Inventory costing under Section 263A
Larger manufacturers must capitalize indirect production and storage costs into inventory.
Industry tax guide
Manufacturing and distribution tax and accounting
Tax incentives for the products you design, the plants you build and the goods you export.
Manufacturers and distributors invest in equipment, facilities and process improvement every year, carry large inventories, and often sell across state lines and overseas.
That gives them access to the widest set of incentives in the tax code: the research credit, new 100% depreciation for production buildings, export incentives and inventory methods that match how costs really flow.
Compared with a general business
What makes taxes different for manufacturing and distribution
Production property expensing
Section 168(n) allows 100% depreciation for qualified production buildings placed in service after July 4, 2025 and before 2031.
Export incentives
IC-DISC structures are available only to companies that export US-made goods.
Sales tax exemptions for manufacturing
Many states exempt production machinery and the utilities used in production, often requiring a utility study.
The rules in detail
Tax rules for manufacturing and distribution
100% depreciation for production buildings
The 2025 tax law added Section 168(n): nonresidential real property used in manufacturing, production or refining can be written off in full if placed in service after July 4, 2025 and before 2031, by election on the original return. Interim IRS guidance is in Notice 2026-16; offices and storage space do not qualify.
Research credit and Section 174A
Developing new products, formulas, tooling and processes can qualify for the research credit, and domestic research costs are deductible right away again starting in 2025. Small businesses can apply the change back to 2022.
IC-DISC for exporters
An interest charge domestic international sales corporation lets a company that exports US-made goods pay a commission to the IC-DISC, which shareholders receive as qualified dividends taxed at capital gain rates rather than ordinary rates.
Planning moves
Ways to save tax in manufacturing and distribution
Claim the research credit
Product, process and tooling development qualifies more often than manufacturers expect.
Elect 100% depreciation on production space
Qualified production property is identified on the original return.
Set up an IC-DISC
Export commissions are taxed at qualified dividend rates.
Claim manufacturing sales tax exemptions
Machinery and production utilities are exempt in many states; past purchases may be refundable.
Review the inventory method
LIFO, Section 263A and small business exemptions are tested against actual costs.
Write off equipment
Section 179 and 100% bonus depreciation on machinery.
Working with OICPA
How we help
Research credit for products and processes
Engineering, tooling and process improvements documented and claimed, including the payroll tax offset for smaller firms.
R&D Tax CreditPlan the plant expansion
Qualified production property, bonus depreciation and cost segregation compared before you build.
Cost Segregation CoordinationExport savings through an IC-DISC
Entity setup, commission calculations and Form 1120-IC-DISC for companies with export sales.
Business Tax AdvisoryEstimate the research credit
A quick estimate from wages, supplies and contractor costs.
R&D Tax Credit EstimatorBookkeeping and reporting
The accounting behind the tax work
Connect product margins with inventory turnover and receivables; prepare documentation for specialist credit reviews when relevant.
The operating challenge
Materials, labor, overhead, freight, and inventory adjustments can distort margins when production records do not reconcile with the financial ledger.
The records that matter
Inventory and production reports, costing policies, equipment registers, purchase orders, and customer terms give the review a practical starting point. We identify missing information before recommending changes.
What you can expect
- A prioritized review of the industry-specific accounting issues above
- A tailored reporting and document checklist based on your operating records
- An agreed action plan connecting financial reporting, tax deadlines, and specialist coordination
Frequently asked questions
Does our new factory qualify for 100% depreciation?
The production portion may, under Section 168(n), if the building is placed in service after July 4, 2025 and before 2031 and is used in manufacturing. Office, administrative and storage space does not qualify, and the election has recapture rules.
Do distributors qualify for IC-DISC?
Yes. A distributor that sells US-manufactured goods for use outside the US can use an IC-DISC, not only the manufacturer.
Is the R&D credit only for large manufacturers?
No. Small and mid-size manufacturers often qualify for process and product work, and eligible startups can use up to $500,000 a year against payroll taxes.
Related articles
References
- 26 U.S. Code § 168: Accelerated cost recovery systemLegal Information Institute, Cornell Law School
- 26 U.S. Code § 41: Credit for increasing research activitiesLegal Information Institute, Cornell Law School
- 26 U.S. Code § 174A: Domestic research or experimental expendituresLegal Information Institute, Cornell Law School
- About Form 1120-IC-DISC, Interest Charge Domestic International Sales Corporation ReturnInternal Revenue Service
Rules reflect federal tax law as of November 2026.