TOPLINE:
The One Big Beautiful Bill (OBBB) increased the CHIPS Tax Credit for business investments in semiconductor manufacturing equipment and the construction of semiconductor manufacturing facilities.
BACKGROUND:
The CHIPS and Science Act of 2022 included various incentives for investments in facilities that produce semiconductors in the United States, including grants, loans, and the CHIPS Tax Credit. The CHIPS Tax Credit (also known as the Advanced Manufacturing Investment Credit) offset 25% (prior to OBBB) of qualifying investments in buildings, structural components, and tangible property for which the main purpose is manufacturing semiconductors or semiconductor manufacturing equipment in the United States. Foreign entities of concern (e.g., Chinese companies) are prohibited from receiving the credit. The credit was made available only for property for which construction begins before December 31, 2026. The Congressional Budget Office published estimates suggesting that the original CHIPS Tax Credit would reduce business taxes by about $24 billion through FY 2031.
What OBBB Did:
- Raised the CHIPS Tax Credit percentage from 25% to 35% of qualifying investments for property in which construction begins after December 31, 2025.
- Kept in place the credit’s original expiration date, meaning the CHIPS Tax Credit only applies to property for which construction begins by December 31, 2026.
Why It Matters?
- Semiconductors are an integral part of many modern products.
- With the proliferation of artificial intelligence (AI) technology, semiconductor manufacturing has boomed. McKinsey estimated that the value of the global semiconductor market would grow from $775 billion in 2024 to $1.6 trillion in 2030.
- The increased CHIPS Tax Credit is a $15 billion expansion of the tax preference.
- Heavy-handed industrial policies can weaken domestic industry instead of strengthening it, making companies dependent on continued government subsidization, ultimately reducing innovation.
Where Can I Find Changes?
OBBB Sec. 70308; 26 U.S.C. § 48D(a).
BOTTOMLINE:
The pass-through deduction is complicated and not ideal policy. It’s a workaround that allowed Congress to cut taxes in 2017 to a comparable degree for pass-throughs as they did for corporations. But whatever the deduction’s shortcomings, allowing a major tax increase on businesses wasn’t the answer. Many small business owners are breathing a major sigh of relief that Congress extended the deduction. Going forward, Congress should strive for corporate integration—alignment of the tax treatment of pass-through businesses and corporations.
This memo is part of the One Big Beautiful Booklet, a collection of more than 60 memos that examine and summarize the major aspects of the One Big Beautiful Bill – the signature legislative achievement of President Trump and the 119th Congress.
