April 13, 2026 Research Credit Reform for Manufacturers Needed Now

Outdated interpretations to tax law are stifling innovation.

By Gary Wallace

The National Association of Manufacturers (NAM) sent a letter to the U.S. Department of the Treasury on March 30, 2026, urging a list of reforms to how research and development credits are processed by the Internal Revenue Service. The requests come at a pivotal point for the manufacturing industry. While the One Big Beautiful Bill Act (OBBBA) did support domestic manufacturing through bonus depreciation, relaxing interest deduction limitation provisions, and eliminating capitalization of US research expenditures, foreign manufacturers in China, Germany, Japan, and India have been investing heavily in vital research focused on factory-based innovations and the integration of artificial intelligence.

The costs associated with these investments are significant. U.S. manufacturing research and development expenditures reached $326 billion in 2020, with labor comprising nearly 70% of costs. This is a significant percentage of the overall U.S. economy. However, according to NAM, the total cost of federal regulations on the manufacturing industry in 2022 was an estimated $3.079 trillion (in 2023 dollars), an amount equal to 12% of U.S. GDP. The total annual cost of complying with federal regulations has risen by $465 billion since 2012. For U.S. manufacturers to remain competitive, the Administration needs to reduce the compliance requirements which are stifling innovation.    

Union Carbide Corp. v. Commissioner of Internal Revenue

By way of background, the IRS’ decision to deny a significant amount of research credits to manufacturers stems from a case decided in 2012. In Union Carbide Corp. v. Commissioner of Internal Revenue, the Tax Court found that research conducted in a manufacturing setting was a production activity and not a qualifying research activity. Since that time, the IRS has increasingly scrutinized expenses that manufacturers claimed as research.

The manufacturing industry has argued that Union Carbide is outdated because the case was, in part, decided based on the Chevron doctrine which allowed federal agencies to interpret vague or ambiguous laws. The Chevron doctrine was overturned by the U.S. Supreme Court in 2024. However, given that there have not been any new cases tied to this specific question around research and development credits, the IRS is continuing to use Union Carbide as a foundation for its decisions.

Regulatory Hurdles

In 2021, the IRS signaled that it would be making significant changes to Form 6765, “Credit for Increasing Research Activities.”  In 2024, the updated Form was released with a burdensome requirement for the manufacturing industry which demands 658 new pieces of information to claim a research credit. As justification for the change, the IRS has stated publicly that this information is needed because the manufacturing industry has taken advantage of these credits and that substantiation have been of poor quality.

Additionally, IRS exam teams have offered conflicting opinions to the industry over statutory and regulatory requirements. While some manufacturers have had success with navigating the new documentation requirements, others are faced with vague or unanswerable questions leaving them in taxation purgatory.

The fact is that the changes made to Form 6765 are beyond burdensome. Many manufacturers have had to build entirely new documentation programs and procedures at a tremendous cost. The weight of having to devote so many manhours and increased investments to reporting is not a good use of time or money for the manufacturing industry. At a time when the American manufacturing industry is facing increased global pressure, they need to be able to devote more resources to their core business.

Solutions Needed Now

For these burdensome regulations to end, it is crucial that the U.S. Department of the Treasury and the IRS meet with the manufacturing industry to map out specific reforms.

Among those reforms should include:

This last point is particularly important because  artificial intelligence is having a tremendous impact on manufacturing. From research to implementation, AI is helping the industry innovate for the future. As AI evolves, so will the needs of manufacturers. Creating a forum in which constant communication can occur is incredibly important so that the industry and tax officials can build a more sustainable reporting process for the future.

The time for reform is now. U.S. manufacturing is an important part of the U.S. economy which helps fuel growth and employment. It is up to the Administration to immediately act so that America can continue to lead the way in innovation.

About the Author:
Gary Wallace, Keiter CPA’s Managing Partner, works with manufacturing leaders to align tax planning with strategic goals, so they’re not only compliant but positioning themselves optimally for the future.

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