November 5, 2024 Final regulations implement the advanced manufacturing investment credit established by the CHIPS Act of 2022
In final regulations (T.D. 10009), Treasury and the IRS implement the advanced manufacturing investment credit (AMIC) under IRC Section 48D, which was enacted under the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act of 2022 to incentivize semiconductor and semiconductor equipment manufacturing in the United States. The final regulations adopt, with modifications, the proposed regulations (REG-120653-22) published in the Federal Register on March 23, 2023 (see Tax Alert 2023-0713). T.D. 10009 is effective December 23, 2024, but the regulations generally apply to property that is placed in service after December 31, 2022, and during a tax year ending on or after October 23, 2024. For taxpayers planning to make the elective payment election under IRC Section 48D(d) and Treas. Reg. Section 1.48D-6, which allows certain taxpayers to treat the AMIC as a payment of federal income tax, see T.D. 9989 and Tax Alert 2024-0624. Background IRC Section 48D allows eligible taxpayers to claim the AMIC, which equals (for any tax year) 25% of the basis of any qualified property (for such tax year) that is part of an advanced manufacturing facility if the property is placed in service after December 31, 2022. IRC Section 48D does not apply to property for which construction begins after December 31, 2026. For qualified property placed in service after December 31, 2022, whose construction began before January 1, 2023, the AMIC is available only for the portion of the basis attributable to the property's construction, reconstruction or erection after August 9, 2022 (the date the CHIPS Act of 2022 was enacted). IRC Section 48D(b)(2) defines "qualified property" as tangible property that:
or
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." Under IRC Section 48D(b)(4), qualified property does not include that portion of the basis of any property that is attributable to qualified rehabilitation expenditures (as defined in IRC Section 47(c)(2)). For qualified progress expenditures, IRC Section 48D(b)(5) provides rules similar to the rules of subsections (c)(4) and (d) of IRC Section 46 (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) shall apply for purposes of IRC Section 48D(a). 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 that allow 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. IRC Section 48D(c) defines an eligible taxpayer as a taxpayer that (1) is not a foreign entity of concern (as defined in Section 9901(6) of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021), and (2) has not made an applicable transaction (as defined in IRC Section 50(a)) during the tax year. IRC Section 50(a)(1) generally requires a taxpayer's tax liability to increase 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." IRC Section 50(a)(3)(A), also enacted under the CHIPS Act of 2022, includes a recapture rule requiring the taxpayer's federal income tax liability for the tax year in which an applicable transaction occurs to increase 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 [AMIC] under [IRC S]ection 48D(a) with respect to such property." The applicable transaction recapture rule will not apply if the taxpayer demonstrates that the transaction has been ceased or 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 the People's Republic of China or a foreign country of concern." Final regulations Definitions The final regulations refine and clarify the definitions of "advanced manufacturing facility," "semiconductor manufacturing," "semiconductor manufacturing equipment," "semiconductor packaging" and "significant transaction." Further, the final regulations introduce new definitions, such as "semiconductor wafer production," "assembly" and "testing." Consistent with the proposed regulations, the final rules primarily apply long-established credit mechanics and procedures common to all investment tax credits (including the IRC Section 48D credit). Determining basis For property whose construction began before January 1, 2023 (and is placed in service after December 31, 2022), the final regulations clarify that taxpayers must allocate the portion of the property's basis attributable to construction, reconstruction or erection after August 9, 2022 (the enactment date of the CHIPS Act) by using any reasonable method, including applying the principles of IRC Section 461. The final regulations also clarify that rules similar to those in Treas. Reg. Sections 1.48-2(b)(2), 1.48-11(b)(5)(i) and 1.48-12(c)(1) apply. Additionally, the final regulations remove the proposed requirement that taxpayers determine basis immediately before the qualified property is placed in service. The final regulations clarify that "basis" has the same meaning as in Treas. Reg. Section 1.46-3(c) with respect to qualified property. In the Preamble, Treasury and the IRS indicate that the property's basis can include capital expenditures as defined in IRC Section 263 and Treas. Reg. Sections 1.263(a)-1 through 1.263(f)-1. Coordination with rehabilitation credit The final regulations use an example to address uncertainty as to whether a taxpayer must claim a rehabilitation credit under IRC Section 47 to be subject to the basis exclusion rule in IRC Section 48D(b)(4). In the example, the basis of any qualified property meeting the definition of qualified rehabilitation expenditures is excluded from the AMIC, regardless of whether a taxpayer actually claims a rehabilitation credit for those qualified rehabilitation expenditures. Although commenters requested that the final regulations clarify whether the AMIC affects any other federal tax credits, the final regulations only include the special rule for coordination with the rehabilitation credit. For the reasons stated in the Preamble, Treasury and the IRS declined to address the impact of the AMIC on other federal credits. Qualified progress expenditures election Under the rules for qualified progress expenditures in Treas. Reg. Section 1.46-5, taxpayers may elect to increase the qualified investment (as defined in IRC Section 48D(b)(1)) in any advanced manufacturing facility of an eligible taxpayer for the tax year by any qualified progress expenditures made after August 9, 2022. If progress expenditure property is being constructed by or for a partnership or S corporation, the final regulations clarify that the rules of Treas. Reg. Section 1.46-5(o)(1) and (p) do not prohibit the partnership or S corporation from making a qualified progress expenditure election under Treas. Reg. Section 1.46-5, provided the partnership or S corporation intends to make an elective payment election under IRC Section 48D(d) and Treas. Reg. Section 1.48D-6. Qualified property To clarify that a taxpayer's ownership of an advanced manufacturing facility is not a prerequisite for claiming the AMIC, the final regulations add a definition for "part of an advanced manufacturing facility." Under that definition, property is part of an advanced manufacturing facility if it is located or co-located either (1) at the advanced manufacturing facility, or (2) on a contiguous piece of land to the advanced manufacturing facility. Parcels or tracts of land are contiguous if they have common boundaries and "would be contiguous but for the interposition of a road, street, railroad, public utility, stream or similar property." The final regulations permit property that is not located or co-located at an advanced manufacturing facility or on a contiguous piece of land to still be considered part of the advanced manufacturing facility if (1) it is owned by the same taxpayer that owns the advanced manufacturing facility, (2) it is connected (e.g., pipeline) to the advanced manufacturing facility, and (3) the sole purpose, function and output of the property is dedicated to the operation of the advanced manufacturing facility. The property also must meet the requirements of IRC Section 48D and its regulations. Under IRC Section 48D(b)(2)(B)(ii), qualified property does not include any building or portion of a building used for offices, administrative services or other functions unrelated to manufacturing. The final regulations reiterate that "tangible depreciable property" does not include buildings and its structural components used as offices. To clarify, the final regulations include a list of certain buildings or portions of buildings within advanced manufacturing facilities that are considered related to manufacturing and not considered offices. In the Preamble, Treasury and the IRS make clear that whether a building or portion of a building is used as an office, is used for administrative services or is unrelated to manufacturing is a factual determination. If an advanced manufacturing facility that is engaged in the manufacturing of semiconductors also conducts vertically integrated activities (e.g., producing raw materials and manufacturing ingots and wafers), the final regulations only consider property used to manufacture the semiconductors to be property integral to the operation of the advanced manufacturing facility. In response to comments, Treasury and the IRS added additional examples to the list of specified property that "normally would be integral to the operation of the advanced manufacturing facility of an eligible taxpayer." Acquired property meets the definition of qualified property under IRC Section 48D(b)(2)(A)(iii)(II)if its original use commences with the taxpayer. In the proposed regulations, the term "original use" (except in Prop. Reg. Section 1.48D-3(e)(2)) meant, for any property, the first use to which any taxpayer puts the property in connection with a trade or business or for the production of income. Taxpayers paying or incurring additional capital expenditures to recondition or rebuild property they acquired or owned satisfy the original use requirement to the extent of the expenditures they paid or incurred. A taxpayer's cost to acquire property reconditioned or rebuilt by another taxpayer, however, does not satisfy the original use requirement. Commenters requested that Treasury and the IRS modify the definition of "original use" to allow for the inclusion of acquired property that was reconditioned or rebuilt by another taxpayer. Treasury and the IRS, however, declined to adopt those modifications, affirming that a taxpayer's cost to acquire property reconditioned or rebuilt by another taxpayer does not satisfy the original use requirement. Advanced manufacturing facility The proposed regulations defined "advanced manufacturing facility" as "a facility of an eligible taxpayer for which the primary purpose is the manufacturing of finished semiconductors or the manufacturing of finished semiconductor manufacturing equipment." In response to comments, the final regulations remove "finished" from the definition of advanced manufacturing facility. They also remove "finished" from Treas. Reg. Section 1.48D-4(c)(1) for purposes of determining whether the facility's primary purpose is manufacturing semiconductors or semiconductor manufacturing equipment. Consistent with the modification, the final regulations define "manufacturing semiconductor manufacturing equipment" as the physical production of semiconductor manufacturing equipment in a manufacturing facility; the regulations further require that such equipment be used by an advanced manufacturing facility engaged in manufacturing of semiconductors as defined in Treas. Reg. Section 1.48D-2(g). The final regulations also adopt a minimum threshold to satisfy the "primary purpose" requirement. Under the final regulations, the "primary purpose" requirement is satisfied if more than 50% of the facility's potential output, as measured by the costs of production, revenue received in an arm's-length transaction or units produced derives from the manufacturing of semiconductors or semiconductor manufacturing equipment. The final regulations include four examples (two of which address vertically integrated manufacturers) to illustrate how this rule applies. The final regulations expand the definition of "semiconductor manufacturing," to also include "semiconductor wafer production," which includes "the processes of growing single-crystal ingots and boules, wafer slicing, etching and polishing, bonding, cleaning, epitaxial deposition, and metrology." Treasury and the IRS explained that the clarification that "semiconductor manufacturing" includes "semiconductor wafer production" is consistent with the definition of "semiconductor manufacturing" in the Department of Commerce rules, which provide guardrails to prevent the improper use of CHIPS Act funding overseen by the Department of Commerce (Commerce Final Rule). Example 2 in Treas. Reg. Section 1.48D-4(c)(3)(ii) indicates that the term "semiconductor wafer production" encompasses the production of solar wafers. The inclusion of solar wafers in the definition of "semiconductor wafer production" was due to "supply chain and national security considerations regarding the production of solar wafers not present in the case of other related products." The decision to include solar wafers resulted from coordination among Treasury, the IRS, the Department of Commerce, and the Department of Defense. Although commenters requested that the final regulations further modify the definition of "semiconductor manufacturing" to include additional products and substances, Treasury and the IRS declined to expand the definition further. Thus, consistent with the proposed regulations, the definition of "semiconductor manufacturing" in the final regulations excludes the production of materials and other substances (e.g., polysilicon) from the definition. In response to comments, the final regulations revise the definition of "semiconductor packaging" to include "assembly' and "testing" within all stages of packaging. Treasury and the IRS explained that this expanded definition "is consistent with the purpose of the [IRC S]ection 48D credit to incentivize the manufacture of semiconductors within the United States." The term "assembly" includes, but is not limited to, wafer-dicing, die-bonding, wire bonding, solder bumping and encapsulation. The term "testing" includes, but is not limited to, probing, screening and burn-in work. In response to comments, Treasury and the IRS clarified that the list of examples of semiconductor manufacturing equipment and subsystems is non-exclusive and included additional examples of property that may qualify as semiconductor manufacturing equipment and subsystems. Regarding research or storage facilities, a commenter requested that the proposed regulations be modified to treat research facilities that do not manufacture any type of semiconductor or semiconductor manufacturing equipment as integral to the operation of an advanced manufacturing facility. Consistent with the proposed regulations, the final regulations clarify that a research or storage facility may qualify as integral to the operation of an advanced manufacturing facility only if the property is used in connection with manufacturing semiconductors or semiconductor manufacturing equipment. The proposed regulations included specific examples of eligible research and storage facilities. The final regulations retained these examples and added additional storage facility examples. Beginning of construction Consistent with the proposed regulations, the final regulations allow a taxpayer to establish that construction of an item of property has begun by satisfying the physical work test or the 5% safe harbor. Under the physical work test, construction begins "when physical work of a significant nature begins, provided thereafter that the taxpayer maintains continuous construction or continuous efforts." The test's focus is on the work performed, not the costs. In response to comments, the final regulations provide a non-exclusive list of examples of on-site and off-site activities to help taxpayers determine whether physical work of a significant nature has occurred. Under the 5% safe harbor, construction is treated as having begun when the taxpayer (1) pays or incurs 5% or more of the total cost of the property; and (2) maintains continuous construction or continuous efforts. To determine whether continuous construction or continuous efforts have occurred, all the relevant facts and circumstance are taken into account. Under the proposed regulations, "paying or incurring additional amounts included in the total cost of the property" could indicate that a taxpayer is engaged in continuous efforts to advance towards completion of a property. The final regulations clarify that taxpayers will satisfy this factor if they pay or incur 5% or more of the property's total cost "each calendar year after the calendar year during which construction of the property began." For purposes of the beginning of construction, the final regulations clarify that taxpayers may treat tooling equipment and semiconductor manufacturing equipment as a single item. The final regulations also treat multiple properties or facilities as a single project if, at any point during their construction, the multiple properties or facilities are owned by a single taxpayer and two or more factors in Treas. Reg. Section 1.48D-5(a)(3)(i) are satisfied. Related taxpayers (as defined in Treas. Reg. Section 1.52-1(b)) are treated as one taxpayer when determining whether multiple facilities or properties should be treated as a single project. Recapture IRC Section 50(a)(3)(C) includes a special recapture rule that applies if a significant transaction involving the material expansion of semiconductor manufacturing capacity occurs in a foreign country of concern. IRC Section 50(a)(3)(C) expressly authorizes Treasury to provide guidance on the recapture requirement for the AMIC. In addition, IRC Section 50(a)(6)(D)(i) expressly authorizes Treasury to determine significant transactions, stating, "[t]he term 'applicable transaction' means, with respect to any applicable taxpayer, 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 semiconductor manufacturing capacity of such applicable taxpayer in … the People's Republic of China or a foreign country of concern … " The final regulations define "significant transaction" as either how it is defined in (1) Treas. Reg. Section 1.50-2(b)(10)(i), or (2) the required agreement (if a taxpayer enters into a required agreement with the Secretary of Commerce under 15 U.S.C. 4652(a)(6)(C) and 15 CFR 231.112. Under the proposed regulations, an "applicable taxpayer" included:
The final regulations retain the general definition of "applicable taxpayer," from Prop. Reg. Section 1.50-2(b)(2)(i)(A) but adopt special rules for partnerships and S corporations. If a partnership placed property in service for which the AMIC was determined, the final regulations define "applicable taxpayer" as:
Similar rules apply to S corporations and shareholders. Implications Scope of 'semiconductors' and 'semiconductor manufacturing' While many commenters requested an expansion of the definition of "semiconductor" to include additional products, substances and processes, Treasury and the IRS declined to expand the scope of the defined term, noting the importance of consistency with the definition from the Department of Commerce, as provided in the Commerce Final Rule (15 CFR 231.115). In a taxpayer-friendly turn, however, the final regulations expanded the definition of "semiconductor manufacturing" to include "semiconductor wafer production" (including the production of solar wafers). The Preamble describes the policy consideration for including the production of solar wafers, noting that there are "specific supply chain and national security considerations regarding the production of solar wafers not present in the case of other related products." The inclusion of wafer production (including solar) is a welcome addition for many taxpayers deeply integrated in the semiconductor (and solar) manufacturing supply chain. Manufacturers of semiconductor wafers and solar wafers that did not expect to be able to claim the AMIC should act now to determine whether to claim a credit and how to comply with the final regulations. The final regulations do not include further upstream production processes, such as the production of precursor materials (e.g., polysilicon), within the scope of "semiconductor manufacturing." Commenters requested the production of additional products and substances be included within semiconductor manufacturing; however, the government indicated this would not be appropriate as those are materials consumed or substantially transformed during the semiconductor manufacturing processes and not included in the Commerce Rule definition of "semiconductor manufacturing." Therefore, taxpayers that only produce precursor materials are unable to claim the AMIC and instead may be eligible to obtain funding (e.g., grants/loans) from the government through the Department of Commerce's CHIPS incentive programs. Elimination of 'finished' requirement For taxpayers that manufacture semiconductors and semiconductor manufacturing equipment, the final regulations' removal of "finished" from the definition of an "advanced manufacturing facility" is reflective of industry practice and the modifications to the definitions of "semiconductor manufacturing" and "semiconductor manufacturing equipment." As noted, this is welcome news for certain taxpayers, including those that produce semiconductor wafers and solar wafers. Primary purpose The government responded favorably to requests that the final regulations include a minimum threshold that would satisfy the "primary purpose" requirement for an advanced manufacturing facility. Under the final regulations, a facility has the "primary purpose" of manufacturing semiconductors or semiconductor manufacturing equipment if more than 50% of its potential output, as measured by the costs of production, revenue received in an arm's length transaction or units produced is derived from the manufacturing of semiconductors or semiconductor manufacturing equipment. The adoption of a more-than-50%-threshold minimum standard benefits taxpayers by providing certainty (unlike the proposed regulations, which included only an example suggesting a potential 75% threshold, rather than a set minimum threshold). Physically located or co-located property and other eligible property In another welcome development, Treasury and the IRS acknowledged that no provision under IRC Section 48D requires a taxpayer to own the advanced manufacturing facility as a prerequisite to claiming the AMIC. Therefore, taxpayers that place in service qualified property that is co-located at another taxpayer's advanced manufacturing facility (e.g., certain fabless semiconductor companies) may be able to claim the AMIC (assuming they otherwise meet the requirements of IRC Section 48D and the final regulations).
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