Congress recently passed a 25% tax credit for equipment to manufacture semiconductors as part of broader bipartisan legislation to encourage domestic semiconductor chip manufacturing. The Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act (H.R. 4346) now heads to President Joe Biden’s desk, where he has pledged to sign it into law.
The new “Advanced Manufacturing Tax Credit” will be added as new Section 48D and is estimated to cost $24 billion over 10 years. It will offer a 25% tax credit for placing into service tangible property integral to a facility with the primary purpose of manufacturing semiconductor or semiconductor equipment. Building and structural components can qualify as long as they are not used for offices, administrative services or other functions unrelated to administrative services.
Taxpayers will be eligible to claim the credit for progress expenditures, and they will be able to claim the credit as a fully refundable payment — even at the pass-through level. There are claw-back rules if the taxpayer undertakes “any significant transaction” involving the material expansion of semiconductor manufacturing capacity in China or a foreign country of concern.
The CHIPS bill does not include a provision retroactively restoring expensing of research and experimentation (R&E) costs under Section 174, as some supporters had hoped. The Section 174 fix also does not appear to be part of the reconciliation agreement between Sen. Joe Manchin, D-W.Va., and Senate Majority Leader Chuck Schumer, D-N.Y. The best hope for Section 174 relief appears to be as part of a year-end “extenders” bill after the November elections. There are no guarantees in the legislative process, however, and many energy extenders may already be addressed in the reconciliation bill. Businesses should consider identifying and tracking the costs that will need to be amortized under current law.
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