The CHIPS Act has enacted new Section 48D, the advanced manufacturing tax credit. Section 48D provides a credit of 25% of qualified investment in a facility that manufactures semiconductors or the equipment to manufacture semiconductors. Taxpayers may elect to be treated as making a payment against tax otherwise due in lieu of claiming the credit.
The credit applies to qualified property placed in service after December 31, 2022, for which construction begins before January 1, 2027. For property for which construction begins before January 1, 2023, the credit applies only to the basis of the property attributable to construction, reconstruction, or erection of the property after August 9, 2022.
The CHIPS Act also establishes a Creating Helpful Incentives to Produce Semiconductors for America Fund and a Creating Helpful Incentives to Produce Semiconductors for America Defense Fund to implement provisions of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (NDAA). The NDAA authorized financial assistance for establishing facilities in the United States to manufacture semiconductors but did not include appropriations. The CHIPS Act appropriates funds for grants and loans for this purpose.
For consideration: Taxpayers constructing or contemplating constructing semiconductor manufacturing facilities should review the CHIPS Act and consider whether it would be advantageous to elect to receive the credit as a payment of tax.
For additional information about the CHIPS Act, see the PwC Insight Senate approves CHIPS funding and tax credits bill to promote US semiconductor manufacturing.
Section 48D allows a tax credit of 25% of an eligible taxpayer’s qualified investment in an advanced manufacturing facility. “Qualified investment” is the basis of qualified property that a taxpayer places in service in a tax year. Qualified investment does not include the basis of property attributable to qualified rehabilitation expenditures, as defined in Section 47(c)(2) (certain amounts paid or incurred in connection with the rehabilitation of a qualified rehabilitated building). The amount of qualified investment includes certain progress expenditures.
“Qualified property” is defined as tangible property (1) for which depreciation or amortization is allowable, (2) that is constructed, reconstructed, or erected by a taxpayer or acquired by a taxpayer that is the original user, and (3) that is integral to the operation of an advanced manufacturing facility. Qualified property includes buildings and structural components that meet these requirements, but does not include a building or portion of a building used for offices, administrative services, or other activities unrelated to manufacturing.
An “advanced manufacturing facility” is a facility for which the primary purpose is to manufacture semiconductors or equipment for manufacturing semiconductors.
An “eligible taxpayer” is a taxpayer that is not a foreign entity of concern as defined in Section 9901(6) of the NDAA (e.g., entities designated as terrorist organizations, engaged in espionage, or for which assets have been blocked), and that has not made an applicable transaction during the tax year. An applicable transaction is any significant transaction involving the material expansion of semiconductor manufacturing capacity, other than capacity for legacy semiconductors, in the People’s Republic of China or a foreign country of concern.
Note: See the State Department web page that discusses countries of particular concern and entities of particular concern for additional information on these designations.
A taxpayer may make an irrevocable election to treat the Section 48D credit for property placed in service in a tax year as a “payment against tax.” The time and manner of making the election are to be provided in regulations or other IRS and Treasury guidance, but must be made no later than the extended due date for filing the return. Taxpayers may not elect to treat the credit as a payment sooner than 270 days after enactment of the CHIPS Act.
A taxpayer that elects to receive the credit as a payment may not claim the credit on its federal income tax return. Rather, the taxpayer reflects the credit on the federal income tax return as a “payment,” which reduces the tax due, similar to payments of estimated tax and amounts withheld from income during the tax year. Accordingly, the amount of the credit is available without regard to tax liability, similar to a refundable credit.
The election to treat the Section 48D credit as a payment against tax must be made by a partnership or S corporation for property held by the entity. No election is allowed to a partner or shareholder. The credit is paid to the partnership or S corporation and is treated in the same manner as a refund referred to in 31 USC 1324(b)(2) (dealing with refunds of internal revenue collections).
Observation: Taxpayers making estimated tax payments may be able to obtain the benefit of the credit in advance by reducing the amount of estimated payments.
Generally, the basis of property for which a credit, including a credit treated as a payment, is received is reduced by the amount of the credit or payment and is increased by any recapture amount.
A taxpayer that disposes of property for which a credit is determined under Section 48D may be required to recapture a portion of the credit, as provided in Section 50(a). The recapture amount is 100% if the property is disposed of in the first year after being placed in service, reduced by 20% for each succeeding year. Thus, for example, a taxpayer that disposes of property in the third year after placing the property in service must recapture 60% of the credit.
Additionally, a taxpayer that engages in an applicable transaction within 10 years of placing in service credit-eligible property is subject to recapture of 100% of the credit allowed.
A taxpayer that receives a direct payment exceeding the allowable credit is subject to tax for the amount of the excess plus 20% of that amount unless the taxpayer has reasonable cause for receiving the excessive payment.