The CHIPS Act, enacted last August, authorizes the federal government to provide direct funds, make direct loans and loan guarantees to qualifying companies making investments in the domestic semiconductor manufacturing industry. The act created a 25% tax credit, which is projected to provide up to $24 billion to semiconductor manufacturers over the next several years, and does not have any cap on total allocation. The CHIPS Act also created various grants and loan programs through the Department of Commerce targeting domestic semiconductor manufacturing and supply chains.
Companies seeking these incentives should know that the process to obtain these funds is open now and that application procedures are in place.
Two Commerce Department offices are responsible for implementing the law
- The CHIPS Research and Development Office, which is investing $11 billion into developing a robust domestic R&D ecosystem
- The CHIPS Program Office (CPO), which is dedicating $39 billion to provide incentives for investment in facilities and equipment in the U.S.
On Feb. 28, Commerce issued its first Notice of Funding Opportunity (NOFO) under the CHIPS Incentives Program, authorized by Title XCIV, seeking applications for projects for the construction, expansion, or modernization of commercial facilities for front- and back-end fabrication of leading-edge, current-generation and mature-node semiconductors. This includes both front-end wafer fabrication and back-end assembly, testing and packaging.
The CHIPS Incentives Program provides direct funding (via grants, cooperative agreements, or other transactions), loans and loan guarantees for eligible projects. An amended NOFO was issued June 23, which included large semiconductor supply chain projects including materials and manufacturing equipment facility projects with capital investments equal to or exceeding $300 million.
Later in 2023, the CPO will release separate funding opportunities for small semiconductor materials and manufacturing equipment facilities under the $300 million threshold and for R&D facilities.
What qualifies for the tax credit?
The Advanced Manufacturing Investment Credit, under new IRC Section 48D, offers a 25% tax credit for investing in facilities that manufacture semiconductors or manufacture equipment to manufacture semiconductors. The credit is refundable, meaning manufacturers will not need to pay tax to benefit.
The credit is available against an expansive list of costs, including some building costs, but only if construction begins on a facility before 2026. Taxpayers are not eligible for a tax credit if they expand semiconductor manufacturing in China or several other “foreign countries of concern” within 10 years of placing a U.S. facility in service.
A facility will generally qualify for the credit if the primary purpose is semiconductor manufacturing, and the manufacturing of semiconductors is defined to include both fabrication and packaging. The credit will not apply to manufacturing, producing, growing, or extracting materials or chemicals that are supplied to an advanced manufacturing facility. Facilities that grow wafers or produce gases, or manufacture components or parts to supply an advanced manufacturing facility, generally will not qualify. However, the credit is available for equipment used to manufacture other specialized equipment integral to the manufacturing of semiconductors and subsystems that enable or are incorporated into the manufacturing equipment.
Companies seeking to increase semiconductor manufacturing capacity in the U.S. should also consider opportunities for R&D tax credits and state and local incentives. The tax benefits and grant and loan programs together can provide compelling economic support for U.S. investments.
Available CHIPS Act awards
The CPO can provide direct funding loans, and loan guarantees. There is no fixed amount for how much a project can receive in direct funding, though the CPO has stated that most direct funding awards are generally expected to range between 5% and 15% of a project’s capital expenditure. There also is also no fixed limit on the loans or loan guarantees that a project may receive. Applicants can request loans or loan guarantees to provide debt financing not available on comparable terms on the private market, and the specific terms will be based on a project’s financing requirements and risk profile.
A single application can result in an award that contains more than one type of incentive. The CPO generally expects that the total amount of an award, inclusive of direct funding and the principal amount of a loan or loan guarantee, will not exceed 35% of project capital expenditures.
When you need to act
Optional pre-applications and full applications for leading-edge facilities started to be accepted on a rolling basis on March 31. Pre-applications, which are recommended for current-generation, mature-node and back-end production facilities, began being accepted on a rolling basis beginning May 1. Full applications for these categories started to be accepted on a rolling basis beginning June 26.
The CPO released one additional funding opportunity for semiconductor materials and manufacturing equipment facilities in June 2023 and expects to release another one for R&D facilities in fall 2023.
The tax credits will generally be claimed on the tax return for the year the facility is placed in service. Companies which will be electing to claim the credit as a refundable payment will need to register with the IRS first. There may be opportunities to claim credits as progress expenditures before the full facility is placed in service.
The CPO will evaluate all applications and pre-applications according to six key criteria: (1) economic and national security objectives; (2) commercial viability; (3) financial strength; (4) technical feasibility and readiness; (5) workforce development; and (6) projects’ broader impacts. The pre-application and the full application vary in the level of detail. Per guidance from the CPO, the following chart indicates the differences in requirements and the NOFO provides details on each.
CHIPS Program Office difference between the pre-application and full application process.
The CPO indicated that the financial information an applicant provides will be the primary source by which their application’s commercial viability and financial strength will be assessed. Applicants need to prepare detailed financial statements and business plans for both their pre-applications and even moreso for their final applications. The process of developing a financial model and business case that properly outlines the project and its financial results, as well as, working with the CPO through the due diligence period can be time consuming and arduous. The CPO has provided a model template on their site that can be used as an initial proxy for the application, however, the final financial model for an entity will likely vary from the template provided due to case specific complexities.
The CHIPS act funding provides an important opportunity to help secure a full microchip supply chain and manufacturing capability within the United States. Companies should be prepared for a thorough application and due diligence process and for those companies that can make it through the comprehensive review the benefits of direct funding and debt assistance may be critical to their success.
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