On July 28, 2022, Congress passed the CHIPS Act (CHIPS). Among other things, CHIPS adds Section 48D to the Internal Revenue Code, which provides a new advanced manufacturing investment tax credit for investments in semiconductor manufacturing. CHIPS, including the new tax credit, is a stand-alone bill separate from the recent legislative package that would have been agreed between Senators Joe Manchin and Chuck Schumer. President Biden is expected to sign the bill.
The new investment tax credit provides eligible taxpayers with a refundable tax credit of 25% of their “eligible investments” in respect of any “advanced manufacturing facility”.
Generally, a qualifying investment for any tax year is the taxpayer’s investment in depreciable property that is an integral part of an “advanced manufacturing facility” and brought into use by the taxpayer in that year. Eligible investments include buildings and structural components, except for portions used for offices, administrative services, or other non-manufacturing functions. An advanced manufacturing facility is one whose primary purpose is to manufacture semiconductors or semiconductor manufacturing equipment. The various special rules applicable to investment tax credits generally, such as rules regarding recapture of credits, reductions in the depreciable base and investments by tax-exempt entities, will apply to the new credit. .
The credit would apply to property placed in service after December 31, 2022 and whose construction begins before January 1, 2023. The credit will end on December 31, 2026 and will not apply to property whose construction begins after that date. Date.
CHIPS was adopted for the purpose of encouraging semiconductor manufacturing in the United States. As with other investment credit property, plant and equipment used primarily outside the United States will not qualify for credit. In addition, taxpayers ineligible for the credit include (i) foreign entities deemed to be “foreign entities of concern” under the National Defense Authorization Act 2021 (for example, foreign terrorist organizations or organizations listed listed by OFAC), and (ii) taxpayers who have engaged in certain material transactions involving the material expansion of semiconductor manufacturing capacity in China or another “foreign country of concern” (such as defined in the National Defense Authorization Act 2021).
Semiconductor manufacturing facilities are expensive projects that require substantial capital investments. CHIPS, including its new investment tax credit, aims to encourage investment and can have a significant impact on the financing landscape for facilities projects. For example, unlike the historical treatment of tax credits arising from renewable energy projects, the new advanced manufacturing credit is intended to be “refundable” pursuant to a “direct payment” election. Thus, semiconductor manufacturers who otherwise would not have been able to benefit directly from the credit (due, for example, to a lack of taxable income and sufficient tax liability) could use the refundable credit to help finance their projects with less reliance on third-party “tax equity investors”. In addition, investors who have not had significant participation in the financing of renewable energy projects, such as REITs and other real estate investors, may find themselves in a better position to invest in these facilities due to, among other things, the significant real estate aspects of the projects and the nature of the credits as potentially refundable.
We anticipate that the new Section 48D will require significant direction from the US Treasury and the IRS in order to function as intended, including regarding how the credit may be refundable.
Due to the generality of this update, the information provided here may not be applicable in all situations and should not be applied without specific legal advice based on particular situations.
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