All In: The CHIPS Act provides incentives for semiconductor investment

In a show of bipartisanship, Congress passed the Creating Beneficial Incentives for Semiconductor Manufacturing Act (CHIPS Act) on July 27, 2022, which was signed into law by President Biden on August 9, 2022. The CHIPS Act provides substantial funding for five years for loans and loan guarantees to support investments in semiconductor manufacturing and a new investment tax credit equal to 25% of the qualifying investment in the tax year with respect to certain advanced manufacturing facilities.

For a breakdown of the highlights of the CHIPS Act, read more below.

CHIPS fund

The CHIPS Act provides funding over a 5-year period to the Secretary of Commerce to construct, expand, or modernize domestic facilities and equipment for manufacturing, assembly, testing, advanced packaging, or research and development. To that end, the CHIPS Act allocates $24 billion in 2022, $7 billion in 2023, $6.3 billion in 2024, $6.1 billion in 2025, and $6.6 billion in 2026 d. The funds are to carry out the programs authorized by the National Defense Authorization Act of 2021, of which $2 billion is specifically provided to focus solely on the production of legacy chips to advance the interests of the economy and national security, as legislation recognizes legacy chips as essential for automakers, the military and other critical industries.

Of the funding provided from 2022 to 2026, up to $6 billion can be used to provide direct loans and loan guarantees to support investments in semiconductor manufacturing. Loans and loan guarantees are available to entities that have a “reasonable prospect of repaying the principal and interest on the loan.” The loan, when combined with other amounts available to the borrower, must be sufficient to cover project costs. The Secretary of Commerce may also impose additional requirements on recipients of a loan or loan guarantee.

Investment credit for expanded production

The CHIPS Act adds a new section 48D which provides a tax credit equal to 25% of the tax base of qualifying property placed in service by a taxpayer during the tax year that is part of an advanced manufacturing facility.

A qualified property is:

(1) any tangible, depreciable property,

(2) which is constructed, reconstructed, or erected by the taxpayer or acquired by the taxpayer if the original use of such property is commenced by the taxpayer, and

(3) which is an integral part of the operation of the advanced manufacturing facility.

Buildings and structural components are also considered qualified property, except for any building used for offices, administrative services, or other non-manufacturing functions.

The advanced manufacturing facility must have the primary purpose of manufacturing semiconductors or semiconductor manufacturing equipment. Like other investment tax credits, the section 48D credit is subject to the rules of section 50, which require the taxpayer to repay all or part of the credit if the investment credit property is sold or ceases to qualify for investment credit and requires reducing the depreciable basis for the tax credit.

Section 48D credit qualifies for direct payment instead of tax credit. In a direct payment, the taxpayer is treated as making a payment against the tax imposed by subtitle A (for the taxable year with respect to which such credit is determined) equal to the amount of such credit.

The credit is granted for properties that are put into operation after December 31, 2022 and whose construction begins before January 1, 2027.

Eversheds Sutherland Observation: Section 48D tax credit is structured similarly to Section 48 Investment Tax Credit (ITC), which provides an incentive for investment in renewable energy projects. Although the bill does not provide rules for satisfying the commencement of construction requirement, IRS guidance may be modeled on the commencement of construction rules for section 48 ITC that are provided in IRS Revenue Procedure 2018-59, as amended.

Eversheds Sutherland Observation: Direct payment allows taxpayers who may not have sufficient tax liability to take advantage of the tax credit without using a tax equity structure. However, any cash payment may be subject to pre-payment review, which may delay receipt of the cash payment and potentially increase disputes between taxpayers and the IRS.

Eversheds Sutherland Observation: It should be noted that the watered-down version of the CHIPS Act does not include a provision reviving research and development (R&D) spending. Although this provision was included in a previous version of the CHIPS Act, the final version of the Act does not change section 174 to allow ongoing expenses for R&D deductions. Beginning this year, taxpayers are required to depreciate qualified research and development expenses under Section 174 over a 5-year period. Previously, qualified research and development expenses could be deducted currently. Efforts to expand current R&D spending have so far been unsuccessful, although it may be included in a separate “extender” bill later this year.