Prepare your manufacturing business for future tax law changes

by Tyler Petzel, CPA

It’s a fact of life: Change is inevitable. It’s also a fact of tax laws. With many provisions within the Tax Cuts and Jobs Act (TCJA) expiring in late 2025, we’re anticipating several state and federal tax law changes that will impact manufacturing businesses, including one that will impact manufacturers who engage in research and design (R&D). While these law changes won’t become effective until January 2026, it’s important to plan for them now.

Here are the ones that could impact you.

1. Qualified business income (QBI) deduction coming to an end.

Introduced as part of the TCJA, the QBI deduction allows business owners to deduct up to 20% of qualified business income on their taxes. When this provision sunsets at the end of 2025, it means that instead of paying tax on 80% of your QBI, you’ll now pay tax on 100%. Each tax bracket’s effective tax rate will increase accordingly.

2. Minnesota’s pass-through entity (PTE) state income tax deduction going away.

As a result of the $10,000 state and local tax (SALT) cap falling by the wayside, Minnesota’s PTE deduction also ends. Many other states’ PTE deductions are also scheduled to end at the same time. However, if you itemize on your personal income tax return, you will still be able to deduct the state income taxes paid.

3. Section 174 amendments expiring.

Update: The Tax Relief for American Families Workers Act passed the House and is expected to be voted on by the Senate. This Act would change Section 174 to allow taxpayers to deduct Section 174 expenses in the year they are paid starting retroactively for 2022 and through 2025.

Thanks to TCJA amendments to Section 174, manufacturers can no longer deduct R&D expenses in the year they were paid. Instead, R&D expenses must be capitalized and amortized (i.e., spread out) over five years for those related to domestic research (15 years for those related to foreign research).

With this Section 174 change going away in 2026, this means you could deduct a full year of expenses in 2026 plus 20% of expenses from 2022, 2023, 2024, and 2025.

Although you’ll have to deal with Section 174 for another few years, the silver lining is that at the time when tax rates are expected to increase, you’ll have more expenses to deduct. For this reason, you may want to consider delaying plans to generate additional taxable income until 2026, if possible.

4. Lifetime estate and gift tax exemption reverting to $5 million indexed for inflation.

As part of these tax law changes, the federal gift tax exemption will revert to its pre-TCJA amount. This means it will decrease from $13.61 million (2024) to roughly $6 million. The last year in which taxpayers can take the higher exemption amount will be 2025.

The takeaway: If the next generation is taking over your business, gifting some of the ownership shares ahead of the change could be beneficial.

Plan ahead for a bright future for your manufacturing business.

True, change may be inevitable. But as the familiar adage goes, growth is optional. Taking action now to prepare for these tax law changes can position your manufacturing business to make the most of the new tax law environment.

This, of course, is easier said than done when you have a business to run. If you’d like guidance on how these tax law changes could affect you, the experts at Abdo can help. Our trust and estate team and R&D team can advise you on steps to take and help you plan ahead for tax impacts.

If you’d like to learn more about how we could help your manufacturing business see a bright future, contact us today.