The Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act was recently signed into law as part of the CHIPS and Science Act of 2022. The bill provides manufactures greater incentives to produce semiconductors (e.g., chips) domestically in the U.S.
Join Matt Brady, our Industrial Industry Leader, and Ron Wainwright, a Strategic Tax Partner in our Tax Credits and Incentives Advisory group, as they explore the benefits the industrial industry is able to take advantage of through this new legislation.
The podcast covers:
- 2:28 – Background on the CHIPS Act
- 4:19 – Importance of Semiconductors in the Industrial Industry
- 9:16 – What is the CHIPS Act and Tax Policy
- 15:19 – Overview of the New Advanced Manufacturing Credit
Stay tuned for Cherry Bekaert’s future podcasts that dive deeper into the Advanced Manufacturing Credit, funding in the CHIPS Act, and the American Manufacturing Credit and Manufacturing Product Credit.
See our previous podcasts in this series that you may have missed:
- CHIPS Act Deep Dive Part 2: Advanced Manufacturing Investment Tax Credit
- CHIPS Act Deep Dive Part 3: American Manufacturing Credit and Manufacturing Production Credit
- CHIPS Act Deep Dive Part 4: Unpacking the Complexities of the Many Tax Credits Under the CHIPS Act and the IRA of 2022
- CHIPS Act Deep Dive Part 5: New Ways to Monetize Energy Tax Credits for the Industrial Industry
View All Industrial Manufacturing Podcasts
MATT BRADY: Welcome to the Cherry Bekaert Industrial podcast. My name is Matt Brady, and I am Cherry Bekaert’s Industrial Industry Leader.
Thank you all for joining us today. I know we have a combination of clients, friends of the firm, and potential future clients, so we appreciate you joining.
At Cherry Bekaert, our goal is to do more than just core compliance items like tax returns and audited financial statements. We also aim to expand and provide proactive advice on accounting advisory matters.
This includes segments within our advisory service line such as digital transformation, New Markets Tax Credits, and transaction advisory for both the buy-side and sell-side. It also covers strategic tax advisory, including SALT, International Tax, R&D credits, accounting method matters, and cost segregation.
Today, we are providing an overview of the CHIPS and Science Act of 2022. This is the first of four podcasts that will go deeper into each aspect of the legislation.
Without further delay, I will introduce my partner, Ron Wainwright. Ron is a partner in our Strategic Tax Advisory Group and has taken a deep dive into the legislation passed on August 9th. Ron, I am happy to have you here.
RON WAINWRIGHT: Thank you, Matt. I appreciate our listeners joining us for this first of four podcasts.
My name is Ron Wainwright, and I am a strategic tax partner. I have been a partner at Cherry Bekaert for over 12 years, following 14 years as a tax partner with one of the mega firms. I look forward to our discussion regarding the CHIPS and Science Act of 2022.
MATT BRADY: We are going to take bite-sized pieces of this in subsequent podcasts, but today we will keep it at a high-level overview. Ron, could you give us some background or initial observations on the CHIPS Act?
RON WAINWRIGHT: Technically, it is referred to as the Creating Helpful Incentives to Produce Semiconductors, or CHIPS, and Science Act of 2022.
It was passed by the Senate on July 27th with a 64 to 33 approval, showing immediate bipartisan support. The House passed it on July 28th with a 243 to 187 vote, including 24 Republicans voting yes.
President Biden signed the CHIPS and Science Act of 2022 on August 9th. At a high level, this legislation is part of a broader effort to increase U.S. competitiveness, specifically within the semiconductor industry.
MATT BRADY: Bipartisan legislation is positive for the economy and the country. Given the recent supply chain issues we have all lived through post-COVID, we understand how semiconductors impact the industry. Why is this bill so important to our industrial clients?
RON WAINWRIGHT: The CHIPS legislation seeks to promote increased U.S. domestic manufacturing of semiconductors to address supply chain issues and national security concerns.
An action item for our listeners in the semiconductor industry is to analyze the new federal funding and tax incentives provided by the Act. All industrial stakeholders should pay attention to this legislation because of the significant subsidies, grants, and loan guarantees.
Semiconductors are at the heart of modern technology, including smartphones, TVs, digital cameras, LED bulbs, ATMs, medical equipment, and cars. We use them every day without thinking about it.
The issue the CHIPS and Science Act addresses is that while these components are ubiquitous, the United States produces a relatively small percentage of them. Nearly a quarter of all semiconductors produced globally are made in China.
About 90% of the most advanced semiconductors are produced by one Taiwanese company, the Taiwan Semiconductor Manufacturing Company. Overall, about 75% of all semiconductors are produced in East Asia.
By contrast, only about 12% of modern semiconductor manufacturing happens in the U.S. That number has dropped significantly from 37% during the 1990s.
This creates economic and political implications that threaten the United States. While the world’s largest chip manufacturers, including Intel and NVIDIA, are U.S. companies, they primarily manufacture in Asia, Europe, and other parts of the world.
The CHIPS and Science Act of 2022 provides grants, subsidies, and a new Advanced Manufacturing Investment Tax Credit. This is intended to shift semiconductor manufacturing back to the United States on a global basis, specifically prior to 2026.
MATT BRADY: That speaks to the intent of the legislation regarding reshoring and self-reliance. What is the tax policy that supports this intent, and what is the high-level overview of the funding contained within the bill?
RON WAINWRIGHT: Scientific research and development, or R&D, is critical to 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 technology handoffs between the federal government and the private sector. However, U.S. federal R&D spending as a percentage of GDP is now at its lowest point in over 60 years.
Total U.S. R&D spending as a percentage of GDP has fallen from fourth place in the 1990s to ninth place globally, behind China, South Korea, Japan, and Germany. The CHIPS and Science Act of 2022 is intended to reverse these trends.
The Act authorizes the largest five-year investment in public research and development in the nation's history. It will invest $39 billion over five years to expand domestic semiconductor manufacturing and provide incentives to build, expand, and modernize U.S. facilities.
The Act creates a new 25% tax credit for companies that invest in semiconductor manufacturing equipment or the construction of manufacturing facilities. Private companies receiving financial assistance will be restricted from expanding certain chip manufacturing into China for 10 years.
There is also $1.5 billion to fund the Public Wireless Supply Chain Innovation Fund to help communication companies compete with Chinese telecom giants. Millions of dollars are also allocated for workforce development to support advanced manufacturing.
The majority of the funding will funnel through two government agencies: the National Science Foundation and the Department of Energy’s Office of Science.
Investments will also create a National Science Foundation directorate for technology, innovation, and partnerships. This will accelerate developments in artificial intelligence, quantum computing, advanced manufacturing, 6G communications, energy, and material science.
MATT BRADY: Can you speak specifically to the new Advanced Manufacturing Investment Tax Credit? Many of our listeners are already taking advantage of credits like the R&D Tax Credit, but what is the sneak preview of this new credit?
RON WAINWRIGHT: Beyond the grants and funding, the CHIPS Act creates a temporary 25% Advanced Manufacturing Investment Tax Credit for investments in semiconductor manufacturing property.
This includes incentives for manufacturing semiconductors and the specialized tooling equipment required in the process. Eligible industrial companies can elect to treat the credit as a payment against tax, which is referred to as Direct Pay.
The credit applies to property placed in service after December 31, 2022, for which construction begins prior to January 1, 2027. This is a substantial benefit for industrial clients beginning to manufacture semiconductors and specialized tooling.
Additionally, the Act authorizes roughly $200 billion in new funding to promote U.S. research programs, R&D, and workforce development. While this requires future action by Congress, it is currently being discussed as part of the 2023 fiscal year appropriations.
MATT BRADY: What you have covered today likely wets the appetite of our listeners. We will cover the Advanced Manufacturing Investment Tax Credit and the funding aspects of the bill in more detail in our upcoming sessions.
There is a lot of incentive to support this shift of semiconductor production back to the U.S. Although the bill was only passed recently, we wanted to be at the forefront of sharing this information.
RON WAINWRIGHT: Thank you, Matt. We look forward to the three additional podcasts where we will take deeper dives into the Advanced Manufacturing Investment Tax Credit and the specific funding programs.
We will also look at how these credits couple with the manufacturing production credit found in the Inflation Reduction Act of 2022. There is a lot of good news for our industrial clients and taxpayers.
MATT BRADY: Thank you, Ron. To all our listeners, thank you for your time. I hope you tune in to our next podcast.
