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Breaking it down
Advanced manufacturing credit
The CHIPS Act establishes a new federal income tax credit worth 25% of the cost of qualifying property placed in service as part of a facility for which the primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment. The credit is effective for property placed into service after Dec. 31, 2022, and applies to properties for which construction begins before Jan. 1, 2027. For tax purposes, the credits reduce the tax basis in the applicable assets.
In lieu of claiming the tax credits directly, taxpayers are permitted to receive the value of the tax credits in the form of a tax refund (direct-pay election) from the Internal Revenue Service.
Financial reporting impact: Reporting entities should carefully evaluate each credit provided under the CHIPS Act to determine if the credit should be accounted for under Accounting Standards Codification (ASC) Topic 740, “Income Taxes,” or other accounting guidance (for example, as government assistance). ASC 740 applies only to credits that are based on a reporting entity’s taxable income.
The direct-pay election effectively treats the tax credit generated as equal to taxes paid on a filed return. Under these provisions, the tax credit is refundable to the taxpayer even if the taxpayer does not have taxable income or a tax liability. When a company receives the benefit of a credit regardless of whether it has income taxes payable or taxable income, we believe the benefit would be accounted for outside of ASC 740 accounting model.
Additionally, because the tax law provides for a reduction of the tax basis of the qualifying property, a temporary timing difference might arise depending on how the credit is accounted for in the financial statements; this might result in the recognition of deferred taxes.
Semiconductor research and development
The CHIPS Act provides approximately $52 billion for American semiconductor research, development, manufacturing, and workforce development. Key aspects of these provisions include the following:
- $39 billion in direct payment subsidies for expanding semiconductor manufacturing, research, packaging, equipment, and materials capacity in the United States. The CHIPS Act expands the eligibility for incentives to downstream materials and equipment suppliers.
- $2 billion for the Defense Department to establish a national network for microelectronics research and development in addition to semiconductor workforce training.
- $11 billion in research and development and workforce development to promote cutting-edge chip research in the United States and to develop a domestic workforce capable of sustaining this research.
- $500 million to provide for international information communications technology security and semiconductor supply chain activities.
Financial reporting impact: When government assistance is not based on a reporting entity’s taxable income (for example, when it is in the form of a government grant or subsidy), it would be outside the scope of ASC 740.
Accounting for government assistance
Currently, U.S. GAAP includes no explicit guidance addressing how business entities would account for government assistance. As a result, most business entities generally analogize to ASC 958-605, “Not-for-Profit Entities – Revenue Recognition,” or International Accounting Standard (IAS) 20, “Accounting for Government Grants and Disclosure of Government Assistance.”
Following is an overview of key aspects of these two models:
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ASC 958-605 |
IAS 20 |
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Financial statement recognition threshold
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When the conditions to be entitled to the government assistance have been substantially met (ASC 958-605-25-11).
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When there is reasonable assurance that a) the entity will comply with the conditions attached to the government assistance and b) the government assistance will be received (IAS 20.7).
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Timing and pattern of recognition in the income statement
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When government assistance is awarded or, if conditional, immediately once the condition is substantially met (ASC 958-605-25-8 and 25-11).
Government assistance is considered conditional if both of the following occur:
- One or more barriers must be overcome before the recipient is entitled to the benefit.
- The contributor has a right of return (ASC 958-605-25-5A).
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Using a systematic basis over the periods in which the entity recognizes the related expenses for which the grants are intended to compensate (IAS 20.12).
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Presentation in the financial statements
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Government assistance is presented on a gross basis – that is, as grant revenue or other income (ASC 958-605-45-1).
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Government assistance can be presented on a gross basis (for example, other income) or on a net basis (for example, deducted from the expense to which it relates, like depreciation).
For grants related to depreciable assets, a company can elect to do either of the following:
- Deduct the assistance from the cost of the asset (net presentation) and recognize the benefit through reduced depreciation expense.
- Present the grant separately as deferred income and amortize it as income or as a reduction in expense (typically depreciation expense) over the useful life of the asset (gross presentation) (IAS 20.24).
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Transactions with a government that are accounted for by analogizing to either a grant model (for example, IAS 20) or a contribution model (for example, in ASC 958-605) are subject to the disclosure requirements of Accounting Standards Update 2021-10, “Government Assistance: Disclosure by Business Entities About Government Assistance.”
Looking ahead
Companies should evaluate which provisions of the CHIPS Act affect their business operations, taxes, and financial reporting. Provisions of the CHIPS Act are governed and administrated by various U.S. government agencies, including but not limited to the Department of Commerce, Department of Energy, Department of the Treasury, and Department of Defense. We expect these government agencies likely will issue additional guidance, though it is unclear when they will do so.
