Chip Factory Tax Credit Rises to 35%, but Construction Must Start by Dec. 31, 2026

The advanced manufacturing investment credit gives chipmakers a federal tax credit for building certain factories in the United States. It sits in Section 48D of the Internal Revenue Code and was added by Public Law 117-167 on Aug. 9, 2022, the CHIPS and Science Act. A 2025 law raised its rate from 25% to 35%, according to the statute as reproduced by Cornell Law School's Legal Information Institute.

The credit also has a fixed end date. The statute says it does not apply to property whose construction begins after Dec. 31, 2026. A Holland & Knight alert dated Oct. 5, 2026 says construction must begin no later than that date and that the deadline applies unless Congress acts. The alert does not describe an enacted extension.

What the Credit Covers

The credit applies to an advanced manufacturing facility, which the statute defines as a facility whose primary purpose is manufacturing semiconductors or semiconductor manufacturing equipment. The final regulations, published in the Federal Register on Oct. 23, 2024 as Treasury Decision 10009, say a facility meets that test when more than 50% of its output, measured by cost of production, arm's-length revenue or units produced, falls within that manufacturing. The rules took effect Dec. 23, 2024.

Qualified property must be tangible and depreciable or amortizable, and it must be integral to the facility's operation. Property can be constructed by the taxpayer, or acquired if its original use begins with the taxpayer. Buildings can qualify, but any building or portion used for offices, administrative services or other functions unrelated to manufacturing does not. Basis attributable to qualified rehabilitation expenditures is excluded.

The base for the credit is the basis of qualified property placed in service during the taxable year. Spending therefore counts toward the credit when the property is placed in service, and the construction-start rule is a separate test.

Property on a separate parcel can count toward a facility if it is located at the facility or on contiguous land. Parcels are contiguous if they share a common boundary, or would except for a road, street, railroad, utility or stream. Holland & Knight says contiguity alone is not enough; the property must also be integral to semiconductor production. Its examples, drawn from the regulations, include an air separation unit that supplies nitrogen on demand. The claiming taxpayer does not need to own the whole facility.

The 35% Rate and the 2025 Change

The 2022 statute set the credit at 25% of qualified investment. Public Law 119-21 substituted 35% for 25%, effective for property placed in service after Dec. 31, 2025, according to Cornell's reproduction of the statute. The current text says the credit is an amount equal to 35% of the qualified investment for the taxable year.

The IRS correction to its 2025 Form 3468 instructions says line 1c should be multiplied by 25% for property placed in service before 2026 and by 35% for all other property. It also removes text that limited the 35% rate to filers with a fiscal tax year ending in 2026. Filers that filed based on the prior instructions and used the 25% rate on amounts now eligible for 35% should file an amended return, the IRS says.

The final regulations published Oct. 23, 2024 still describe a 25% credit, while the statute and the IRS correction state 35%. The regulations were published before the 2025 amendment.

The Dec. 31, 2026 Construction-Start Deadline

The statute ends the credit for property whose construction begins after Dec. 31, 2026. Holland & Knight says the deadline concerns when construction begins, not when the facility is completed or placed in service.

The physical work test has no fixed minimum spending threshold. It requires physical work of a significant nature on the property. The final regulations list on-site and off-site examples, and that list is not exclusive. On-site work, such as pouring foundations and concrete pads, may count. Off-site work may count when performed under a binding written contract signed before manufacture, construction or production begins, and it cannot be work on property the vendor normally holds in inventory. Planning, design, financing, permitting, surveys, environmental studies and site clearing do not count, even if capitalized. Signing a contract alone is not enough.

The 5% safe harbor treats construction as begun if the taxpayer has paid or incurred at least 5% of the property's total cost. Cash-method taxpayers count amounts paid, and accrual-method taxpayers count amounts incurred. The threshold is measured against final project cost, so cost increases could push the 2026 amount below 5%. Holland & Knight recommends conservative scope modeling and detailed cost documentation.

A taxpayer that meets both tests generally uses the earlier date on which either was first met. Both routes require continuity, through continuous construction or continuous efforts. Property that begins construction in 2026 and is placed in service by Dec. 31, 2036 is treated as meeting continuity. Projects that miss that safe harbor are judged on their facts and circumstances, subject to rules for specified excusable disruptions.

Who Can Claim It and How the Payment Election Works

The statute limits the credit to taxpayers that are not foreign entities of concern and that have not made an applicable transaction, as defined in Section 50(a), during the taxable year. Under the final regulations, a person is also a foreign entity of concern if at least 25% of its voting interest is held, directly or indirectly, by any combination of such entities.

A taxpayer may elect to treat the credit as a payment against its tax. For partnerships and S corporations, the entity makes the election for property it holds directly, and partners or shareholders cannot elect separately for that property. The election is due by the return due date, including extensions, and cannot be made earlier than 270 days after enactment. Once made, it is irrevocable.

Excessive payments carry an additional amount. The tax increases by the excess plus 20% of that excess, but the 20% part does not apply if the taxpayer shows reasonable cause. The 10-year recapture rule applies to an applicable transaction within 10 years after the property is placed in service. The final rule describes such transactions as significant ones involving a material expansion of semiconductor manufacturing capacity in a foreign country of concern, and it excludes certain transactions that primarily involve expansion of legacy semiconductor manufacturing capacity. Recapture can be avoided if the transaction is ceased or abandoned within 45 days of the Secretary's determination and notice. The preamble says aligning this period with Commerce Department clawback periods would be inconsistent with section 50(a)(3)(A), because the clawback periods begin on the date of an award.

Where the Deadline Stands in the Latest Alert

For a chipmaker weighing a US fab, the statute ties eligibility to the start of construction and ties the rate to the year property is placed in service. Under the IRS correction, property placed in service before 2026 is at 25%, and other property is at 35%.

Under the statute, the credit does not apply to property whose construction begins after Dec. 31, 2026. A project that has not met the physical work test or the 5% threshold by that date may fall outside the credit. For a chipmaker, the date that matters is when construction starts, not when the plant opens.

The Holland & Knight alert dated Oct. 5, 2026 does not describe an enacted extension. It says construction must begin by Dec. 31, 2026 unless Congress acts.