CHIPS and Science Act with semiconductor tax credit passes Congress

By Paul Bonner

The U.S. House of Representatives on Thursday passed a bill now known as the CHIPS and Science Act, by a margin of 243–187. The bill now goes to President Joe Biden, who has indicated he will sign it into law.

The House vote came a day after the Senate passed its substitute amendment to the House bill, titled the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act of 2022 (Senate Amendment 5135 to H.R. 4346). In agreeing to the Senate amendment, the House, like the Senate, voted along bipartisan lines, but not without some partisan contention. House Republican leaders in a memo urged party members to vote no, but 24 GOP House members ultimately voted for the bill.

Biden said in a statement that he looked forward to signing the bill.

The CHIPS and Science Act includes an advanced manufacturing investment credit of 25% of qualified investment in a tax year with respect to any advanced semiconductor manufacturing facility of an eligible taxpayer. Property qualifies for the credit if, among other requirements, it is integral to the operation of an advanced manufacturing facility, defined as having a primary purpose of manufacturing semiconductors or semiconductor manufacturing equipment.

Budget reconciliation bill

The act's House passage also occurred a day after Senate Democrats announced a breakthrough agreement on a budget reconciliation bill, with a variety of tax provisions. The central one is a 15% corporate minimum tax on C corporations' adjusted financial statement income, which the Joint Committee on Taxation estimates would raise $313 billion in revenue. Senate Majority Leader Chuck Schumer, D-N.Y., said he hopes to bring that bill, which is endorsed by swing senator Joe Manchin, D-W.Va., to a floor vote in the Senate next week.

The reconciliation bill also contains an array of tax credits and grants and other incentives aimed at supporting clean energy production, increasing energy efficiency, and reducing carbon emissions by a projected 40% by 2030.

Carried interests: One of its tax provisions unrelated to the environment would lengthen the holding period for long-term-capital-gain treatment of partnership interests held in connection with performance of services, commonly known as carried interests. The current three-year minimum holding period under Sec. 1061(a) would in effect be changed to five years after the latest of (1) the date the taxpayer acquired substantially all of an applicable partnership interest with respect to which gain is realized; (2) the date on which the partnership acquired substantially all of its assets; or (3) if the partnership owns, directly or indirectly, interests in one or more other partnerships, the date determined by applying similar rules as (1) and (2) with respect to the other partnership or partnerships (bill Section 10201). This provision is projected to raise $14 billion in revenue.

Premium tax credit: In addition, the bill would extend provisions of the American Rescue Plan Act, P.L. 117-2, that temporarily widened eligibility for premium tax credits under the Patient Protection and Affordable Care Act, P.L. 111-148. The provision, which adjusts the percentage of health care insurance premiums offset by the credit for certain taxpayers whose household income exceeds 400% of the poverty line, currently applies to 2021 and 2022 tax years, which the bill would extend through 2025 (Section 12001 of the bill). This provision would "cost" an estimated $64 billion in foregone revenue.

IRS funding: The reconciliation bill would also increase funding for the IRS. Over the next 10 years, the bill would provide $45.6 billion for enforcement and $3.18 billion for taxpayer services. Another $25.3 billion would go toward operations support and $4.75 billion to business systems modernization. The bill's money for enforcement is estimated to increase IRS tax collections by $124 billion over the period.

Notably, the bill does not include a provision some House Democrats had advocated that it contain, a repeal of the so-called SALT cap, the $10,000 limitation on state and local taxes claimable as an itemized deduction, enacted effective for tax years 2018–2025 by the law known as the Tax Cuts and Jobs Act, P.L. 115-97. A repeal has been introduced repeatedly in the current and previous Congresses.

— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.

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