The Biden administration finalized rules for a 25% tax credit for semiconductor manufacturing projects, expanding eligibility for what is likely to be the largest incentive program from the 2022 Chips and Science Act. 

The new regulations, which come more than a year after the initial proposed rules, mean that a wider swath of companies will be able to get the tax breaks. That includes businesses that produce the wafers that are ultimately turned into semiconductors, as well as manufacturers of chips and chipmaking equipment.

The credits also will apply to solar wafers — an unexpected shift that could help spur domestic production of panel components. So far, the U.S. has struggled to foster manufacturing of those parts, despite a surge of investment in U.S. panel-making factories. 

Samsul Said/Bloomberg

But the benefits don’t extend all the way up the supply chain. Still excluded are facilities that produce underlying materials like polysilicon, which is used to make wafers. That approach is consistent with how the original law was written, as well as how the Commerce Department defines semiconductors and equipment as opposed to materials, a Treasury official said. 

The tax refunds are one of three main subsidy streams available from the Chips Act, which aims to revitalize the American semiconductor industry after decades of production shifting abroad. The law also set aside $39 billion in grant funding — more than 90% of which has been allocated, though not yet spent — and $75 billion in loans and loan guarantees, of which officials are likely to use less than half. 

The latter two incentive categories have garnered the most attention — President Joe Biden has even visited factories to herald the announcements — but it’s the tax credits that could be most meaningful for companies. Proposed grants typically cover 10% to 15% of project costs, compared with 25% for tax credits. The idea is to make it just as cost-effective to build a factory in the U.S. as in Asia.

“Our goal is to give you the minimum amount of money necessary to get you to expand on our shores in a way that advances our economic and national security objectives,” Mike Schmidt, director of the Commerce Department’s chips office, said in an August interview when asked about tax credits. “That means looking at all sources of funding and then figuring out how our funds get you over that hump.”

Some companies argued in negotiations that the tax credits shouldn’t “count against” their other funding, Schmidt said — a line of reasoning that didn’t sway government officials.

Chip companies have announced more than $400 billion in planned U.S. investment over the past several years, including massive factories from leading-edge manufacturers like Taiwan Semiconductor Manufacturing Co. and Intel Corp. There also are efforts underway to make older-generation processors and other supplies.

The surge in activity likely means that the Chips Act will be more expensive than anticipated.

The Congressional Budget Office originally estimated that the tax credits would cost $24 billion in forgone revenue. But the true number could be more than $85 billion, according to a June report by the Peterson Institute for International Economics that used “very conservative assumptions based on the current investment trends.” 

That would exceed the original projected cost of the entire Chips Act, the report said, “resulting in a total cost overrun of nearly 80%.”

Asked whether the Treasury Department has its own cost estimate for the tax credit, an official didn’t provide a specific number. But any overrun could be seen as a win by the Biden administration since it represents additional investments in American manufacturing. 

In almost every case, tax credits will account for the greatest share of Chips Act incentives going to any one company. Micron Technology Inc., for example, expects to get around $11.3 billion in tax credits for two chip factories in New York. That’s compared with $6.1 billion in grants and $7.5 billion in loans to support those two facilities plus another plant in Idaho.

Texas Instruments Inc. anticipates $6 billion to $8 billion in tax credits — as much as five times the size of its Chips Act grant.

The Public Company Accounting Oversight Board announced today it settled a disciplinary order sanctioning Yusufali & Associates and Yusufali Musaji, the firm’s owner and partner for multiple violations of PCAOB rules and standards.

The PCAOB imposed a $50,000 fine, revoked the firm’s registration and barred its partner.

The sanction is the latest in a long line of increased enforcement efforts by the PCAOB, most recently including sanctions against four firms in September for failing to make required communications with audit committees, as well as one firm for violating reporting requirements. The Board previously sanctioned Baker Tilly, Grant Thornton Bharat, Mazars and SW Audit in February, as well as three firms in November 2023 and five firms in July 2023.

The violations committed by the Yusufali & Associates and/or Musaji include:

• Failing to obtain engagement quality reviews;
• Failing to obtain sufficient appropriate audit evidence and to perform sufficient audit procedures for multiple significant accounts;
• Failing to determine whether there are critical audit matters;
• Failing to make certain required audit committee communications;
• Failing to comply with audit documentation requirements and failing to cooperate with a Board inspection; and,
• Failing to file Form APs.

The Board also found that the firm’s quality control system failed to provide reasonable assurance that the firm:

1. Would comply with standards, including requirements regarding audit documentation, engagement quality reviews and Form APs filings, and, 
2. Only undertook engagements that it could reasonably expect to perform with professional competence.

“To protect investors, the PCAOB will not hesitate to hold accountable auditors who fail to perform audits in accordance with PCAOB rules and standards,” PCAOB Chair Erica Williams said in a statement.

Without admitting or denying the finding, Musaji and the firm consented to the PCAOB’s order, which:
 

• Censures both respondents and imposes a $50,000 civil money penalty, jointly and severally, against them; 
• Revokes the firm’s registration with the right to reapply after three years; 
• Bars Musaji with a right to petition to terminate his bar after three years; 
• Requires the firm to undertake remedial efforts to improve its system of quality control before reapplying to registration; and, 
• Requires Musaji to complete 50 additional hours of continued professional education before seeking to terminate his bar.

The 2024 elections are nearly upon us, with the fate of the tax world hanging in the balance. Of course, other important issues loom as well, including open borders, crime, inflation, and conflicts in Europe and the Middle East, as well as the style and personality of the candidates themselves. But for tax nerds, these are eclipsed by the positions offered by the candidates on taxation.

The tax landscape is highly dependent on the fate of the election, according to Marc Gerson, a member at Miller & Chevalier and former majority counsel at the House Ways and Means Committee.

“Obviously the fate of the 2017 tax cuts is at stake,” he explained. “But also what happens during the lame duck session is critical. The focal point will be to extend the 2017 provisions which were enacted on a temporary basis. Some have expired, while others will expire at the end of 2025, so it’s safe to say that regardless of the election results, we will see some tax legislation next year. Neither party wants to see higher taxes on all Americans. What is to be determined is the length and scope of any extension and how it will be paid for.”

They also have to pass a budget, he observed: “And regardless of formal requirements, there will be incredible pressure on Congress and the White House to pay for legislation so there will be no increase in the deficit. Some Republicans assert that the tax cuts ‘paid for themselves,’ since revenue increased after enactment of the Tax Cuts and Jobs Act.”

“There are Republicans that take the position that the extension of the TCJA should not have to be paid for because under dynamic scoring they will lead to greater revenue,” Gerson observed. “But some Republicans prefer deficit reduction to tax relief, and some Democrats believe that tax cuts will add to an already overburdened deficit.”

Dynamic scoring assesses the effect of tax legislation not only in terms of its direct effect on the budget, but also the indirect effects of tax on economic growth. It projects a positive or negative effect on jobs, wages, investment, gross domestic product and revenue. 

The reconciliation process allows the passage of the budget without the impediment of a filibuster by the minority party. The post-election “lame duck” Congress will return to Washington November 12. 

“So much depends on the election. If either party has a sweep, they will try to do tax through reconciliation. Then the extreme policies of either party will get tempered down,” said Gerson. “The other thing to keep in mind is that Congress and the White House next year will have immediate ‘must pass’ legislation so they will have to deal with the deficit, government funding and tax law. They really have a full agenda of ‘must pass’ legislation from the beginning of the year. It will be very challenging right from the start.”

Perhaps foremost among that must-pass legislation will be some kind of solution for funding the government (the current arrangement ends December. 20).

“The productivity of the new Congress is dependent on the election results, which may result in a change in control of both the House and the Senate,” said Gerson. “This may result in the delay of any real consideration in the lame duck session. The new Congress will have to deal with the debt limit, government funding, a farm bill and the TCJA tax cuts. Meanwhile, the current continuing resolution expires December 20. There could be disaster-related legislation in the lame duck session, which could involve targeted disaster tax relief and may start the discussion of a 2024 tax bill. And they may pass either an omnibus appropriations bill if they can agree on it, or another continuing resolution bill into the new year.”