Oregon R&D Tax Credit for Semiconductors: Savings & Innovation

The Research and Development (R&D) tax credit for the semiconductor industry is a pivotal financial incentive for businesses in Oregon. This specialized credit provides significant tax relief to companies engaged in qualified semiconductor research activities, thereby encouraging investments in new product development and process improvements.

This tax credit reduces the financial burden of qualified research expenses for semiconductor companies. Oregon R&D tax credit supports businesses in overcoming budgetary challenges and stimulates job creation and skill development within the local workforce. It positions Oregon as an attractive hub for semiconductor companies, promoting sustained economic development and a thriving business ecosystem until 2029.

Does Oregon have an R&D Credit?

While there are R&D credits for the semiconductor industry, the general R&D credit for Oregon was allowed to expire. Semiconductor R&D credits for the state of Oregon are secured until 2029. This specialized credit provides significant financial relief to semiconductor businesses engaged in qualifying research activities, encouraging investments in new product development and process improvements.

The semiconductor-specific R&D tax credit is a crucial incentive designed to foster innovation and technological advancement within this vital sector. By allowing semiconductor companies to offset a portion of their R&D expenditures against their state tax liabilities, the credit reduces the overall cost of research and development, enabling businesses to allocate more resources toward innovative projects.

This incentive is particularly beneficial for small and medium-sized enterprises (SMEs) in the semiconductor industry that often struggle with the high costs associated with innovative activities.

The credit encourages these businesses to invest in new product development, process improvements, and technological advancements, reinforcing Oregon’s position as a hub for semiconductor innovation.

Despite the expiration of the general state-level credit, the semiconductor-specific R&D tax credit provides a targeted incentive for businesses in this industry. Oregon businesses can still take advantage of the federal research tax credit. The federal research credit remains a robust incentive, offering substantial tax savings for companies undertaking qualified research activities.

By leveraging this federal credit, businesses can continue to get credit for their basic research expenses, drive innovation, and remain competitive in their respective industries.

What is the Oregon R&D Tax Credit for Semiconductors?

The Oregon Legislature House Bill (HB) 2009 introduced a targeted Research and Development (R&D) tax credit specifically designed for semiconductor companies. This credit aims to bolster innovation and technological advancements within this crucial sector by providing financial incentives for companies engaged in qualified research activities. The benefits for semiconductor businesses are substantial.

By claiming the R&D tax credit, semiconductor companies can offset a portion of their research expenses against their state tax liabilities, resulting in significant cost savings. This financial relief enables businesses to allocate more resources towards innovative projects, driving revenue growth and enhancing their competitive edge in the global market.

House Bill 2009 sets a sunset date of January 1, 2029, for the semiconductor R&D tax credit. This targeted credit supports the semiconductor sector effectively and contributes to Oregon’s economic growth. The continued availability of this credit ensures that Oregon remains an attractive hub for semiconductor innovation and development.

Oregon aims to maintain its position as a leader in technology and innovation by fostering advancements within the semiconductor industry. The R&D tax credit provides critical support to semiconductor companies, helping them manage the high costs associated with research and development.

While this state tax credit is related to the federal R&D tax credit, it is specifically tailored to meet the unique needs of semiconductor companies in Oregon. Businesses can potentially benefit from both state and federal credits, maximizing their tax savings and further incentivizing R&D investments.

Eligibility Criteria for the Oregon Semiconductor R&D Tax Credit

The eligibility criteria for the Oregon Semiconductor R&D Tax Credit are designed to target companies within semiconductor manufacturing that are heavily involved in research and development activities. Understanding these criteria is crucial for businesses aiming to take advantage of the financial incentives provided by the credit.

To qualify for the Oregon Semiconductor R&D Tax Credit, companies must engage in activities that fall under the definition of qualified refundable research and development. These activities need to aim at discovering information that would eliminate uncertainty concerning the development or improvement of a product, process, technique, formula, or invention.

Eligible entities include a wide range of businesses within the semiconductor sector. The credit is available to companies that produce semiconductors, encompassing firms involved in various stages of semiconductor production, including basic research payments, design, development, fabrication, assembly, testing, packaging, and validation.

These companies are essential in driving innovation and technological advancement within the industry. Companies that create manufacturing equipment used in the production of semiconductors are also eligible. This includes businesses developing tools and machinery necessary for the fabrication and assembly of semiconductor devices.

The credit also extends to firms involved in the creation of core intellectual property (IP) related to semiconductors. This IP can include patents, proprietary technologies, and trade secrets that are vital for semiconductor production and advancement. Furthermore, companies developing electronic design automation software qualify for the credit. This software is crucial for designing and testing semiconductor devices, making it an integral part of the R&D process in the industry.

Qualified semiconductor companies are defined as businesses that meet the criteria above and are primarily engaged in the semiconductor industry’s core activities. These activities must be geared toward advancing semiconductor technology and contributing to the industry’s overall growth and innovation.

Understanding the eligibility criteria for this tax credit provides valuable insight into the types of activities and entities that are supported. This knowledge remains relevant for businesses seeking to leverage other R&D tax incentives, such as the federal R&D tax credit, to continue driving innovation in the semiconductor sector.

Four-Part Test for Qualifying Activities

The Four-Part Test is a crucial framework used to determine whether a qualified semiconductor company can qualify for tax credits for business directly related to research and development.

This test ensures that the activities meet specific criteria to be eligible for financial incentives. In the context of the semiconductor industry, understanding and applying this test is essential for companies aiming to maximize their tax benefits while engaging in innovative projects.

Technological In Nature

To meet the technological in-nature criterion, the R&D activities must fundamentally rely on the principles of physical or biological sciences, engineering, or computer science. This means that the project must involve scientific or engineering knowledge and methodologies to address technical challenges and achieve its objectives.

Designing a new type of transistor involves applying principles of electrical engineering and materials science. The development process requires a deep understanding of how different materials and electrical properties interact to create a functional and efficient semiconductor device.

Creating advanced semiconductor materials, such as new silicon-germanium alloys, relies on chemical and materials science principles.

The research would involve studying the atomic structure, bonding characteristics, and thermal properties of these materials to develop a product that meets specific performance criteria. These activities are technological, as they depend on scientific experimentation and engineering processes to achieve innovative outcomes.

By ensuring that their R&D activities are technological, semiconductor companies can demonstrate that their projects involve genuine scientific and engineering efforts. This not only helps in qualifying for R&D tax credits but also reinforces the importance of technical expertise and innovation within the industry.

Permitted Purpose

To satisfy the Permitted Purpose criterion, the R&D activities must be intended to develop or improve a product or process. This means that the goal of the research must be to create something new or to enhance the functionality, performance, reliability, or quality of an existing product or process.

For example, in the semiconductor industry, this could involve developing a new generation of microprocessors with increased processing speed and reduced power consumption. The project aims to create a superior product that offers significant advancements over previous versions, thus meeting the Permitted Purpose criterion.

This could include activities such as improving the semiconductor fabrication process. If a company is working on developing a new lithography technique that allows for more precise etching of circuits on a silicon wafer, the goal is to enhance the manufacturing process.

This improvement can lead to higher yields, reduced defects, and overall better performance of the final semiconductor products. Such efforts align with the Permitted Purpose criterion as they seek to enhance existing processes substantially.

Eliminate Uncertainty

To qualify for eliminating uncertainty, a project must eliminate technical uncertainty that is not simply related to cost or schedule. These uncertainties may pertain to the capability, method, or design necessary to achieve the desired outcome.

For instance, a semiconductor company developing a new fabrication process may encounter uncertainty regarding whether the proposed process will produce chips with the desired level of precision and performance. The company must then engage in a series of experiments and evaluations to overcome these uncertainties.

The process of eliminating uncertainty typically involves the use of scientific methods, such as hypothesis testing, modeling, simulations, and controlled experiments. Documenting this process is crucial, as it demonstrates the systematic approach taken to address the technical challenges and validate the solutions.

An example of eliminating uncertainty in the semiconductor industry could involve developing a new type of transistor, which would include systematic testing, including material analysis, prototype creation, and performance evaluation under various conditions, to determine if the new material is viable.

Experimentation

To qualify as experimentation, a project must involve a structured approach to experimentation, which includes testing different methods, materials, or designs to achieve the desired outcome. This process often entails iterative testing and evaluation to determine the most effective solutions.

For instance, a semiconductor company developing a new chip design might experiment with various circuit layouts and materials to enhance performance and reduce power consumption. Each iteration would involve designing, fabricating, and testing the chip, followed by analyzing the results to guide subsequent modifications.

The experimentation process typically includes forming hypotheses, conducting controlled experiments, gathering and analyzing data, and drawing conclusions based on the findings. It often requires multiple iterations and adjustments to achieve the desired technical advancements.

Thorough documentation of the experimentation process is essential, as it demonstrates the systematic approach taken to address technical challenges and validate the solutions. This involves an element of failure to show you’re working on solutions to problems that haven’t been solved yet.

How to Qualify for Oregon R&D Tax Credits as a Semiconductor Company?

To be considered a qualified semiconductor company eligible for the Oregon Semiconductor R&D Tax Credit, businesses must follow a specific application process administered by Business Oregon.

Meeting the eligibility criteria is the minimum requirement for claiming credit and reducing corporate excise taxes. Essential documentation needs to be filed with the respective Oregon department to begin the process of claiming the credit.

Applicants are required to explain how their proposed R&D activities will support and enhance their semiconductor-related business. This involves outlining specific research projects, their objectives, and the anticipated outcomes.

Companies need to demonstrate how their R&D efforts will lead to technological advancements, product improvements, or process enhancements within the semiconductor manufacturing industry. This explanation helps Business Oregon assess the potential impact of the proposed R&D on the company’s operations and the broader industry.

All application materials submitted to Business Oregon are treated with strict confidentiality under Oregon Revised Statutes (ORS) 192.311 to 192.478. This ensures that sensitive business information, proprietary data, and trade secrets are protected from public disclosure. The confidentiality provisions encourage companies to provide detailed and accurate information without fear of compromising their competitive advantage.

Calculating the Oregon Semiconductor R&D Tax Credits

The calculation of the Oregon Semiconductor R&D Tax Credit involved a method where the credit was 15% of the increase in qualified research expenses and research payments over a base amount.

This approach incentivized companies to boost their R&D investments by providing a tax credit proportional to their additional spending. For example, if a semiconductor company increased its research expenses by $1 million over the base amount, it would receive a $150,000 tax credit.

Each taxpayer could claim a maximum credit of $4 million per year, ensuring that the benefits were spread among taxpayers and multiple companies rather than concentrated in a few large firms. For up to five years, there were statewide aggregate limitations for each biennium, meaning that there was a fixed pool of credits available. No further credits could be granted for that period after this limit.

Unlike the federal R&D credit, the Oregon Semiconductor R&D Tax Credit did not allow the use of the credit to apply the Alternative Simplified Credit (ASC) method. Instead, Oregon required companies to use the traditional method of calculating the increase over a base amount, ensuring that the credit directly reflected the additional investment in research and development.

Refundability of the Oregon Semiconductor R&D Tax Credit

The Oregon Semiconductor R&D Tax Credit involves a calculation method where the credit is 15% of the increase in qualified research expenses and research payments over a base amount.

This approach incentivizes companies to boost their R&D investments by providing a tax credit proportional to their additional spending. For example, if a semiconductor company increases its research expenses by $1 million over the base amount, it would receive a $150,000 tax credit.

Each taxpayer can claim a maximum credit of $4 million per year, ensuring that the benefits are spread among multiple companies rather than concentrated in a few large firms. For up to five years, there are statewide aggregate limitations for each such credit expired biennium, meaning that there is a fixed pool of credits available. No further credits can be granted for that period after this limit is reached.

Unlike the federal R&D credit, the Oregon Semiconductor R&D Tax Credit does not allow the use of the credit applies the Alternative Simplified Credit (ASC) method. Instead, Oregon requires companies to use the traditional method of calculating the increase over a base amount, ensuring that the credit directly reflects the additional investment in research and development.

The Oregon Semiconductor R&D Tax Credit is refundable, which means that if the amount of the credit exceeds the taxpayer’s liability, the excess credit can be refunded to the taxpayer. This refundability feature provides immediate financial relief to semiconductor companies, enhancing their cash flow and allowing them to reinvest in further research and development activities.

This aspect of the credit makes it particularly beneficial for smaller firms and startups that may not have substantial tax liabilities but are heavily investing in innovation and technological advancements.

Oregon Semiconductor Qualifying Research Expenditures

Qualifying research expenditures for the Oregon Semiconductor R&D Tax Credit are directly related to developing or improving semiconductor products and processes. These expenditures include wages for employees engaged in qualified research activities, costs of supplies used in the research, and amounts paid for the right to use computers in conducting the research.

Additionally, 65% of contract research expenses, such as payments to third-party contractors for conducting qualified research, are considered qualifying expenditures. These provisions ensure that companies can maximize their innovative efforts and technological advancements while benefiting from the financial incentives provided by the tax credit.

Wages

Qualifying research expenditures for the Oregon Semiconductor R&D Tax Credit were those directly related to the development or improvement of semiconductor products and processes. These expenditures include wages for employees engaged in qualified research activities, such as engineers and scientists working on R&D projects.

The costs of supplies used in the research and amounts paid for the right-to-use computers in conducting the research were also considered qualifying expenditures.

The focus was on expenditures that addressed technical uncertainties and involved a systematic process of experimentation. For example, costs incurred in developing a new semiconductor chip design, improving manufacturing processes, or testing new materials would qualify, provided these activities were conducted in Oregon.

Supplies

Qualifying research expenditures are those directly related to the development or improvement of semiconductor products and processes. These expenditures included wages for employees engaged in qualified research activities, such as engineers and scientists working on R&D projects.

The costs of supplies used in the research and amounts paid for the right-to-use computers in conducting the research were also considered qualifying expenditures. It is essential to document the supplies used for research specifically, rather than normal operating supplies, to avoid confusion.

Supplies used in the research include materials, prototypes, and laboratory consumables necessary for conducting experiments and tests. Costs for silicon wafers, specialized chemicals, and other materials directly used in developing semiconductor devices would qualify under this definition.

The focus is on expenditures that address technical uncertainties and involve a systematic process of experimentation. Costs incurred in developing a new semiconductor chip design, improving manufacturing processes, or testing new materials would qualify, provided these activities are conducted in Oregon.

Contracted Research

Contract research expenses are when a business performs qualified research on behalf of the taxpayer. In this case, 65% of the amount paid to the non-employee can be considered a qualified expense.

How to Claim the Oregon Semiconductor R&D Tax Credits?

Claiming the Oregon Semiconductor R&D Tax Credit is a detailed and complex process, often requiring the expertise of a CPA consultant to navigate the requirements and maximize benefits.

First, businesses must register with Business Oregon by December 1 of the prior year. Next, they need to document their average Qualified Research Expenses (QREs) and basic research expenses for the three preceding calendar tax years beginning to establish a baseline. Then, they project their QREs and basic research expenses for the current tax year.

After submitting this information, Oregon provides preliminary confirmation of the eligible credits. The business then claims the credit on their tax returns, following line-by-line instructions and attaching all required documentation, including detailed records of research activities and expenses related fee them.

The forms that you would need to fill out include:

• Form OR-R&D: Specifically for claiming the Oregon Research and Development Tax Credit. For the federal version, look for federal form 6765.
• Form OR-20: This is the Oregon Corporation Excise Tax Return, which is the taxes that your credit would be claimed against.
• Schedules and Documentation: This is gathered by you, and you can get more help from a certified public accountant on which specific schedules and recipes that you’ll need to fill out to meet all requirements for this tax credit.

Because it is such a complex process, a CPA consultant is highly recommended to ensure all steps are followed correctly and to maximize the tax credit benefit.

Next Steps

Engaging a certified CPA is crucial to navigating the complexities of claiming R&D tax credits. A professional can ensure that all documentation and forms are accurately completed, maximizing your tax benefits.

In the research and development sphere, it can be confusing to navigate which expenses can be covered versus which can’t.

Having expert help can not only assist you in finding unused credits but also avoid accidentally claiming those you don’t qualify for, which can result in a painful auditing process.

Our expert CPAs can help identify other current credits your Oregon business may qualify for, providing expert guidance to optimize your financial strategies. Don’t miss out on valuable opportunities—consult with a CPA today to enhance your business’s growth and innovation potential.

FAQs

Here are some frequently asked questions about this tax credit:

Is the Oregon Semiconductor R&D Tax Credit Refundable?

The Oregon Semiconductor R&D Tax Credit is only partially refundable to varying degrees based on the number of employees within a company. Companies with fewer than 150 employees can receive a 75% of new refundable research amount. Those with 150 to 499 employees can receive a 50% refund, and companies with 500 to 2,999 employees can receive a 25% refund. Companies with 3,000 or more employees are not eligible for any refundable research credits. Any non-refundable credits can be carried through 2029.

What records do I need to keep to support my Oregon Semiconductor R&D Tax Credit Claim?

To support your Oregon Semiconductor R&D Tax Credit claim, you need to maintain comprehensive records that document your research activities and expenses. This includes detailed documentation of research expenses that may qualify for unused credits, such as wages for employees engaged in R&D, costs of supplies used specifically for research, and payments for contract research.

Can I claim both the Oregon Semiconductor R&D Tax Credit and the federal R&D tax credit?

Yes, you can claim both the Oregon Semiconductor R&D Tax Credit and the federal R&D tax credit. These credits are designed to be complementary, allowing businesses to maximize their financial benefits from research and development activities. By claiming both credits, you can significantly reduce your tax liabilities at both the state and federal levels, providing substantial support for your R&D investments.