The CHIPS Act, from 2022, is a complicated piece of legislation. Its ultimate aim is to free the United States of its dependence on foreign made semiconductors. This idea dovetails with the intention to create jobs and strengthen national security. The USA leads the world in designing semiconductors but they have been largely manufactured abroad in recent decades. The supply chain issues during the Covid 19 pandemic made it obvious that this wasn’t an ideal situation, especially given that semiconductors are ubiquitous in everything from toasters to computers to automobiles. Finding an appliance, automobile, jet aircraft etc. that doesn’t require semiconductors would be a real trick.
We’ve discussed the CHIPS Act, or portions of it before, but never specifically the advanced manufacturing tax credit enacted as part of Section 48D.
The advanced manufacturing tax credit is a tax break essentially compensating businesses opening new facilities to make chips or make the machinery used to make chips. The basics are fairly straightforward; build or rehabilitate a facility and get a substantial tax break. Of course, as will all such credits, there are strings attached.
The credit is 25% for qualifying investment and applies to facilities in service beginning in 2023. The property must also be under construction before January 1, 2027. There are other stipulations as to dates of construction or reconstruction of facilities.
Then there is the definition of what constitutes a qualified property. Some of the terminology can be obscure but the gist is that:
A-The property has to be fundamental to a semiconductor producing facility. Office space does not qualify.
B-Depreciation/amortization is allowable for the property
C-The property needs to be constructed, reconstructed or acquired by a taxpayer that is the original user.
This is a simplification, of course. There is a great deal more to sort through.
There are also guarantees for workers written into the legislation. There are requirements for those taking advantage of this tax credit to show they are going to “develop a local workforce.” That is a fancy way of saying create jobs in their community. They also have to show plans to provide child care for those new workers. The aim is to reward businesses that create high quality jobs.
There are also security requirements attached to this credit. An eligible taxpayer cannot be or have had transactions with a “foreign agent of concern.” This includes terrorist organizations, entities that have had assets blocked or that engage in espionage. This includes nation states as well. It would defeat the purpose of the legislation to allow such nations or organizations to benefit from the tax break.
If your business is looking to get into the manufacture of semiconductors or the machinery used to make them, Hito would be thrilled to help you navigate through the requirements to take advantage of the credit.