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The IRS has issued temporary (TD 9975) and proposed (REG-105595-23) regulations on the "elective payment election" of the advanced manufacturing investment credit (AMIC), which was enacted by the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act of 2022. The proposed regulations would implement the provisions of IRC Section 48D(d) and modify Prop. Reg. Section 1.48D-6 of the proposed regulations issued in March 2023 (see Tax Alert 2023-0713).

Background

IRC Section 48D allows taxpayers to claim the AMIC, which equals 25% of the basis of any qualified property that is part of any taxpayer's advanced manufacturing facility if the property is placed in service after December 31, 2022. IRC Section 48D(b)(3) defines an advanced manufacturing facility as "a facility for which the primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment."

IRC Section 48D, however, does not apply to property constructed after December 31, 2026. Also, for qualified property placed in service after December 31, 2022, whose construction began before January 1, 2023, the AMIC is available only to the extent the property's construction, reconstruction or erection occurred after August 9, 2022.

Under IRC Section 48D(d)(1), a taxpayer may elect to treat the AMIC as a payment of federal income tax equal to the AMIC, instead of as a credit against the federal income tax liability for that tax year (elective payment election). IRC Section 48D(d)(2) has special rules for an elective payment election, which allows a partnership or S corporation to receive a payment instead of a tax credit for property held directly by a partnership or an S corporation.

If an election is made, IRC Section 48(d)(3) is applied before determining a partner's distributive share or an S corporation shareholder's pro rata share of the AMIC. Any AMIC for which the election is made is treated as tax-exempt income for purposes of IRC Sections 705 and 1366. A partner's distributive share of tax-exempt income is based on the partner's distributive share of the applicable AMIC for each tax year. A partnership or S corporation must make the election no later than the due date (including extensions) of the tax return for the tax year for which the is election is made.

IRC Section 50(a)(1) generally requires a taxpayer's tax liability to be increased by the recapture percentage of the aggregate decrease in the credits allowed under IRC Section 38 from all prior tax years. The recapture rule applies if, during any tax year, the taxpayer disposes of investment credit property, or the property ceases to be investment credit property before the close of the recapture period. The aggregate decrease results from "reducing to zero any credit determined under [IRC Section 50(a)(1)] with respect to such property."

New IRC Section 50(a)(3)(A), also enacted under the CHIPS Act, includes a recapture rule requiring the taxpayer's federal income tax liability for the tax year in which an applicable transaction occurs to be increased by 100% of the aggregate decrease in the credits allowed under IRC Section 38 for all prior tax years. The recapture rule applies if the applicable transaction occurs before the close of the 10-year period beginning on the date the taxpayer placed the property eligible for the AMIC in service. The aggregate decrease results "from reducing to zero any investment credit determined under [IRC S]ection 46 that is attributable to the [IRC S]ection 48D credit with respect to such property."

The applicable transaction recapture rule will not apply if the taxpayer demonstrates that the transaction has ceased or was abandoned within 45 days of a determination and notice by the Secretary. An applicable transaction is "any significant transaction (as determined by the Secretary, in coordination with the Secretary of Commerce and the Secretary of Defense) involving the material expansion of [the] semiconductor manufacturing capacity of such applicable taxpayer in a foreign country of concern."

Proposed regulations

Making the elective payment election

The proposed regulations would modify Prop. Reg. Section 1.48D-6(a)(1) and (2) of the March 2023 proposed regulations to clarify that taxpayers may only make an elective payment election on an original tax return filed no later than the return's due date (including extensions) for the tax year for which the AMIC is determined. To make the election, taxpayers would have to include with the tax return any required source credit forms for the qualified property, a completed Form 3800 (General Business Credit) and any additional required information. Taxpayers could not make the elective payment election on an amended return or by filing an administrative adjustment request under IRC Section 6227. Relief under Treas. Reg. Sections 301.9100-1 through -3 would not be available.

When making the election, taxpayers would have to include a statement that they attest, under penalties of perjury, that they are not foreign entities of concern. In addition, taxpayers would have to attest that they have not entered into an applicable transaction during the tax year the qualified property is placed in service, and they will not claim a double benefit.

Application of IRC Section 48D(d)(3)

A taxpayer that makes an elective payment election would apply IRC Section 48D(d)(3) as follows:

• Step 1: Calculate the tax liability, without taking into account general business credits, that must be paid on the due date of the tax return (excluding extensions), and the federal income tax liability the taxpayer may offset with general business credits "pursuant to the limitation based on the amount of tax under [IRC S]ection 38"
• Step 2: Calculate the general business credit carryforwards allowed for the tax year plus the current-year general business credits allowed under IRC Section 38
• Step 3: Apply the general business credits allowed for the tax year (as calculated in Step 2), including the IRC Section 48D credit, against the tax liability
• Step 4: Identify any excess or unused general business credit attributable to the current year IRC Section 48D credits for which the taxpayer is making an elective payment election and treating the unused IRC Section 48D credits as a payment against the tax for the tax year in which the credits are determined (net elective payment amount)
• Step 5: Reduce the IRC Section 48D credits for which an elective payment election is made by the amount allowed as a general business credit under IRC Section 38 for the tax year and the net elective payment amount that is treated as a payment against tax in Step 4, which reduces the IRC Section 48D credits to zero

The proposed regulations would deem the full amount of IRC Section 48D credits for which the elective payment election is made as allowed for all other purposes of the Code, including the basis reduction and recapture rules of IRC Section 50.

Partnerships and S corporations

If a partnership or S corporation makes the elective payment election, the proposed regulations would require the IRS to pay the partnership or S corporation an amount equal to the credit. Before determining a partner's distributive share or shareholder's pro rata share, the proposed regulations would require the IRC Section 48D credit to be reduced to zero and deemed allowed only to the entity for that tax year. The proposed regulations would treat any amount for which the election is made as tax-exempt income for purposes of IRC Sections 705 and 1366, and a partner's distributive share of the tax-exempt income would equal the "partner's distributive share of its otherwise allocable basis in the qualified property as determined under [Treas. Reg. Section] 1.48D-2(h)(2)(i) for such year." The partnership or S corporation would take the tax-exempt income into account at the same time as the partnership or S corporation would have taken the underlying credit into account absent the elective payment election. The partnership or S corporation would treat the tax-exempt income as received or accrued on the date the qualified property is placed in service.

The proposed regulations also would treat the tax-exempt income as being derived from an investment activity, not from the conduct of a trade or business under IRC Section 469(c)(1)(A). Therefore, the tax-exempt income would not be "passive income to any partners or shareholders who do not materially participate." In addition, the proposed regulations would clarify that IRC Section 48D and its regulations do not impose any restrictions on how the partnership or S corporation may use the payment it receives from the elective payment election.

To determine the IRC Section 48D credit the partnership or S corporation will receive as a payment, the proposed regulations would require the S corporation or partnership to calculate the IRC Section 48D credit allowable as if an elective payment election were not made. The limitation established in IRC Section 469 would not apply.

The proposed regulations also would require the partnership or S corporation to take into account the IRC Section 49 at-risk rules at the partner or shareholder level as of the close of the tax year in which the qualified property is placed in service when determining the IRC Section 48D credit for qualified property held directly by a partnership or S corporation. A partnership or S corporation that makes an elective payment election would be required to request from each partner or shareholder subject to IRC Section 49 "the amount of such partner's or shareholder's nonqualified nonrecourse financing with respect to the qualified property as of the close of the [tax] year in which the property is placed in service."

For partnerships subject to the centralized partnership audit regime of subchapter C of chapter 63 of the Code, as amended by the Bipartisan Budget Act (BBA) of 2015, the IRS issued an additional set of proposed regulations (REG-101607-23), which would add new paragraph (j) to Treas. Reg. Section 301.6241-7 to allow "an election by a BBA partnership under [IRC S]ection 48D(d) [to be] adjusted outside of the BBA audit rules."

Special rules

The proposed regulations would modify the March 2023 proposed regulations on excessive payments and basis reductions and recapture amounts by (1) adding examples to clarify the basis reduction and recapture notice requirement, and (2) renumbering the affected paragraphs. The proposed regulations also would establish that rules similar to the IRC Section 50(a) and (c) rules apply for purposes of IRC Section 48D. Additionally, the proposed regulations would require the adjusted basis of property to be reduced by the amount of the IRC Section 48D credit determined for property for which the taxpayer has made an elective payment election.

The proposed regulations also would:

• Establish a similar basis reduction rule for partnerships or S corporations that make an elective payment election
• Clarify the application of the IRC Section 50(c)(5) basis adjustment rule to take adjustments made under Prop. Reg. Section 1.48D-6(e)(2)(ii) into account
• Clarify that taxpayers should report recapture amounts on their annual returns

Applicability dates

Taxpayers may rely on the proposed regulations for elective payments of the IRC Section 48D credit made after December 31, 2022, in tax years ending before the date the final regulations are published in the Federal Register, provided they follow the proposed regulations in their entirety and in a consistent manner for all IRC Section 48D(d) elections.

Comments

The IRS requests comments on:

• Whether future guidance should clarify or expand the methodology for calculating the elective payment amount
• Whether there are other Code sections under which the IRC Section 48D credit would be deemed as allowed for the tax year in which the elective payment election is made
• What information or reporting requirements are needed for partnerships and S corporations to apply the rules when determining the IRC Section 48D credit for which a partnership or S corporation can make an elective payment election
• Whether clarifications are needed on how the at-risk rules apply to the IRC Section 48D credit determination
• Whether additional guidance on excessive payments is needed

Taxpayers may submit comments electronically through the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-105595-23) or send comments to CC:PA:LPD:PR (REG-105595-23), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Comments are due by August 14, 2023.

Temporary and proposed regulations on pre-filing registration requirements

The temporary regulations require taxpayers to complete a mandatory pre-filing registration process. Taxpayers complete the registration process electronically through the IRS electronic portal. The pre-filing registration process requires taxpayers to:

• Satisfy the registration requirements and receive a registration number before making the elective payment election
• Obtain a registration number for each qualified investment in an advanced manufacturing facility for which an IRC Section 48D credit will be determined and for which an elective payment election will be made
• Provide the information required as part of the pre-filing registration process

Once the taxpayer completes the pre-filing registration process, the temporary regulations require the IRS to review the information and issue a separate registration number for each qualified investment for which the taxpayer submitted sufficient information. The temporary regulations require the taxpayer to renew the registration for each subsequent year in which the taxpayer will make an elective payment election for a qualified investment in an advanced manufacturing facility. If the facts related to a qualified investment in an advanced manufacturing facility change, the temporary regulations require the taxpayer to amend the registration to reflect the new facts.

The temporary regulations require the taxpayer to include the registration number of the advanced manufacturing facility on its annual tax return. If the registration number is not included, the temporary regulations require the IRS to treat the elective payment election as ineffective.

The temporary regulations apply to tax years ending on or after June 21, 2023, and expire on June 12, 2026. The text of the temporary regulations is the same as the proposed regulations.

Implications

The temporary and newly proposed regulations provide needed clarity regarding computational guidelines and compliance requirements for purposes of monetizing the IRC Section 48D credit. These requirements are numerous and specifically include a relatively novel registration process designed to give the IRS the pertinent details associated with any advanced manufacturing facility project and the related IRC Section 48D credit claimed.

It is anticipated that additional guidance and further modifications to the temporary and proposed regulations will be issued before, or as part of, the regulations being issued in final form. Areas of focus in this space both specific to and outside of the regulations continue to be, but are not limited to, the following:

• Calculations for purposes of IRC Section 48D(d)(3) related to the AMIC, as well as general business credits and other pertinent provisions
• Computations of IRC Section 38 recapture for purposes of aforementioned computations and compliance requirements
• Evaluation of critical placed-in-service dates (as manufacturing, storage and other assets integral to the production process potentially may be placed in service in stages)
• Technical interpretation of other aspects of the newly proposed and previously proposed IRC Section 48D regulations, where there is uncertainty (e.g., third-party subcontractors that place in service assets integral to the manufacturing process on the manufacturing plant facility site of the primary manufacturer of semi-conductors or semi-conductor manufacturing equipment)
• Tax return compliance requirements involving Form 3800, General Business Credit, and other required source credit forms

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Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor