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 standalone bill separate and apart from the recent legislative package reportedly agreed upon between Senators Joe Manchin and Chuck Schumer. President Biden is expected to sign the bill into law.
The new investment tax credit provides eligible taxpayers with a refundable tax credit of 25% of their “qualified investments” with respect to any “advanced manufacturing facility.”
Generally, a qualified investment for any taxable year is the taxpayer’s investment in depreciable property integral to an “advanced manufacturing facility” and placed in service by the taxpayer during that year. Qualified investments include buildings and structural components, except those portions used for offices, administrative services, or other functions not related to manufacturing. An advanced manufacturing facility is a facility with the primary purpose of manufacturing semiconductors or semiconductor manufacturing equipment. The various special rules applicable to investment tax credits generally, such as rules regarding credit recapture, reductions to depreciable basis, and investments by tax-exempt entities, will apply to the new credit.
The credit would apply for property placed in service after December 31, 2022, and for which construction begins prior to January 1, 2023. The credit will sunset on December 31, 2026, and will not apply to property the construction of which begins after that date.
CHIPS was passed with the goal of incentivizing U.S. semiconductor manufacturing. As with other investment credit property, facilities and equipment used predominately outside the United States will not be eligible for the credit. In addition, taxpayers ineligible for the credit include (i) foreign entities deemed “foreign entities of concern” pursuant to the 2021 National Defense Authorization Act (e.g., foreign terrorist organizations or organizations included on the OFAC list), and (ii) taxpayers who have engaged in certain significant transactions involving the material expansion of semiconductor manufacturing capacity in China or another “foreign country of concern” (as defined in the 2021 National Defense Authorization Act).
Semiconductor manufacturing facilities are costly projects that require substantial capital investments. CHIPS, including its new investment tax credit, is intended to encourage investments and may significantly impact the financing landscape for facility projects. For example, in a significant departure from the historic treatment of tax credits arising from renewable energy projects, the new advanced manufacturing credit is intended to be “refundable” pursuant to a “direct pay” election. Thus, semiconductor manufacturers that otherwise could not have benefitted directly from the credit (due to, for example, a lack of sufficient taxable income and income tax liabilities) could use the refundable credit to help finance their projects with less dependence on third-party “tax equity” investors. In addition, investors that have not participated significantly in renewable energy project financing, such as REITs and other real estate investors, may find themselves better able to invest in these facilities due to, among other things, the substantial real estate aspects of the projects and the nature of the credits as potentially refundable.
We expect new Section 48D will require significant guidance from the U.S. Treasury and the IRS in order to function as intended, including with respect to the manner in which the credit can be refundable.