Starting a New Business & Launching Successfully: Tax and Business Planning Tips

HOST: MATT BRADY: I am the industrial industry leader at Cherry Bekaert. Our goal is to do more than core compliance of tax returns and audits; we aim to be forward thinking and provide proactive advice.

HOST: MATT BRADY: Today's episode is part two of a series on the CHIPS and Science Act of 2022. The first episode provided a high-level overview; today we will dive into the Advanced Manufacturing Investment Tax Credit.

HOST: MATT BRADY: There will be two additional episodes that go into more detail. To that end, I want to bring in our subject matter expert and partner, Ron Wight, who has taken an extensive deep dive into this Act.

RON: I think you'll find a lot of useful information in this episode.

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

RON: On August 9, 2022, the president signed the CHIPS and Science Act of 2022, which creates incentives to produce semiconductors in the United States. The Act authorizes $52.7 billion to increase domestic semiconductor production.

RON: The incentives are narrowly targeted, but expanding semiconductor production will significantly benefit the industrial and manufacturing industries. Scientific research and development is critical to economic development, public health, and national defense.

RON: Historical technology advances have driven a substantial portion of U.S. productivity growth. Many innovations—GPS, atomic clocks, cancer drugs, web browsers, barcodes, speech recognition, and 3D printing—resulted from partnerships and technology transfers between the federal government and the private sector.

RON: The CHIPS and Science Act is narrowly focused on semiconductors and chips, and we expect public-private partnerships to generate significant industrial activity over the next five years.

RON: From a historical perspective, 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 today among advanced economies.

RON: Taiwan, South Korea, Japan, and Germany have outpaced the United States. To reverse these trends, the CHIPS and Science Act authorizes $52.7 billion for a five-year investment in public R&D specifically focused on the semiconductor industry.

HOST: MATT BRADY: One of the key incentives in the CHIPS Act is the Advanced Manufacturing Investment Tax Credit. Can you explain what that is and why it matters?

RON: The Advanced Manufacturing Investment Tax Credit, often called the AMC, is a new credit created by the Act. For years, the United States pioneered semiconductor technology, but U.S. share of global semiconductor production has declined dramatically—from about 37% in 1990 to about 12% today.

RON: Semiconductor production is now highly concentrated overseas, with roughly 75% of global production occurring in East Asia. Foreign government subsidies account for as much as 70% of the cost difference for producing semiconductors overseas, combined with other factors. This results in a 25–40% cost advantage for overseas production versus the United States.

RON: The CHIPS and Science Act and the AMC are intended to change those dynamics, keep the U.S. on the technological forefront, and retain high-skill, high-wage jobs. The AMC provides a 25% tax credit of what is referred to as qualified investment related to an advanced manufacturing facility.

HOST: MATT BRADY: What exactly is qualified property, and what are the eligibility requirements and timing rules for the AMC?

RON: The credit is created in the Internal Revenue Code as section 48D. It creates a temporary Advanced Manufacturing Investment Tax Credit for specific investments in semiconductor manufacturing property.

RON: Qualified property is tangible property that meets these criteria: it qualifies for depreciation or amortization; it is constructed, reconstructed, or erected by the taxpayer, or acquired by the taxpayer if the original use of the property begins with the taxpayer; and it is integral to the operation of the advanced manufacturing facility.

RON: Qualified property can include a building or a portion of a building, except for portions used for functions unrelated to manufacturing. Certain structural components of a building and portions used for manufacturing-related functions may qualify.

RON: The credit is available for qualified property placed in service after December 31, 2022. Construction must begin before January 1, 2027, to qualify. If construction began before enactment, only the portion of basis attributable to construction that began after enactment is eligible for the 25% credit.

RON: The Act provides for recapture of the credit if the taxpayer enters a transaction within ten years of claiming the credit. Eligible taxpayers can claim the credit as a payment against tax through Direct Pay, allowing a tax refund if they do not have sufficient tax liability to use the credit.

RON: Taxpayers generally are eligible for the credit unless they are designated as a foreign entity of concern. That term refers to entities deemed foreign security threats under prior defense authorization legislation.

RON: Paired with CHIPS grant funding, the AMC can erase the 25–40% cost disadvantage for leading-edge semiconductor production, putting the United States on a more even playing field with foreign producers.

RON: The AMC provides a baseline incentive for reshoring chip manufacturing while allowing grant funding to be focused on leading-edge semiconductor technologies critical to the U.S. economy and national security.

RON: The AMC includes safeguards similar to CHIPS funding requirements to prevent recipients of the credit from building advanced semiconductor production facilities in countries that present national security concerns, such as the People's Republic of China.

HOST: MATT BRADY: What do you expect will happen in the semiconductor manufacturing sector as a result of the CHIPS Act and the AMC?

RON: I expect major announcements by companies investing significant capital between now and 2027 to build, purchase, or refit manufacturing facilities to produce semiconductors in the United States.

RON: On the day the Act was signed, Micron announced it would invest $40 billion to manufacture chips in the United States. Micron indicated the investment could create up to 40,000 jobs, including 5,000 highly paid technical and operational roles, and increase U.S. memory chip production from roughly 2% to about 10%.

RON: Qualcomm committed an additional $4.2 billion for chips, specifically at GlobalFoundries' New York facility. Intel announced plans to invest up to $100 billion to build a new chip complex in Ohio, starting with an initial $20 billion commitment. Wolfspeed announced about $5 billion to build an advanced semiconductor manufacturing facility in North Carolina.

RON: The Advanced Manufacturing Investment Tax Credit, together with grant programs and other funding in the CHIPS Act, will drive manufacturing back to the United States. We will likely see continued announcements from Micron, Qualcomm, Intel, Wolfspeed, and others as momentum grows.

HOST: MATT BRADY: This has been a bipartisan, $52.7 billion investment with a 25% tax credit and significant grant funding. For our listeners, this episode is the second in our series: episode one explained the CHIPS Act; today we covered incentives tied to the Act.

HOST: MATT BRADY: Future episodes will focus on funding mechanisms and a deeper dive into both the Advanced Manufacturing Investment Tax Credit and the manufacturing production credit. Ron, thank you for the discussion. I look forward to episodes three and four.