For manufacturers looking to maximize their tax savings, tax advisers say there is opportunity to reinvest in areas such as equipment purchases—and there are other potential savings to be had in R&D projects and used equipment purchases.

Call MSC’s Machinery Team for questions or help planning your upcoming equipment purchases at 800-331-1110.

Is Now the Right Time to Buy Capital Equipment?

Is now a good time to buy that new 5-axis CNC machine or other major manufacturing equipment you’ve been eager to get into production?

“The answer to that question is always: Don’t let the tax answer sway you one way or the other,” says CPA Brian Kitchen, a director of tax strategies who specializes in the manufacturing industry for Kreischer Miller. “It should always be a business decision first. But if there is an opportunity to reinvest in the company with a new piece of equipment that may be faltering or may need to be repaired—or maybe it’s been repaired dozens of times already—the thought of acquiring a new piece of equipment by cash or financing qualifies for a tax incentive.”

Tax Incentives for Capital Equipment Purchases in 2026

The good news for manufacturers considering an investment is that the federal tax environment is currently favorable.

Beginning with the 2017 U.S. Tax Cuts and Jobs Act, or TCJA, companies could expense the full cost of equipment at 100 percent for federal taxable income, but that benefit was scheduled to phase down beginning in 2023.

The One Big Beautiful Bill Act (OBBBA), enacted in 2025, restored 100 percent bonus depreciation for qualifying property acquired and placed in service after Jan. 19, 2025, and made that treatment permanent.

For example, if a manufacturer spends $500,000 on new machines and software and simulation technology, that manufacturer can deduct that total amount in the year it is acquired.

“That could be significant tax savings, as indirectly, the government is effectively subsidizing that asset acquisition via not having to pay taxes on those dollars,” Kitchen says. It means more money in the hands of manufacturers to invest for growth—rather than cost.

Manufacturers have several ways to accelerate the tax benefits associated with qualifying equipment purchases.

Section 179 Expensing

Section 179 of the tax code allows a business to elect to deduct the cost of qualifying property in the year it is placed in service rather than recovering the cost through depreciation over time.

The provision can be particularly useful for smaller businesses. Qualifying property can include machinery, equipment and certain software.

For tax years beginning in 2026, the maximum deduction is $2.56 million. The deduction begins to phase out when the total cost of qualifying property placed in service exceeds $4.09 million.

Bonus Depreciation: Current Rates and Phaseout

Under the TCJA, the 100 percent bonus depreciation rate was scheduled to fall each year, from 80 percent in 2023 down to zero in 2027. OBBBA reversed that phaseout for qualifying property. There is no scheduled phaseout for 2026 or subsequent years.

Cash vs. Finance vs. Lease

The best way to pay for equipment isn’t necessarily the one that produces the largest tax deduction. Manufacturers should balance after-tax cost, cash flow, financing costs and the equipment’s expected useful life.

• Paying cash avoids financing costs but ties up capital that could be used elsewhere.

• Financing can preserve cash while allowing a business to acquire and depreciate qualifying equipment. Interest costs and loan terms would become part of the overall investment calculation.

• Leasing can offer lower upfront costs and predictable payments, but its tax treatment depends on the structure of the agreement.

Tax Benefits for Used Manufacturing Equipment

Historically, the bonus depreciation tax benefit rewarded only those companies that bought new equipment—but many manufacturers also buy or lease used manufacturing equipment. Buyers of used machining gear also have something to celebrate.

“New tax laws allow bonus depreciation on used property, removing the restriction that required you to be the original purchaser,” writes Kerry Defler, a lead tax partner in manufacturing and distribution for Aprio. The used equipment must be new to the manufacturer claiming the deduction.

For used equipment, as for new equipment, there is no scheduled phaseout under OBBBA tax law.

R&D Tax Credits for Manufacturers

Another under-the-radar area for a bit of potential tax relief comes in the form of research and development credits, Kitchen explains. Tax credit for R&D, as it’s commonly referred to, has not diminished for manufacturers.

“If a company is buying equipment but that equipment is being used for a new focus area—such as new product development—they are likely using research and development efforts to make that happen,” Kitchen says. “That new piece of equipment could be vital to that process. And so a good amount of the costs associated with product development could be eligible for that research and development tax credit.”

Read more: How Smarter Tooling Decisions Can Drive Higher Productivity and Lower Cost Per Part

What Qualifies as R&D in a Machine Shop

In a machining context, perhaps a machine shop decides to prove its ability to manufacture aerospace or medical parts—and invests in new equipment. There is a fair amount of trial and error and quality testing to bring parts to specification—and also to an output level that proves profitable.

“It isn’t only a deduction for the equipment, but it’s also a credit on top of the deduction,” Kitchen says. “The credit lowers your tax liability.”

As an example, Kitchen says that he has seen companies that spend around $100,000 in R&D typically yield a 5 percent to 10 percent tax credit—with 10 percent being the highest end. And it’s not just equipment that is potentially eligible: It’s also the labor involved in the R&D project that can be part of the qualifying expenses, according to Kitchen.

“If it’s a machine shop, they’re likely going to have a fair amount of scrap in the R&D process,” Kitchen says. “Typically, companies are not getting their new products or parts right the first time. Maybe the fifth time. There is a lot of trial and error, and so this R&D credit in manufacturing can be profound.”

How to Calculate Your Credit

The federal research credit is based on a company’s qualified research expenses, or QREs, such as wages, supplies and contract research expenses. Companies can calculate the credit using either the regular credit method or the alternative simplified credit method—generally, whichever method yields the larger credit. The calculation is more complicated than applying a percentage to R&D expenses; for example, the regular method involves comparing current QREs with a calculated base amount.

Manufacturers considering the credit should document qualifying projects and expenses and work with a tax professional familiar with the research credit.

The Time Value of Money

Do these immediate “accelerated” tax savings benefit manufacturers, or does the former way of depreciating costs over time have its own set of benefits that companies can continue to use?

To help determine the best financial equipment investment strategy that is aligned with your company’s goals, Kitchen recommends that your tax adviser run time value of money calculations with you to find out what makes the most sense for your business in the timing you need. It really will depend on your situation.

Accelerated Depreciation vs. Long-Term Depreciation

Being able to deduct qualifying costs sooner can reduce taxable income earlier than spreading depreciation over the machine’s recovery period, which is a more long-term approach. Accelerated depreciation changes the timing of the tax benefit, potentially improving cash flow and the investment’s overall economics.

This is where the time value of money becomes important. A dollar saved on taxes today can be more valuable than a dollar of tax savings received several years from now because today’s cash can be retained, invested or used elsewhere in the business.

“I always look at it and ask this: If you can save a tax dollar today and perhaps reinvest in the company and generate more revenue, that’s usually a win,” Kitchen says. “But it varies from taxpayer to taxpayer.”

Working with a Tax Adviser on Equipment Decisions

A lot goes into equipment decisions, including purchase price, expected productivity gains, maintenance savings, financing costs, tax effects and expected useful life. It’s a good idea, then, to model equipment purchases before committing to them.

A tax adviser can help determine which deductions or credits apply and how the timing and structure of a purchase affect the company’s tax position. The goal is to understand the after-tax economics of the investment and choose an approach that supports the company’s broader financial goals.