Section 48D credit rises to 35% and why you must act before 2027

The One Big Beautiful Bill Act delivers a significant boost to domestic semiconductor manufacturing by enhancing the advanced manufacturing investment credit under Internal Revenue Code Section 48D. Section 70308 of the legislation amends IRC Section 48D(a) by replacing "25 percent" with "35 percent," effective for all qualifying property placed in service after December 31, 2025.

That 10-percentage-point increase is not a small adjustment. For capital-intensive semiconductor facilities that routinely involve tens or hundreds of millions of dollars in qualifying investment, the credits are substantially larger and directly reduce federal income tax liability. A business investing $50 million in a new domestic chip fabrication facility sees its available credit rise from $12.5 million to $17.5 million under the enhanced rate. That is a $5 million gain on a single project.

However, there is a construction deadline every eligible manufacturer must understand before planning around the enhanced credit. Under IRC Section 48D(e), the credit does not apply to any property the construction of which begins after December 31, 2026. That deadline is unchanged by the OBBB Act. With a publish date of April 2026, manufacturers have fewer than nine months to break ground and secure eligibility under the enhanced 35 percent rate before the window closes permanently.

The One Big Beautiful Bill Act's enhancement builds on the original goals of the CHIPS and Science Act of 2022, which first established the Section 48D credit at 25 percent as part of a broader national initiative to rebuild America's domestic semiconductor supply chain. Understanding the mechanics of the enhanced credit, the qualifying property definitions, the construction deadline, and the coordination opportunities available under current tax law is essential for any manufacturer planning facility expansion.

What is the advanced manufacturing investment credit?

The advanced manufacturing investment credit was created by the CHIPS and Science Act of 2022 as a 25 percent investment-based tax credit under IRC Section 48D. Congress designed the credit to encourage U.S.-based investment in semiconductor fabrication facilities, recognizing that domestic chip production had declined significantly relative to foreign competitors over the prior two decades.

The credit applies to the qualified investment a taxpayer makes in any taxable year for an eligible facility. An eligible facility under Section 48D is one whose primary purpose is the manufacturing of semiconductors or the manufacturing of equipment that is itself used to produce semiconductors. The credit is calculated as a percentage of the taxpayer's total qualified investment in that facility for the applicable tax year, with no statutory dollar ceiling on the credit amount.

Key structural features of the Section 48D credit include the following:

• No cap on the total credit amount, meaning larger qualifying investments generate proportionally larger credits
• A direct pay election under IRC Section 6417 allows certain eligible entities, including tax-exempt organizations and governmental bodies, to treat the credit as a direct payment from the IRS rather than a tax offset
• Credit carryforward rules applicable to unused credit amounts
• Recapture provisions under Section 50 that claw back credit amounts if the qualifying property ceases to serve its intended semiconductor manufacturing purpose within 10 years of being placed in service

The original CHIPS Act also included restrictions barring foreign entities of concern, specifically those owned or controlled by China, Russia, Iran, or North Korea, from claiming the credit. These restrictions were enacted as part of the original 2022 legislation and remain in effect under current law. For guidance on qualifying property classification and depreciation documentation, IRS Publication 946 provides the foundational rules that apply directly to semiconductor manufacturing equipment and facility components.

What changed with Section 48D under the OBBB Act

Section 70308 of the One Big Beautiful Bill Act makes a single amendment to IRC Section 48D(a). The statutory text strikes "25 percent" and replaces it with "35 percent," raising the credit rate by 40 percent relative to the prior law. This is the only change Section 70308 makes. No new eligibility rules were added, no facility definitions were modified, and no alterations were made to the existing foreign-entity restrictions in the original CHIPS Act. The entire enhancement is contained in that single rate change from 25 to 35 percent.

The following table summarizes what changed and what did not:

What the OBBB Act changed:

• Credit rate for property placed in service after December 31, 2025: raised from 25% to 35%

What the OBBB Act did not change:

• Eligible facility definition (semiconductor manufacturing or semiconductor manufacturing equipment)
• Qualified investment definition (basis of qualifying property placed in service)
• Construction deadline of December 31, 2026 (credit unavailable if construction begins after this date)
• Foreign entity of concern restrictions from the original CHIPS Act
• Direct pay election structure under IRC Section 6417
• Recapture rules under Section 50 for applicable transactions within 10 years

One important nuance: taxpayers who elected to claim the credit on qualified progress expenditures before the property is placed in service may still be subject to the 25 percent rate on those earlier expenditures, even if the property is ultimately placed in service after December 31, 2025. The 35 percent rate applies to property placed in service after the effective date, not to pre-placement progress expenditure elections made before that date. Manufacturers with active construction projects should review their elections carefully with a qualified tax advisor.

Businesses considering Late C Corporation elections should factor in the enhanced rate when analyzing their entity structure before committing to a structure for new projects.

Why the December 2026 construction deadline matters

The most important planning fact about the Section 48D credit is not the rate increase. It is the construction start deadline. Under IRC Section 48D(e), no credit is available for property the construction of which begins after December 31, 2026. The One Big Beautiful Bill Act did not extend this deadline.

This means the following for manufacturers planning new semiconductor facilities:

1. Construction must physically begin, or a valid 5 percent safe harbor must be satisfied, by December 31, 2026
2. The property can be placed in service after that date and still qualify for the credit, provided construction began on time
3. A physical work test or 5 percent safe harbor, as defined in the IRS final regulations under Section 48D, governs whether construction is considered to have begun
4. A continuity requirement also applies, requiring sustained construction activity after the start date

For an article published in April 2026, manufacturers have fewer than nine months to satisfy the beginning-of-construction requirement. Semiconductor fab construction typically requires 18 to 36 months from groundbreaking to operational status, meaning the planning and permitting work must be underway now. Waiting until the fourth quarter of 2026 to begin construction creates significant logistical risk and may jeopardize eligibility.

Depreciation and amortization planning should be coordinated with the construction start date to maximize the combined benefit of Section 48D credit and 100 percent bonus depreciation under Section 70301 of the One Big Beautiful Bill Act.

How much can you save with the enhanced 35% credit

The financial impact of the enhanced credit scales directly with the size of the qualifying investment. Because Section 48D imposes no maximum dollar cap, larger projects generate proportionally larger credits, making the rate increase from 25 percent to 35 percent especially valuable for large-scale semiconductor facility construction.

Consider how the enhanced rate changes the math across three investment tiers:

A small semiconductor equipment manufacturer investing $10 million in a new U.S. production facility claimed a $2.5 million credit under the prior 25 percent rate. Under the OBBB Act's 35 percent rate, that same $10 million investment generates a $3.5 million credit, yielding an additional $1 million in tax savings on that project alone.

A mid-size chip fabrication company expanding an existing facility with a $50 million qualifying investment sees its credit increase from $12.5 million to $17.5 million, gaining $5 million in additional tax benefits from the expansion.

For a larger manufacturer committing $200 million to a new domestic fab, the credit rises from $50 million at the prior rate to $70 million at the enhanced rate, a difference of $20 million on a single capital project.

Strategic timing consideration: the effective date requires the property to be placed in service, not merely purchased or under construction. Manufacturers must coordinate their construction schedules and commissioning timelines to ensure the qualifying property is fully operational and placed in service after December 31, 2025, while ensuring construction begins before December 31, 2026.

What property qualifies for the Section 48D credit

Not every manufacturing investment qualifies for the Section 48D credit. Precise eligibility depends on both the nature of the facility and the category of property within it. IRS final regulations clarify which property categories qualify, providing greater certainty for manufacturers planning major capital projects.

Qualifying property categories confirmed by the final regulations include:

• Fabrication equipment and production machinery integral to semiconductor manufacturing
• Cleanrooms and specialized HVAC systems essential to production environments
• Automated manufacturing equipment and quality control systems
• Semiconductor packaging operations, including assembly, testing, and advanced protection methods
• Wafer production infrastructure, including single-crystal growth, slicing, and cleaning equipment
• Air separation units co-located at and integral to an advanced manufacturing facility

The following property does not qualify:

• Buildings or portions of buildings used for offices, administrative services, or other functions unrelated to manufacturing
• Sales facilities, marketing departments, or corporate headquarters space
• Consumables such as chemicals, gases, or process fluids
• Lodging, parking, or non-production support facilities

C Corporations represent the most effective entity type for absorbing the Section 48D credit, given the 21 percent flat corporate tax rate and the ability to carry unused credits forward. For manufacturers with significant ongoing capital programs, carry-forward credits from high-investment years can offset tax liability across multiple future periods.

How to stack R&D and depreciation for maximum savings

The Section 48D investment credit does not stand alone as a tax benefit for semiconductor manufacturers. The One Big Beautiful Bill Act created and enhanced several provisions that work alongside Section 48D to reduce the total after-tax cost of domestic manufacturing expansion.

The most powerful coordination involves research and development. Semiconductor manufacturing is inherently R&D-intensive, covering process improvement, materials research, and yield enhancement. Under Section 70302 of the One Big Beautiful Bill Act, domestic R&D expenses are fully deductible in the year incurred for tax years beginning after December 31, 2024, through December 31, 2029, reverting to 5-year amortization thereafter. Manufacturers can claim AI-driven R&D tax credits on qualifying research while simultaneously claiming the enhanced Section 48D credit on the underlying facility, since both provisions apply to related but legally distinct expenditure categories.

A second layer of coordination comes from 100% bonus depreciation. Under Section 70301 of the One Big Beautiful Bill Act, qualifying personal property acquired and placed in service after January 19, 2025, is eligible for immediate full expensing. Both the Section 48D credit and first-year bonus depreciation can apply to certain assets in the same year. However, basis adjustments may reduce the depreciable base and should be calculated carefully before filing.

Additional deduction strategies that produce independent savings alongside the Section 48D credit include:

• Business meals during vendor negotiations, contractor planning sessions, and facility design meetings generate Meals deductions that reduce taxable income separately from credit amounts
• Site visits, equipment inspections, and attendance at semiconductor industry conferences generate fully deductible Travel expenses when properly documented
• Manufacturers with large technical workforces can enhance Employee achievement awards programs to generate additional deductions while retaining specialized engineering talent

Which entity type gets the most from Section 48D

The structure through which a manufacturing business holds its qualifying facility significantly affects how the Section 48D credit is used and the degree of tax efficiency achieved. Both corporate and pass-through entity types can claim the credit, but the mechanics differ in ways that matter for tax planning.

For C Corporations, the 21 percent corporate tax rate combined with the 35 percent investment credit creates a strong equation. A C Corporation with $60 million in qualifying semiconductor facility investment generates a $21 million Section 48D credit. Applied against a year with $100 million in taxable income at the 21 percent rate, resulting in a $21 million tax bill, the credit eliminates that liability, with any excess carrying forward. The flat corporate rate makes credit planning more predictable than in pass-through structures, where individual owners' marginal rates vary.

Pass-through considerations differ in important ways. Credits from Partnerships and S Corporations flow through to individual owners in proportion to their ownership percentages. High-income owners in the 37 percent marginal bracket can apply the credit against substantial personal tax liability when combined with large individual income. However, the alternative minimum tax may limit credit utilization in certain cases and requires separate analysis.

Building a competitive compensation package to attract the specialized technical talent that semiconductor manufacturing demands is an equally important planning consideration. Offering Health reimbursement arrangement benefits and robust Traditional 401k plans generates additional deductions that reduce net tax cost while helping manufacturers compete for engineering and process talent. Texas-based manufacturers benefit from the absence of state income tax, meaning the full value of the Section 48D credit reduces federal liability without a corresponding state offset. Review your 2026 Texas State Tax Deadlines to ensure federal credit claims and state filings are properly coordinated.

How to document and claim the Section 48D credit

Claiming the enhanced Section 48D credit requires rigorous documentation capable of surviving audit scrutiny. The IRS requires taxpayers to register through the IRS Pre-Filing Registration Tool before claiming the credit as a direct pay election, and to file Form 3468, Investment Credit, and Form 3800, General Business Credit, with the applicable annual return.

1. IRS Pre-Filing Registration — Obtain a registration number for each qualifying investment through the IRS Pre-Filing Registration Tool before filing the return; this number must appear on Form 3468
2. Facility description records — a written description confirming the facility's primary use in semiconductor manufacturing or semiconductor production equipment manufacturing
3. Property identification schedules — itemized lists of each qualifying asset with acquisition dates, purchase prices, placed-in-service dates, and contractor identification
4. Qualified investment workpapers — a complete accounting of the investment base, clearly segregating qualifying semiconductor manufacturing property from non-qualifying assets
5. Entity eligibility documentation — records confirming the taxpayer is not a foreign entity of concern under the restrictions established by the CHIPS and Science Act of 2022
6. Beginning-of-construction evidence — physical work test documentation or 5 percent safe harbor expenditure records proving construction commenced before December 31, 2026
7. Placed-in-service evidence — contractor certifications, certificates of occupancy, or commissioning records establishing the date the qualifying property became operational

Recapture rules require ongoing attention after the credit is claimed. If the qualifying property is disposed of or ceases to be used for semiconductor manufacturing within the 10-year recapture period under Section 50, a proportionate share of the credit must be repaid to the IRS in full.

Maximize your savings with Instead

The enhanced advanced manufacturing investment credit is one of the most powerful business tax opportunities in the One Big Beautiful Bill Act. With the credit rate rising to 35 percent for qualifying property placed in service after December 31, 2025, and a construction deadline of December 31, 2026, semiconductor manufacturers and equipment makers have a narrow, high-value window to act.

Instead helps businesses identify, calculate, and document their full range of available tax credits and deductions under the new law. Instead's intelligent system integrates the enhanced Section 48D credit into a comprehensive tax strategy alongside R&D expensing, bonus depreciation, and other OBBB Act provisions, ensuring manufacturers capture every dollar available before the deadline passes.

Explore Instead's pricing plans to find the right level of support for your manufacturing business, and start building a tax strategy that fully captures the savings available under the One Big Beautiful Bill Act.

Frequently asked questions

Q: What credit rate does the Section 48D credit provide under the OBBB Act?

A: Section 70308 of the One Big Beautiful Bill Act raises the IRC Section 48D credit rate from 25 percent to 35 percent for qualifying property placed in service after December 31, 2025. Property placed in service on or before that date retains the original 25 percent rate from the CHIPS and Science Act of 2022.

Q: When must construction begin to qualify for the Section 48D credit?

A: Construction must begin by December 31, 2026. Under IRC Section 48D(e), the credit does not apply to property whose construction begins after that date. The One Big Beautiful Bill Act did not extend this deadline. Manufacturers can use a physical work test or a 5 percent safe harbor to establish when construction began for purposes of this termination rule.

Q: Can a business claim both the Section 48D credit and bonus depreciation on the same property?

A: These provisions can be coordinated, but basis adjustments may apply. When the Section 48D investment credit is claimed on qualifying real property, the depreciable basis may be reduced before bonus depreciation is calculated. Equipment and personal property are handled differently from facility real property. Coordination with a qualified tax advisor before filing is strongly recommended.

Q: Does the 35% rate apply to qualified progress expenditures claimed before the property is placed in service?

A: Not necessarily. Taxpayers who elected to claim the credit on progress expenditures before the placed-in-service date may still be subject to the original 25 percent rate on those earlier expenditure claims, even if the property is ultimately placed in service after December 31, 2025. The 35 percent rate applies to property placed in service after the effective date, not to pre-placement progress elections made before the effective date.

Q: What types of facilities and property qualify for the Section 48D credit?

A: Facilities whose primary purpose is the manufacturing of semiconductors, or the manufacturing of equipment used to produce semiconductors, qualify. Qualifying property includes fabrication equipment, cleanrooms, specialized HVAC systems, automated manufacturing equipment, and semiconductor wafer production infrastructure. Administrative offices, sales facilities, and property unrelated to manufacturing are excluded.

Q: Is there a dollar cap on the total Section 48D credit a business can claim?

A: No. The Section 48D credit equals 35 percent of qualifying investment with no statutory dollar ceiling. Larger projects generate proportionally larger credits, making it especially valuable for billion-dollar semiconductor fab projects.

Q: Do I need to register with the IRS before claiming the Section 48D credit?

A: Yes. Taxpayers making a direct pay election must register through the IRS Pre-Filing Registration Tool to obtain a registration number for each qualifying investment before filing. That number must be included on Form 3468 attached to the annual return. Failure to register in advance may jeopardize the direct pay election.