The CHIPS and Science Act of 2022, which includes the Creating Helpful Incentives to Produce Semiconductors for America Act, just got approval from Congress. The expectation is that President Biden will soon sign it into law. The $52 billion package offers hefty tax incentives to boost domestic semiconductor production, often known as chip production.

Although the incentives themselves are narrowly focused, the increase in semiconductor production should have positive effects across many different businesses. The numerous products and devices that depend on semiconductor chips could lower the chances of future supply chain concerns. That includes cell phones and autos to children’s toys. The bill also aims to resolve national security issues brought up by the dependence on foreign semiconductor production. 

The momentum for the CHIPS Act

Although the United States invented and advanced chip technology, many lawmakers believe that the nation has become overly dependent on imports. American companies still generate almost half of all semiconductor sector profits. However, according to the government, the U.S. share of worldwide chip production has decreased from 37% in 1990 to only 16%. 75% of semiconductor production comes from East Asia. Congress claims that this situation threatens both national and economic security.

Up to 70% of the cost difference in manufacturing semiconductors abroad is attributable to government subsidies. This gives foreign manufacturers a 25% to 40% cost advantage over American manufacturers. The grants under the CHIPS Act merge with a new tax credit. The aim is to fully offset this cost difference and encourage the “re-shoring” of semiconductor manufacturing.

The new tax credit

The CHIPS Act establishes a temporary “advanced manufacturing investment credit” set out in Section 48D of the Internal Revenue Code for investments in property used to manufacture semiconductors. The Sec. 48D credit equals 25% of the eligible investment made in an advanced manufacturing facility. The primary use is to produce semiconductors or the machinery used in semiconductor manufacture.

A tangible asset that meets the following criteria is considered to be qualified property if it:

• Qualifies for depreciation or amortization
• Was built, rebuilt, or erected by the taxpayer, or acquired by the taxpayer if they used the asset for its initial purpose
• Is essential to the operation of the advanced manufacturing facility

Additionally, it can refer to a building, a building section (apart from an area utilized for purposes unrelated to manufacturing, like administrative services), and some building structural elements.

Eligible taxpayers

The credit is available for qualified property placed into service after December 31, 2022, if construction begins before January 1, 2027. If construction began before the enactment of the CHIPS Act, only the portion of the basis attributable to construction beginning after enactment is eligible.

If a taxpayer isn’t a “foreign entity of concern,” they are typically eligible for the credit. The term refers to foreign security threats under previous defense authorization legislation or those with conduct detrimental to U.S. national security or foreign policy.

The CHIPS Act excludes taxpayers who have made an “applicable transaction.” For example, the early disposition of investment credit property under Sec. 50(a)). Any “substantial expansion” of the taxpayer’s semiconductor manufacturing capability in China or other specified “foreign countries of concern” is also thought to be an applicable transaction. Suppose a taxpayer engages in such a transaction within ten years of claiming the credit. In that case, the law allows for the recapture of the credit.

Eligible taxpayers can use the benefit as a “direct pay” payment against their taxes. In other words, taxpayers can get a tax refund if they don’t owe enough money in taxes to take advantage of the credit. Without this choice, qualified taxpayers might find it difficult to sell their credits.

Additional provisions in the CHIPS Act

The CHIPS Act also allocates

• $200 million for workforce development and training
• $1.5 billion to promote innovation in the wireless supply chain
• $39 billion in subsidies for domestic facilities and equipment used for semiconductor fabrication, assembly, testing, advanced packaging, and research and development

Additionally, it contains nearly $170 billion for federal research and development.

If you think your company might be eligible for the new tax credit, keep an eye out for further IRS instructions. Those instructions should include how it will operate and the direct pay clause. Contact our RRBB accountants and advisors today. We can assist you in maximizing this tax advantage as well as others.

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