IRS Issues Final Regs on CHIPS Act Advanced Manufacturing Investment Credit

(Parker Tax Publishing November 2024)

The IRS issued final regulations to implement the advanced manufacturing investment credit established by the CHIPS Act of 2022 under Code Sec. 48D to incentivize the manufacture of semiconductors and semiconductor manufacturing equipment in the United States. The final regulations clarify that the term "manufacturing of semiconductors" includes semiconductor wafer production and include other revisions in response to practitioners' comments. T.D. 10009.

Background

Section 107(a) of the CHIPS act of 2022 (Pub. L. 117-67) added Code Sec. 48D to establish the advanced manufacturing investment credit (Section 48D credit) as an investment credit for purposes of Code Sec. 46, which is a current year business credit under Code Sec. 38.

Code Sec. 48D(a) provides that the Section 48D credit is an amount equal to 25 percent of the qualified investment for any tax year with respect to any advanced manufacturing facility of an eligible taxpayer. Code Sec. 48D(b)(1) provides that the "qualified investment" with respect to any advanced manufacturing facility for any tax year is the basis of any qualified property placed in service by the taxpayer during such tax year which is part of an advanced manufacturing facility. However, the Section 48D credit only applies to property placed in service after December 31, 2022, and, for any property the construction of which begins prior to January 1, 2023, only to the extent of the basis thereof attributable to the construction, reconstruction, or erection after August 9, 2022 (the date of enactment of the CHIPS Act). In addition, the Section 48D credit does not apply to property the construction of which begins after December 31, 2026.

Under Code Sec. 48D(b)(2), "qualified property" means tangible property with respect to which depreciation or amortization is allowable that is integral to the operation of the advanced manufacturing facility if (1) constructed, reconstructed, or erected by the taxpayer, or (2) acquired by the taxpayer, if the original use of such property commences with the taxpayer. Qualified property includes any building or its structural components satisfying such requirements unless the building or portion of the building is used for offices, administrative services, or other functions unrelated to manufacturing.

Code Sec. 48D(b)(3) provides that the term "advanced manufacturing facility" means a facility for which the primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment. Code Sec. 48D(b)(4) provides that the qualified investment with respect to any advanced manufacturing facility for any tax year does not include the portion of the basis of any such property that is attributable to qualified rehabilitation expenditures (as defined in Code Sec. 47(c)(2)).

Under 48D(c), an "eligible taxpayer" for purposes of the Section 48D credit is any taxpayer that (1) is not a foreign entity of concern, and (2) has not made an applicable transaction (as defined in Code Sec. 50(a)) during the tax year.

Applicable Transaction Recapture Rule

The CHIPS Act added recapture rules in Code Sec. 50(a)(3), (6)(D) and (E) to address certain expansions in connection with advanced manufacturing facilities. Under 50(a)(3)(A), if there is an "applicable transaction" by an "applicable taxpayer" (i.e., a taxpayer that has been allowed a Section 48D credit for a prior tax year) before the close of the 10-year period beginning on the date such taxpayer placed in service property that is eligible for the Section 48D credit, then the taxpayer's income tax liability for the tax year in which such transaction occurs must be increased by 100 percent of the aggregate decrease in the credits allowed under Code Sec. 38 for all prior tax years which would have resulted solely from reducing to zero any investment credit determined under Code Sec. 46 that is attributable to the Section 48D credit with respect to such property (applicable transaction recapture rule).

Under Code Sec. 50(a)(6)(D), the term "applicable transaction" means, with respect to any applicable taxpayer, any significant transaction (as determined by the Treasury Secretary, in coordination with the Secretary of Commerce and the Secretary of Defense) involving the material expansion of semiconductor manufacturing capacity of such applicable taxpayer in a foreign country of concern, other than certain transactions that primarily involve the expansion of manufacturing capacity for legacy semiconductors.

Prior Guidance

In March 2023, the IRS issued proposed regulations (REG-120653-22) (March 2023 proposed regulations) related to the Section 48D credit. The March 2023 proposed regulations primarily apply long-established credit mechanics and procedures common to all investment tax credits (including the Section 48D credit) previously set forth in regulations and sub-regulatory guidance. The March 2023 proposed regulations also included proposed definitions and rules for determining who is an eligible taxpayer, what qualifies as qualified property or an advanced manufacturing facility, whether the beginning of construction requirement is met, and what qualifies as a significant transaction involving a material expansion of semiconductor manufacturing capacity in a foreign country of concern for purposes of the recapture rule under Code Sec. 50(a)(3). In addition, Prop. Reg. Sec. 1.48D-6 of the March 2023 proposed regulations set forth the general requirements that would apply for making an elective payment election under Code Sec. 48D(d), and the general requirement that an eligible taxpayer, partnership, or S corporation would need to comply with the registration procedures in Prop. Reg. Sec. 1.48D-6(c)(2) as a condition of, and prior to, any amount being treated as a payment under Code Sec. 48D(d)(1) or (d)(2)(A)(i)(I). However, the March 2023 proposed regulations reserved on the procedures and additional information required for completing the pre-filing registration process.

In June 2023, the IRS published proposed regulations (REG-105595-23) to update Prop. Reg. Sec. 1.48D-6 of the March 2023 proposed regulations (June 2023 proposed regulations). The IRS also issued temporary regulations in T.D. 9975 under Reg. Sec. 1.48D-6T to set forth mandatory information and registration requirements for taxpayers planning to make an elective payment election under Code Sec. 48D(d) to treat the amount of the Section 48D credit as a payment of federal income tax, or in the case of a partnership or S corporation, to receive a payment in the amount of such credit.

In March 2024, the IRS published final regulations (T.D. 9989) to remove the temporary regulations and adopt the June 2023 proposed regulations with modifications (March 2024 final regulations).

T.D. 10009

On October 23, the IRS published final regulations in T.D. 10009 that adopt Prop. Reg. Sec. 1.48D-1 through 1.48D-5 and Prop. Reg. Sec. 1.50-2 of the March 2023 proposed regulations with certain modifications in response to practitioners' comments. The final regulations apply to property that is placed in service after December 31, 2022, and during a tax year ending on or after October 23, 2024.

The final regulations include a transition rule to address the proper method for allocating basis attributable to the period beginning on the day after the date of enactment of the CHIPS Act (August 10, 2022) and ending on the day immediately before the effective date of Code Sec. 48D (December 31, 2022). Specifically, Reg. Sec. 1.48D-2(c)(2) of the final regulations clarifies that for property the construction of which began before January 1, 2023, the portion of the basis of such property attributable to construction, reconstruction, or erection after August 9, 2022 must be allocated using any reasonable method, including by applying the principles of Code Sec. 461.

The definition of "basis" in Prop. Reg. Sec. 1.48D-2(c) is revised in the final regulations to allow capitalized costs incurred after the placed in service date of qualified property to qualify for the Section 48D credit. The final regulations provide that, with respect to any qualified property, "basis" has the same meaning as provided in Reg. Sec. 1.46-3(c). Thus, if for the first tax year in which property is placed in service by the taxpayer the property meets the definition of qualified property but the basis of the property does not reflect its full cost because the total amount to be paid or incurred by the taxpayer for the property is indeterminate, a credit will be allowed with respect to so much of the cost as is reflected in the basis of the property as of the close of such first tax year. A credit will also be allowed to the taxpayer for any subsequent tax year with respect to any additional cost paid or incurred during such subsequent tax year and reflected in the basis of the property as of the close of such subsequent tax year.

The final regulations provide that a taxpayer may claim a Section 48D credit for qualified property placed in service as part of an advanced manufacturing facility the primary purpose of which is semiconductor manufacturing. The final regulations define "semiconductor manufacturing" as semiconductor wafer production, semiconductor fabrication, and semiconductor packaging. The final regulations clarify that the definition of the term "manufacturing of semiconductors" includes semiconductor wafer production, but excludes the production of precursor materials such as polysilicon from the scope of the definition. Under the final regulations, "semiconductor wafer production" includes "the processes of growing single crystal ingots and boules, wafer slicing, etching and polishing, bonding, cleaning, epitaxial deposition, and metrology."

With respect to the applicable transaction recapture rule, the final regulations clarify that, in the case of property placed in service by a partnership, the term "applicable taxpayer" means any direct or indirect partner in a partnership: (1) who was allowed a Section 48D credit for such property for any tax year prior to when such partnership entered into an applicable transaction and includes such partnership; (2) with respect to the partner's share of any Section 48D credit allowed for such property prior to when such partner entered into an applicable transaction; or (3) with respect to the partner's share of any tax-exempt income from a partnership that made an election under Code Sec. 48D(d)(2) for any tax year prior to when such partner entered into an applicable transaction.

The final regulations also remove the $100,000 threshold in the definition of "significant transaction" in the March 2023 proposed regulations. Instead, the revised definition focuses on the type of transaction that could result in material expansion. Accordingly, the definition of "significant transaction" in the final regulations includes: (1) an investment, whether proposed, pending, or completed, including any capital expenditure, loan, or gift; (2) the formation of a subsidiary, whether classified as a corporation or partnership for federal tax purposes; (3) a merger, acquisition, or takeover; (4) the formation of a joint venture; or (5) a long-term lease or concession arrangement under which a lessee (or equivalent) makes substantially all business decisions concerning the operation of a leased entity (or equivalent), as if it were the owner. The final regulations also clarify that the term "material expansion" includes any construction of a new facility for semiconductor manufacturing.

For a discussion of the advanced manufacturing investment credit, see Parker Tax ¶104,335.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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