Addressing the Micro Chip Production Problem

As it turned out, semiconductor chips make the world turn. Though most notably missing from the auto industry, semiconductor chips also power smartphones, computers, electronic toothbrushes, and more. Since COVID began, there’s been a worldwide chip shortage. Unfortunately, it is unclear when this crucial-shortage will be resolved. In fact, it appears many major automobile manufacturers, including Ford, have elected to re-start production because of a lack of certainty about when the shortage will be resolved.

The unfortunate reality is the heavy reliance on the foreign production of microchips. In fact, it is estimated that only 12% of the world’s microchips are manufactured domestically. To address this disparity, Congress is reviewing a new piece of legislation that would allocate $280B to domestic advanced manufacturing. Known as the US Chips & Science Act, it not only calls for new targeted funding but also the creation of new tax credits and incentives. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

About the U.S. CHIPS and Science Act

Over the last 30 years, chip manufacturing in the U.S. has dropped by more than half. Today, chip manufacturing leaders range from South Korea, Japan, China, and Taiwan, with the U.S. among the top worldwide manufacturers for memory chips. The products that rely on chips are as varied as the chips themselves; not all semiconductor chips are in short supply. The chips that are on a long wait list are most often tied to advanced manufacturing.

The new bipartisan legislation, Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act (the CHIPS Act), is a follow-on to a January 2021 House-passed bill to which funding was never allocated. The July 2022 legislation, which will become law soon, seeks to inject much-needed research and development dollars into domestic manufacturing.

A breakdown of the details includes:

• $52.7 billion to provide money to build and expand semiconductor manufacturing facilities
  • $39 billion for manufacturing; up to $6 billion can be used to offset the cost of direct loans and loan guarantees
  • $11 billion for research and workforce training
  • $2 billion to take laboratory breakthroughs to other applications more quickly
• $170 billion for technology research and development in federal agencies over the next five years
  • Targets: artificial intelligence, quant computing, wireless communications, and precision agriculture
• $20 billion to accelerate new technologies critical for U.S. security
• $61 billion to increase existing R&D functions at universities and research hubs

What remains to be seen is whether the bill will relieve the chip shortage now or if it’s a long-term investment in U.S. advanced manufacturing – or perhaps both.

Tax Provisions in the CHIPS Act

The biggest tax incentive is the creation of a new 25 percent tax credit for qualified investment property.

Advanced Manufacturing Investment Credit

This is a new tax credit worth 25 percent of qualified investments in an advanced semiconductor manufacturing facility. It runs through 2026 and is codified in the newly created Section 48D of the Tax Code. An advanced semiconductor manufacturing facility has the primary purpose of making semiconductors or semiconductor manufacturing equipment.

The taxpayer must have constructed, reconstructed, erected, or acquired the property before January 1, 2027. Property placed in service after 2022 qualifies; current projects that would otherwise fall under the tax credit eligibility would need to be carefully considered.

Qualified investment property is a tangible property for which depreciation and amortization are available. It can be an entire building or a part of it, including structural components; an office or administrative services building is excluded. In addition, the property must be integral to the advanced manufacturing facility.

Eligibility is excluded from taxpayers that are designated as a “foreign entity of concern” and those making “applicable transactions,” which include:

• Early disposition of investment credit property.
• Limitations on which chips can be produced abroad; material foreign investment is disallowed.

If a taxpayer were to claim the credit but invest in the expansion of a China-based chip manufacturing facility within ten years, then the credit would need to be recaptured. There are provisions in the bill for partnership agreements between other countries, pending future negotiations.

What’s unique about the investment tax credit is that it will operate as a direct pay election. With direct pay – which the IRS will need to provide guidance on – the refundable tax credit would come directly from the federal government.

Research and Development Investments

The CHIPS Act authorizes $169.9 billion over the next five years to fund research and build new technology hubs around the country. Four agencies – the National Science Foundation, Department of Commerce, National Institute of Standards and Technology, and Department of Energy – will marshal the funds according to targeted technology areas.

Who Will Benefit from the CHIPS Act?

Large manufacturers will most definitely stand to benefit from the new investment tax credit, especially those that relocate or expand semiconductor plants domestically. Others include:

• Chip manufacturer suppliers
• Nonprofits that are involved with semiconductor manufacturing workforce training
• Some STEM startups
• University research centers
• Semiconductor chip designers

Contact Us

The ongoing shortage of microchips has been a persistent problem for virtually every industry. The unfortunate reality is the issue is not expected to be resolved anytime soon. The CHIPS Act is a significant first step towards addressing the issue domestically and provides important new incentives to certain manufacturers. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information please call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.