Oregon’s New R&D Tax Credit a Boon for Eligible State Businesses

What happens when you mix one-part federal research credit with one-part CHIPS Act and add a dose of spice in the form of states wanting to lure the semiconductor industry to its region? You get Oregon’s Research and Development Tax Credit for Semiconductors.

Oregon hasn’t offered a research and development tax credit since 2017, when the credit was similar to the federal research credit but limited in several ways. The semiconductor credit will be the state’s newest and only active research credit. And though it looks like a piggyback on the federal research credit on the surface, there are a few key differences that make it unique to the state.

The credit is “determined in accordance with section 41 of the Internal Revenue Code,” which is good news for companies that traditionally take the research credit. But unlike the federal credit, Oregon has limited it to $4 million per taxpayer.

We know that companies can qualify employee expenses, supply expenses, and contractor expenses. The qualified activities will have to meet the four-part test: The activity must be technical in nature, for a permitted purpose, intended to eliminate technical uncertainty, through a process of experimentation.

First, the calculation is modified to be 15% of the allowable expenses, which is less than the 20% at the federal level but substantially more than the 5% of the legacy Oregon credit. Second, the alternative simplified credit calculation isn’t available. Third, only qualified expenses incurred by “qualified semiconductor companies” are eligible for the credit. While the first two items are fairly straightforward, the last one is worth exploring.

There are two buckets of qualified semiconductor companies. First are companies involved in the production of semiconductors, including research, design, development, fabrication, assembly, testing, packaging, and validation. Second are the companies that create manufacturing equipment, core intellectual property, and electronic design automation software.

The company’s primary business must be directly related to semiconductors, and the qualified research activities have to support that business. A company may be involved in the testing of semiconductors, but if that isn’t the company’s primary business, it likely won’t qualify.

What makes the credit special? First, it’s refundable for some companies based on employee headcount at the end of the tax year.

Employers with over 3,000 employees aren’t eligible to receive any amount of the credit as a refund. Any amount that is unused and not eligible to be refunded can be carried forward for up to five years.

Taxpayers must apply in advance for the credit. Though the application process details haven’t yet been announced, the statute requires a few fundamental components.

The application must describe how the taxpayer is a qualified semiconductor company. This means the credit won’t be based on a list of industry codes or anything similar. Companies in related spaces can apply and make their case to the Oregon Business Development Department, allowing for some flexibility in qualification.

Similarly, taxpayers must describe how their research and development activities are related to semiconductors or support conducting such business. There is no statutory guidance on what counts as “in support of a trade or business directly related to semiconductors.” This probably will be a point of discussion between taxpayers and the Oregon BDD for a while. However, the more a taxpayer can relate the research activities to its semiconductor business, the more likely the application will be approved.

In all cases, the information in the application is confidential and not subject to public disclosure laws.

The new law still has several unknowns. The application fee is left up to the Oregon BDD, and the form of the application also hasn’t been revealed. While the statute lays out some required information, it doesn’t limit the Oregon BDD to only that information.

The biggest question is how restrictive the Oregon BDD will be in granting the credit. With a budget of $35 million in the first year, the credit likely will be awarded to taxpayers with the strongest ties to the semiconductor industry. There are indications that smaller businesses should get priority, such as favorable terms related to refundability. However, the BDD may instead focus on large employers that can maximize the credit.

Because Gov. Tina Kotek (D) only recently signed the bill, more information is expected in the coming months. Taxpayers should determine whether they’re likely to qualify based on the statutory language and anticipated announcements from the Oregon BDD. If so, they must register with the Oregon BDD by Dec. 1.

A successful application will prove the company performs qualified activities. The credit relies on the application being approved, so it’s worth investing time and effort into ensuring the application presents the taxpayer in the best light. Once approved, the research must be completed, and the credit must be claimed on the annual tax return.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Holland King runs a tax litigation firm focused on credits and incentives in Atlanta. He has 15 years of experience representing clients before the IRS and litigating matters before the US Tax Court.

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