The Creating Helpful Incentives to Produce Semiconductors for America (CHIPS) Act was signed into law on August 9, 2022, by President Biden as part of the CHIPS and Science Act of 2022.
The $52 billion package provides generous tax incentives to increase domestic production of semiconductors, also known as chips. While the incentives themselves are narrowly targeted, the expansion of semiconductor production will likely benefit a wide range of industries.
In particular, it may reduce the risks of future supply chain issues for the many goods and devices that rely on semiconductor chips—from cell phones and vehicles to children’s toys. The law also is intended to address national security concerns related to the reliance on foreign production of semiconductors.
Although the US developed and pioneered chip technology, some legislators have determined the country has become too reliant on foreign producers. According to the government, American companies still account for almost half of revenue in the global semiconductor industry, but the US share of global chip production has fallen from 37% in 1990 to 12% today. 75% of semiconductor production now occurs in East Asia, which Congress believes poses a national and economic security threat.
Government subsidies are responsible for up to 70% of the cost difference in producing semiconductors overseas, giving foreign producers a 25%–40% cost advantage over US producers. The combined grants and tax credit included in the CHIPS Act are intended to make up for this cost differential and thereby incentivize domestic semiconductor production.
New Tax Credit
The CHIPS Act enacted Internal Revenue Code (IRC) Section 48D to create a temporary advanced manufacturing investment credit for investments in semiconductor manufacturing property. The credit amounts to 25% of qualified investment related to an advanced manufacturing facility, which is defined as a facility with the primary purpose of manufacturing semiconductors or semiconductor manufacturing equipment.
Qualified property is tangible property that meets the following criteria:
- Qualifies for depreciation or amortization
- Is constructed, reconstructed, or erected by the taxpayer or acquired by the taxpayer if the original use of the property begins with the taxpayer
- Is integral to the operation of the advanced manufacturing facility
It also can include a building, a portion of a building—other than a portion used for functions unrelated to manufacturing, such as administrative services—and certain structural components of a building.
The credit is available for qualified property placed in service after December 31, 2022, if construction begins before January 1, 2027. If construction began before the CHIPS Act was enacted, only the portion of the basis attributable to construction begun after enactment is eligible.
Taxpayers generally are eligible for the credit if they aren’t designated as a foreign entity of concern. The term generally refers to entities that have been deemed foreign security threats under previous defense authorization legislation or those with conduct that has been ruled detrimental to US national security or foreign policy.
The CHIPS Act additionally excludes taxpayers that have made an applicable transaction, which may include the following:
- Early disposition of investment credit property under IRC Section 50(a)
- Any material expansion of a taxpayer’s semiconductor manufacturing capacity in China or other designated foreign countries of concern
The law provides for recapture of the credit if a taxpayer enters such a transaction within 10 years of claiming the credit.
Notably, eligible taxpayers can claim the credit as a payment against tax, which is known as direct pay. In other words, taxpayers can receive a tax refund if they don’t have sufficient tax liability to use the credit. Without this option, eligible taxpayers could struggle to monetize their credits.
The CHIPS Act also provides:
- $39 billion in subsidies to build, expand, or modernize domestic facilities and equipment for semiconductor fabrication, assembly, testing, advanced packaging, or R&D
- $200 million for workforce development and training
- $1.5 billion to spur wireless supply chain innovation
- Almost $170 billion for governmental research and development
If your business might qualify for the new tax credit, reach out to your Moss Adams professional to learn how we can help you make the most of this and other tax credits.