Semiconductor Tax Credit Boost Only Helps Projects in Progress

Among the changes that the US Senate has made to President Donald Trump’s massive tax and spending package is increasing the advanced manufacturing investment credit, informally known as the semiconductor credit, to 30% from 25%.

This change would apply to any facilities placed in service after Dec. 31. But what the bill didn’t do is just as important for those looking to take advantage of this credit.

The investment tax credit was introduced in the CHIPS Act to encourage the construction or improvement of facilities that manufacture semiconductors or other semiconductor manufacturing equipment. It allowed the property owner to claim 25% of the qualified investment as a tax credit as long as construction began before Jan. 1, 2027. At the taxpayer’s election, the credit could be refunded even in the absence of a tax liability.

The Senate’s proposal mainly changes the tax credit rate to 30% of the qualified investments, effective for any facility placed in service after this year, giving taxpayers a significant boost. A 5% increase can represent tax savings in the millions for an average-sized project.

However, Congress didn’t extend the life of the credit—it still would expire at the end of 2026—and only facilities that begin construction before Dec. 31, 2026, can receive the credit.

This leaves approximately 18 months for new projects to break ground, including obtaining internal and external approvals, sourcing and purchasing the necessary land, community engagement, securing investment, designing the project, and obtaining required permits. Projects that are just one day late and begin construction in 2027 will miss out on the tax credit entirely.

There is a distinction between the credit’s expiration and the proposed increase. The credit expires when construction begins, while the credit increase is applied based on the placed-in-service date. This difference in language allows any project that begins construction before the end of next year to qualify for the higher tax credit rate, even if the facility isn’t placed in service for years to come.

While other credits have seen their utilization mechanism get repealed through the elimination of transferability, the election for direct pay or the refund mechanism for the semiconductor tax credit hasn’t changed. This allows taxpayers to continue using the tax credit against their tax liability or receive a refund, helping to finance the project immediately.

Fundamentally, the larger tax credit is great if plans for a new semiconductor facility are already underway. It’s unlikely that any facility already in planning or construction will turn down an additional 5% tax credit for no extra work.
But will it generate new investments? Probably not.

If Congress wanted to increase investment in new semiconductor manufacturing facilities, it would have been better to extend the life of the credit. The credit has been a success, demonstrated by the boom of new semiconductor facilities.

At the end of the credit’s life, the US will have significantly more manufacturing capabilities than before. These projects benefit from the investment tax credit and help spur innovation and economic gains.

But the lifecycle of any new industrial manufacturing project is measured in years, not months. Even in commercial and industrial construction, semiconductor facilities aren’t small or simple. They require extensive planning, careful construction, and significant investment to complete.

One study shows that across 83 projects reported to receive some assistance from the investment tax credit or a grant from the Department of Commerce, the average project costs almost $600 million, with the median project coming in at about half of that. While there may be some companies that can stand up a $600 million project in the next 18 months, it won’t be many.

The Senate’s proposal will help those projects already in process but will do little to incentivize new ones. If Congress wants to continue developing domestic semiconductor capabilities, it should create a policy that taxpayers can rely on for more than a few months.

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

Author Information

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

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