Houston’s manufacturing sector is one of the most tax-advantaged industries in the country and one of the most undertaxed in the sense that manufacturers consistently miss deductions, credits, and structural opportunities that could meaningfully reduce what they owe.
Unlike most industries, manufacturers have access to a specific set of tax tools that don’t exist elsewhere: the R&D tax credit, specialized inventory accounting elections, qualified production property depreciation under the OBBBA, and Section 179 deductions on capital-intensive equipment purchases. Most Houston manufacturers are using some of these. Few are using all of them and the gap is significant.
At Riley & Company, we work with manufacturing businesses across Houston, The Woodlands, Northwest Houston, and Cypress. Here are the tax opportunities we see most consistently overlooked and what to do about them.
The Research and Development (R&D) tax credit is one of the most valuable credits available to manufacturers and one of the most commonly dismissed with “that doesn’t apply to us.”
It does. The IRS defines qualifying research activities broadly not just laboratory science, but any activity that involves developing or improving a product, process, formula, or technique through a process of experimentation. For manufacturers, that includes:
The credit equals 20% of qualified research expenditures above a calculated base amount or a simplified 14% credit for businesses using the Alternative Simplified Credit method. For most manufacturers with active engineering, design, or process improvement work, this credit is worth pursuing.
Critically, wages paid to employees involved in qualifying activities count not just materials and contract costs. If your engineers, machinists, or quality control team spends time on qualifying work, their wages may be includable in the credit calculation. Our tax planning services include R&D credit analysis as part of any manufacturing tax engagement.
Manufacturing is capital-intensive by nature machinery, tooling, vehicles, equipment, technology infrastructure. Each purchase is a deduction opportunity, and in 2026, the rules around equipment deductions are the most favorable they’ve been in years.
Under Section 179, businesses can immediately deduct up to $2.56 million in qualifying equipment placed in service during the tax year (2026 limit, with phaseout beginning at $4.09 million). With 100% bonus depreciation permanently restored under the One Big Beautiful Bill Act, qualifying equipment placed in service in 2026 can be fully expensed in the year of purchase no multi-year depreciation schedule required.
For manufacturers making significant capital investments, the combination of Section 179 and bonus depreciation means a $500,000 equipment purchase could generate a full $500,000 deduction in Year 1 directly reducing taxable income by that amount.
The strategic opportunity: equipment purchases should be timed with your income projection in mind. A year-end tax review in October or November before major purchases are finalized allows you to model whether accelerating a purchase into the current year produces more benefit than deferring it to the next.
The One Big Beautiful Bill Act introduced a provision that many manufacturers haven’t yet heard about: 100% first-year depreciation for Qualified Production Property (QPP) nonresidential real property used in manufacturing, placed in service after July 4, 2025, and before January 1, 2031.
This means manufacturing facilities buildings and structural improvements placed in service within this window qualify for immediate full expensing rather than the standard 39-year depreciation schedule. For manufacturers building new facilities or making significant structural improvements, this provision dramatically accelerates the tax benefit of that investment.
The interaction between QPP, Section 179, and standard bonus depreciation requires careful planning but the opportunity for Houston manufacturers expanding capacity or building new facilities is substantial and time-limited to the 2031 window.
Inventory accounting is a source of meaningful tax planning opportunity for manufacturers and the method you use directly affects your taxable income in any given year.
LIFO (Last In, First Out): In periods of rising raw material costs which have characterized much of the Houston manufacturing environment in recent years LIFO allows manufacturers to expense the most recently acquired, higher-cost inventory first. This reduces gross profit and taxable income relative to FIFO in an inflationary environment. The IRS requires a LIFO election and specific conformity requirements, but for manufacturers with significant inventory, the tax deferral can be substantial.
Uniform Capitalization (UNICAP) Rules: Under Section 263A, manufacturers must capitalize certain indirect costs into inventory rather than expensing them currently. Understanding which costs are required to be capitalized and how UNICAP applies to your specific operations affects your cost of goods sold calculation and your taxable income. Getting this wrong is a common audit trigger for manufacturers.
The right inventory method depends on your industry, your raw material cost trajectory, and your financial reporting requirements. This is an area where a CPA with manufacturing experience makes a material difference.
The Section 199 Domestic Production Activities Deduction was repealed by the 2017 Tax Cuts and Jobs Act but its successor provisions still reward domestic manufacturing. The Qualified Business Income (QBI) deduction under Section 199A remains available to pass-through manufacturers, allowing eligible owners to deduct up to 20% of qualified business income from their personal return.
For Houston manufacturers structured as S-Corps, partnerships, or sole proprietors, the QBI deduction is one of the most significant tax benefits available and one that rewards proper planning around owner compensation, W-2 wages paid, and qualified property basis. As your revenue grows, the interaction between these factors becomes increasingly complex and increasingly important to manage correctly.
Texas provides significant sales tax exemptions for manufacturers and many Houston manufacturing businesses aren’t fully capturing them.
Under Texas Tax Code Chapter 151, manufacturing equipment, machinery, and certain materials used directly in the manufacturing process are exempt from Texas sales tax. This includes:
The exemption requires proper documentation and certificate of exemption filings with vendors. Many manufacturers overpay Texas sales tax because they haven’t audited their purchases against the exemption criteria or because their vendors are collecting tax on items that should be exempt.
According to the Texas Comptroller’s manufacturing exemption guidelines, the exemption applies when items are “necessary and essential to and used or consumed in or during the actual manufacturing” process. A sales tax refund claim can recover overpaid taxes going back four years making a historical audit worthwhile for manufacturers who haven’t reviewed their exemption status recently.
Yes, the R&D credit isn’t reserved for large companies or high-tech industries. Any manufacturer performing qualifying research activities, including process improvement work, can potentially claim it. The credit scales with the amount of qualifying expenditures, so smaller operations generate smaller credits — but still meaningful ones relative to their size.
Yes, they can be layered. Section 179 is applied first, then bonus depreciation on any remaining basis. The optimal combination depends on your income level, asset mix, and multi-year tax position. Your CPA should model both scenarios before you finalize the treatment.
Texas allows sales tax refund claims going back four years from the date of overpayment. A manufacturing sales tax audit can identify exempt purchases on which tax was incorrectly paid and recover those amounts through a refund claim filed with the Texas Comptroller.
The manufacturers who consistently pay less in taxes aren’t doing so because they got lucky at filing time. They’re working with CPAs who understand the manufacturing industry who know about the R&D credit, LIFO elections, UNICAP requirements, QPP depreciation, and Texas sales tax exemptions and who engage year-round to make sure every opportunity is captured before the year closes.
At Riley & Company, we bring over 25 years of experience serving Houston manufacturers with the industry-specific tax knowledge their businesses require. From equipment purchase timing to R&D credit documentation to inventory method elections, we work alongside our manufacturing clients throughout the year not just at tax time.
Contact Riley & Company today and let’s find out what your manufacturing business is leaving on the table.
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