As the year comes to a close, manufacturers still have a chance to optimize budgets, reduce tax liability, and invest in future growth. Here’s a breakdown of the opportunities available – with relevant IRS codes and guidelines.
Disclaimer: We’re engineers, not tax accountants, so be sure to check with your own tax professional before moving forward.
1. Tax Deductions & Accelerated Depreciation
Section 179 Deduction (IRC §179)
Manufacturers may deduct up to $1,220,000 in qualifying equipment, such as 3D printers and scanners, placed in service during 2025, with the deduction phasing out dollar-for-dollar after $3,050,000 in purchases.
What This Means for You
This provision allows companies to expense equipment like machinery, tools, and software immediately, improving year-end cash flow.1
Bonus Depreciation (IRC §168(k))
In addition to Section 179, businesses can deduct 60% of the cost of eligible new or used equipment placed in service before year-end.
What This Means for You
This is particularly valuable for larger purchases exceeding the Section 179 limits, as bonus depreciation applies automatically unless opted out.2
2. Inventory Management
Writing Off Inventory for Reduction (IRC §471)
Manufacturers can write off obsolete, damaged, or unsellable inventory can reduce taxable income.
What This Means for You
A year-end review ensures compliance with valuation rules and prevents overstating taxable income.3
Deductions for Bulk Purchases (IRC §162(a))
Bulk purchasing of raw materials may accelerate deductions if it qualifies as an ordinary and necessary business expense.
What This Means for You
While this can provide a deduction in the current year, manufacturers should weigh it against future cash flow constraints.4
3. Prepaid Expenses & Timing Purchases
Deductible Prepaid Spending (CFR § 1.263(a))
In Treas. Reg. §1.263(a)-4(f), certain prepaid expenses are deductible if they qualify under the “12-month rule.”
What This Means for You
This typically applies to contracts such as insurance or licenses that don’t extend beyond the next tax year.5
Deferring Deductions (IRS Publication 535)
Prepaying rent, insurance, or supplies before December 31 can shift deductions into the current tax year.
What This Means for You
This can be particularly effective for smoothing income spikes in profitable years.6
4. Employee Training & Education Budgets
Deducting Training & Business Expenses (IRC §162(a))
Training expenses that improve job-related skills are deductible as ordinary and necessary business expenses.
What This Means for You
This includes workshops, safety certifications, or specialized engineering courses that benefit current operations.7
Qualifying Under Education Assistance Program (IRC §127)
Tuition assistance programs may qualify under the Educational Assistance Program exclusion up to $5,250 per employee.
What This Means for You
Employers must establish a written program that meets IRS requirements to qualify for this exclusion.8
5. Research & Development (R&D) Tax Credit
Qualified Research Expenses (IRC §41)
Qualified research expenditures (QREs), such as developing new processes or improving production efficiency, may qualify for the R&D tax credit.
What This Means for You
This dollar-for-dollar credit reduces tax liability directly, rather than just reducing taxable income.9
Innovation Projects (IRC §41(b))
Wages, supplies, and contractor costs tied to innovation projects can be included.
What This Means for You
Maintaining proper project documentation and time-tracking is essential to substantiate claims.10
6. Capital Improvements & Energy Credits
Business Upgrades (IRC §168)
Permanent improvements such as machinery and building upgrades must generally be capitalized but may qualify for accelerated depreciation under §168.
What This Means for You
Proper asset classification ensures maximum allowable deductions under Modified Accelerated Cost Recovery System (MACRS) rules.11
Sustainability Upgrades
Certain energy-efficient improvements may qualify for credits:
- IRC §179D: Energy-efficient commercial building deductions.
- IRC §48: Investment tax credit (ITC) for renewable energy property.
What This Means for You
These provisions reward manufacturers who invest in long-term energy savings and sustainability.12
7. Charitable Contributions
Deductible Gifts (IRC §170)
Donations of cash or inventory to qualified charities may be deductible.
What This Means for You
This allows manufacturers to repurpose excess stock while also generating goodwill in the community.13
Large Donations (IRC §170(f)(8))
Contributions must be made to IRS-recognized §501(c)(3) organizations and properly documented.
What This Means for You
Written acknowledgment is required for donations over $250.14
8. Retirement Plan Contributions
Company Tax Breaks (IRC §404(a))
Employer contributions to qualified retirement plans, such as 401(k), SEP IRA, and SIMPLE IRA, are deductible.
What This Means for You
These contributions provide tax savings while supporting employee retention.15
Contribution Limits (IRC §402(g))
Salary deferrals are subject to annual limits under IRC §402(g).
What This Means for You
Employers should remind employees of limits. For example, $23,000 in 2025 for 401(k) deferrals, plus catch-up contributions for those aged 50+.16
9. Budget Utilization & Year-End Spending
Business Expenses (IRC §162(a))
Expenses incurred for ordinary and necessary business purposes are deductible.
What This Means for You
This can include IT upgrades, marketing initiatives, or professional services entered before year-end.17
Making the Most of Your Budget (IRC §446)
Strategic year-end spending (such as IT, training, marketing) ensures budgets are fully utilized and may improve next year’s allocations.
What This Means for You
Departments that don’t use their budgets risk reductions in the following fiscal year.18
10. Strategic Planning for Next Year
Looking Ahead (IRC §446)
Manufacturers should forecast 2026 capital needs to decide whether to accelerate or delay purchases.
What This Means for You
Early planning provides flexibility in aligning business strategy with available tax incentives.18
Tax Planning Flexibility (IRC §446(b))
Manufacturers can accelerate expenses to reduce current-year taxable income, and it may be beneficial to delay expenses if income is expected to rise next year.
What This Means for You
Evaluating multi-year projections can prevent unexpected tax spikes.19
Bottom Line
Manufacturers should balance tax-driven decisions (such as Section 179, bonus depreciation, and R&D credit) with operational investments (such as training, equipment, and inventory control) to end the year strong — and start the next with momentum.
If you need help deciding on any hardware, software, or training expenditures before the end of 2025, reach out to us.
Sources
- IRS Publication 946 – How to Depreciate Property
- IRS Publication 946; Tax Cuts and Jobs Act summary
- IRC §471; Treas. Reg. §1.471-2
- IRC §162(a); IRS Publication 535 – Business Expenses
- Treas. Reg. §1.263(a)-4(f)
- IRS Publication 535
- IRC §162(a); IRS Publication 535
- IRC §127; IRS Publication 970 – Tax Benefits for Education
- IRC §41; IRS Form 6765 – Credit for Increasing Research Activities
- IRC §41(b)
- IRC §168; IRS Publication 946
- IRS Notice 2018-59
- IRC §170; IRS Publication 526 – Charitable Contributions
- IRC §170(f)(8)
- IRC §404(a); IRS Publication 560 – Retirement Plans for Small Business
- IRC §402(g); IRS Notice 2024-75 (2025 Retirement Plan Limits)
- IRC §162(a)
- IRC §446; IRS Publication 538 – Accounting Periods and Methods
- IRC §446(b); IRS Publication 538
