Understanding the CHIPS Act and its Potential Benefits to the Construction Industry
Category | Briefing Papers
Mark R. Becker is a shareholder in the construction law group of Fabyanske, Westra, Hart & Thomson, and may be reached at mbecker@fwhtlaw.com. Kylee A. Evans is a law clerk at Fabyanske, Westra, Hart & Thomson and may be reached at kevans@fwhtlaw.com.
The Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Sciences Act was signed into law August 9, 2022. The Act was passed in response to the U.S.’s shrinking dominance in the semiconductor and science industry.[1] In the 1990s, the U.S. produced around 37% of the world’s semiconductors—that number fell to 12% in 2020.[2] The fragility of the global semiconductor supply chain was on full display in 2021 as electronics and auto manufacturers struggled to keep up with rising domestic demand and decreasing global supply.
The Act will invest nearly $280 billion over the next ten years in scientific research and development, semiconductor manufacturing and workforce development, and tax credits for chip production.[3] Most of the investment—around $200 billion—will be used for scientific research and development. However, an important investment for the construction industry includes a $50 billion investment in building and maintaining semiconductor manufacturing plants—the so-called CHIPS for America Fund. Even for companies that can’t access direct federal investment, the law sets aside $24 billion in tax credits for investments related to chip production.
Many construction industry participants may wonder how they can benefit from these historic funds. This article will focus on the $74 billion allocated for domestic semiconductor production. It will outline how those programs function and how a company can apply for them.
CHIPS for America Fund
The National Defense Authorization Act for 2021 created the CHIPS for America Fund to “provide funding to eligible applicants to incentivize investment in facilities and equipment in the United States for the fabrication, assembly, testing, advanced packaging, production, or research and development of semiconductors, materials used to manufacture semiconductors, or semiconductor manufacturing equipment.”[4] The CHIPS Act allocated $39 billion to this Fund. An additional $11 billion will be invested separately to advance research and commercialization of semiconductor in the U.S.[5] The CHIPS Fund may offer significant federal money for developers looking to build semiconductor-related manufacturing plants.
The Fund, operated by the Department of Commerce, will operate in accordance with a few guiding principles outlined in the President’s Executive Order implementing the program.[6] Those principles include: protecting taxpayer dollars; meeting economic and national security needs; ensuring long-term leadership in the sector; strengthening and expanding regional manufacturing and innovation clusters; catalyzing private sector investment; and generating benefits for a broad range of stakeholders and communities. To execute the Fund, the DOC has created a CHIPS Program Office (CPO) housed at the National Institute of Standards and Technology (NIST) which will solicit and accept applications for the program.
The CPO expects to start soliciting applications six months after the law was enacted, making February 2023 the expected open date. The CPO’s process will include a preliminary application stage which allows applicants to get feedback from the agency before submitting their final applications. The Department has not released the value of any particular grant or loan while it assesses the impact of the new CHIPS tax credit. As of now, the Department claims that the funds may be in the form of grants or cooperative agreements, or subsidized loans or loan guarantees. The full funding outline is expected to be released in February 2023.
Allocation of the Funds
To be eligible for the incentive funds, the applicant must be a “covered entity” as defined in the statute. This definition is quite broad and can include: “a private entity, a nonprofit entity, a consortium of private entities, or a consortium of nonprofit, public, and private entities with a demonstrated ability to substantially finance, construct, expand, or modernize a facility relating to fabrication, assembly, testing, advanced packaging, production, or research and development of semiconductors, materials used to manufacture semiconductors, or semiconductor manufacturing equipment.”[7] Although a single entity could receive the award, the factors considered—discussed below—seem to suggest that the Department will be looking for projects that include joint ventures between developers, design professionals, etc.
Additionally, the funds must solely be used to support facilities in the U.S., not any facilities outside the country. Although foreign companies can apply, “foreign entities of concern” will not be granted approval.[8] This includes entities like terrorist organizations, but it also includes entities subject to the jurisdiction of “countries of concern” such as China, North Korea, Russia, and Iran.[9]
The DOC plans to divide the $39 billion allocated for the Fund into two separate initiatives:
In the first initiative, the DOC will provide “large-scale investments in leading-edge logic and memory manufacturing clusters.”[10] The first initiative will be more exclusive, but the Department plans to allocate three-quarters of the $39 billion—around $28 billion—into these projects. The Department envisions projects of this type to include “the construction or expansion of manufacturing facilities to fabricate, package, assemble, and test these critical components, particularly focusing on projects that involve multiple high-cost, production lines and associated supplier ecosystems.”
In the second initiative, the DOC will expand “manufacturing capacity for mature and current-generation chips, new and specialty technologies, and for suppliers to the industry.”[11] The second initiative, though broader, will only account for one-quarter of the incentive funds—around $10 billion. Because of its flexibility, the Department expects these projects to be more creative. The Department gives examples of potential projects such as: construction or expansion of facilities for the fabrication packaging, assembly, and testing of legacy and current-generation semiconductors; facilities to produce new or specialty technologies; and equipment upgrades that provide near-term efficiency improvements in semiconductor facilities (fabs). As such, this initiative could award funds to manufacturers of equipment and materials essential to semiconductors, even if the project itself won’t produce semiconductors.
Factors Considered for Applications
Although the Department has assured applicants that the CPO’s solicitation for applications will include “clear eligibility, evaluation, and selection criteria,” it has outlined some broad evaluation factors that the CPO will consider when granting awards:
Factor 1: Increase Scale and Attract Private Capital
The Department will be more likely to accept proposals that build large-scale fabs or proposals seeking to expand current U.S. fabs. This will require significant private capital in addition to federal funds; the CPO will evaluate an applicants’ ability to attract that capital. Additionally, the CPO wants applicants to include plans for how they will capitalize on federal funding in the most efficient way possible.
Factor 2: Leverage Collaborations to Build Out Semiconductor Ecosystems
Successful applicants will increase collaborations between various industry stakeholders, investors, customers, designers, and suppliers. The Department lists, for example, programs such as purchase commitments and other initiatives to improve demand transparency, collaboration between producers and suppliers, and even enabling fabless design firms.
Factor 3: Secure Additional Financial Incentives and Support to Build Regional and Local Industry Clusters and Corridors That Strengthen Communities
Applicants must demonstrate that they have secured incentives from state and local governments for the project. The CPO will prioritize funding for proposals that can demonstrate that their state and local incentives have a potential for large spillover benefits for the region. These benefits include maximizing performance of the project to increase competitiveness and economic gains for the region. Additionally, the Department will prioritize funding for proposals that demonstrate the ability to “move quickly, reduce project risk, demonstrate ample local support and/or regional cooperation, and provide broad-based benefits.”[12]
Factor 4: Establish a Secure and Resilient Semiconductor Supply Chain
The Department will prioritize funding for proposals that demonstrate an applicant’s ability to adhere to standards and guidelines on information security and data tracking and verification. As well as the ability of the applicant to withstand potential global supply chain disruptions.
Factor 5: Expand the Workforce Pipeline to Match Increased Domestic Capacity Workforce Needs
Successful applicants will demonstrate their ability to increase suitable industry workers through pipeline programs, internships and apprenticeships, and other outreach and recruitment strategies.
Factor 6: Create Inclusive and Broadly Shared Opportunities for Businesses
The Department will also prioritize proposals that “result in measurable benefits to small and underrepresented businesses.”
Factor 7: Financial Considerations
Finally, applicants must demonstrate plans for sustaining and maintaining the facilities after the CHIPS funding expires.
Although these considerations are not exhaustive, they give potential applicants an idea of what to consider when building their applications.
For updates and details on the CPO’s forthcoming solicitation for applications, the DOC directs potential applicants to the newly created webpage for the program, chips.gov.
Strings Attached to the Funds
As with most federal programs, there are various expectations associated with the acceptance of federal dollars. There are a few broad requirements placed on applicants who accept money from the CHIPS for America Fund. First, the CPO will ensure that recipients of CHIPS funds “cannot compromise national security by sending the latest technology abroad.” This includes a 10-year prohibition on “engag[ing] in any significant transactions. . . involving the material expansion of semiconductor manufacturing capacity in [China] or any other foreign country of concern.”[13]
Second, applicants must provide evidence of significant investments in worker and community programs and secure commitments from educational institutions for worker training. Moreover, the Davis-Bacon rule—requiring that workers earn local prevailing wages—will apply to any CHIPS-funded construction projects.
Finally, no recipients may use the public funds on stock buybacks or dividend payments to shareholders.
Tax Incentive for Investments in Chip Production
The CHIPS Act also created a new advanced manufacturing investment tax credit (ITC), administered by the IRS and Treasury Department. The ITC was created as a way to fill in the gaps for companies investing in semiconductors domestically. The government expects this incentive to allow companies to be competitive while also building and maintaining semiconductor plants in the U.S. The credit operates similarly to the clean energy ITC, with which many businesses may be familiar.[14] Just like the clean energy ITC, the manufacturing ITC comes with its own set of complexities.
A complete view of the ITC will require Treasury guidance, but there are some overarching details outlined in the statute. Taxpayers can claim the credit if they make a “qualified investment” during the tax year. The credit is equal to 25% of the basis of qualified property placed in service during the taxable year (generally, the cost of acquiring or constructing eligible property[15]). Qualified property is defined by the statute as any tangible property which is constructed, reconstructed, or erected during the tax year which is integral to the operation of a facility whose primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment. This tax credit is also available to manufacturers of equipment used in semiconductor manufacturing, even if the taxpayer does not manufacture semiconductors directly. The tax credit only applies to investments made on buildings whose construction begins after December 31, 2022, and before January 1, 2027. If the building began construction before December 31, 2022, the taxpayer would only get the benefit based on the signing date of the statute—August 9, 2022.
The ITC includes a direct pay option which may be attractive to a company with a smaller tax liability. Direct pay allows the taxpayer to treat the ITC as a tax payment which can ultimately result in a tax refund. A company cannot elect to receive the ITC as direct pay until 270 days after the enactment of the statute—meaning no earlier than May 5, 2023.[16] This allows time for the Treasury department to set up the program and issue guidance about its details.
Similar to the CHIPS Fund, acceptance of the tax credit comes with some strings attached. A taxpayer is only eligible for the credit if it is not a foreign entity of concern—discussed above—and has not made any “significant transactions involving the material expansion of semiconductor manufacturing capacity” in China or any other foreign country of concern within the claimed tax year.[17] And by accepting the tax credit, the taxpayer agrees that it will not engage in such a transaction within 10 years of placing in service any claimed property. Failing to meet this requirement will result in the recapture of 100% of the allowed credit.
Conclusion
There are various ways construction industry participants and developers can access the wealth of funds from the newly enacted CHIPS Act. The two main programs include direct federal investment from the CHIPS Fund and new manufacturing investment tax incentives. This article has outlined how some of those programs operate and how stakeholders can access them. Be sure to watch for updates as the Department of Commerce releases finalized details about the programs in February 2023.
[1] Press Release, White House Briefing Room, Fact Sheet: CHIPS and Science Act Will Lower Costs, Create Jobs, Strengthen Supply Chains, and Counter China, (Aug. 9, 2022), https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/09/fact-sheet-chips-and-science-act-will-lower-costs-create-jobs-strengthen-supply-chains-and-counter-china.
[2] Ana Swanson, Congress is Giving Billions to the Chip Industry. Strings are Attached (Aug. 3, 2022), https://www.nytimes.com/2022/08/03/business/economy/chip-industry-congress.html; see also Press Release, U.S. Dept. of Com., Analysis for CHIPS Act and BIA Briefing (Apr. 6, 2022), https://www.commerce.gov/news/press-releases/2022/04/analysis-chips-act-and-bia-briefing.
[3] The CHIPS and Science Act: Here’s what’s in it, McKinsey & Co. (Oct. 4, 2022), https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-chips-and-science-act-heres-whats-in-it.
[4] U.S. Dept. of Com., A Strategy for the CHIPS for America Fund 4 (2022), https://www.nist.gov/system/files/documents/2022/09/13/CHIPS-for-America-Strategy%20%28Sept%206%2C%202022%29.pdf; see also 15 U.S.C. § 4652.
[5]See 15 U.S.C. § 4656.
[6] Exec. Order No. 14080, 87 Fed. Reg. 52847 (Aug. 25, 2022).
[7] 15 U.S.C. § 4651(2).
[8] CHIPS Act of 2022, 15 US.C. § 4651(8).
[9] CHIPS Act of 2022, 15 US.C. § 4651(7)(A).
[10] U.S. Dept. of Com., supra note 4 at 9.
[11] Id. at 10.
[12] U.S. Dept. of Com., supra note 4 at 16.
[13] CHIPS Act of 2022, 15 U.S.C. § 4652(b)(6)(C)(i).
[14] Compare Cong. Rsch. Serv., IF10479, The Energy Credit or Energy Investment Tax Credit (ITC) 1 (2021), https://crsreports.congress.gov/product/pdf/IF/IF10479 with U.S. Dept. of Com., supra note 4 at .; see also Roger Lee, CHIPS Act Tax Credit Ambiguities, Nat’l L. Rev. (Aug. 22, 2022), https://www.natlawreview.com/article/chips-act-tax-credit-ambiguities.
[15] See Cong. Rsch. Serv., supra note 11.
[16] New Tax Credit Provides Benefits for Semiconductor Manufacturing, PwC (Aug. 2022), https://www.pwc.com/us/en/services/tax/library/new-tax-credit-provides-benefits-for-semiconductor-manufacturing.html.
[17] CHIPS Act of 2022, 15 US.C. § 4651(7).
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