Tax Alert: CHIPS and Inflation Reduction

Two pieces of legislation are working their way through Congress that contain noteworthy tax provisions:

1. The CHIPS Act of 2022 has passed both houses of Congress, and President Biden is expected to sign it on Aug. 9, 2022.
2. The Inflation Reduction Act of 2022 – the long-awaited deal between Sen. Joe Manchin (D-WV), Sen. Majority Leader Charles Schumer (D-NY), and President Biden – was announced on July 27, 2022. Schumer is hoping the Senate will vote on the bill over the weekend of Aug. 6, 2022, but the legislative process is likely to last into the following week, and ultimate passage is not yet guaranteed.

CHIPS Act of 2022

The CHIPS Act primarily provides funding to various government programs to support U.S. companies that manufacture computer chips, as well as other funding designed to encourage innovation and development of certain technologies within the United States. The tax provisions are limited to a new tax credit called the Advanced Manufacturing Investment Credit. The new credit is equal to 25% of any qualified property placed in service after Dec. 31, 2022, that is integral to the operation of an advanced manufacturing facility. For this purpose, the term “advanced manufacturing facility” means a facility for which the primary purpose is the manufacturing of semiconductors and semiconductor manufacturing equipment. The goal for this new credit is to reduce the costs associated with the manufacturing of these computer chips.

Inflation Reduction Act of 2022

The Inflation Reduction Act is the scaled-back compromise to what was originally known as the Build Back Better Plan. The Inflation Reduction Act is still a large, significant piece of legislation, with important nontax provisions, but it is much smaller than the initial BBB proposal. In particular, the most talked about and broadly applicable tax provisions of the original BBB proposal have been eliminated from the legislation.

The tax provisions that remain part of this legislation include:

• A 15% minimum corporate tax on corporations with book profits in excess of $1 billion (This new minimum tax is expected to only impact approximately 200 of the largest corporations.)
• Additional IRS funding designed to increase the IRS’s enforcement and compliance efforts
• A host of environmental tax credits designed to address climate change

Previous drafts of this legislation included changes to the eligibility requirements for long-term capital gain treatment on certain partnership interest referred to as “carried interests.” However, further compromise needed to secure the vote of Sen. Kyrsten Sinema (D-AZ) resulted in the removal of the carried interest tax provision.

KSM will continue to provide updates on this legislation as it continues to move through the legislative process. In the meantime, for questions or more information, please reach out to your KSM advisor or complete this form.