How Manufacturers Can Reduce Costs Without Compromising Growth in 2025

Rising input prices. Labor shortages. Increased compliance obligations. If you’re a manufacturer, odds are you’ve felt the squeeze from more than one direction. Even when sales are strong, profitability can feel elusive. The big question many of us are asking right now isn’t “how do we grow?” It’s “how do we keep our margins intact while we do it?”

The good news? There are practical ways to reduce costs without gutting the core of your operation, and they don’t have to involve freezing raises or cutting shifts. It involves being smarter with how you plan, spend and structure your operations, so you can protect what you’ve built and grow with confidence.

Let’s walk through proven, IRS-compliant cost-saving strategies designed specifically for midsized manufacturing firms. From tax credits to operational fine-tuning, these steps can free up capital and help you reinvest in what matters most.

Labor Efficiency: Reducing Cost Per Output Without Cutting Heads

Labor is one of the largest (and most variable) costs in manufacturing. In 2025, average wages for production workers continue to trend upward, with the U.S. Bureau of Labor Statistics reporting a year-over-year increase of nearly 4% in base pay and even steeper gains in skilled roles. Add in the rising cost of health benefits and turnover, and labor costs can quickly outpace productivity if left unchecked.

But cutting headcount isn’t how you build long-term efficiency or morale. Instead, manufacturers are getting sharper about how they use the workforce they already have. In addition to measuring employee productivity KPIs, here are a few moves we’re seeing gain traction:

• Cross-training production staff. When employees can step into multiple roles, you reduce downtime and create flexibility across shifts.
• Shift optimization. Rather than hiring to meet short-term demand spikes, many manufacturers are reconfiguring shifts, using data from their ERP systems to align labor with production cycles more accurately.
• Revisiting overtime policies. Overtime is sometimes unavoidable. But too much reliance on it could mean your base scheduling model needs adjustment.
• Targeted automation. We’re not talking about replacing workers with robots. We’re talking about supplementing human labor with smart systems, automated packaging, inspection systems or even maintenance alerts that reduce downtime. These targeted upgrades often pay for themselves in under a year.

Keep in mind that many of these efforts also support employee retention. When workers feel their time and skills are used wisely, morale improves and so does productivity. And labor efficiency impacts everything from delivery schedules to scrap rates.

R&D Tax Credit Utilization: Unlocking Hidden Savings in Your Innovation

If you’re in manufacturing, there’s a strong chance your business qualifies for the federal Research and Development (R&D) tax credit, even if you don’t have a formal R&D department. Unfortunately, too many midsized manufacturers leave this money on the table simply because they don’t realize their activities meet the criteria.

Let’s clear that up. The R&D tax credit isn’t limited to labs and white coats. It applies to process improvements, testing prototypes, developing new equipment, refining software used in production or even modifying packaging systems for efficiency. In other words, the type of improvements your team works on every day.

And the potential savings are significant. Under the current IRS rules, qualified expenses like wages, supply costs and contractor fees can be used to calculate the credit. The dollar-for-dollar reduction in tax liability can range from thousands to hundreds of thousands, depending on the scale of your activities.

To make this credit work for you, documentation is key. That includes tracking employee hours tied to qualifying activities, maintaining records of tests or design changes and keeping notes about technical uncertainties your team encountered. It’s not complicated, but it does require planning.

Our R&D Tax Credit Services team helps manufacturers identify and validate eligible activities and compile the necessary documentation to satisfy IRS standards. We’ve worked with companies developing new molding methods, testing materials for product durability and reconfiguring floor plans to improve workflow, all examples that led to sizable tax savings.

If your business is improving its processes to stay competitive, you should be exploring the R&D credit. It’s one of the most underutilized tools in a manufacturer’s tax toolkit.

SALT Strategy: Multi-State Operations and Hidden Tax Drain

It’s common for growing manufacturers to expand across state lines, whether through sales reps, warehouses, delivery routes or vendor relationships. What’s less common is full visibility into the tax implications that come with those moves. That’s where state and local tax (SALT) planning becomes essential.

Nexus rules can trigger tax obligations in a state even without a physical office. Something as simple as a traveling technician, attending trade shows or fulfilling remote orders can create a filing requirement. And every state has its own rules. If you’re not actively tracking your business presence, you could be missing tax obligations or overpaying in states where your exposure is limited.

Another common SALT blind spot is apportionment. Many states use a three-factor formula that considers property, payroll and sales. Others lean more heavily on sales alone. The way you report your income across those jurisdictions can make a major difference in your total tax bill.

We’ve seen manufacturers save tens of thousands by restructuring how they allocate expenses and revenue between states. For example, shifting drop shipment strategies or rethinking where your contracts are executed can materially reduce liability.

James Moore’s State and Local Tax Services team has worked with manufacturers that operate across the Southeast and beyond. We help clients stay compliant, avoid costly penalties and structure operations to reduce exposure.

These state-level issues don’t just affect tax returns. They influence decisions around hiring, warehousing and customer service. When handled correctly, SALT planning helps you grow confidently without stepping into regulatory pitfalls.

Operational Cost Reviews: Revisiting Overlooked Expense Buckets

When was the last time you did a line-by-line review of your operating costs? For many manufacturers, recurring expenses build up quietly over time and gradually eat away at profit margins. These aren’t the headline-grabbing costs like materials or payroll. They’re the everyday functions that don’t always get the same scrutiny, but they should.

Take utilities. According to the U.S. Energy Information Administration, commercial electricity rates in the United States have increased steadily, with the national average reaching 13.42 cents per kilowatt-hour as of early 2025. That number is even higher in manufacturing-intensive states like Florida and California. Reviewing your energy usage and supplier contracts can lead to significant savings, especially if you’re eligible for alternative rate plans or local energy efficiency incentives.

Freight and logistics are another category with hidden cost traps. With fuel prices fluctuating and demand across the supply chain still recovering from pandemic-era volatility, it’s critical to review your shipping contracts. Some manufacturers have responded by renegotiating terms with third-party logistics providers, switching to regional carriers for last-mile delivery or consolidating orders to reduce the number of shipments.

Software subscriptions also deserve attention. In the race to digitize, many manufacturers adopted platforms for scheduling, reporting, compliance and communication. Over time, that tech stack grows. You might be paying for multiple tools that perform the same function or licenses that are no longer in use. Conducting a quarterly audit of your SaaS platforms and renegotiating vendor contracts can free up thousands annually.

None of these steps require deep restructuring. They just require you to stop and inspect areas that often run on autopilot. Done well, cost reviews like these can return meaningful savings that you can reinvest in your people, equipment or growth initiatives.

Equipment and Depreciation: Making Smart Capital Moves in 2025

If you are planning capital expenditures in 2025, the One Big Beautiful Bill Act has changed the depreciation landscape in significant ways. Under the new law, bonus depreciation is now permanently set at 100% for qualified property that is both acquired and placed in service after Jan. 19, 2025. That means manufacturers investing in new machinery or production assets after that date can deduct the full cost immediately, a substantial shift from the phasedown under prior law.

For property acquired before Jan. 20, 2025, and placed in service later that year, the prior phase‑down rates still apply unless a taxpayer elects the transitional rates—40% for 2025 and 60% for 2024.

The Section 179 deduction has also been enhanced under the OBBBA. For 2025, the deduction limit has increased to $2.5 million, with a phase‑out threshold raised to $4 million of total equipment purchases in a year. That gives manufacturers more room to expense qualified equipment outright without relying entirely on bonus depreciation.

In practical terms, if your business buys $500,000 in eligible machinery, you can either take:

• 100% bonus depreciation (if both acquisition and service dates fall after Jan. 19, 2025), or
• Section 179 expensing, up to the $2.5 million limit, regardless of acquisition or placed‑in‑service date, as long as income supports it.

Keep in mind that state tax rules may differ; some states do not conform to federal bonus depreciation, while others allow Section 179 expensing. It’s critical to align federal strategies with your state position.

Whether you choose bonus depreciation or Section 179 (or a combination thereof), your decisions should be informed by both timing of purchases and your broader tax and cash flow goals. With careful planning, you can take full advantage of the enhanced expensing rules created by the OBBBA to reduce taxable income this year and invest confidently in your operation.

Plan Now, Save More: Smart Cost Strategy for Smarter Manufacturing

Cost pressure in manufacturing isn’t going anywhere. But neither is opportunity. From rethinking how you staff your floor to capturing every available tax credit, 2025 offers a real chance to protect your margins without sacrificing growth.

Labor efficiency, R&D tax credits, SALT planning, operational expense audits and capital equipment deductions aren’t one-time fixes. They’re part of a broader mindset shift toward intentional financial leadership.

Now is the time to act. With new tax rules phasing in and deadlines approaching, a conversation today could mean measurable savings by year-end.

Let’s make 2025 your most efficient year yet. Contact a James Moore professional to find out how we can help your manufacturing business build a cost strategy that works for the long haul.

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