PMMI and fellow industry groups are urging the U.S. Treasury to reform how R&D tax credits are applied, arguing that current rules are making it harder and more expensive for companies to invest in innovation.
At the center of the issue is a change that requires companies to amortize R&D expenses over multiple years instead of deducting them immediately. Industry leaders say this shift is increasing tax burdens, reducing cash flow, and discouraging investment in new product development, engineering, and process improvements.
In a formal letter to the Treasury Secretary, stakeholders are calling for regulatory relief or legislative fixes that would restore immediate expensing or otherwise ease the financial impact.
The Honorable Scott Bessent
Secretary U.S. Department of the Treasury
1500 Pennsylvania Avenue NW
Washington, DC 20220
Dear Secretary Bessent:
On behalf of the nation’s manufacturing industry and the 13 million people who make things in America, the undersigned manufacturing associations urge the Department of the Treasury to reform the compliance processes, audit procedures, and regulations that undermine the value and impact of the Sec. 41 Research Tax Credit.
The Trump Administration and Congress have already taken a series of critical steps to support research investment in the tax code by restoring immediate research expensing in H.R. 1, modifying CAMT guidance to maximize the impact of immediate research expensing, and delivering a Side-bySide agreement on Pillar Two that protects the U.S. R&D tax credit from extraterritorial taxes. The Administration now has a significant opportunity to continue its momentum in implementing proinnovation policy by reassessing research credit compliance processes and regulations.
Manufacturers conduct 52% of all private sector research in the U.S., and the R&D credit is a vital tool for encouraging additional research investment and driving innovation. However, various aspects of the credit, including compliance burdens and the disqualification of certain research expenditures that are vital for manufacturing, undermine its value as a research incentive.
- Compliance and Audit Burdens: The information reporting required for taxpayers to claim the R&D credit has expanded far beyond the documentation that is produced in the ordinary course of business. This increased burden has necessitated a variety of new systems solely to meet reporting obligations. As such, manufacturers have been forced to structure their research enterprises according to the needs of the IRS rather than those which best support their research efforts. Manufacturing engineers and innovators are increasingly spending time explaining their work to their tax departments and the IRS, rather than focusing on driving innovation. Furthermore, when under audit, manufacturers face varying interpretations by different exam teams and confusion over what concerns the IRS has and how to address them; in many cases, exam teams take an adversarial approach to manufacturing employees, assuming wrongdoing rather than a good-faith attempt to comply with a complicated tax credit.
- Disqualification of Factory-Based Research: Research expenses that occur in a manufacturing setting, such as on a manufacturing shop floor, are increasingly classified by the IRS as manufacturing expenses, rather than research expenses—denying manufacturers the benefits of the R&D credit for these vital research costs. This misinterpretation stems not from statute, but from case law, Union Carbide v. Commissioner,1— under which the IRS was afforded deference under a standard that has since been overturned by the Supreme Court in Loper Bright Enterprises v. Raimondo.2 The policy choices set in motion by Union Carbide have resulted in the IRS denying a significant portion of both product and process research that is vital for manufacturing competitiveness. As China continues to hone its specialization in factory-based innovations and as AI continues to be adapted into manufacturing processes, the denial of these research expenses harms the competitiveness of manufacturers in America at a time of critical technological change and geopolitical challenge.
Manufacturers across the United States are leading the future of manufacturing, driving innovation to compete globally and ensure that America is the best place in the world to make things. Increasingly, tax policy is aligning with this effort to lead through innovation. However, these major weaknesses of the R&D tax credit are imposing unnecessary barriers to innovation on our nation’s manufacturers, while excluding much of the research that is vital to manufacturing competitiveness.
To improve these processes, manufacturers recommend:
- Reassessing compliance and audit procedures to better balance taxpayer compliance burden and IRS risk assessment capabilities, including by working directly with taxpayers to develop a reporting framework that is both administrable and informative. Treasury’s commitment to promulgating a workable Form 6765 is a step in the right direction, and the Department should take this opportunity to further reduce the compliance burdens that have accumulated for the R&D tax credit.
- Evaluating regulations that prevent the qualification of manufacturing shop floor research and innovation. Allowing taxpayers to claim factory-based research expenses for both produce and process research would recognize the importance of manufacturing shop floor R&D for advanced manufacturing and the integrated nature of manufacturing processes and manufactured products.
Manufacturers greatly appreciate the work of Congress and the Trump Administration to pass and implement a pro-growth tax code. Innovation is the foundation of American economic prosperity, and the tax code plays an important role in incentivizing and accelerating the research investment that makes innovation possible. Reforming the processes and regulations that have accumulated around the R&D tax credit would build on the significant tax policy success that Treasury has already achieved. If the R&D credit can be reformed to remove unnecessary roadblocks to innovation, manufacturers will be better equipped to drive technological advancement, compete globally, and capitalize on the economic impacts of artificial intelligence as the United States continues its efforts towards a manufacturing renaissance.
Sincerely,
- National Association of Manufacturers
- AICC, The Independent Packaging Association
- American Bakers Association
- American Boiler Manufacturers Association (ABMA)
- American Chemistry Council
- American Cleaning Institute
- American Composites Manufacturers Association
- American Foundry Society
- American Frozen Food Institute
- American Iron and Steel Institute
- AMT- The Association For Manufacturing Technology
- Asphalt Roofing Manufacturers Association
- Associated Equipment Distributors
- Beer Institute
- Can Manufacturers Institute
- Cellulose Insulation Manufacturers Association
- Composite Panel Association
- ECIA - Electronic Components Industry Association
- Flexible Packaging Association (FPA)
- Household & Commercial Products Association
- INDA, Association of the Nonwoven Fabrics Industry
- Independent Lubricant Manufacturers Association
- Independent Petroleum Association of America
- Industrial Fasteners Institute
- Industrial Truck Association
- Institute of Makers of Explosives
- MEMA. The Vehicle Suppliers Association
- Metal Powder Industries Federation
- Metals Service Center Institute
- Motorcycle Industry Council
- National Council of Textile Organizations
- National Electrical Manufacturers Association
- National Glass Association
- National Marine Manufacturers Association
- National Tooling and Machining Association
- National Waste & Recycling Association
- Non-Ferrous Founders' Society
- North American Association of Food Equipment Manufacturers (NAFEM)
- North American Millers' Association
- Pharmaceutical Research and Manufacturers of America (PhRMA)
- Plastics Industry Association
- Plumbing Manufacturers International
- PMMI - The Association for Packaging and Processing Technologies
- Polyisocyanurate Insulation Manufacturers Association
- Precast/Prestressed Concrete Institute
- Precision Machined Products Association
- Precision Metalforming Association
- PRINTING United Alliance
- Recreational Off-Highway Vehicle Association
- Specialty Vehicle Institute of America
- STI/SPFA
- Textile Care Allied Trades Association
- The Carpet & Rug Institute
- The Hardwood Federation
- The Recycled Materials Association
- The Vision Council
- TRSA, the Association for Linen, Uniform and Facility Services
- U.S. Tire Manufacturers Association
- Valve Manufacturers Association
- Vinyl Institute Window and Door Manufacturers Association
What This Means for OEMs
- Higher R&D costs upfront
Amortization reduces near-term cash flow for innovation. - Slower development cycles
Projects may be delayed or scaled back. - More pressure on smaller OEMs
Limited capital makes the impact harder to absorb. - Shift toward faster ROI projects
Incremental improvements may take priority over long-term innovation. - Potential competitive gap
Global OEMs could gain ground if U.S. investment slows. - Uncertainty in planning
Policy changes make long-term R&D strategy harder to predict.
