3 Tax Savings Manufacturers Shouldn’t Overlook
As the end of the third quarter of 2026 approaches, it is a good time for manufacturers to start thinking about year-end tax planning. Manufacturers continue to face challenges, such as increased labor costs, supply chain uncertainty, and pressure to invest in the latest equipment and technology. Careful tax planning can be an effective way to offset some of these challenges. There are several potential options for a manufacturing company, such as accelerated depreciation on machinery/equipment purchases, R&D incentives, and energy credits. Implementing some of these strategies can help manufacturers reduce taxable income and set their businesses up for continued success.
The following three opportunities are especially relevant for manufacturers that are investing in machinery, automation, process improvements, domestic production, or facility upgrades in 2026.
1. Accelerated Expensing for Machinery and Equipment
Purchasing equipment is essential for any manufacturer. Manufacturers buying equipment, tooling, robotics, material-handling systems, computers, or certain software may be able to deduct eligible costs much faster through Section 179 expensing and bonus depreciation.
Section 179 expensing allows immediate, 100% tax deductions for the purchases of qualifying machinery and equipment. The maximum Section 179 deduction for 2026 is reportedly $2,560,000. There is a phaseout of the max deduction once qualified property placed in service for the year exceeds $4,090.000. Even with the phase-out rules, Section 179 expensing can be an effective tax-saving tool. However, Section 179 expensing cannot force a business into a taxable loss.
Bonus depreciation may also allow a 100% first-year deduction for qualifying property acquired and placed in service under current rules. Bonus rules have constantly changed over the years, but 100% bonus depreciation was made “permanent” starting January 19, 2025. Qualifying assets placed in service after this date can be 100% expensed via bonus depreciation.
Planning Tip: Section 179 expensing and bonus depreciation can both be used during the same tax year. Consult a tax professional to maximize these deductions. Keep in mind that not all state/local jurisdictions conform to accelerated depreciation methods.
2. R&D Costs & Credits
Some manufacturing businesses overlook research and development credits because they do not realize it can apply. Research and development (R&D) costs do not apply only to science labs and new inventions. Qualifying R&D activity can include improving production lines, testing new materials, designing prototypes, reducing scrap, improving throughput, automating manual steps, or solving technical uncertainty in product or process design.
Unlike in recent prior years, R&D costs are now eligible for immediate expensing. In years past, these costs were required to be capitalized and amortized; typically over a span of 60 months. The One Big Beautiful Bill Act (OBBBA) declared that these costs are now deductible in-full in the year they were incurred. Also, any unamortized R&D costs that were capitalized in prior years are eligible to be expensed in 2026. Taxpayers also have the option to split these deductions over 2 years. Unfortunately, this change can make compliance for state and local tax returns a bit complicated. Some states conform to Federal treatment while others do not.
Planning Tip: Try to document as much as possible; capture project notes, technical challenges, testing results, employee time, contractor costs, and supply costs as work occurs. Strong documentation makes the credit easier to support and helps identify eligible projects before details are forgotten.
3. Energy, Building, and Production Incentives
Manufacturers investing in energy-efficient equipment or facility improvements may qualify for valuable federal, state, or local tax incentives. These incentives can come in the form of tax deductions, rebates, credits, and more. Projects, such as upgraded HVAC systems, LED lighting, high-efficiency motors, and renewable energy installations, can provide both operating cost savings and tax benefits.
The landscape of these incentives has changed rather significantly with the implementation of the OBBBA. The unfortunate reality is that a lot of these incentives are trending towards expiration. But, as of 2026, there are still some valuable incentives available.
Planning Tip: Before beginning a project, evaluate available incentives to ensure all documentation requirements are met.
How Manufacturers Can Turn These Opportunities into Savings
- Build a 2026 capital expenditure list and identify expected placed-in-service dates.
- Map each major project to potential deductions, credits, rebates, and grants before contracts are finalized.
- Track R&D activities in real time, including employee time, test runs, prototypes, failed attempts, and technical uncertainties.
- Review state conformity rules for bonus depreciation, Section 179, credits, and treatment of R&D costs.
- Meet with tax advisors before year-end rather than waiting for return preparation.
The Bottom Line
For manufacturers, 2026 tax savings will depend less on a single deduction and more on timing, documentation, and coordination. Companies that connect operations, engineering, finance, and tax planning can turn everyday investments in equipment, innovation, energy efficiency, and inventory management into measurable tax advantages.
Please reach out to a member of our Manufacturing & Distribution team for more information on the topic outlined above. For more information regarding our Manufacturing & Distribution experience, visit our Manufacturing & Distribution industry page.
About the Author
Camden Hess joined McKonly and Asbury in 2023. He is currently a Supervisor for the firm’s Tax Segment.
