The CHIPS Act (Creating Helpful Incentives to Produce Semiconductors for America Act) is an important part of the CHIPS and Science Act of 2022. It introduces substantial tax incentives designed to encourage and increase the production of semiconductors within the United States.
In this article, we will review how the CHIPS Act impacts taxes through incentives promoting U.S. semiconductors and learn about the tax credit, eligibility criteria, and the potential benefits.
Semiconductors, commonly referred to as chips or microchips, are essential components used in a wide range of products. These products include smartphones, other “Smart” devices, such as televisions), computers, automobiles, medical devices, and even industrial machinery. Semiconductors are also in high demand by the U.S. Department of Defense, the U.S. Military and are vital for other high-tech government agencies, including NASA. The increasing demand for these products, coupled with emerging technologies like artificial intelligence and the Internet of Things (IoT), has challenged the manufacturing industry with significant supply chain disruptions.
The CHIPS Act recognizes the critical role of semiconductors for National Defense and other domestic needs and aims to bolster domestic production to secure the nation’s technological leadership. This article examines the motivation behind the CHIPS Act, the newly established tax credit, and eligibility criteria for businesses looking to take advantage of these incentives.
The CHIPS Act is a necessary step in addressing the considerable disparity in semiconductor production costs between the United States and foreign countries. Foreign producers currently receive large subsidies from foreign governments, which give foreign producers a substantial cost advantage of 25% to 40% over U.S. producers.
Relying heavily on foreign sources for semiconductor manufacturing poses risks in terms of supply chain vulnerabilities. These risks, in turn, create the potential for U.S. security risks if the country’s defense department is unable to have reliable access to the needed quantity of semiconductors. In response to this challenge, the CHIPS Act helps mitigate foreign threats and enhances the nation’s ability to maintain a secure and reliable supply of critical technologies for national defense. It introduces strategic measures such as grants and a new tax credit to incentivize domestic semiconductor production or the “re-shoring” of this vital industry.
Encouraging domestic semiconductor production not only impacts national security, but also has the potential to create thousands of high-skilled jobs in the manufacturing sector. Setting up and operating advanced semiconductor facilities requires a skilled workforce in engineering, research, and development, leading to a positive impact on the overall job market.
Additionally, increased semiconductor production can drive economic growth by fostering innovation, attracting investments, and strengthening related industries such as electronics, telecommunications, and robotics. A robust domestic supply chain enhances the nation’s ability to meet critical technology demands, even during global supply chain disruptions.
The Advanced Manufacturing Investment Credit established under the CHIPS Act introduces a temporary credit for businesses that invest in semiconductor manufacturing property. Section 48D of the Internal Revenue Code codifies this credit, which aims to encourage investments in semiconductor manufacturing property. Eligible businesses can receive a 25% credit for qualified investments in advanced manufacturing facilities and semiconductor equipment.
The credit’s introduction aims to make the United States a more attractive destination for foreign semiconductor companies looking to expand their operations or establish a presence in the country. Increased foreign direct investments can spur collaboration, knowledge exchange, and technology transfer, benefiting the overall semiconductor ecosystem.
With the incentive in place, businesses are more likely to allocate resources towards research and development efforts in semiconductor technology. This, in turn, can lead to breakthroughs in chip design, fabrication processes, and materials, propelling the industry forward and maintaining global leadership.
To take advantage of this tax credit, businesses must fulfill specific criteria and meet certain eligibility requirements. Here are the key points to consider:
It is important for businesses to carefully assess their eligibility and ensure they meet all the criteria before claiming the CHIPS Act Tax Credit. This credit can significantly reduce tax liabilities, enabling businesses to reinvest in research, development, and infrastructure, thus promoting growth and competitiveness within the advanced manufacturing industry.
As with any tax-related matter, businesses should seek professional advice from tax experts or financial advisors to ensure compliance with all relevant regulations and to maximize the benefits of the CHIPS Act Tax Credit.
The CHIPS Act tax credit is applicable to qualified property placed in service after December 31, 2022, with construction commencing before January 1, 2027. For projects that began construction before the enactment of the CHIPS Act, only the portion of the basis attributed to post-enactment construction is eligible.
It must be noted that recapture provisions do exist in the Act to safeguard against certain actions that are not in the spirit of the Act. Businesses engaging in “applicable transactions,” such as early disposition of investment credit property under Sec. 50(a) or undertaking a “material expansion” of semiconductor manufacturing capacity in designated foreign countries of concern, risk credit recapture within 10 years of claiming the credit.
With a focus on creating a level playing field for U.S. producers, the Act’s tax credit provisions encourage businesses to invest in advanced manufacturing facilities for semiconductors. Most taxpayers are eligible for the credit, with exceptions for designated “foreign entities of concern,” which refer to entities deemed foreign security threats or having actions detrimental to U.S. national security or foreign policy under previous defense authorization legislation.
Eligible taxpayers also have the option to claim the credit as a payment against tax, commonly referred to as “direct pay,” enabling them to receive a tax refund if their tax liability is insufficient to utilize the credit fully. By offering a direct pay option, eligible taxpayers can effectively monetize their credits and potentially boost various industries that rely heavily on semiconductors.
The COVID-19 pandemic highlighted the importance of supply chain resilience. Disruptions in the semiconductor supply chain resulted in shortages of essential products, affecting industries worldwide. By bolstering domestic semiconductor production, the CHIPS Act aims to reduce reliance on foreign suppliers and enhance the resilience of the semiconductor supply chain against future disruptions and geopolitical uncertainties.
The CHIPS Act represents a significant effort by the U.S. government to address the challenges faced by the semiconductor industry and promote domestic production. By providing tax incentives, fostering innovation, and encouraging collaboration, the Act aims to secure the nation’s technological leadership, strengthen national security, create jobs, and drive economic growth.
As the semiconductor industry continues to play a pivotal role in shaping the future of technology, the impact of the CHIPS Act on taxes and incentives will be crucial in determining the industry’s trajectory within the United States and its global competitiveness. By leveraging this incentive effectively, businesses can not only drive their own growth but also contribute to the overall advancement of the nation’s manufacturing capabilities and technological prowess.
Content provided by LBMC tax professional Chris Williams. He can be reached at C.Williams@litpliant.net.
LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.
