The story of H.R. 1- One Big Beautiful Bill and Its overall tax effects on the Manufacturing industry and the employees within; How Taxation policy plays a part of the American manufacturer’s dreams

Written by: Stephen Zogal, MST, E.A.

Date Published: 12/26/2025

The United States Manufacturing Industry had been a cornerstone of the American dream in the 1800^s through the 1900^s. It was often viewed as the backbone prior to the U.S. Manufacturers outsourcing manufacturing to China. There wasn’t a specific single event or policy which influenced this outcome. It was the result of multiple decades of tax and economical policy within the U.S. system itself for which graced China’s advantage to increase their GDP (Global Domestic Product) and seize control of the industrial manufacturing markets. The U.S. government has since recognized its role in the manufacturing industry and its policy’s which has allowed China to benefit from. Prior to H.R.1, One Big Beautiful Bill was the Tax Cuts and Jobs Act (TCJA) passed in 2017. The TCJA did attempt to correct the gaps in the United States Tax Law that allowed China to have a competitive edge against the U.S. in Manufacturing. One of the hot topics was bonus depreciation.

Bonus Depreciation prior to H.R.1 under I.R.C. § 168 allowed for qualifying property to be written off by the Manufacturer at 100% of the asset’s costs from 2017 through 2022. Then year over year lowering the amount of the depreciation applicable by a 20% decrease until it was scheduled to reach 20% by tax year 2026. The resulting table provides a clear picture of the schedule set:

Tax Year	Percentage of Depreciation Allowed Under TCJA
2017 - 2022	100%
2023	80%
2024	60%
2025	40%
2026	20%

In comparison- this was a dramatic increase to the law prior to TCJA which only allowed for up to 50% depreciation of equipment, computer software and other improvements. While temporary tax policy it did provide incentives for manufacturers to invest in the equipment while being able to generate tax savings substantially.

Fast forward to 2025, the temporary increase in bonus depreciation was not enough incentive to hold back China’s gain on GDP and although bonus depreciation was only one cog in the giant wheelhouse for US Tax policy- it was a major player the role for manufacturers investment of equipment. Currently, Qualified property as defined under I.R.C. § 168 which was amended by H.R. 1 section 70307 stated “qualified production property means that portion of nonresidential real property” which is placed in construction between January 19^th 2025 and January 1^st 2029 and placed in service before January 1^st, 2031. By the definition of Qualified Production Activity “means the manufacturing, production, or refining of a qualified product. The activities of any taxpayer do not constitute manufacturing, production, or refining of a qualified product unless the activities of such taxpayer result in a substantial transformation of the property comprising the product.” In simple terms, a piece of equipment that transports an apple from point A to point B would not qualify as production property as it does not alter the apples appearance or substantial transformation of that apple. A piece of equipment that adds caramel to the apple could qualify as its substantial transforms that apple into a different product. Although, I would note that the word substantial within this definition is subjective to the court’s interpretation.

Unfortunately for Manufacturers the new law does not allow for office space to be included within the definition. Under I.R.C. § 168(n)(2)(C) “The term “qualified production property” shall not include that portion of any nonresidential real property which is used for offices, administrative services, lodging, parking, sales activities, research activities, software development or engineering activities, or other functions unrelated to the manufacturing, production, or refining of tangible personal property.” Manufacturers would be unable to use bonus depreciation on the office space. Overall, the bonus depreciation was made permanent this round by U.S. lawmakers unless future lawmakers have a change of heart, it will remain a valuable tool for manufacturers to invest in equipment while managing tax savings.

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For many decades, U.S. tax law has recognized the importance of research and development (R&D) through both deductions and credits. One of the foundational rules governing the tax treatment of research‑oriented expenditures was I.R.C. § 174 (Research or Experimental Expenditures). Prior to the changes ushered in by H.R. 1, the landscape around I.R.C. § 174 experienced meaningful shift most notably with the implementation of the Tax Cuts and Jobs Act (TCJA) in 2017 that significantly affected how manufacturers could deduct or amortize their R&E costs.

Beginning for tax years after December 31, 2021, the TCJA amended I.R.C. § 174 which resulted in research or experimental expenditures paid or incurred had to be capitalized and then amortized domestic expenditures over five years, and foreign expenditures over fifteen years. Under this regime, a company could no longer write off its domestic R&E expense immediately. Instead, the deduction had to be spread-out over multiple years, delaying tax benefits and reducing the incentive effect of an immediate expense. Many Manufacturers criticized this change as reducing the attractiveness of U.S.-based R&D investment by increasing the cost of capital for innovation.

To illustrate: a company that incurred $1 million in qualified research costs in 2022 could not deduct all $1 million in 2022. Instead, only a portion would be deductible each year for five years, thereby increasing the effective tax cost of that investment. This created cash flow implications and potentially discouraged investment in high‑risk, high‑reward research projects.

H.R. 1 reverses this trajectory. The legislation reinstates the full and immediate deductibility of domestic R&E expenses beginning in 2025. This means that companies can once again deduct the full cost of eligible research in the year it is incurred, rather than waiting years to realize the tax benefit. By accelerating deductions, this provision lowers the effective cost of research, improves cash flow, and creates a powerful incentive for Manufacturers to expand R&D efforts on American soil. The legislation, however, retains a longer amortization schedule for foreign research, signaling a clear policy preference for domestic development and innovation. The financial impact of this change is immediate and substantial. For example, under the prior TCJA rules, a company that incurred $2 million in qualified R&E costs could only deduct $200,000 in the first year, spreading the rest over the subsequent four years. Under H.R. 1, that same $2 million is fully deductible in the current tax year, drastically reducing taxable income and freeing up capital for reinvestment. This change is especially impactful for industries that operate on long product development cycles or engage in high-risk research—such as aerospace, biotechnology, advanced manufacturing, energy, and software development.

Section 70302 of H.R. 1 introduces a key transition provision that permits taxpayers to accelerate the deduction of certain previously capitalized R&E expenditures—those incurred in taxable years beginning after December 31, 2021 and before January 1, 2025—that were charged to capital account under the previous I.R.C. § 174 rules. In essence, Manufacturers that had earlier capitalized and amortized domestic R&E costs now have the ability to elect to deduct the remaining unamortized portion either in a single year (the first taxable year beginning after December 31, 2024) or ratably over a two‑taxable‑year period beginning with that year.

This election is a big mechanism in tax planning for manufacturers. Example: A Manufacturer with $1.2M in Research and Experimental (R&E) costs. Under TCJA amortization of the R&E would occur over a 60 month period (5 years). In the example below is a trial balance used to show that perspective of the underlining result.

Let’s assume this manufacturer is a C Corporation with a 21% tax on profits. Under TCJA this would result in a taxable income of $1M and the resulting tax of $210,000 ($1M x 21%). Under H.R. 1 if the manufacturer made the election to write off the unamortized portion the result would be a huge advantage from a tax planning perspective.

This election serves as a corrective mechanism, addressing the timing mismatch introduced by the TCJA’s requirement that domestic R&E costs be amortized over five years (and foreign costs over 15 years). By offering this elective deduction, Section 70302 of H.R. 1 enables companies to recapture tax benefit for research investments incurred during the amortization period and restore cash flow benefit earlier than originally scheduled.

Many manufacturing companies felt disadvantaged when they had to capitalize costs under TCJA despite decades of an immediate expense in prior law. This election helps remedy that timing mismatch. The ability to deduct what was previously locked up as amortizable cost in one or two years accelerates tax benefit and improves liquidity. This provides a strategic tax planning advantage as companies can evaluate whether to take the full deduction in the first year or spread it over two years, depending on their tax profile and future profitability.

Under TCJA manufacturers were allowed to immediately expense the cost of qualifying property, rather than recovering that cost through depreciation over several years. However, the limits and scope of this provision were far more modest compared to the changes introduced under H.R. 1. The maximum amount a taxpayer could elect to expense under I.R.C. § 179 under TCJA was $500,000 per year, with a phase-out threshold beginning at $2 million in total equipment purchases. Once a Manufacturer acquired more than $2 million of qualifying property in a year, the deduction began to reduce dollar-for-dollar, eventually phasing out completely for purchases exceeding $2.5 million. These limits were adjusted for inflation, but only marginally. They remained largely restrictive for mid-sized or fast-growing Manufacturers with high capital expenditure needs.

Under TCJA law, the types of property that qualified for I.R.C. § 179 expense included:

• Tangible personal property (e.g., machinery, equipment, furniture)

• Off-the-shelf computer software

• Certain Manufacturer-use vehicles (with specific limits)

• Qualified leasehold, restaurant, and retail improvements (added in later years)

Importantly, real property such as buildings and most improvements to real estate were generally not eligible for I.R.C. § 179 deduction. There were some exceptions for qualified improvements, but the scope was narrower and more complex than it would become later.

With the passage of H.R. 1 brought a significant expansion of the tax provisions under I.R.C. § 179, enhancing the ability of Manufacturers to immediately deduct the full cost of certain capital expenditures. Building on the reforms made under the 2017 Tax Cuts and Jobs Act, the latest changes raise the deduction limits and widen the scope of eligible property offering a substantial incentive for Manufacturers to invest in equipment, technology, and infrastructure. Beginning with tax years starting after December 31, 2024, the maximum amount a Manufacturer can expense under I.R.C. § 179 has been increased to $2,500,000, with a phase-out threshold beginning at $4,000,000. This is a marked increase from the prior limits of $1,160,000 (for 2023, indexed for inflation) and $2,890,000 in total qualifying purchases. These new limits reflect Congress’s intent to support more robust domestic Manufacturer investment by making it easier to recover capital costs.

The deduction begins to phase out dollar-for-dollar after the total cost of qualifying equipment placed in service exceeds $4 million. Therefore, once a company places more than $6.5 million of eligible property in service in a year, the I.R.C. § 179 deduction would be fully phased out. These thresholds are also indexed for inflation beginning in 2026, ensuring that the deduction retains its real value over time, even as costs rise.

One of the most impactful aspects of the revised I.R.C. § 179 rules is the expanded definition of what constitutes “qualifying property.” The deduction now applies not only to tangible personal property—such as machinery, office equipment, and Manufacturer-use vehicles—but also to a broader set of real property improvements. Specifically, Manufacturers may expense:

• Roofs

• Heating, ventilation, and air-conditioning (HVAC) systems

• Fire protection and alarm systems

• Security systems

• Qualified improvement property made to the interior of nonresidential buildings

This expanded eligibility is especially valuable for service-sector businesses, manufacturers, and real estate developers, many of whom regularly invest in facility improvements and upgrades. It also bridges a former gap between physical infrastructure investment and more traditional capital equipment, giving Manufacturers a more comprehensive path to accelerate cost recovery.

World events do control U.S. Tax Policy. To understand the situation that led to the Advance Manufacturing Investment Credit we must dive deep into historical references regarding the China’s pressures on Tiawan. In the 18^th century Tiawan was a part of China. Today, pressures from President Xi Jinping of the Chinese Communist Party (CCP) seeks to make Tiawan apart of the China’s mainland once again. Why does this matter to the United States? There are many reports that show Tiawan Semiconductors control 70 - 90% of the global market depending on the node size. In the Age of Technology, Semiconductors were used in everyday life. From hospitals, travel, agriculture, cell phones and even the department of defense. Without semiconductors, technology would simply not exist.

 It’s not hard to understand why that is important to the United States and its adversaries. If China manages to take Tiawan, U.S. reliance on those semiconductors would be at the mercy of our greatest adversary. Congress finally received the memo. The U.S. reliance on Tiawan for semiconductors needed to be addressed or face the consequences if China invades Tiawan.

The creation and expansion of the Advance Manufacturing Investment Credit (AMIC) addressed the issue. This provision, codified under Section 48D of the Internal Revenue Code, aims to reinforce the country’s industrial base by promoting domestic investment in high-tech manufacturing infrastructure. With the global economy still recovering from pandemic-induced supply chain disruptions and rising geopolitical tensions, the AMIC represents a deliberate policy shift to encourage advanced production on U.S. soil. By increasing the credit rate and widening eligibility requirements, the legislation sends a strong signal that revitalizing domestic manufacturing is not only a matter of economics, but of national security and global competitiveness.

Under the revised law, Manufacturers investing in eligible advanced manufacturing facilities can receive a tax credit equal to 35% of the cost of qualifying property placed in service after December 31, 2025. This is an increase from the previous 25% credit, thereby substantially lowering the net cost of capital investment for qualifying projects. The credit applies to manufacturing operations that include, but are not limited to, semiconductor fabrication, chip production, and other advanced technologies critical to the modern economy. Property must be used within a qualified advanced manufacturing facility and can include specialized machinery, cleanroom systems, or infrastructure co-located and directly integrated with the primary facility.

To qualify for the credit, companies must begin construction on eligible property prior to January 1, 2027. This timeline is strategically designed to spur immediate action and accelerate project starts within a narrow investment window. The law defines a qualified facility with strict operational requirements, emphasizing that manufacturing must take place within the U.S. or its territories. Moreover, final regulations clarify that vertically integrated operations will be scrutinized to ensure that only assets truly integral to advanced manufacturing are eligible. This ensures that the credit benefits production activities aligned with national priorities rather than peripheral or unrelated Manufacturer units.

The strategic importance of the AMIC cannot be overstated. In addition to reducing the effective tax rate on capital expenditures, the credit aligns with broader policy objectives such as strengthening domestic supply chains, improving job growth in industrial regions, and reducing dependence on foreign sources for essential technologies. For example, semiconductor fabrication—long dominated by overseas producers—has emerged as a focal point for reindustrialization efforts. With the global demand for microchips growing exponentially due to the proliferation of electric vehicles, data centers, and smart devices, the U.S. government has prioritized domestic chip manufacturing as a linchpin of both economic and security policy. The AMIC directly supports this goal by incentivizing private sector investment in semiconductor fabs and their supply chains.

An interesting addition in H.R. 1 to the AMPC (Advance Manufacturing Production Credit) is the introduction of Metallurgical Coal within I.R.C § 45X(c)(6) which allows as stated “regardless of whether such production occurs inside or outside of the United States”. According to a 2025 congressional report in 2023 China was the top importer of Metallurgical Coal accounting for 41% of global import which begs the question what is it used for? The answer is simple – Steel production. Short story, Manufacturers can qualify for the Advance Manufacturing Production Credit regardless of where Metallurgical Coal is mined rather domestically or internationally.

China’s war machine depends greatly on the production of Steel. It shouldn’t be a surprise with Tiawan surrounded by the Western Pacific Ocean and if China is to overtake Tiawan, China’s navel capacity must be increase. According to BBC reports, China has overtaken the US in the number of ships it commands. While the US shipbuilding efforts have remained steady since 2005 the potential for conflict with China cannot be ruled out. H.R. 1 increase the amount of funding for Navel Shipbuilding and with that transposes the demand for Steel and key components to increase the production is Metallurgical Coal Supply. US Budgetary appropriations roughly $29 billion in additional FY2025 funding for the shipbuilding industrial base and U.S. naval shipbuilding programs, including funding for U.S.-made steel plate. Overall, the AMPC on Metallurgical Coal demonstrates how global events influence US Tax and Economical policies.

Historically, the AMPC has been calculated by the IRS on form 7207. The current draft of the form for tax year 2025 has the calculation for Metallurgical Coal on the bottom of page 2 and its calculation in accordance with I.R.C. § 45X(b)(1)(M) is 2.5% of production costs.

Example: A Manufacturer whose 20% of costs is the production of Metallurgical Coal.

In this example the result of 20% of costs would be $3,702,000 which would result in a tax credit under AMPC of $92,500. In other words, a salary of one to two employees was covered by the US government to produce Metallurgical Coal to increase the production of Steel within the United States.

Furthermore, the law complements other tax incentives such as bonus depreciation and full deduction under I.R.C. § 179. Companies are now able to layer these incentives, dramatically reducing taxable income in the years capital investments are made. The coordination of these benefits gives Manufacturer owners and CFOs unprecedented flexibility in structuring their capital deployment strategies. When combined with the potential for transferable or monetizable tax credits under separate clean energy provisions, the AMIC significantly enhances the financial viability of large-scale capital projects that would otherwise carry long payback periods.

From a tax planning perspective, timing is crucial. The increased 35% credit applies only to assets placed in service after the start of 2026, which means firms must carefully coordinate procurement, construction, and commissioning activities to optimize their tax positions. Additionally, taxpayers must rigorously document eligibility, including use tests, facility location, and integration of systems. Improper classification or failure to meet the narrow statutory definitions may result in disallowance or credit recapture. Given the size and complexity of many manufacturing projects, firms are advised to seek legal and tax counsel early in the design phase to ensure full compliance and credit maximization.

Although the credit is federally available, not all states may automatically conform to it. Manufacturers operating in multiple jurisdictions should examine their state tax codes to determine conformity with I.R.C. § 48D and assess the net impact of investing in one location over another. This consideration could be particularly important for companies looking to establish operations in regions that offer supplementary state or local incentives.

Still, the Advance Manufacturing Investment Credit represents a foundational shift in U.S. tax policy aimed at incentivizing domestic production of advanced goods. It reflects a deliberate move away from globalization as the default economic model and toward a more sovereign, resilient approach to industrial development. While the headline 35% rate offers powerful upfront savings, the true value of the AMIC lies in its ability to alter long-term Manufacturer strategy, support large-scale employment, and rebuild the United States productive capacity. For eligible companies, this is a credit worth careful planning and prompt action.

Beyond depreciation and tax credits there hasn’t been much benefit in manufacturing for employee incentives. Before the changes proposed in H.R. 1, the federal tax landscape already included incentives for employers to support child care services, most notably through the Employer-Provided Child Care Credit codified under I.R.C. § 45F. Enacted as part of earlier tax reforms, this provision was designed to encourage Manufacturers to play a more active role in helping their employees access affordable, quality child care. While not widely utilized compared to other Manufacturer tax incentives, I.R.C. § 45F represented a foundational effort to tie workplace productivity and employee well-being to direct tax relief. In the end, the initial I.R.C. § 45F ended up being more of a paperweight than a substantial relief to manufacturers.

The Employer-Provided Child Care Credit allowed Manufacturers to claim a nonrefundable tax credit equal to 25% of the expenses incurred to provide childcare services for employees, plus an additional 10% credit for resource and referral services offered to help employees find childcare. The maximum total credit was capped at $150,000 per year, and any amount not used in a particular year could not be carried forward. The structure of the credit emphasized both direct provision (e.g., on-site daycare facilities) and facilitation (e.g., working with third-party providers or childcare referrals).

Eligible expenses included costs for acquiring, constructing, rehabilitating, or expanding property used as part of an employer-operated childcare facility, as well as operating costs such as wages for caregivers, insurance, training, and supplies. However, for the credit to apply, the facility had to comply with all applicable state and local laws, and it had to be open to all employees without discrimination.

Despite its seemingly generous structure, utilization of the Employer-Provided Child Care Credit was minimal. According to historical data, very few Manufacturers, especially small to mid-sized took advantage of the credit- fact is less than 1% took advantage of the credit.⁶ The reasons were multifaceted. First, many employers lacked the scale or capital to construct or operate a childcare facility. Second, the administrative and regulatory burdens associated with licensing, compliance, and staffing posed significant challenges. Third, the credit was non-refundable and subject to an annual cap, limiting its appeal in terms of cash flow and long-term return on investment. Finally, and possibly the greatest factor is the potential of a lawsuit against the corporate-owned daycare facility revolving around injuries to children.

For many companies, particularly in lower-margin industries, investing in childcare infrastructure did not present a compelling value proposition under the TCJA framework. As a result, the credit remained underutilized and functioned more as a symbolic benefit than a widespread tax planning strategy.

The Tax Cuts and Jobs Act of 2017 prioritized corporate rate reduction, immediate deduction (under I.R.C. §§ 179 and 168(k)), and the elimination or curtailment of several deductions. While it preserved I.R.C. § 45F, the TCJA did not expand or significantly reform the Employer-Provided Child Care Credit. This maintained a status quo in which only large corporations or those with strategic HR initiatives engaged in using the credit. Interestingly, the broader policy environment did see some discussion about enhancing work-life balance, especially for working parents. However, the TCJA did not take the step of repositioning employer-provided childcare as a mainstream Manufacturer tax incentive leaving that opportunity to be reconsidered in future legislation.

In the years prior to H.R. 1, the Employer-Provided Child Care Credit under TCJA stood as a niche but underleveraged tax incentive. While it offered targeted relief to companies willing and able to invest in childcare solutions, the credit lacked the structural and financial scale needed to trigger widespread adoption. The limitations inherent in the original version such as the cap, narrow applicability, and nonrefundable nature prevented it from achieving broader policy goals related to workforce participation and childcare access.

The 2025 enactment of H.R. 1 finally addressed the issue of this childcare tax credit incentive. Among its most noteworthy provisions is the enhancement of the employer‑provided childcare tax credit, formally codified under I.R.C. § 45F. This reform transforms what had been a relatively under‑utilized incentive into a potentially significant Manufacturer tool both for supporting employees and improving employer recruitment and retention strategies. As stated by the United States Government Accountability office in a 2022 report to congress regarding the Employer-Provided Childcare Credit “In 2013, the last year available, manufacturing, finance and insurance, and information industries accounted for about half of the aggregate amounts of the credit claimed.” We shouldn’t be surprised that, according to the report, manufacturers were the biggest industry claiming the credit.

Previously, the credit allowed an employer to claim 25% of qualified childcare expenditures—plus an additional 10% for resource and referral services—up to a maximum of $150,000 per year. Those limits constrained broad adoption, particularly among smaller Manufacturers without the capacity to operate on‑site childcare facilities. Under H.R. 1, however, the credit percentage increases substantially—to up to 50% for eligible “small businesses” (and around 40% for larger employers), with the annual cap rising to $500,000 (and $600,000 for certain small businesses). This dramatic escalation in benefit levels signals Congress’s intent to elevate employer‑provided childcare from a niche benefit into a mainstream component of workplace strategy.

One of the biggest changes introduced by H.R. 1 is the explicit expansion of eligible expenses to include payments made to third‑party intermediaries or contractors that arrange licensed childcare services for employees. Under the updated law, an employer no longer must operate or own an on‑site childcare facility to claim the credit. Instead, the employer may contract with a childcare provider or a qualified intermediary that in turn contracts with one or more licensed childcare facilities to deliver services to employees, and those contract payments may now qualify. This shift lowers the barrier for many Manufacturers, especially those without real estate or operations infrastructure, to provide meaningful childcare benefits via partnerships with external providers. It effectively reduces liability and operational complexity for the employer while expanding childcare access for employees.

The policy implications are substantial. Employers now have an incentive to integrate childcare support into their talent and operational strategies. Large manufacturing firms, service Manufacturers, hospitality providers, and even small‑to‑mid sized companies can now factor the childcare credit into decisions about where to locate, how to schedule shifts, and how to retain key staff. Since half (or a meaningful portion) of these childcare expenditures can be offset by the tax credit, the net cost to the employer declines substantially, making investment in childcare more financially viable.

For employees, the expanded credit means better access to subsidized childcare through their employer, improved work‑life stability—and for employers, lower turnover, improved productivity, and enhanced employer brand. The inclusion of third‑party contract options also means employees might benefit from services closer to home or more flexibly structured, rather than being limited to employer‑on‑site centers. Practically speaking, employers must still meet certain compliance requirements. Qualified expenses must be paid to licensed childcare providers or intermediaries contracting with such providers, the services must be offered broadly to employees, and records must demonstrate eligibility. Also, making sure that the contract is structured correctly, and that the services meet federal and state licensing standards, is key to safely claiming the credit. Given the expanded size of the benefit, employers should proactively review documentation, contracts, and employee eligibility to ensure the credit is fully supported.

H.R. 1’s expansion of the employer‑provided childcare credit marks a decisive shift in how the tax code treats childcare benefits. By increasing credit rates, raising caps, and—most importantly—allowing third‑party contracted childcare services to qualify, the law widens both employer and employee access. For companies willing to act, this isn’t merely a tax credit, it’s a strategic investment in workforce stability and operational efficiency.

The tax treatment of employee compensation has long been a strategic consideration for Manufacturers, especially those in labor-intensive industries. Another benefit of H.R. 1, the introduction of an above-the-line deduction for “qualified overtime compensation” adds a new and compelling layer to the equation. Under I.R.C. § 225, this new framework, it may be reasonable and advantageous for employers to consider converting some salaried employees into hourly wage structures as a method of delivering greater after-tax benefits to workers and improving retention in competitive labor markets.

Before H.R. 1, all wages including overtime were taxed as ordinary income, and salaried and hourly employees were essentially on equal footing regarding federal taxation. With H.R. 1’s “no tax on overtime” provision, however, hourly workers earning overtime now have access to a tax deduction of up to $12,500 (or $25,000 for joint filers) for qualifying overtime compensation. The deduction is targeted: it only applies to the “premium” portion of pay (typically the 0.5x portion of time-and-a-half), but the tax savings can be substantial, especially for middle-income workers and industries that rely on frequent overtime shifts.

Traditionally, Manufacturers use salaried pay structures for predictability, compliance simplicity, and cultural perceptions of professionalism. However, many salaried employees, particularly in fields like logistics, operations, and even tech, routinely work beyond 40 hours a week without additional pay or tax benefits. In this new tax environment, that approach may warrant reconsideration. By switching certain roles from exempt salaried to non-exempt hourly, employers can allow these workers to qualify for overtime—and therefore the new tax deduction. If structured correctly, the change would not necessarily increase employer payroll costs, since base pay levels can be adjusted to keep total compensation similar. However, it delivers additional tax-free income to employees in the form of deductible overtime premiums.

For instance, an hourly employee earning $80,000 annually who works regular overtime could deduct up to $12,500 of that overtime pay, significantly reducing their taxable income. That reduction could lead to thousands in tax savings creating a new tool for increasing net compensation without directly raising base wages. Labor markets across industries are experiencing high turnover and rising wage pressures. One of the most effective ways to retain skilled workers is to offer a total compensation package that maximizes take-home pay and work-life balance. By offering hourly roles with predictable overtime and a tax incentive attached, Manufacturers can:

• Differentiate themselves in competitive job markets.

• Offer employees meaningful tax savings without additional cash outlays.

• Encourage a performance-based compensation model tied to productivity.

This could be particularly effective in industries such as manufacturing, logistics, health care, and emergency services—where overtime is standard and employees are seeking both financial stability and flexibility.

Of course, such a shift requires careful attention to labor classification laws. Not all salaried employees can legally be reclassified as hourly; FLSA rules require non-exempt status for eligibility for overtime. Employers must ensure that job duties, wage levels, and working conditions meet these standards before making changes. Additionally, payroll systems would need to track the “premium” portion of overtime for tax reporting, and communication with employees would be key to ensuring understanding of how the change benefits them.

The H.R. 1 provision allowing a deduction for overtime compensation introduces not just a tax benefit, but a potential paradigm shift in workforce compensation strategy. By reclassifying select salaried roles to hourly, employers can make overtime more financially attractive to workers—without materially increasing costs. The result is a win-win: stronger employee retention, greater employee satisfaction, and a compensation model that aligns with federal tax incentives. As tax professionals and Manufacturer leaders evaluate the impact of H.R. 1, this strategy deserves serious consideration.

Manufacturers were once a cornerstone in the U.S. industry, and it can be once again a pillar of the U.S. Economy with the changes H.R. 1 implemented through tax policy. Bonus Depreciation, I.R.C. § 179 Deduction, Election for R&E Amortization, Advanced Manufacturing Investment Credit, Advance Manufacturing Production Credit, Employer Provided Childcare Credit and Overtime Tax Deduction gives power back to US Manufacturers to increase the gap between the decades of China’s GDP gains and Manufacturing incentives while leading the way to greater investments into the U.S. economy.

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McDermott, B. (2025, September 4). The 45F tax credit for employer-provided child care | congress.gov | library of Congress. Congress.gov. https://www.congress.gov/crs-product/IF12379

I.R.C. § 45F

Chemtob, D. (2025, July 9). This barely used child care tax break for employers just got an overhaul. Forbes. https://www.forbes.com/sites/daniellechemtob/2025/07/09/this-barely-used-child-care-tax-break-for-employers-just-got-an-overhaul/

United States Government Accountability Office. (2022, February). Employer-Provided Child Care Credit, Estimated Claims and Factors Limiting Wider Use. https://www.gao.gov/assets/gao-22-105264.pdf

I.R.C. § 225