Since the enactment of the Tax Cuts and Jobs Act (TCJA) in 2017, U.S. manufacturers have experienced significant economic growth. The law lowered corporate tax rates, provided deductions for pass-through entities, and allowed full expensing of capital investments, among other provisions. These changes enabled manufacturers to expand operations, invest in new equipment, increase research and development (R&D) spending, and raise wages. In fact, 2018 marked the strongest year for manufacturing job creation in over two decades, and wage growth reached its highest levels in 15 years. The favorable tax climate encouraged companies to invest in domestic production rather than shifting operations overseas. However, many of these tax benefits are set to expire at the end of 2025, creating significant challenges for manufacturers.
The following key provisions outline the major changes that will impact businesses if no action is taken, threatening to reverse these gains and create a far less hospitable business environment.
- Pass-Through Deduction and Individual Income Tax Rates: The TCJA established a 20% deduction for pass-through entities, benefiting many small and family-owned manufacturing businesses. This deduction is scheduled to expire at the end of 2025. Additionally, individual income tax rates are set to revert to pre-2017 levels, which could increase the tax burden on pass-through manufacturers. A survey by the National Association of Manufacturers (NAM) found that 93% of pass-through manufacturers believe the loss of this deduction will harm their ability to grow, create jobs, and invest in their businesses.
- Corporate Tax Rate: The TCJA reduced the corporate tax rate from 35% to 21%, enhancing the global competitiveness of U.S. manufacturers. While this rate is not scheduled to expire, there have been discussions about increasing it, which could negatively affect manufacturers’ investments and job creation efforts.
- Research and Development (R&D) Expensing: Previously, manufacturers could fully deduct R&D expenses in the year they were incurred. This provision expired in 2022, requiring businesses to amortize R&D expenses over several years, increasing the cost of conducting research. NAM reports that 94% of manufacturers found immediate R&D expensing important, and 78% believe that increasing R&D costs would decrease their ability to grow U.S. manufacturing activity.
- Full Expensing of Capital Investments: The TCJA allowed for 100% expensing of capital equipment purchases, facilitating investments in new equipment and expansion. This provision began phasing out in 2023 and is set to expire completely in 2027, potentially limiting manufacturers’ ability to invest in necessary equipment and machinery.
- Interest Deductibility: The TCJA permitted manufacturers to deduct interest on business loans up to 30% of earnings before interest, tax, depreciation, and amortization (EBITDA). This standard expired in 2022, and the cap is now based on earnings before interest and tax (EBIT), excluding depreciation and amortization. This change makes debt financing more expensive, particularly for capital-intensive manufacturers.
- Estate Tax: The TCJA increased the estate tax exemption threshold, benefiting family-owned manufacturers. This increased exemption is scheduled to be reduced by half at the end of 2025, potentially subjecting more family business assets to taxation and threatening their continuity.
- International Tax Provisions: The TCJA implemented a hybrid territorial system to support U.S. manufacturers’ global competitiveness. However, certain international tax changes are set to take effect at the end of 2025, which could make the U.S. a less attractive place for manufacturing investment.
With these looming changes, manufacturers must prepare now to navigate the shifting tax landscape and minimize disruptions to their operations. Consulting with financial and tax professionals will help businesses assess how these changes will affect their operations. Companies should plan capital investments strategically, ensuring they take advantage of full expensing before it phases out. Accelerating R&D initiatives now can help firms maximize available tax benefits. Manufacturers should also advocate for extending or making key TCJA provisions permanent. Partnering with trade associations like NAM can strengthen their advocacy efforts. Engaging policymakers through direct outreach can highlight the impact of these tax changes on jobs, wages, and investment. Without congressional action, the expiration of these tax provisions could lead to nearly six million job losses and a $1 trillion hit to the U.S. economy. The future of U.S. manufacturing depends on preserving a tax code that encourages investment, innovation, and growth.
John Hadwen is a Principal at ARB. He specializes in providing individuals and businesses with comprehensive
tax compliance and consulting services related to closely-held business, manufacturing, construction & real estate, and professional services firm taxation. Prior to joining ARB, John was a Tax Principal at a large, regional CPA firm.
