Guidance Issued on the CHIPS Act Manufacturing Investment Credit | FORVIS – Forvis
On March 21, 2023, the IRS and the U.S. Treasury Department (Treasury) issued proposed regulations providing guidance to taxpayers on the Advanced Manufacturing Investment Credit (the CHIPS Act tax credit) under the Creating Helpful Incentives to Produce Semiconductors Act of 2022 (CHIPS Act).
Here are some common questions you may be asking about this tax credit that the proposed regulations provide insight on:
Any taxpayer is eligible to claim this credit if they are not a “foreign entity of concern” and have not made an “applicable transaction” during the taxable year. For purposes of the CHIPS Act tax credit, the U.S. Department of Commerce issued guidance on March 21, 2023 defining “foreign entity of concern” to include, but not limited to, foreign entities designated as a foreign terrorist organization by the Secretary of State, and other federal legislation and Treasury lists. Applicable transactions are defined in Section 50(a)(6) as material expansions of semiconductor manufacturing capacity in China or a foreign country of concern. Note that if a taxpayer claims this credit but then engages in an applicable transaction within 10 years of placing the credit-eligible property in service, the taxpayer will be required to recapture all the CHIPS Act tax credits claimed. The recapture amount is computed by determining the tax amount if the credits in prior years for the manufacturing incentive had been reduced to zero.
The CHIPS Act tax credit is equal to 25% of any qualified investment, e.g., the basis of any qualified property, that is part of an advanced manufacturing facility and placed in service by the taxpayer after December 31, 2022. If construction began prior to January 1, 2023, the CHIPS Act tax credit is only available to the extent of the basis of qualified property attributable to the construction, reconstruction, or erection after the CHIPS Act was enacted on August 9, 2022.
The requirements to be treated as qualified property include:
For pass-through entities, the proposed regulations clarify that a partner or shareholder is treated as the taxpayer with respect to the partner’s or shareholder’s share of basis in the partnership’s qualified property for purposes of calculating the qualified investment. A partner’s share of the partnership’s basis should be determined in accordance with the ratio in which the partners divide the partnership’s general profits or otherwise determined under Regulation §1.46-3(f). For S corporations, the basis of qualified property must be apportioned pro rata among the shareholders. Similar rules apply to estates and trusts. This means that partnerships and S corps with qualifying property may pass through a portion of the qualified basis to the ultimate taxpayers who may claim a credit, subject to any limits at the partner or shareholder level.
The facility’s primary purpose must be to manufacture finished semiconductors or semiconductor manufacturing equipment. This is a facts and circumstances test; however, the proposed regulations do clarify that a facility that manufactures, produces, grows, or extracts materials or chemicals that are supplied to an advanced manufacturing facility that manufactures semiconductors, or semiconductor manufacturing equipment, does not meet the primary purpose requirement. Facts that may indicate a facility has a primary purpose of manufacturing finished semiconductors or manufacturing finished semiconductor manufacturing equipment include:
Treasury is asking for comments on whether for purposes of the CHIPS Act tax credit, the definition of “semiconductor” should include semiconductive substances on which an electronic device or system is manufactured, e.g., polysilicon and compound semiconductor wafers.
Construction of the property must begin before January 1, 2027. To help establish that construction has begun, the proposed regulations provide the Physical Work Test or the Five Percent Safe Harbor:
Under either the Physical Work Test or the Five Percent Safe Harbor, the taxpayer also must prove that there was either continuous construction, e.g., continuing physical work of a significant nature, or continuous efforts to advance toward completing the property, like entering into binding contracts, obtaining permits, and paying bills that go toward the costs of the property.
Eligible taxpayers may elect to treat the CHIPS Act tax credit as a payment against their federal income tax equal to the credit amount, even if the taxpayer has zero tax liability, effectively resulting in a refundable credit. If the taxpayer has zero tax liability, this effectively converts the credit into cash. This election must be made no later than the due date (including extensions) of the tax return for the taxable year in which the election is made, but in no event earlier than May 8, 2023. This election is irrevocable. For pass-through entities, the direct pay election must be made by the partnership or S corp that directly holds the property for which the CHIPS Act tax credit is claimed; the election is not available to the partner or shareholder.
If your company is interested in taking advantage of the CHIPS Act tax credit for semiconductor manufacturers, reach out to a professional at Forvis Mazars or use the Contact Us form below.
If you’re interested in also learning about the other CHIPS Act funding available for semiconductor manufacturers under the CHIPS for America Fund, see FORsights™ article, “Guidance Released on How to Apply for CHIPS Act Funding.”