Proposed Regulations Implement the Advanced Manufacturing Investment Credit

(Parker Tax Publishing March 2023)

The IRS issued proposed regulations under Code Sec. 48D to implement the advanced manufacturing investment credit, which was established by the CHIPS Act of 2022 to incentivize the manufacture of semiconductors and semiconductor manufacturing equipment within the United States. REG-120653-22.

The proposed regulations address (1) the credit's eligibility requirements; (2) an election that eligible taxpayers may make to be treated as making a payment of tax (including an overpayment of tax), or for an eligible partnership or S corporation to receive an elective payment instead of claiming a credit; and (3) a special 10-year credit recapture rule that applies if there is a significant transaction involving the material expansion of semiconductor manufacturing capacity in a foreign country of concern.

Background

The CHIPS Act of 2022 (CHIPS Act) (Pub. L. 117-167) added Code Sec. 48D to establish the advanced manufacturing investment credit (Section 48D credit) as an investment credit for purposes of Code Sec. 46 of the Code, which is a current year general business credit under Code Sec. 38.

Under Code Sec. 48D(a), the amount of the Section 48D credit for any tax year is generally 25 percent of the taxpayer's qualified investment for the 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.

Code Sec. 48D(b)(2) provides that for purposes of Code Sec. 48D(b), the term "qualified property" means tangible property with respect to which depreciation (or amortization in lieu of depreciation) 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. Under Code Sec. 48D(b)(3), the term "advanced manufacturing facility" means a facility for which the primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment.

The Section 48D credit applies to qualified property placed in service after December 31, 2022. It does not apply to property the construction of which begins after December 31, 2026.

Proposed Regulations

On March 23, the IRS published proposed regulations in REG-120653-22 to implement the Section 48D credit. The proposed regulations address (1) the credit's eligibility requirements, (2) an election that eligible taxpayers may make to be treated as making a payment of tax (including an overpayment of tax), or for an eligible partnership or S corporation to receive an elective payment instead of claiming a credit, and (3) a special 10-year credit recapture rule that applies if there is a significant transaction involving the material expansion of semiconductor manufacturing capacity in a foreign country of concern.

The proposed regulations provide rules for calculating the amount of a taxpayer's qualified investment pursuant to Code Sec. 48D(b)(1), generally, and in the context of certain passthrough entities. Code Sec. 48D(b)(1) specifies that "qualified investment" 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 statute is silent as to manner in which a taxpayer's basis in qualified property is allocated in the context of passthrough entities. The proposed regulations clarify that a partner's share of basis in the qualified property of a partnership is determined under the rules in Reg. Sec. 1.46-3(f), which contains rules for determining a partner's share of the qualified basis of a partnership under the former investment tax credit provisions in Code Sec. 46. Under those regulations, a partner is treated as the taxpayer with respect to its share of the basis of the partnership's qualified property for calculating its qualified investment. Generally, a partner's share of the partnership's basis is determined in accordance with the ratio in which the partners divide the general profits of the partnership (that is, taxable income of the partnership as described in Code Sec. 702(a)(8)). The proposed regulations also specify that an S corporation must apportion the basis of qualified property pro rata among its shareholders.

Code Sec. 48D(b)(2)(B)(ii) excepts from the definition of qualified property "a building, or a portion of a building, used for offices, administrative services, or other functions unrelated to manufacturing." The proposed regulations clarify that human resources or personnel services, payroll services, legal and accounting services, and procurement services; sales and distribution functions; and security services (not including cybersecurity operations) are among functions unrelated to manufacturing semiconductors or semiconductor manufacturing equipment.

Under Code Sec. 48D(b)(2)(A)(iv) property must be "integral to the operation of the advanced manufacturing facility" to meet the definition of qualified property. The proposed regulations specify that property is integral to the manufacturing of semiconductors or semiconductor manufacturing equipment if it is used directly in the manufacturing operation and is essential to the completeness of the manufacturing operation. The proposed regulations further specify that property, including a building and its structural components, that constitutes a research or storage facility may qualify as integral to the operation of an advanced manufacturing facility if the property is used in connection with the manufacturing of semiconductors or semiconductor manufacturing equipment. Conversely, a research facility that does not manufacture any type of semiconductors or semiconductor manufacturing equipment does not qualify.

Code Sec. 48D(b)(3) provides that an advanced manufacturing facility must be a "facility for which the primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment." The proposed regulations explain that the determination of the primary purpose of a facility will be made based on all the facts and circumstances and list certain facts and circumstances relevant to this test. The proposed regulations make clear that a facility that manufactures, produces, grows, or extracts materials or chemicals that are supplied to an advanced manufacturing facility that manufactures semiconductors, or semiconductor manufacturing equipment, does not meet the primary purpose requirement.

Code Sec. 48D(d)(2)(A)(i) provides that, in the case of a partnership or an S corporation that makes an election under Code Sec. 48D(d)(1), "the Secretary shall make a payment to such partnership or S corporation equal to the amount of such credit." In the preamble to the proposed regulations, the IRS requested comments on any guidance needed to determine the extent to which, if any, other Code provisions that limit the amount of a credit to a taxpayer, such as Code Sec. 469 (passive activity credits), Code Sec. 49 (at-risk credit rules), and Code Sec. 50, may be applied to limit the amount of the payment to the partnership or S corporation. The IRS also requested comments on the tax treatment of the payment to the partnership or the S corporation.

The CHIPS Act added special recapture rules in Code Sec. 50(a) for certain expansions in connection with advanced manufacturing facilities. Under Code Sec. 50(a)(3)(A), if there is an "applicable transaction" by an applicable taxpayer 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 federal 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" generally means a transaction involving the material expansion of semiconductor manufacturing capacity in a foreign country of concern. The proposed regulations provide definitions relevant to the applicable transaction recapture rule and address the amount of recapture required under Code Sec. 50(a)(3).

The regulations are proposed to apply to tax years ending on or after the date the regulations are published as final regulations in the Federal Register. Taxpayers may rely on the proposed regulations for property placed in service after December 31, 2022, in tax years ending before the date the regulations are published as final regulations.

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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