What to Know About the CHIPS Act Tax Credit

The CHIPS and Science Act of 2022 is a U.S. initiative designed to revitalize the domestic semiconductor industry. A feature of this legislation is the Advanced Manufacturing Investment Credit, established under Internal Revenue Code Section 48D and commonly known as the CHIPS tax credit. This provision stimulates private investment in the facilities and equipment for semiconductor production within the United States. By lowering the after-tax cost of these investments, the policy seeks to enhance national security and supply chain resilience, encouraging long-term commitments to domestic manufacturing.

Who Qualifies for the Credit

An “eligible taxpayer” can claim the CHIPS tax credit, a term that includes corporations, S corporations, partnerships, and individuals engaged in a trade or business. The defining requirement is not the taxpayer’s organizational structure but the nature of their investment. To qualify, the taxpayer must invest in an “advanced manufacturing facility.”

An advanced manufacturing facility is one where the “primary purpose” is manufacturing finished semiconductors or the specialized equipment used to produce them. This test requires that more than 50 percent of the facility’s operational activities and resources be dedicated to these specific manufacturing functions. This means facilities with diversified operations must show that semiconductor-related production is their main function.

The qualified investment must be made within the United States or one of its territories. Investments in facilities located in a foreign country of concern are explicitly ineligible, reinforcing the focus on strengthening the domestic supply chain. These countries include:

• The People’s Republic of China
• The Russian Federation
• North Korea
• Iran

Taxpayers must maintain clear documentation to prove the location and primary purpose of their facility to substantiate their eligibility for the credit.

Qualified Investments and Credit Calculation

The value of the CHIPS tax credit is tied to a taxpayer’s “qualified investment” in an advanced manufacturing facility. A qualified investment includes the basis of tangible property integral to the facility’s operation, such as the building, its structural components, and specialized manufacturing equipment. The property must be new, with its “original use” beginning with the taxpayer.

Certain assets are excluded from qualified property. The cost of acquiring land is not eligible, nor is any portion of a building used for non-manufacturing functions like general office space. The investment must be for property “placed in service” after December 31, 2022. Construction of the facility must also begin before January 1, 2027.

The credit is calculated as 25 percent of the taxpayer’s basis in the qualified property for the tax year. The basis is the cost of acquiring or constructing the property. For example, if a business has a qualified investment of $100 million in a new U.S. facility, the resulting tax credit would be $25 million.

Direct Pay and Transferability Options

The CHIPS Act provides two mechanisms for monetizing the credit: direct pay and transferability. The direct pay option, or elective payment, allows any eligible taxpayer to treat the credit amount as a payment of tax for the first five years of the facility’s life. If the credit amount exceeds the taxpayer’s income tax liability, the IRS will issue the difference as a direct cash refund.

This option is beneficial for new ventures or companies in a loss position that would otherwise be unable to use the credit. For partnerships and S corporations, the election is made at the entity level, and the resulting payment is made directly to the partnership or S corporation, providing immediate liquidity.

The second option is transferability, which allows a taxpayer to sell all or a portion of the credit to an unrelated taxpayer for cash. This one-time transfer enables companies that cannot use the credit themselves to realize its value. The cash received from the sale is not taxable income to the seller, and the buyer cannot deduct the purchase price.

The buyer can then use the purchased credit to offset their own federal income tax liability. This provision creates a secondary market for the tax credit, providing flexibility for project financing, such as selling future credits to secure upfront capital.

Claiming the Credit and Post-Filing Rules

To claim the credit, particularly when using direct pay or transferability, a taxpayer must complete a mandatory pre-filing registration with the IRS. This process is done through an online portal and results in a unique registration number for each qualified investment. This number must be included on the taxpayer’s annual tax return to validate the election.

The credit is claimed using Form 3468, Investment Credit, and the result is carried to Form 3800, General Business Credit. The pre-filing registration must be completed and the return filed by its original due date, including extensions, to make a valid election.

After claiming the credit, taxpayers must adhere to rules that can trigger a “recapture” of the benefit. The credit is subject to two recapture provisions. The first is a five-year rule that applies if qualified property is sold or ceases to be used for its intended purpose. The recapture amount decreases by 20 percent for each full year the property was in service.

A second 10-year rule requires a 100 percent recapture of the credit if the taxpayer engages in a significant transaction involving the material expansion of semiconductor manufacturing in a foreign country of concern. These rules ensure the tax incentive rewards long-term commitment to the domestic semiconductor industry.