Year-End Tax Planning Strategies for Manufacturers

Many owners think about taxes in April. By then most of the decisions that set the bill were made in October, November and December. Equipment, inventory, bonuses, retirement contributions and R&D costs all have year-end timing rules.

The 2025 tax law (P.L. 119-21, usually called the One Big Beautiful Bill Act or OBBBA) changed several of them. Below is how I'd work through year-end for a manufacturer under the rules that apply to 2026.

This is general information, not tax advice. Work with your CPA on your own facts before you act.

Why Year-End Tax Planning Hits Differently for Manufacturers

A manufacturer carries inventory, runs heavy equipment and has labor, material and overhead flowing through cost of goods sold. Each of those has its own tax timing rules. A service business doesn't deal with most of them.

Timing is the issue. Many of these moves only work before December 31. A machine has to be running by year-end. A bonus has to be fixed by year-end. Inventory has to be scrapped or offered for sale at the right time. In February your CPA can only report what already happened.

It also takes current books. If the books are two months behind, you don't know your income, your inventory or your asset list. I think the first year-end step is closing November on time so the rest of the plan is built on real numbers. Our month-end close checklist for job shops is a good place to start.

Accelerate Equipment Purchases to Maximize Depreciation Deductions

If you need the equipment anyway, buying and installing it before year-end moves the deduction into 2026. There are three tools now.

• Bonus depreciation is 100% and permanent for property acquired after January 19, 2025. It has no dollar cap and can create a loss. If you signed the contract before January 20, 2025, the old phase-down applies, which is generally 20% for property placed in service in 2026.
• Section 179 lets you expense up to $2,560,000 in 2026, phasing out once purchases pass $4,090,000. It can't push business income below zero, and it also covers roofs, HVAC, fire protection and security systems on existing buildings.
• Qualified production property under new Section 168(n) lets you elect a 100% first-year write-off for the production part of a new factory building, if construction began after January 19, 2025 and other conditions are met.

The key phrase is "placed in service." The machine has to be installed and ready to run by December 31. A crate on the dock doesn't count.

I wouldn't buy equipment just for the deduction. A $500,000 machine that saves $105,000 of tax at a 21% rate still cost $500,000 in cash. If you'd buy it next spring anyway, pulling it into December can make sense. If you wouldn't, it doesn't.

We go deeper on choosing between the tools in Section 179 vs. bonus depreciation. For the building rules, see our post on the qualified production property incentive.

Review Your Inventory Valuation Before Year-End

Inventory is usually one of the largest assets on a manufacturer's balance sheet. It's also where I see the most confusion about what reduces taxes and what doesn't.

Here's the rule that matters. Booking a reserve for obsolete or slow-moving inventory on your books does not, by itself, reduce your taxes. The Supreme Court settled that in Thor Power Tool Co. v. Commissioner (1979). A book write-down to net realizable value is the right accounting answer under GAAP. It just isn't a tax deduction yet.

For tax, you generally get the deduction when you actually get rid of the goods. That means scrapping them, selling them, or, under Treasury Regulation 1.471-2(c), offering damaged or obsolete goods for sale at a reduced price within 30 days after your inventory date and valuing them at that bona fide selling price less the cost to dispose. That last option isn't available for goods you account for under LIFO.

So the year-end move is practical. Walk the floor. Find the old castings, discontinued parts and raw material tied to products you no longer make. If it's truly dead, scrap it or sell it before year-end, and keep the paperwork: scrap tickets, sale invoices, written offers with prices and dates.

Changing your inventory method, from FIFO to LIFO for example, is a different decision. It generally needs an IRS filing and affects every year after, so talk to your CPA well before year-end. Our comparison of FIFO, LIFO and average cost covers the trade-offs.

Deduct domestic R&D costs under Section 174A

For tax years beginning after December 31, 2024, domestic research and experimental costs are deductible in the year you pay them again, under new Section 174A. Research done outside the U.S. still has to be amortized over 15 years.

That's a big change from 2022 through 2024, when domestic R&D had to be spread over five years. Process engineering, prototyping, custom tooling development and software can all count if there's real technical uncertainty.

The retroactive election that let smaller companies amend 2022 through 2024 had a deadline of July 6, 2026. That has passed. If you chose to spread your leftover 2022 to 2024 costs over 2025 and 2026, the second half lands on this year's return, so plan for it.

For year-end, the job is tracking. Make sure engineering time and test materials are coded separately so your CPA can support the deduction. Our full guide to Section 174 R&D expensing covers the details.

Don't Overlook the R&D Tax Credit

The deduction lowers taxable income. The research credit under Section 41 reduces the tax itself. They're separate, and you can often claim both.

Work that may qualify includes developing new products, improving a process, testing new materials, designing custom fixtures and solving production engineering problems. The credit is based on qualified wages, supplies and some contractor costs.

There's an interaction to plan for. Starting in 2025, you generally reduce your Section 174A deduction by the amount of the credit, or elect a smaller credit instead. Your CPA will model which is better.

Documentation is the hard part. The IRS expects project-level records: who worked on what, for how long, and what technical question they were trying to answer. Gathering that in December is easier than rebuilding it in March. See our post on the R&D tax credit for manufacturers.

Check the business interest limit if you borrow

If you carry a line of credit or equipment loans, Section 163(j) can limit how much interest you deduct. The limit is 30% of adjusted taxable income.

For tax years beginning after 2024, adjusted taxable income is again figured before depreciation and amortization, which is closer to EBITDA. That makes the limit easier to live with when you're taking big depreciation deductions.

Many smaller manufacturers are exempt. If your average annual gross receipts for the prior three years are $32 million or less in 2026, the limit generally doesn't apply. Related companies are added together for that test.

Time Your Income and Expenses Strategically

Moving income and expenses between years only helps if this year and next year look different. If they look the same, you're just moving the problem.

Income. If you're on the cash method, income generally counts when you collect. If you're on the accrual basis, income generally counts when it's earned, which for a manufacturer is usually when the goods ship. Holding an invoice until January doesn't move income if the parts shipped in December. Delaying the shipment might, but only if the customer is fine with it.

Year-end bonuses. An accrual-basis company can deduct a 2026 bonus on its 2026 return if the bonus is fixed by December 31, 2026 and paid by March 15, 2027. That's the 2.5-month rule. It doesn't work for related parties under Section 267. Bonuses to anyone who owns more than 50% of a C corporation, or to any shareholder of an S corporation, are deducted when they're paid.

Prepaid expenses. A cash-method business can generally deduct a prepayment that doesn't run past the earlier of 12 months after the benefit starts or the end of next year. Accrual-basis rules are tighter. Ask before you prepay a year of insurance to get a deduction.

Timing calls need a current P&L. If you don't have one, you're guessing. A current cash flow forecast gives you the rest of the picture.

Maximize retirement plan contributions

For a profitable year, retirement contributions are one of the cleanest deductions. The 2026 limits are:

Item	2026 limit
401(k) employee deferral	$24,500
Catch-up, age 50 and over	$8,000
Catch-up, ages 60 to 63	$11,250
Total annual additions per person (Section 415(c))	$72,000
SEP contribution	Lesser of 25% of compensation or $72,000
SIMPLE IRA deferral	$17,000

Employee deferrals have to come out of 2026 paychecks, so that part is a December payroll item. Employer contributions can often be made up to the return due date. One new wrinkle: if your prior-year wages were over $150,000, your catch-up contributions generally have to go in as Roth.

Use Cost Segregation to Accelerate Deductions on Facilities

If you own your building or just finished a build-out, a cost segregation study can split the cost into shorter lives. A commercial building is 39-year property. Parts of it, like dedicated electrical for equipment, process piping, certain site improvements and interior improvements, can often be 5-, 7- or 15-year property instead.

Those shorter-life pieces qualify for 100% bonus depreciation if they were acquired after January 19, 2025. Older buildings can sometimes catch up missed depreciation through an accounting method change.

A study has a cost. I think it's worth pricing out when the building is large or recently built, and less so for a small leased space. For new construction, compare it with the qualified production property election. They can work together.

Review Your Entity Structure and Owner Compensation Before Year-End

If you're an S corporation, owners who work in the business need a reasonable salary before taking distributions. Too low invites IRS questions. Too high costs payroll tax you didn't need to pay. Review it each year. Our post on S corp vs. C corp tax implications covers the bigger structure question.

The qualified business income deduction under Section 199A is now permanent. Eligible pass-through owners can deduct up to 20% of qualified business income. Above $201,750 of taxable income ($403,500 married filing jointly) for 2026, limits based on W-2 wages and the cost of your equipment start to phase in. Owner pay and equipment purchases both affect the math.

The state and local tax deduction cap for individuals went up to $40,400 for 2026, but it shrinks for higher incomes. Pass-through entity tax elections, where the company pays state income tax and deducts it federally, are still available in states that offer them. If you only operate in Texas this doesn't come up, since Texas has no personal income tax. If you have owners or operations elsewhere, confirm with your CPA.

Plan charitable gifts around the new floor

Starting in 2026, a C corporation can only deduct charitable gifts above 1% of its taxable income, and still no more than 10%. Small gifts below the floor won't produce a deduction.

If the company gives every year, it may make sense to bunch two years of giving into one. Individuals have a similar new floor of 0.5% of adjusted gross income.

Get ready for 1099s at the new threshold

For payments made in 2026, the Form 1099-NEC and 1099-MISC threshold went from $600 to $2,000. Fewer vendors will need a form, but you still need a W-9 from everyone you pay for services.

December is the time to chase missing W-9s, not late January. Our guide to 1099 forms for manufacturing companies has the details and deadlines.

A year-end checklist

Item	Timing
Close November books; update full-year projection	Early December
Equipment installed and running	By December 31
Pull signed contract dates on large purchases	Before the return
Scrap or sell obsolete inventory; keep documentation	By year-end (reduced-price offers within 30 days after the inventory date)
Fix bonus amounts by board action or written plan	By December 31; pay by March 15, 2027
Final 2026 payroll deferrals for 401(k)	Last 2026 payroll
R&D time and materials coded and documented	Before close
Collect missing W-9s	December

How Accounovation Helps Manufacturers Keep More of What They Earn

We're not your tax preparer. We're the finance team that keeps your books, inventory and fixed asset records current through the year, and we coordinate with your CPA so year-end planning happens in November, not April. Here's how we work with your CPA.

In practice we bring a current P&L and projection, a list of equipment and its in-service dates, an inventory review and the bonus and payroll numbers to a planning meeting with your CPA. These moves work best as part of a year-round manufacturing tax strategy, backed by an outsourced controller who keeps the numbers clean.

If you want help getting ready for year-end, that's part of our fractional CFO work. Happy to jump on a call if helpful.

Frequently Asked Questions

When should a manufacturing company start year-end tax planning?

October is ideal, early November at the latest. Equipment has to be running and bonuses fixed by December 31, so you need time to act on what the numbers show.

Does writing down obsolete inventory reduce my taxes?

Not by itself. A book reserve isn't deductible for tax; you generally get the deduction when you scrap or sell the goods, or offer them for sale at a reduced price within 30 days after your inventory date.

Is bonus depreciation still 100% for 2026?

Yes, for property acquired after January 19, 2025. Equipment under a binding contract signed before January 20, 2025 still follows the old phase-down, which is generally 20% if placed in service in 2026.

Can I deduct a year-end bonus I pay in 2027?

Generally yes if you're on the accrual method, the amount is fixed by December 31, 2026, and it's paid by March 15, 2027. The exception is related parties, such as any S corporation shareholder or a more-than-50% owner of a C corporation.

Can manufacturers really qualify for the R&D tax credit?

Often, yes. Process improvement, prototyping, new materials testing and custom tooling development can qualify if there's real technical uncertainty and you keep project-level records.