Research and Development Tax Credit for Semiconductors

The Oregon Research and Development Tax Credit for Semiconductors is a targeted fiscal incentive providing a 15 percent credit on qualified research expenses to bolster the state’s leading role in the global semiconductor ecosystem. This specialized credit, established by the 2023 Legislative Assembly, aligns state tax policy with federal initiatives to secure the regional technology infrastructure through 2029.

Historical Evolution of Research Incentives in Oregon

The trajectory of research and development incentives in Oregon reflects a broader strategic shift from generalized industrial support to hyper-specialized sectoral investment. For decades, Oregon operated under a broad-based corporate research credit that incentivized a wide array of manufacturing and scientific activities. However, that general credit expired in 2017, leaving the state without a primary R&D incentive for several years. This period of absence created a significant competitive disadvantage for Oregon, particularly as neighboring states and international competitors intensified their efforts to attract high-value intellectual property and technical talent. The resurgence of the credit in 2023 was not a mere reinstatement of the old policy but a calculated response to the unique pressures facing the semiconductor industry, which remains the single largest driver of Oregon’s manufacturing exports and high-wage employment.

The legislative impetus for the current framework was the passage of House Bill 2009 and Senate Bill 4 during the 2023 Regular Session. These measures were collectively known as the “Oregon CHIPS Act” and represented a bipartisan effort to synchronize state resources with the federal Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act of 2022. While the federal legislation provided $52 billion in funding for domestic manufacturing and research, it required states to demonstrate a “skin in the game” through local incentives and infrastructure support. Oregon’s legislative response sought to capitalize on this “once-in-a-generation” opportunity to secure federal matching funds and encourage private sector expansions that might otherwise have been diverted to other domestic hubs like Arizona, Ohio, or Texas.

The policy shift toward a semiconductor-exclusive credit was driven by rigorous budget considerations and a desire for high-impact revenue expenditure. During the committee hearings for House Bill 2009, economists and lawmakers debated the merits of a broader credit versus one limited to “advanced manufacturing”. Ultimately, the decision was made to focus specifically on the semiconductor industry due to its unique capital intensity and its foundational role in the regional economy, often referred to as the “Silicon Forest”. This targeted approach allows the state to offer a more generous credit rate—15 percent compared to the 5 percent offered under the prior expired credit—while maintaining aggregate fiscal control through biennial caps.

Statutory Framework and Legal Definitions

The primary legal authority for the semiconductor research credit is found in Oregon Revised Statutes (ORS) 315.518 through 315.522. These statutes, along with the administrative rules promulgated by the Oregon Business Development Department (Business Oregon) and the Oregon Department of Revenue, form the comprehensive guidance for taxpayers.

Definition of a Qualified Semiconductor Company

A critical component of the law is the rigorous definition of what constitutes a “qualified semiconductor company.” This definition is intended to encompass the entire life cycle of a semiconductor product, from initial design and software tools to final assembly and testing. Under ORS 315.518, an entity is qualified if its primary business is involved in:

Business Sector	Description of Qualified Activity
Core Semiconductor Operations	Research, design, development, fabrication, assembly, testing, packaging, or validation of semiconductors.
Manufacturing Equipment	The creation of specialized machinery and tools required for semiconductor fabrication.
Intellectual Property	The development of semiconductor core intellectual property (IP) blocks.
Design Software	The production of electronic design automation (EDA) software specifically for the semiconductor industry.

By including equipment manufacturers and EDA software providers, the legislature recognized that the strength of the Oregon cluster lies not just in the “fabs” (fabrication plants) but in the sophisticated support ecosystem that enables chip manufacturing. This prevents the credit from being utilized by general-purpose software firms or manufacturers of unrelated electronics, ensuring that every dollar of tax expenditure is reinvested into the state’s core technological competence.

Qualified Research and Basic Research Payments

Oregon law largely mirrors the federal definitions of research activities but adds a strict geographic constraint. For the purposes of ORS 315.518, “qualified research” must meet two primary criteria: it must be conducted within the borders of Oregon, and it must support a trade or business directly related to semiconductors. The state adopts the “Four-Part Test” established by Section 41 of the Internal Revenue Code (IRC) to determine whether an activity qualifies for the credit.

The first requirement of the test is that the research must be “technological in nature,” meaning it must fundamentally rely on the principles of engineering, computer science, or the physical or biological sciences. In the semiconductor context, this often involves activities such as developing new lithography techniques, optimizing transistor architecture, or creating advanced thermal management systems for high-performance chips.

The second requirement is the “permitted purpose,” which stipulates that the research must be intended to improve the functionality, performance, reliability, or quality of a business component. Routine maintenance or cosmetic changes to a product do not qualify. The third part of the test requires the “elimination of uncertainty,” where the taxpayer must demonstrate that the activity was undertaken to discover information that would resolve a technical unknown regarding a product’s development. Finally, the “process of experimentation” requirement mandates that the taxpayer use a systematic approach, such as modeling, simulation, or trial and error, to evaluate different solutions to the technical uncertainty.

Basic research payments follow a similar logic but are typically payments made by the semiconductor company to a qualified organization, such as a university or a non-profit scientific research organization, for the conduct of original investigation for the advancement of scientific knowledge not having a specific commercial objective. This is particularly relevant in Oregon, where collaborations between industry giants and research institutions like Oregon State University or the University of Oregon are common.

Administrative Guidance: The Certification Lifecycle

A unique feature of the Oregon semiconductor R&D credit is the bifurcated administrative process. Unlike most corporate tax credits that are self-executing on a tax return, this credit requires a proactive certification from the Oregon Business Development Department (Business Oregon) before it can be claimed with the Department of Revenue.

The Role of Business Oregon (OBDD)

The administrative rules governing the certification process are found in OAR Chapter 123, Division 401. Business Oregon serves as the “gatekeeper” for the program, ensuring that taxpayers meet the statutory definition of a qualified semiconductor company and that their projected expenses align with the state’s fiscal caps.

Administrative Phase	Key Deadline and Requirement
Annual Application	October 15 of each calendar year for the tax year beginning in that year.
Certification Fee	$3,000 per annual application, regardless of the credit amount sought.
Documentation	Narrative of eligibility, historical QRE reports for the prior 3 years, and current projections.
Certification Issuance	The department typically issues written determinations by November 15 each year.

The 2024 tax year had a unique “pre-registration” requirement where taxpayers intending to claim the credit were required to register by December 1, 2023. This allowed the Legislative Revenue Officer to collect preliminary data on the program’s potential impact. For all subsequent years (2025–2029), taxpayers only need to file the annual application by the October 15 deadline.

A critical aspect of the Business Oregon guidance is the management of “oversubscription.” If the total credits requested by all qualified companies exceed the annual cap established by the legislature, Business Oregon must reduce the certified amounts. The rules specify that if such a reduction is necessary, the department will prioritize the first $200,000 of each taxpayer’s request and then apply a pro-rata reduction to the remaining amounts to ensure the aggregate cap is not breached. This mechanism ensures that smaller companies are not squeezed out of the program by large manufacturers with massive research budgets.

The Role of the Department of Revenue (DOR)

Once a taxpayer receives a certification letter from Business Oregon, they must then interface with the Oregon Department of Revenue to apply the credit to their tax liability. The DOR’s rules are found in OAR 150-315-0195 and provide the technical instructions for tax return filing.

Taxpayers claim the credit by filing Schedule OR-RESEARCH along with their corporate excise or personal income tax return. The DOR cross-references the claim with the Business Oregon database. A vital distinction in the DOR guidance is that while a taxpayer cannot claim more than the amount certified by Business Oregon, they may claim less if their actual, realized qualified research expenses at the end of the year are lower than what they projected during the application phase.

The DOR also provides specific guidance on the treatment of pass-through entities. For S-corporations and partnerships, the credit is calculated at the entity level based on the entity’s qualified research activities in Oregon and is then passed through to the individual shareholders or partners on a pro-rata basis. This is a significant expansion from Oregon’s prior R&D credit, which was limited to C-corporations.

Calculation Methodologies and Technical Application

The semiconductor R&D credit follows the fundamental calculation principles of the federal IRC Section 41, with several notable modifications and Oregon-specific variables. Taxpayers have two primary methods to calculate the credit: the Regular Research Credit method and the Alternative Simplified Credit (ASC) method.

The Regular Research Credit Method

The Regular Method is designed to incentivize growth in research spending. It calculates the credit based on the amount by which current-year Oregon QREs exceed a historical “base amount”.

The credit is generally determined as follows:

Credit = 0.15 × (Current Year QREs – Base Amount)

The “Base Amount” is the product of the taxpayer’s “fixed-base percentage” and the average Oregon gross receipts for the prior four tax years. For the purposes of the Oregon credit, “gross receipts” are defined as total sales in the state as calculated under the state’s apportionment statutes, specifically ORS 314.665. The fixed-base percentage is typically the ratio of the taxpayer’s aggregate QREs to aggregate gross receipts for a specific historical period, though this percentage is capped at a maximum of 16 percent for Oregon purposes.

The Alternative Simplified Credit (ASC) Method

For companies that may not have consistent historical data or whose gross receipts have grown significantly faster than their R&D spending, the ASC method often provides a more favorable outcome. The ASC does not rely on gross receipts; instead, it looks solely at the trend of R&D spending.

The calculation for the ASC in Oregon is:

Credit = 0.14 × (Current Year QREs – 0.50 × Average QREs of Prior 3 Years)

If the taxpayer had no qualified research expenses in any of the three preceding years, the credit is calculated at a reduced rate of 6 percent of the current year’s QREs. Once a taxpayer elects the ASC method, that election is irrevocable for the tax year without specific permission from the Director of the Department of Revenue.

Coordination with Basic Research Payments

In addition to the credit for QREs (which primarily cover in-house wages, supplies, and contract research), taxpayers can also claim a 15 percent credit for basic research payments made to universities and certain scientific organizations. This credit is calculated separately as 15 percent of the portion of basic research payments that exceed a “qualified organization base period amount” as defined in IRC Section 41(e).

Expense Category	Regular Rate	ASC Rate	Base Requirement
In-House QREs	15%	14%	Exceed historical base.
Contract Research	15%	14%	Usually 65% of contract cost.
Basic Research	15%	N/A	University/Non-profit payments.

Refundability Mechanics and Employee Thresholds

A defining characteristic of the 2023 semiconductor credit is its tiered refundability structure. This was specifically designed to support the “scale-up” of smaller companies and startups that may be heavily investing in R&D but have not yet generated sufficient taxable income to utilize a standard non-refundable credit.

The refundability of the credit is tied to the number of people the taxpayer employs in Oregon. This creates a powerful incentive to not only conduct research in Oregon but to maintain a significant workforce within the state.

Refundability Tier Structure

The law establishes different “refundability percentages” based on the Oregon employee count at the close of the tax year:

Oregon Employee Count	Refundable Percentage of Credit	Non-Refundable Percentage
Fewer than 150 employees	75%	25%
150 to 499 employees	50%	50%
500 to 2,999 employees	25%	75%
3,000 or more employees	0%	100%

For companies with fewer than 3,000 employees, the refundable portion can be used to satisfy the Oregon corporate minimum tax under ORS 317.090. Any remaining refundable portion after satisfying the tax liability (including the minimum tax) is paid to the taxpayer as a cash refund. The non-refundable portion, however, cannot be used against the minimum tax and must be applied to the regular tax liability first. Any unused non-refundable portion may be carried forward for a period of five years, but no carryforward can be utilized after the program sunsets on December 31, 2029.

This tiered approach ensures that smaller firms receive immediate cash flow to reinvest in their operations, while the state’s largest employers—those with 3,000 or more Oregon employees—receive the credit as a non-refundable offset to their substantial existing tax liabilities.

Fiscal Controls and Aggregate Statewide Limits

To ensure that the semiconductor R&D credit remains sustainable within the state budget, the Oregon Legislature implemented strict aggregate caps on the total amount of credits that can be certified in any given biennium or fiscal year.

The total amount of potential tax credits for all qualified semiconductor companies in the state may not exceed the following limits at the time of certification:

• Biennium July 1, 2023 – June 30, 2025: $35 million.
• Biennium July 1, 2025 – June 30, 2027: $80 million.
• Biennium July 1, 2027 – June 30, 2029: $90 million.
• Fiscal Year beginning July 1, 2029: $50 million.

Business Oregon’s administrative rules (OAR 123-401-0600) further refine these biennial limits into specific annual caps for each tax year to provide predictability for both taxpayers and state planners:

Tax Year	Annual Cap on Certified Credits
2024	$35,000,000
2025	$40,347,956
2026	$39,652,044
2027	$44,000,000
2028	$46,000,000
2029	$50,000,000

In addition to these aggregate limits, each individual taxpayer is subject to an annual cap of $4 million. This prevents a few dominant players in the industry from consuming the entire statewide allocation and ensures that a wide array of startups and mid-market firms can access the program.

Interactions with Other Oregon Tax Incentives

A critical consideration for semiconductor companies is how the R&D credit interacts with other established state incentives, such as the Oregon Investment Advantage and the Strategic Investment Program (SIP). While Oregon’s tax system generally allows for the stacking of incentives, each program has its own geographic and functional restrictions.

Oregon Investment Advantage Comparison

The Oregon Investment Advantage (OIA) provides a 10-year taxable income exemption for certified businesses that locate or expand in specific areas of the state. Unlike the semiconductor R&D credit, which is available statewide, the OIA is largely restricted to rural areas and specifically excludes the high-growth urban centers of Multnomah, Washington, Clackamas, and Lane counties.

Feature	Semiconductor R&D Credit	Oregon Investment Advantage
Primary Mechanism	Tax Credit (Direct reduction of tax)	Income Exemption (Reduction of taxable base).
Geographic Scope	Statewide (Oregon-conducted research)	Primarily Rural Counties (Specific exclusions).
Industry Focus	Semiconductor-specific ecosystem	Broad “traded-sector” industries.
Duration	Sunsets Dec 31, 2029.	10-year benefit for each project.

Because most semiconductor R&D activity is clustered in the “Silicon Forest” region (Washington County), most participants in the R&D tax credit program are ineligible for the Oregon Investment Advantage. However, for a semiconductor firm locating a testing or validation facility in a rural county like Coos or Umatilla, it may be possible to benefit from both programs—utilizing the OIA to exempt its operational income and the R&D credit to offset any remaining tax liability from its research efforts.

Strategic Investment Program (SIP) and Enterprise Zones

The Strategic Investment Program (SIP) is a property tax incentive that has been heavily utilized by the semiconductor industry in Hillsboro and Aloha. Under the SIP, companies pay a full property tax on a portion of their investment and a community service fee in lieu of taxes on the remainder.

The semiconductor R&D credit is designed to complement these property tax benefits. While the SIP lowers the cost of physical assets (buildings and equipment), the R&D credit lowers the cost of the intellectual labor required to operate those assets. This “dual-track” incentive structure—targeting both capital and labor—is intended to make Oregon more competitive against states like Arizona and Ohio, which have also implemented aggressive property and income tax abatements for the semiconductor sector.

Detailed Example: Financial Modeling of the Credit

To demonstrate the practical application of the guidance provided by Business Oregon and the Department of Revenue, consider the hypothetical case of “Cascade Chip Design,” a qualified semiconductor company based in Hillsboro.

Scenario Profile

• Tax Year: 2024 (Calendar year filer).
• Business Model: Development of advanced EDA software for 2nm process nodes.
• Oregon Workforce: 120 full-time employees at year-end.
• 2024 Oregon QREs: $10,000,000 (Wages for software engineers and testing equipment).
• Average Oregon QREs (2021-2023): $6,000,000.
• Average Oregon Gross Receipts (2020-2023): $50,000,000.
• Fixed-Base Percentage: 0.0800 (8%).
• Pre-Credit Tax Liability: $250,000.
• Corporate Minimum Tax: $15,000.

Step 1: Business Oregon Certification

Cascade Chip Design files its certification application by October 15, 2024, paying the $3,000 fee. They provide a narrative explaining how their EDA software is “primarily intended for use in the semiconductor industry”. Business Oregon determines the company is eligible and, assuming no statewide cap reduction is necessary, certifies a potential credit based on their $10M projection.

Step 2: Calculation (Regular Method)

First, determine the Base Amount:

Base Amount = Average Gross Receipts × Fixed-Base Percentage

Base Amount = $50,000,000 × 0.08 = $4,000,000

Next, calculate the excess QREs:

Excess QREs = $10,000,000 – $4,000,000 = $6,000,000

Apply the credit rate:

Total Credit = 15% × $6,000,000 = $900,000

This is well under the $4 million individual taxpayer cap.

Step 3: Calculation (ASC Method Alternative)

Cascade Chip Design also evaluates the ASC method:

ASC Base = 50% × Average Prior 3 Years QREs

ASC Base = 0.50 × $6,000,000 = $3,000,000

ASC Credit = 14% × ($10,000,000 – $3,000,000)

ASC Credit = 0.14 × $7,000,000 = $980,000

Cascade Chip Design elects the ASC method on Schedule OR-RESEARCH as it yields an additional $80,000 in credit.

Step 4: Refundability and Final Tax Impact

With 120 Oregon employees, the company is in the 75 percent refundability tier.

Refundable Credit = 0.75 × $980,000 = $735,000

Non-Refundable Credit = $980,000 – $735,000 = $245,000

The non-refundable portion is applied first to the regular tax liability:

Tax after Non-Refundable Credit = $250,000 – $245,000 = $5,000

The refundable portion is then applied. It covers the remaining $5,000 regular tax and the $15,000 minimum tax.

Remaining Refundable Portion = $735,000 – $5,000 – $15,000 = $715,000

Cascade Chip Design receives a $715,000 cash refund from the Oregon Department of Revenue, effectively subsidizing more than 7 percent of their total R&D payroll for the year.

Compliance, Auditing, and Retention Guidelines

The Oregon Department of Revenue and Business Oregon maintain ongoing oversight to ensure that the credit is not abused. Taxpayers should be aware that certification by Business Oregon does not prevent the Department of Revenue from auditing the underlying research activities to ensure they meet the federal “Four-Part Test”.

Record Keeping Requirements

To successfully withstand an audit, a semiconductor company must be able to link specific expenses to specific technological uncertainties. Standard financial accounting records are often insufficient. The Department of Revenue expects “contemporary documentation,” which may include:

• Technical Documentation: Project plans, white papers, lab notebooks, and records of failed experiments that demonstrate a systematic process of experimentation.
• Time Tracking: Payroll records and time-tracking data that clearly delineate the percentage of an employee’s time spent on qualified research versus routine production or administrative tasks.
• Contract Agreements: For contract research, the taxpayer must demonstrate that they retain the substantial rights to the research results and bear the financial risk of failure.

The statutory period for auditing tax returns in Oregon is generally three years from the date the return was filed, but for the purposes of the R&D credit, tax professionals typically recommend a minimum seven-year retention period to cover both the state and federal statutes of limitations.

Revocation of Certification

Under ORS 315.061, the state has the authority to revoke a credit if it is discovered that the taxpayer made a willful misrepresentation to obtain certification. If Business Oregon or the Department of Revenue discovers that a business willfully failed to report a material fact or made a false statement, the business may be required to repay all previously claimed credits along with a 20 percent penalty.

Economic Impact and Future Outlook

The 2023-25 Tax Expenditure Report and the Legislative Revenue Office analysis provide a window into the expected performance of the semiconductor R&D credit. Initial projections suggest that the credit will be utilized by a range of companies, from early-stage design startups to global giants like Intel, though the $4 million individual cap ensures that the benefits are distributed across the ecosystem.

Projected Utilization Data

Metric	Projection (March 2024 Analysis)
Registered Taxpayers	26 qualified companies (Initial 2024 cohort).
Projected QRE Spending	$600 Million in Oregon-based research.
Estimated Revenue Impact	$23.9 Million for the first year.
Economic Goal	Retention of existing workforce and recruitment of new design firms.

The credit is a centerpiece of Oregon’s strategy to maintain its status as a “global center” for semiconductor research. By focusing on research rather than just manufacturing, the state aims to insulate itself from the boom-and-bust cycles of commoditized chip production, instead anchoring companies through high-value intellectual property that is more difficult to relocate.

As the program moves toward its 2029 sunset, the Legislative Assembly will likely review the “return on investment” (ROI) of the program. This will include not just the tax revenue generated by new jobs, but the amount of federal CHIPS Act funding that was successfully leveraged by Oregon companies because of the state’s proactive incentive stance. There is already discussion in the legislature about potentially expanding the credit to other “advanced manufacturing” sectors if the semiconductor implementation proves both fiscally manageable and economically transformative.

In the immediate term, the October 15 annual deadline remains the most critical date for any semiconductor company operating in Oregon. Given the potential for annual cap proration, companies that can precisely document their R&D spend and file their applications early in the window will be better positioned to secure their full certified amount, providing the necessary capital to continue pushing the boundaries of Moore’s Law within the borders of the Silicon Forest.

Final Thoughts