President Biden signed the CHIPS Act into law on Tuesday, August 9, 2022. The acronym “CHIPS” stands for “Creating Helpful Incentives to Produce Semiconductors.”
This $52 billion bill is expected to advance competitiveness against China and other foreign semiconductor producers. It includes a 25% investment tax credit for researching and manufacturing semiconductor chips here in the United States. The credits will be recoverable after December 31, 2022, and sunset in 2026. Tax credits are more beneficial than tax deductions because credits actually reduce the federal tax liability dollar for dollar.
Here are the basics of the CHIPS Act:
- To receive the 25% tax credit, “qualified property” must be placed in service by a domestic U.S. business.
- “Qualified property” must be tangible property, subject to depreciation or amortization, and constructed, reconstructed, or erected by a qualifying U.S. business. Also, the property must be integral to operating an “advanced manufacturing facility.”
- An “advanced manufacturing facility” is a facility whose primary purpose is manufacturing semiconductors or semiconductor manufacturing equipment.
- So, manufacturing buildings and its structural components will generally qualify for the CHIPS credits.
- But: portions of buildings used for offices, administrative services, or other functions unrelated to manufacturing do not qualify.
- The credit will be available to partnerships and S Corporations and other non-pass-through businesses like regular C corporations.
- The credit is refundable for partnerships and S corporations, which means that those pass-through entities can receive tax credit refunds directly.
The CHIPS Act authorizes the Treasury Department to promulgate regulations to clarify the credits and enforce its provisions. Thus, when regulations are issued and finalized, they will have the full force and effect of law.