CHIPS Act Deep Dive Part 2: Advanced Manufacturing Investment Tax Credit

MATT BRADY: Welcome to Cherry Bekaert's industrial podcast. I am Matt Brady, the Industrial Industry Leader at Cherry Bekaert.

We appreciate you listening today. For those who have joined us before, welcome back. For those who are new to our podcast, welcome.

At Cherry Bekaert, our goal is to do more than provide core compliance for tax returns and audits. We aim to be forward-thinking and provide our clients with proactive advice.

To that end, today’s podcast is part two of our series on the CHIPS and Science Act of 2022. Our first podcast provided a high-level overview, which is available on our website.

Today, we will dive deeper into the new Advanced Manufacturing Investment Tax Credit aspect of the CHIPS and Science Act of 2022.

There will be two additional podcasts following this one. We will focus specifically on this credit today and provide more detail in podcasts three and four.

I would like to introduce our subject matter expert, Ron Wainwright. Ron is a partner who has taken an extremely deep dive into this act to ensure we are being proactive with our clients.

Ron, thank you for joining us today.

RON WAINWRIGHT: Thank you, Matt. I believe our listeners will find a significant amount of valuable information in this podcast.

MATT BRADY: Ron, to kick us off, could you give a quick high-level overview of the CHIPS and Science Act of 2022 for those who have not heard the first episode?

RON WAINWRIGHT: On August 9, 2022, the President signed the CHIPS and Science Act of 2022. This legislation creates incentives to produce semiconductors for America.

It is a $52.7 billion piece of tax legislation designed to provide significant tax incentives to increase the domestic production of semiconductors, also known as chips.

While the incentives are narrowly targeted, the expansion of semiconductor production will significantly benefit the industrial and manufacturing industries.

Scientific research and development are critical to our economic development, public health, and national defense.

As much as 85% of U.S. productivity growth in the first half of the 20th century resulted from technological advances.

These advances came through partnerships and technology handoffs between the federal government and the private sector, such as GPS, atomic clocks, cancer drugs, web browsers, barcodes, speech recognition, and 3D printing.

We expect these same types of partnerships to generate significant industrial activity over the next five years.

Historically, U.S. federal R&D spending as a percentage of GDP is at its lowest point in over 60 years.

Total R&D spending as a percentage of GDP has fallen from fourth place in the 1990s to ninth place globally today.

Advanced economies such as Taiwan, South Korea, Japan, and Germany have outpaced the United States.

To reverse these trends, the CHIPS and Science Act of 2022 authorizes $52.7 billion for a five-year investment in public R&D focused on the semiconductor industry.

One of the key items we want to discuss today is the Advanced Manufacturing Investment Tax Credit.

MATT BRADY: This is clearly policy-driven with the goal of increasing U.S. production. Our listeners must think through how they can fund this effort from a business perspective.

Understanding the Advanced Manufacturing Investment Tax Credit will help our listeners understand what this shift means for them.

RON WAINWRIGHT: The United States pioneered semiconductor technology, but we are now too reliant on foreign producers.

American companies still dominate the global industry, accounting for nearly half of all revenues, but the U.S. share of global production has dropped from 37% in 1990 to 12% today.

This represents a national and economic security threat, as 75% of global production now occurs in East Asia.

Foreign government subsidies drive as much as 70% of the cost difference for producing semiconductors overseas.

This results in a 25% to 40% cost advantage for overseas production compared to the United States.

The CHIPS and Science Act of 2022 aims to change these dynamics, retain high-skill jobs, and remain at the forefront of technological development.

The program provides a 25% tax credit for qualified investments, beyond subsidies and grants.

MATT BRADY: Ron, could you explain the details around eligibility, qualified property, and the specific requirements?

RON WAINWRIGHT: The Advanced Manufacturing Investment Tax Credit, or AMITC, is based on a bipartisan bill intended to facilitate American-built semiconductors, also known as the FABs Act.

The act enacted Section 48D of the Internal Revenue Code. It creates a temporary investment tax credit for specific investments in semiconductor manufacturing property.

The credit amounts to 25% of qualified investments related to an advanced manufacturing facility.

Qualified property is defined as tangible property that meets three criteria. First, it must qualify for depreciation or amortization.

Second, it must be constructed, reconstructed, or erected by the taxpayer, or acquired by the taxpayer if the original use begins with them.

Third, it must be integral to the operation of the advanced manufacturing facility.

Qualified property can also include a building or a portion of a building, provided it is not used for functions unrelated to manufacturing.

Administrative services and certain structural components of the building may also qualify.

The credit is available for qualified property placed in service after December 31, 2022.

Construction must begin before January 1, 2027. If construction began before the act was enacted, only the portion of the basis attributable to construction after enactment is eligible for the 25% credit.

The act further provides for the recapture of the credit if a taxpayer enters a specific transaction within 10 years of claiming it.

Eligible taxpayers can claim the credit as a payment against tax, known as direct pay.

This allows taxpayers to receive a tax refund if they do not have sufficient tax liability to use the credit.

Without this option, eligible taxpayers could have struggled to monetize the Advanced Manufacturing Investment Tax Credit.

Taxpayers are generally eligible for the credit if they are not designated as a foreign entity of concern.

This refers to entities deemed foreign security threats under previous defense authorization legislation.

The AMITC also erases the difference with foreign subsidy regimes.

When paired with CHIPS grant funding, it erases the 40% cost difference for leading-edge semiconductor production.

This puts the United States on an even playing field with foreign countries that have moved manufacturing away from the U.S. over the last decade.

The AMITC also includes safeguards to ensure recipients do not build advanced production facilities in countries that present a national security concern, such as the People's Republic of China.

The legislation was originally characterized as the America COMPETES Act to address global semiconductor competition.

MATT BRADY: In your assessment, what does this mean for semiconductor manufacturing in the U.S.?

RON WAINWRIGHT: From a tax policy perspective, I expect we will see major announcements by companies investing significant dollars through 2027.

These companies will build or refit manufacturing facilities to produce semiconductors.

On August 9, 2022, Micron announced it would invest $40 billion to manufacture chips in the United States.

This investment is supported by grants and the AMITC. Micron indicated it would create up to 40,000 U.S. jobs and increase memory chip production capacity from 2% to 10%.

Qualcomm also committed an additional $4.2 billion to manufacture chips at their New York facility.

They plan to increase U.S. semiconductor production by 50% over the next five years.

Intel announced plans to invest up to $100 billion for a new chip complex in Ohio, starting with an initial $20 billion commitment.

In Raleigh, North Carolina, Wolfspeed announced a $5 billion investment to build a new advanced semiconductor manufacturing facility.

The combination of the Advanced Manufacturing Investment Tax Credit and CHIPS Act grant programs will drive manufacturing back to the U.S.

MATT BRADY: This highlights the significant momentum underway. This was a bipartisan initiative involving more than $52 billion.

Today’s discussion provided the second step in our podcast series, moving from an overview of the act to specific incentives.

We appreciate you joining us today. Please listen to our first podcast if you have not already, and join us for our next two episodes.

Podcast three will focus on funding mechanisms behind the CHIPS and Science Act of 2022, and podcast four will dive into manufacturing production credits.

Ron, thank you for the information today. I look forward to our next discussions.