the adjusted basis of qualified production property. That is the portion of nonresidential real property used as an integral part of a qualified production activity, placed in service in the United States, whose original use begins with the taxpayer, whose construction begins after January 19, 2025 and before January 1, 2029, and which is placed in service before January 1, 2031.
The rules are narrower than the headline suggests:
In practice, the accounting team needs a defensible allocation of square footage between the production floor and the excluded uses, plus construction start documentation. For a fuller walkthrough of the definitions, see our guide to qualified production property depreciation.
For tax years beginning after December 31, 2024, the IRS confirms in its summary of the new law's provisions that taxpayers may deduct domestic research or experimental expenditures. Foreign research costs are still capitalized and amortized over 15 years, and costs to acquire or improve land or depreciable property are not eligible.
For a manufacturer, research spending often sits inside ordinary payroll: engineers developing a new product line, or production staff running trials on a new process. Unless those hours are coded to projects during the year, the deduction is hard to support and the related research credit is easy to miss. The changes are covered in more depth in our article on how the One Big Beautiful Bill Act changed Section 174.
Manufacturers tend to carry equipment loans and lines of credit, so the business interest limit is a real constraint for those above the gross receipts threshold. The Form 8990 instructions state that P.L. 119-21 amended Section 163(j) to allow an add-back for depreciation, amortization or depletion when computing adjusted taxable income (ATI) for tax years beginning after 2024. The deductible amount remains capped at 30% of ATI. The same instructions note that for tax years beginning after 2025, the limit generally also applies to capitalized interest, other than interest capitalized under Sections 263(g) and 263A(f).
Take a manufacturer with $60 million of revenue, $2,000,000 of taxable income before interest and depreciation, $1,200,000 of depreciation and $700,000 of business interest. The figures are simplified and assume no business interest income or floor plan interest.
| Item | ATI without the depreciation add-back (2022 to 2024 rule) | ATI with the add-back (2025 onward) |
|---|---|---|
| Adjusted taxable income | $800,000 | $2,000,000 |
| 30% limit | $240,000 | $600,000 |
| Interest deducted this year | $240,000 | $600,000 |
| Interest carried forward | $460,000 | $100,000 |
Under the restored rule, the plant deducts $360,000 more interest in the current year. Large bonus or qualified production property deductions no longer shrink the interest cap, which makes the asset and financing plans easier to coordinate. Our article on the business interest expense limitation for 2026 covers carryforwards and the remaining limits.
Every item above depends on cost data that is right before the tax return is prepared. Three areas deserve a review before the books are handed to the tax preparer.
Cost of goods sold. COGS on the return is built from beginning inventory, purchases, labor and other costs, less ending inventory. The schedule on Form 1125-A for cost of goods sold has to tie to the general ledger and the physical count.
Overhead. Factory rent, utilities, supervision, depreciation and maintenance support production without belonging to a single product. A larger manufacturer subject to Section 263A must allocate a share of these indirect costs to inventory, and even an exempt one needs a consistent method for pricing. The manufacturing overhead allocation methods guide explains the common allocation bases.
Job and product costing. Product level costs show which lines earn their keep, and they feed the inventory values on the balance sheet. Better costing also exposes scrap, rework and freight that quietly erode gross margin, which is the subject of how better cost accounting improves margins.
A practical routine spreads the work across the year so decisions are made with time to act:
For owners who want someone to own this calendar and the financial model behind it, a virtual CFO for manufacturing companies can sit between the plant's bookkeeping and its tax adviser.
What is the gross receipts limit for small business manufacturers in 2026? For tax years beginning in 2026, a business meets the Section 448(c) test if its average annual gross receipts for the three prior tax years do not exceed $32,000,000. Meeting the test exempts it from uniform capitalization and, for a business that is not a tax shelter, the Section 163(j) interest limit, and it allows simplified inventory methods under Section 471(c).
Can a manufacturer deduct the full cost of a new factory in 2026? Only the production portion may qualify. Section 168(n) allows an elective 100% deduction for qualified production property whose construction begins after January 19, 2025 and before January 1, 2029 and that is placed in service before January 1, 2031. Offices, parking, research and engineering space and other excluded uses are depreciated under the normal rules.
Is bonus depreciation still 100% for manufacturing equipment? Yes, for qualified property acquired after January 19, 2025. The law made the 100% rate permanent, so equipment placed in service in 2026 can be fully deducted in the first year, subject to state conformity and the election rules.
What is the Section 179 limit for 2026? The 2026 limit is $2,560,000. It is reduced dollar for dollar once total Section 179 property placed in service in the year exceeds $4,090,000, and it phases out completely at $6,650,000.
Can manufacturers deduct research and development costs right away? Domestic research or experimental expenditures are deductible for tax years beginning after December 31, 2024 under Section 174A. Foreign research costs are still amortized over 15 years, and amounts spent to acquire or improve depreciable property do not qualify.
Madras Accountancy supports US manufacturers and the CPA firms that serve them with bookkeeping, inventory and cost reporting, fixed asset tracking, tax preparation and CFO support, so year-end decisions rest on current numbers. To talk through your plant's records before the 2026 year closes, contact our team.
The section 4960 excise tax is 21% of nonprofit pay over $1M. From 2026 it covers all employees. See the medical carve-outs, Form 4720 and a worked example.
The paid family and medical leave tax credit is permanent from 2026. See the 12.5% to 25% rates, the premium option, the 6-month rule and how Form 8994 works.
Opportunity zones become permanent in 2027 under the One Big Beautiful Bill. See the new deferral, rural bonus, and the 2026 handoff.
