Executive summary: Proposed regulations kick off CHIPS Act credit claims
The Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued a notice of proposed rulemaking to be entered into the Federal Register on March 23, 2023. The notice of proposed rulemaking contains proposed regulations for the advanced manufacturing investment credit under section 48D of the Internal Revenue Code and for the related rules under section 50.
- The proposed regulations provide definitional and procedural guidance on credit claims by addressing the following topics:
- Requirements for credit eligibility
- Direct payment procedures that make the credit effectively refundable
- Special rules for the recapture of the credit that may result from transactions involving foreign entities of concern
Comments and requests for a public hearing should be submitted within 60 days of March 23, 2023. Even though the regulations are not final, taxpayers may rely on these proposed regulations for property placed in service after Dec. 31, 2022, in taxable years ending before the date the Treasury decision adopting regulations as final is published in the Federal Register. To rely on these regulations taxpayers must follow them in their entirety in a consistent manner.
Proposed regulations issued on semiconductor manufacturing credit
Proposed regulations and request for comment
Specific requests for public comment were included in the notice of proposed rulemaking. Taxpayers will have 60 days from March 23, 2023, the date the notice of proposed rulemaking is to be published in the Federal Register, to submit comments and/or request a public hearing.
Requirements for credit eligibility
The advanced manufacturing investment credit under section 48D is available for certain capital expenditures integral to the operation of the advanced manufacturing facility. Such a facility’s primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment. Seemingly straight forward, eligibility, the statute leaves taxpayers with technical and industry-specific questions on eligibility. The proposed regulations begin to answer several of these questions.
Only property integral to the manufacturing of semiconductors or semiconductor manufacturing equipment. The proposed regulations provide that, to be integral to these operations, property must be used directly in the manufacturing operation, essential to the completeness of the manufacturing operation, and must not be transformed in any material way as a result of the manufacturing operation. The definition of integral property is extended to cover certain research and storage facilities used in connection with the manufacturing of semiconductors or semiconductor manufacturing equipment. However, the proposed regulations specifically exclude materials, supplies and other inventoriable items from qualifying as integral to the operation of a qualified facility.
The primary purpose of a manufacturing facility may not be clear, especially in the case of a facility that produce specialized industrial equipment in addition to semiconductors or semiconductor manufacturing equipment. Such a determination will be based on all relevant facts and circumstances surrounding the construction, reconstruction, or erection of the advanced manufacturing facility of an eligible taxpayer. The proposed regulations provide several factors that may indicate that a facility’s primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment. Also included are two examples in which approximately 75% of the output of taxpayers’ facilities is equipment that will be used for semiconductor manufacturing operations. The primary purpose of these two example facilities is the manufacturing of semiconductor manufacturing equipment (i.e., they are determined to be advanced manufacturing facilities). This threshold of 75% of a facility’s output may be part of the analysis the IRS will use when determining a facility’s primary purpose. Notably, the proposed regulations specifically call out facilities that produce, grow, or extract materials or chemicals that are supplied to advanced manufacturing facilities are not facilities for which the primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment.
The proposed regulations also clear up some uncertainty for taxpayers that do not manufacture semiconductors from start to finish. Semiconductor manufacturing is among the terms defined in the guidance. Manufacturing of semiconductors includes the fabrication of the chips or the packaging of semiconductors which opens the benefit to more taxpayers.
Direct payment procedures
Under section 48D taxpayers can elect to receive a payment, known as direct pay, with respect to allowable credits. The proposed regulations contain some revelations on direct payments.
First, the election will be treated as made on the later of the due date (determined without regard to extensions) of the claimant’s income tax return or the date on which such return is filed. Depending on the claimant’s facts, costs for qualified investments could be incurred more than one year before the elective payment is deemed made, lengthening the time the claimant receives the benefit of the credit.
Second, the proposed regulations foreshadow registration procedures that will be required of taxpayers claiming direct pay. Specific registration requirements were not included in the proposed regulations. Instead, Treasury has requested comments on registration requirements and other procedures for electing direct pay with respect to section 48D credits.
Special rules for potential recapture of credit
The section 48D advanced manufacturing investment credit is a component of the section 46 investment tax credit (ITC). Generally, ITC property that is disposed of, or otherwise ceases to be ITC property with respect to the taxpayer, within 5 years of being placed in service will trigger the recapture of a portion or all the ITC claimed. The potential for recapture of a section 48D credit is expanded for certain expansions involving the material expansion of semiconductor manufacturing capacity of the taxpayer in a foreign country of concern within the 10-year period after a qualified investment is placed in service. The proposed regulations provide the rules for determining whether a recapture event has occurred within the applicable 10-year period and will require new record keeping requirements.
Washington National Tax takeaways
The proposed regulations offer some clarification on credit eligibility. Taxpayers may use definitions and examples in the guidance to determine their eligibility in cases where the facts of their facilities may not obviously meet the definition of an advanced manufacturing facility. Where ambiguity remains, taxpayers should be prepared to submit public comments to guide Treasury in the crafting of final regulations.
The proposed regulations on the elective payments of section 48D credits may be indicative of Treasury’s stance in forthcoming guidance on section 6417 elective payments with respect to twelve energy-related applicable credits. The timing of elective payments, the registration requirement, and more could be borrowed or modified in forthcoming guidance on elective payments under section 6417.