The Tax Impact of the CHIPS Act on Semiconductor Manufacturing

The advanced manufacturing investment tax credit, established to incentivize semiconductor manufacturing within the U.S., aims to boost domestic production capabilities and reduce dependency on foreign semiconductor supply chains. “The CHIPS Act: IRS Releases Final Advanced Manufacturing Investment Credit Regulations” — an article published in several journals, co-authored by Poole finance lecturer Christian Koch — outlines the finalized regulations from the IRS regarding the CHIPS Act’s tax credit.

We sat down with Koch to learn more about his research and the impact of this recent paper.

What is at the center of your research?

At its core, the article covers the CHIPS Act’s regulations, which provide a manufacturing investment credit designed to incentivize domestic semiconductor production. I was involved in co-authoring this article partly due to my background as a semiconductor analyst, where I covered major companies like Intel and Microchip during the tech bubble in the late 1990s and early 2000s. 

The CHIPS Act, which Congress passed in 2022, is significant for areas like the Triangle, where companies like Wolfspeed have benefited directly. Their facility near NC State received around $750 million through this funding to bolster semiconductor manufacturing here in North Carolina. The Act’s main goal is to encourage manufacturers to either build new, cutting-edge fabrication plants or bring capacity back to North America.

Our article, now published in The Journal of Taxation, Corporate Taxation Journal, and Practical Tax Strategies, provides detailed guidance on navigating the IRS regulations. As of May this year, the IRS released final regulations on how companies can claim the credit, which involves two primary steps: pre-filing registration and making a formal election. However, this tax credit is only available for a limited time — from 2023 to 2026 — so it’s especially timely for companies considering such investments.

For those unfamiliar, can you explain the CHIPS Act and its purpose?

The CHIPS Act addresses challenges that date back to the tech bubble era. Back then, many semiconductor companies began outsourcing manufacturing to improve their financials — outsourcing was cheaper due to high costs for essentials like water and electricity in Silicon Valley. Major players like Intel and Motorola shifted production to places like Europe and Taiwan.

COVID, however, highlighted vulnerabilities in global supply chains, not only for semiconductors but for critical products like medications. The government recognized that semiconductors are vital for both consumer and military use, as these chips now power everything from home appliances to vehicles. To address this, the CHIPS Act aims to bring semiconductor manufacturing back to North America by providing tax credits for companies that build facilities domestically. 

Can you explain the credit and its regulations?

The Advanced Manufacturing Investment Credit (AMIC), which gives companies a 25% tax credit to help cover the costs of building or upgrading facilities to produce chips within the U.S. In other words, for every dollar a company spends to set up chip manufacturing in the U.S., they can get 25 cents back through this tax credit, as long as they meet the necessary requirements.

The IRS recently issued final regulations — essentially detailed guidelines — explaining how companies can apply for and use this tax credit. Some of the key points include:

• Election Process: Companies need to go through specific steps to qualify for and claim the credit. Following these steps accurately is essential to avoid issues.
• Limitations on Double Benefits: Companies can’t claim this credit if they’re also using other similar tax credits to cover the same expenses.
• Overpayment Penalty: If companies receive too much credit by mistake, they face a 20% penalty, although there are exceptions if they can show they acted reasonably. 

How do you predict the credit impact will affect the semiconductor industry?

The CHIPS Act is well-intentioned, aiming to incentivize domestic manufacturing, but its effectiveness remains uncertain. It’s early days, and we don’t yet know if the 20–25% incentive will have the desired impact. There could also be unintended consequences that are hard to predict.

Right now, North America lacks sufficient semiconductor capacity compared to Taiwan, which dominates advanced chip manufacturing with companies like TSMC. There’s an ongoing debate about potential geopolitical risks, especially concerning a possible conflict over Taiwan, which could affect both military and consumer supply chains.

The government incentives are meaningful, but the results will hinge on companies’ ability to navigate the credit process, including pre-filing and registration requirements. Intel’s plan to balance capacity across North America, Asia, and the EU reflects a cautious approach. So, the effectiveness of the CHIPS Act remains to be seen; we’ll likely get a clearer picture in the next few years.