Semiconductors R&D Tax Credits

Fuel innovation in semiconductor manufacturing and design. Companies in the U.S. semiconductor industry—covering wafer fabrication, chip design, packaging, process engineering—are engaged in high‑tech research and development. Many of these activities qualify for the federal R&D Tax Credit under IRC §41, as well as state‑level incentives.

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Examples of qualifying activities in semiconductor manufacturing & design

Node / Process Development Testing and refining new process nodes (e.g., 3nm, 2nm), novel etch or deposition techniques, defect‑density reduction, yield improvement.
Advanced Packaging & Integration Developing heterogeneous integration, 3D‑stacked dies, chip‑let architectures, new substrate materials or interconnect strategies.
Materials & Photo‑Lithography Innovation Examining new resist materials, EUV/XUV lithography enhancements, new materials for interconnects, diffusion/implant trials.
Design & Simulation of Chip Architectures Using CAD/EDA tools, simulation of new logic, memory or analog‑mixed signal architectures, modelling power and performance trade‑offs.
Automation, Data Analytics & Yield Engineering Implementing AI‑based defect‑detection systems, automated inspection, high‑throughput measurement and test systems.

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What qualifies as R&D in Semiconductors?

To qualify, activities must:

Pursue a permitted purpose such as developing a new node process, advanced packaging technique, defect‑reduction technology, or next‑generation chip architecture
Address technical uncertainty about method, capability, or design in micro‑electronics, materials science, photolithography, process engineering
Follow a process of experimentation through wafer‑trial runs, lithography studies, defect tracking experiments, or packaging validation
Be technological in nature, grounded in electrical engineering, materials engineering, chemical engineering or software modelling of chip behavior

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Qualified Research Expenses (QREs)

Expense Type

Examples in Semiconductor Industry

Eligibility Notes

Wages

Process engineers, design engineers, yield analysts, materials scientists

Must be tied to experimentation rather than production

Supplies

Wafer lots, material samples, masks, test coupons, instrumentation consumables

Must be consumed in R&D—as opposed to standard production inventory

Software / Cloud

Chip‑design simulation tools, lithography modelling platforms, fault‑analysis software

Eligible when used for research, modelling or validation

Contract Research

University labs, foundries doing pilot runs, material‑science labs

Generally ~65% of subcontract cost may qualify when dedicated to research

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Roles commonly involved in qualifying activities

Semiconductor process engineers (fab, front‑end/back‑end)
Chip design engineers (logic, memory, analog, mixed‑signal)
Materials scientists and lithography specialists
Automation engineers for metrology, inspection, yield improvement
External research partners, foundries, lab facilities

What does not qualify

Routine wafer production or chip manufacturing without experimental change
Maintenance, scale‑up of known processes without uncertainty
General administrative, sales or marketing functions
Equipment purchases for standard production not directly tied to R&D

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Compliance and Documentation

§174 Update

Following the One Big Beautiful Bill Act (OBBBA) signed July 4, 2025, §174 now allows immediate expensing of domestic research expenses for tax years beginning on or after January 1, 2025. Taxpayers may also elect optional amortization under new §174A. Foreign research expenses must still be amortized over 15 years. This is separate from the §41 credit but impacts overall tax planning.

Project goals (e.g., new node yield targets), test plans, manufacturing trial logs
Wafer‑trial results, defect counts, yield improvement data, material trial outcomes
Simulation logs, design revisions, packaging test data
Employee hours, role descriptions, test vs production differentiation
Audit‑ready demonstration of the four‑part test

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Frequently Asked Questions

Do semiconductor firms qualify for the R&D Tax Credit?

Yes — if they are engaging in process innovation, materials research, design optimisation, packaging enhancement or automation of fab/test flows.

What expenses can be claimed?

Wages for engineers and scientists, supplies (wafer lots, masks, material samples), software modelling tools, and contract research in labs or foundries.

Which operations are eligible?

Wafer fabrication plants, design houses, packaging/test facilities, materials suppliers, and yield‑improvement labs—provided they are conducting research, not just production.

What activities do not qualify?

Routine manufacturing, production scaling of established processes, purely administrative functions, standard equipment purchases.

How much might be saved?

Savings depend on the scale and scope of the R&D—but companies can claim a significant portion of qualified research expenses if properly documented and supported.

How should semiconductor companies document research?

Keep detailed records of trial lots, defect statistics, simulation results, design iterations, material evaluations, tool time, and employee time tied to R&D tasks.