The 2025 Tax Overhaul: A New Horizon for Manufacturing and M&A

The American tax landscape has been fundamentally reshaped with the enactment of the “One Big Beautiful Bill Act” (OBBBA) on July 4, 2025. This landmark legislation introduces a series of pro-business reforms that are particularly significant for the manufacturing sector and the broader mergers and acquisitions (M&A) environment. Manufacturers and companies considering strategic M&A activities must fully grasp these new provisions to optimize their financial strategies and capitalize on emerging opportunities in this revitalized economic climate.

A New Era for American Manufacturing

The OBBBA delivers several critical provisions designed to directly stimulate investment, innovation, and growth within the manufacturing sector. Many of these address key concerns businesses had about prior tax policy, offering renewed stability and powerful incentives.

• Permanent 100% Bonus Depreciation: This is a monumental win for capital-intensive industries like manufacturing. Previously scheduled to phase down, the OBBBA permanently reinstates 100% bonus depreciation for qualified property acquired after January 19, 2025. This allows businesses to immediately deduct the full cost of eligible assets, such as machinery, equipment, and certain qualified improvement property, in the year they are placed in service. This accelerated tax savings significantly improves cash flow, directly incentivizing new and expanded capital expenditures.
• New Bonus Depreciation for “Qualified Production Property” (QPP): Going a step further, the OBBBA introduces a special 100% bonus depreciation for Qualified Production Property (QPP) through 2029. QPP is broadly defined as nonresidential real property used in the manufacturing, production, or refining of certain qualified products in the U.S. To qualify, construction must begin after January 19, 2025, and before January 1, 2029, with the property placed in service before January 1, 2031. This is a powerful expansion of bonus depreciation to include new manufacturing facilities, offering a direct incentive for domestic industrial development and reshoring initiatives.
• Immediate Expensing of Domestic Research & Development (R&D) Expenditures: The prior requirement to capitalize and amortize R&D expenses over several years had been a significant financial burden for many innovative businesses. The OBBBA reverses this, allowing for immediate deductibility of domestic R&D costs for tax years beginning after December 31, 2024. This change is crucial for manufacturers engaged in product innovation, process improvement, and technological advancement, as it reduces taxable income and substantially improves cash flow, encouraging further investment in critical R&D. Furthermore, taxpayers can elect to accelerate the deduction of any remaining unamortized domestic R&D expenses from 2022-2024 over a one- or two-year period, with special retroactive rules easing the transition for small businesses.
• Increased Section 179 Expensing Limit: The expensing limit under Section 179 has been significantly increased to $2.5 million annually (up from $1 million), with a phaseout threshold of $4 million (up from $2.5 million), effective for tax years beginning after December 31, 2024. These amounts will be adjusted for inflation in subsequent years. This provides another direct avenue for manufacturers, particularly small and medium-sized businesses, to immediately deduct the cost of qualifying property, further enhancing cash flow and encouraging equipment acquisition without the complexities of depreciation schedules.
• Revised Section 163(j) Business Interest Limitation: The calculation for the business interest limitation under Section 163(j) reverts to the original TCJA method, allowing businesses to compute adjusted taxable income without subtracting depreciation, amortization, or depletion (i.e., using an EBITDA-like calculation). This change increases the allowable interest deduction, which is particularly beneficial for capital-intensive manufacturers that often rely on debt financing for operations, expansion, and M&A activities.

Propelling Mergers and Acquisitions

The 2025 tax law is poised to significantly influence M&A dynamics, creating new opportunities and strategic considerations for both buyers and sellers across industries, but particularly impacting asset-heavy sectors like manufacturing.

• Increased Appeal of Asset Acquisitions: The permanent reinstatement of 100% bonus depreciation makes asset acquisitions substantially more attractive. Buyers of asset-heavy target companies (e.g., manufacturers with significant machinery and equipment) can now accelerate depreciation deductions post-acquisition, significantly enhancing near-term cash flow and improving deal returns. This could shift deal structures to favor asset purchases over stock purchases where advantageous for tax purposes.
• Enhanced Valuations for R&D-Intensive Companies: The immediate expensing of domestic R&D costs will directly improve the after-tax valuations and earnings forecasts for businesses that incur substantial R&D expenditures. This encourages investment and potentially leads to increased deal activity and more aggressive bidding in innovative sectors, including advanced manufacturing, biotech, and software.
• Boost for Qualified Small Business Stock (QSBS): The OBBBA significantly enhances the benefits of Section 1202, making it an even more potent tool for incentivizing investment in small, domestic businesses. For QSBS acquired after July 4, 2025, the new provisions are:
  • Tiered Gain Exclusion: The previous “five-year cliff” for 100% gain exclusion is replaced with a more flexible, tiered system:
    • 50% exclusion for QSBS held for at least three years but less than four.
    • 75% exclusion for QSBS held for at least four years but less than five.
    • 100% exclusion for QSBS held for at least five years.

    This tiered approach provides tax benefits even for earlier liquidity events.

  • Increased Per-Issuer Gain Exclusion Cap: The maximum amount of gain eligible for exclusion per taxpayer, per issuer, has been raised from $10 million to $15 million, also subject to inflation adjustments.
  • Expanded Gross Asset Test: The maximum aggregate gross assets a corporation can have immediately after issuing QSBS has increased from $50 million to $75 million, adjusted for inflation.

  These changes make investing in and selling qualified small businesses highly appealing, potentially stimulating M&A activity involving emerging manufacturing firms and encouraging capital formation in the startup ecosystem.

• Permanence of Qualified Business Income (QBI) Deduction: The 20% deduction for qualified business income (QBI) under Section 199A, which was previously set to expire, has been made permanent. This is welcome news for pass-through entities (S corporations, partnerships, sole proprietorships), which are common among small and medium-sized manufacturers. For M&A involving such entities, this permanence provides greater certainty and stability for long-term tax planning for business owners.
• Impact on Debt Financing: The improved deductibility of business interest expenses under Section 163(j) will likely make debt financing more appealing for M&A, providing companies with greater flexibility to pursue leveraged buyouts and other debt-reliant transactions.

Heading Off the “Tax Cliff”: Provisions Made Permanent or Extended

Prior to the OBBBA, many significant provisions from the Tax Cuts and Jobs Act (TCJA) of 2017 were slated to “sunset” at the end of 2025, leading to uncertainty and potential tax increases. The OBBBA largely acts to prevent this “tax cliff,” providing greater stability for individuals and businesses:

• Individual Income Tax Rates: The income tax rate schedules for individuals, estates, and trusts are made permanent starting in 2026, largely maintaining the TCJA’s lower rates.
• Standard Deduction Amounts: The significantly increased standard deduction from the TCJA is made permanent. Additionally, OBBBA adds an extra $750 to the standard deduction for single taxpayers and $1,500 for married couples in 2025, with inflation adjustments thereafter. A new $6,000 deduction per individual for taxpayers 65 or older is also introduced through 2028.
• State and Local Tax (SALT) Deduction Cap: The controversial $10,000 limitation on the deduction for state and local taxes increases from $10,000 to $40,000, with a 1% annual increase through 2029. It is important to note, however, that this cap is set to revert back to $10,000 in 2030.
• Child Tax Credit: The Child Tax Credit is increased by $200 to $2,200 for 2025, with inflation adjustments going forward.
• Estate and Gift Tax Exemption Amounts: The lifetime exclusion amount for estates of decedents dying during 2025 increased to $13.99 million per individual (from $13.6 million in 2024), maintaining higher exemption levels.

Strategic Planning for the New Tax Landscape

While the 2025 tax law offers numerous advantages, businesses must engage in proactive and sophisticated tax planning to fully leverage these changes and navigate any remaining complexities. Key considerations include:

• Revisiting Capital Expenditure Plans: Manufacturers should immediately reevaluate their capital investment strategies for the remainder of 2025 and beyond to maximize the benefits of 100% bonus depreciation and the QPP provision. Accelerating planned investments could yield significant tax savings.
• Optimizing R&D Strategies: Companies with significant R&D investments should assess their past (2022-2024) and future R&D expenditures to take full advantage of immediate expensing and potential catch-up deductions. This could lead to substantial tax refunds for prior years.
• M&A Deal Structuring: Parties involved in M&A must meticulously analyze the tax implications of asset versus stock deals in light of the renewed bonus depreciation, QSBS enhancements, and other changes. The optimal structure could vary significantly depending on the target’s asset base, R&D intensity, and the seller’s QSBS eligibility.
• International Tax Impact: While the OBBBA focuses heavily on domestic provisions, multinational manufacturing entities should also consider how these changes interact with existing international tax rules, such as those impacting GILTI (Global Intangible Low-Taxed Income) and FDII (Foreign-Derived Intangible Income).
• Ongoing Monitoring and Expert Consultation: Given the breadth and potential future adjustments (even with the permanence of many provisions), engaging with experienced tax advisors is crucial. They can provide tailored guidance to understand the specific implications for individual businesses and develop optimal, compliant tax strategies.

In conclusion, the 2025 tax law, particularly the OBBBA, ushers in a new era of generally pro-business policies. The renewed and expanded incentives for capital investment, R&D, and favorable M&A tax treatment are poised to stimulate economic growth and enhance the global competitiveness of U.S. manufacturers. By understanding and strategically responding to these changes, businesses can position themselves for significant financial benefits and sustained growth in the years to come.