Senate passes CHIPS Act with semiconductor tax credit

By Paul Bonner

The U.S. Senate on Wednesday passed a bill to encourage greater domestic production of microchips and other semiconductor materials and devices, in part through a new investment tax credit.

The Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act of 2022 (Senate Substitute Amendment 5135 to H.R. 4346) includes the credit in Section 107 of Division A of the bill. Other divisions and sections of the bill would provide grants and incentives for semiconductor and other scientific research and innovation, as well as for education in the fields of science, technology, engineering, and mathematics (STEM), leading several senators, including its principal sponsor, Sen. Chuck Schumer, D-N.Y., to refer to it as the "CHIPS and science act."

The Senate first turned back a challenge Wednesday to the bill's consideration under budgetary rules, on a motion by Sen. Bernie Sanders, I-Vt. A motion to waive those rules with respect to the bill, by Maria Cantwell, D-Wash., passed 64 to 33, and an ensuing motion to adopt the substitute amendment then passed by the same margin. The amended bill, which originated in the House of Representatives, now returns there for consideration.

In floor debate, some senators characterized the bill on the one hand as required to ensure a future supply of microchips for U.S. manufacturing of consumer goods and devices on which national security depends — independent of Chinese and other foreign manufacturing sites — and to strengthen STEM education. On the other hand were those, including Sanders, who cast it as a boon to large multinational corporations well able to finance their own production and research, at the expense of fiscal resources that could aid working families.

The tax credit, called the "advanced manufacturing investment credit," would be established in part by adding new Sec. 48D to the Code, which would supplement the Sec. 46 list of components of the investment credit, which in turn is a component of the Sec. 38 general business credit.

Sec. 48D would provide a credit amount of 25% of qualified investment in any tax year with respect to any advanced manufacturing facility of an eligible taxpayer. Eligible taxpayers are those not designated a "foreign entity of concern" — broadly, certain deemed foreign security threats under a previous defense authorization act or whose conduct is administratively ruled detrimental to U.S. national security or foreign policy.

Also excluded from eligibility are taxpayers that have made an "applicable transaction," which includes early disposition of investment credit property under Sec. 50(a). Added to Sec. 50(a) applicable transactions by the bill is any "material expansion" of semiconductor manufacturing capacity of the taxpayer in China or other "foreign country of concern" under the defense authorization act.

Qualified property is tangible property with respect to which (1) depreciation or amortization is allowable; which is (2) constructed, reconstructed, or erected by the taxpayer or acquired by the taxpayer, if the original use of the property commences by the taxpayer; and (3) is integral to the operation of the advanced manufacturing facility. Qualified property can also include a building or portion of one (other than one used for offices, administrative services, or other functions unrelated to manufacturing) or certain structural components of it.

An advanced manufacturing facility is one with a primary purpose of manufacturing semiconductors or semiconductor manufacturing equipment.

There are rules for basis reduction of creditable property and denial of dual benefits with the Sec. 47(c)(2) rehabilitation credit.

The credit sunsets for any property of which construction begins after Dec. 31, 2026.

— 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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