New Tax Credit Offers 6.5x Bonus for Using U.S.-Made Cotton Fabric, Mandates Digital Tracing for All Textiles

The “Buying American Cotton Act of 2026” is a major tax play designed to reshape where clothing and textile companies source and process their cotton. This bill creates a new business tax break, the Domestic Cotton Consumption Credit (Section 45BB of the Internal Revenue Code), which gives companies a financial incentive to use U.S.-grown cotton in products sold domestically. The credit is calculated based on the volume of U.S. cotton used, its market price, and a percentage that shifts based on where the processing happens.

The Trade-Off: Processing Location Matters

This credit isn't a flat rate; it’s a tiered incentive that uses the tax code to push companies toward specific trade partners. If a company processes the U.S. cotton only in the United States or in countries that have a free trade agreement (FTA) with the U.S., they get the maximum 24% credit multiplier. However, if the cotton touches any facility in a country without a U.S. FTA, the credit drops to 18%. For the small business owner trying to keep costs down by using established, non-FTA supply chains, this 6% difference in the tax credit could be significant enough to force a tough decision: either restructure their entire supply chain or accept a smaller tax break.

The Massive Multiplier for Domestic Manufacturing

Here’s where the bill really aims to move the needle: it offers huge multipliers if the U.S. cotton is processed into yarn or fabric domestically. If a company uses U.S.-made cotton yarn, the credit amount is multiplied by 1.6. More dramatically, if the company uses U.S.-made cotton fabric (material woven or knitted in the U.S.), the credit is multiplied by a whopping 6.5. This provision is a clear signal: the government is willing to pay a premium via the tax code to incentivize the reshoring of textile manufacturing—the spinning and weaving stages—back to the U.S. For textile mills, this massive multiplier could make domestic production financially competitive against cheaper foreign alternatives, potentially creating jobs in the U.S. textile sector.

The Catch: Digital Tracing and Compliance Costs

To claim any of this credit, the bill introduces a significant layer of administrative complexity. Every piece of “Qualified Cotton” must meet strict “proof-of-origin” requirements. This means the cotton must be digitally traced from the U.S. farm, assigned a permanent bale identification number, and its movement verified through every stage of processing until it becomes a final product. The Treasury Secretary is tasked with issuing regulations to make this digital tracing system work. While this transparency is great for consumers who want verified “Made in USA” products, it creates a substantial new compliance burden, especially for smaller businesses or those with complex international operations. They’ll need to invest in new tracking software and certification processes just to access the credit, which could be a major hurdle.

What This Means on the Ground

For consumers, this bill could eventually mean more clothing and textiles that are genuinely made, start to finish, in the U.S. But, incentivizing domestic production with large tax credits often translates to higher initial production costs, which could be passed on as slightly higher prices at the retail level. For the textile industry, this legislation is a powerful financial incentive to invest heavily in U.S. spinning and weaving facilities. However, if you’re a mid-sized apparel company that currently sources fabric from a non-FTA country, you’ll be facing a double whammy: a lower base credit (18%) and the high cost of implementing the new digital tracing requirements. The bill’s complexity and its reliance on a 3-year average market price for cotton (which could be out of sync with current costs) mean that companies will need sharp accountants to navigate this new system effectively.