Effective August 9, 2022, the Creating Helpful Incentives to Produce Semiconductors and Science Act – popularly known as “CHIPS” – provides funding to various programs to reduce reliance on foreign semiconductor production by enhancing the United States workforce, manufacturing and research capacity in the semiconductor industry. The CHIPS and Science Act will be implemented over a five-year term, with the bulk of funding becoming available in the first year.

The programs and initiatives in the CHIPS Act can be broken into three major categories:

• Incentives to increase semiconductor production and manufacturing.
• Initiatives promoting STEM R&D and workforce development.
• Initiatives to support the US supply chain, national security and international trade.

While the $52.7 billion legislative commitment has rightly created a loud buzz in the industry, the all-important mechanics of how the money will be allocated are still underdevelopment.  However, there are some important considerations regarding the CHIPS Act that we can explain today, including:

• Funding appropriations to each of the several CHIPS Act incentives and initiatives.
• Key restrictions on eligible applicants.
• Details on two currently active incentive programs, i.e., the Advanced Manufacturing Tax Credit and the CHIPS incentive for Commercial Fabrication Facilities.
• State-level programs designed to support businesses planning to apply for CHIPS Act programs.

Funding Appropriations

The CHIPS Act is generally focused on the semiconductor industry and aimed at remedying the shortages in semiconductors that have created further shortages in several critical industries globally and specifically in North America. The impact was felt in in every industry that uses a computer, but the CHIPS Act focuses specific assistance targeted towards “critical manufacturing industries” such as automotive, defense, telecommunications, and more, while at the same time offering incentives for advanced manufacturing related to semiconductors generally. Here is a high-level list of the allocations:

$52.7 billion funding appropriated to CHIPS programs over 5 years – This funding is to be disbursed to various agencies to implement programs and initiatives to promote the semiconductor industry in the US, as follows:

CHIPS for America Fund – $50 billion over 5 years, to be implemented by the National Institute of Science and Technology (NIST)

• $39 billion is appropriated for incentive programs over 5 years to develop domestic manufacturing capability, to be implemented by the Commerce Department.
• $11 billion over 5 years is appropriated for Commerce R&D and workforce development programs.

CHIPS for America Defense Fund - $2 billion over 5 years

• $400 million per year for 5 years to be implemented by the Department of Defense and focused on semiconductor research, manufacturing, and workforce training for defense specific applications.
• CHIPS for America Defense Fund is administered by the Department of Defense in coordination with Departments of Commerce, Energy, Homeland Security.

CHIPS for America International Technology Security and Innovation Fund - $500 million over 5 years

• Funding to facilitate coordination with foreign government partners to support international information and communications technology security and semiconductor supply chains.

CHIPS for America Workforce and Education Fund - $200 million over 5 years

• Funding for the National Science Foundation to promote training and growth of the semiconductor workforce.

$1.5 billion for the Public Wireless Supply Chain Innovation Fund

• Managed by the National Telecommunications and Information Administration (NTIA) to promote wireless technologies and expand access to broadband throughout the US.

Advanced Manufacturing Tax Credit – no limit

• 25% credit of the qualified investment in the taxable year with respect to any advanced manufacturing facility of an eligible taxpayer.

Restrictions:

Each of the CHIPS Act programs are subject to restrictions and requirements for eligibility, some of which are generating controversy and intense lobbying.

1. Any entity of foreign concern, detailed below, is not eligible for CHIPS Act programs.
2. A taxpayer cannot have made a significant expansion of manufacturing within a country of foreign concern in the same year they apply.
3. All applicants will be required to comply with Department of Commerce and Government Accountability Office policies to ensure that recipients of CHIPS Act benefits increase the participation of economically disadvantaged individuals in the semiconductor workforce. (Department of Commerce representatives stressed this point during recent presentations at the Select USA event.)

A foreign “entity of concern” is defined as an entity which is any of the following:

• Designated as a foreign terrorist organization under Immigration and Nationality Act.
• Specially designated national or blocked person as maintained by the Department of Treasury.
• Owned, controlled by, or subject to the jurisdiction of a government of a foreign country of concern – for the CHIPS Act, this includes China, North Korea, Russia, Iran, or any other country determined to be a country of concern by the Secretary of State.
• Involved in activities for which conviction was obtained under one of the following: the Espionage Act, the Economic Espionage Act, the Arms Export Controls Act, the Atomic Energy Act, the Export Control Reform Act, International Emergency Economic Powers Act, or as an agent of foreign government or committing fraud and related activity in connection with computers.
• As determined by the Secretary of Commerce, Secretary of Defense, and Secretary of National Intelligence.

The fact that many of the most important potential participants in these programs are global companies with vast international operations has created uncertainties over how the program will be administered.

CHIPS Incentive Program:  Advanced Manufacturing Investment Credit

The Advanced Manufacturing Investment Credit (AMIC or Investment Credit) is the program which will be most immediately applicable to businesses looking to expand semiconductor production or semiconductor equipment manufacturing. This program incentivizes expansion of specified manufacturing activities by offering credits of up to 25% eligible costs to eligible taxpayers who make qualifying investment to expand or create eligible manufacturing process prior to 2027. Here are some of the key factors to consider for eligibility under this program.

Qualified Investment

• Put simply, qualified investment under this program includes the costs to build and place a qualifying advanced manufacturing facility (defined below) into service.
• Note that any costs receiving the Rehabilitation credit cannot also be used for the AMIC tax credit.

Qualified advanced manufacturing facility

• The primary purpose of the facility must be for the manufacturing of semiconductors or semiconductor manufacturing equipment.
• Only the investment in qualifying manufacturing activities is counted in calculating the credit; the costs associated with office or other non-manufacturing activities are excluded.
• Only costs of “fixtures” attached to the property will count.

Eligible Taxpayer

• As with all programs under the CHIPS and Science Act, an applicant must not be an entity of foreign concern.
• Further, an applicant may not have made, nor make, an “applicable transaction” which is defined as a significant expansion (as determined by Secretary of Commerce and Secretary of Defense) in semiconductor manufacturing within a country of foreign concern. However, an applicable transaction does not include an expansion of manufacturing capacity for legacy semiconductors.

CHIPS Incentives Program: Commercial Fabrication Facilities

The National Institute of Standards and Technology (NIST) has issued its first notice of funding opportunity (NOFO) for Commercial Fabrication Facilities and is currently accepting preliminary/potential applications on a rolling basis. The first wave of formal applications began on June 26, 2023, and also will continue on a rolling basis.

The NIST will review proposed fabrication facilities on a case-by-case basis for direct funding, loans, or loan guarantees for the construction, expansion, modernization, purchase of equipment, or workforce development of facilities for the production of semiconductors with awards sized with consideration to project specific needs. While NIST indicates that there is no maximum amount a project can receive, the agency expects most awards will range between 5%-15% of the project’s capital expenditures. Cost sharing or local match is not required for this program but may be a factor for consideration in the NIST review of the project as state or local support can be an indicator of likely success of the project.

Examples of State-Level Purpose-Built Matching Programs

Because certain CHIPS Act programs require a state or local "match” or contribution for eligibility, the availability of state or local incentives becomes a strategically important site selection consideration for companies evaluating locations for new or expanded operations. In order to increase their attractiveness for semiconductor industry projects, a number of states have implemented complementary programs. Following are some examples:

• The Texas CHIPS Act: Texas has proposed a state CHIPS Act that would create the Texas Semiconductor Innovation Consortium and the Texas Semiconductor Innovation Fund. The consortium would leverage the expertise and capacity of higher education institutions, industry, and stakeholders in Texas to develop a comprehensive strategic plan for investing in Semiconductor manufacturing. The Innovation Fund would provide funding for higher education institutions seeking semiconductor manufacturing and design products, as well as issue grants to semiconductor manufacturers.  
• New York Green CHIPS Program:   New York signed legislation in August of 2022that created the Green CHIPS Program. This allocates $10 billion in economic incentives for environmentally friendly semiconductor manufacturing and supply chain projects. It is described as a companion program to the Federal CHIPS program. Four different tax credits and one utility incentive are available under the program. 
• Oregon CHIPS Act: The Governor of Oregon recently signed the Oregon CHIPS Act into law in April of 2023. This program allocated $210 million to support Oregon firms applying for Federal CHIPS funds; $190 million is allotted to direct grants and loans for semiconductor manufacturers, $10 million for research institutions, and $10 million to help with land development costs.  
• Idaho Semiconductor for America Act:  Effective July 2022, the Idaho Semiconductor for America Act provides qualifying Idaho semiconductor companies with a Sales and Use Tax exemption on the purchase of qualifying construction and building materials.
• Pennsylvania EDGE Tax Credits: In November of 2022, the Pennsylvania EDGE Program was passed in House Bill 1059. The program established three non-refundable, transferrable tax credits, one of which was aimed at semiconductor manufacturers. The Semiconductor and Manufacturing, Biomedical Manufacturing and Research Tax Credit allocated $20 million annually for biomedical and semiconductor manufacturing facilities, with $10 million allocated to each, respectively.  
• Illinois Federal Grant Support Program:  Illinois has launched a program designed specifically to assist Illinois-based businesses obtain federal grants that align with the state’s policy objectives by providing a state matching funds or contribution of up to $2 million.

Conclusion:

The CHIPS Act will direct over $50 billion into initiatives to support the semiconductor industry. Some of the funding will be channeled directly to semiconductor manufacturers and related equipment manufacturers, while some is earmarked to indirectly benefit the industry by targeting workforce development and R&D initiatives. Regulations are being considered that could expand the definition of eligible production activities related to the semiconductor industry that will be deeded eligible for financial support.  The distribution of allocated funding has only just begun, but companies that believe they may qualify for the Advanced Manufacturing Investment Credit, or the Commercial Fabrication Facilities benefits should be actively pursuing these incentives now.  

Companies in the semiconductor industry that have begun or are planning to evaluate locations for facilities that may be eligible for CHIPS Act support will need to understand the extent to which local/state incentives are required as a condition of CHIPS Act funding or even the extent to which such state/local incentives may provide a competitive advantage in the application process.