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SPECIAL INDUSTRIES

In addition, Section 107 of the stems from a taxpayer’s ability to make implementing a process to track quali-
CHIPS Act of 2022 creates a new re- an election to be treated as making a fied investments, including planning
fundable 25% advanced manufacturing payment against tax equal to the credit around timing, basis reduction, and
investment tax credit (ITC) under Sec. amount otherwise determined in lieu recapture provisions; and (4) substantiat-
48D for qualified investment related of claiming the credit (direct-pay elec- ing and monetizing the Sec. 48D credit.
to facilities that primarily manufacture tion) as a general business tax credit.⁶
semiconductors and semiconductor Through the direct-pay election, taxpay- Qualified investment and
manufacturing equipment. Importantly, ers are entitled to a payment from the qualified property
this new ITC can supplement and be federal government to the extent that An eligible taxpayer’s qualified invest-
paired with other funding secured under they do not have a tax liability to offset ment with respect to an advanced
the CHIPS for America programs. This or if the taxpayer is in a tax loss position. manufacturing facility is the tax basis
article summarizes the key features of The costs associated with building or (i.e., capitalized costs) of any qualified
the new Sec. 48D credit and highlights expanding a semiconductor manufactur- property originally placed in service by
key considerations for manufacturers ing facility can easily surpass $1 billion, the taxpayer after 2022.⁷ The construc-
of semiconductors and semiconductor meaning a 25% tax credit would be tion of such property must begin before
manufacturing equipment, includ- significant to the project’s economic vi- Jan. 1, 2027.⁸ If the construction began
ing current uncertainties surrounding ability. With such a substantial incentive before Jan. 1, 2023, only capitalized costs
the credit. value tied to qualifying for the Sec. 48D attributable to the construction, recon-
credit, it is critical for potential credit struction, or erection of the property
Advanced manufacturing ITC claimants to assess eligibility in order after Aug. 9, 2022 (i.e., the CHIPS Act
overview to plan accordingly. Considerations in- of 2022 enactment date), are eligible
The refundable Sec. 48D credit is equal clude: (1) understanding the meaning of for the Sec. 48D credit, provided that
to 25% of the qualified investment the terms “qualified investment,” “quali- the property is placed in service after
in new depreciable tangible property fied property,” “advanced manufacturing Dec. 31, 2022. It is necessary for tax-
integral to the operation of a facility to facility,” “eligible taxpayer,” “foreign payers that have qualified investments
manufacture semiconductors or semi- entity of concern,” and “applicable incurred on or before Aug. 9, 2022, to
conductor manufacturing equipment. transaction”; (2) identifying which costs separately track costs after that date to
The refundable nature of the credit will qualify and areas of uncertainty; (3) help substantiate and determine the

6. Sec. 48D(d). 8. Sec. 48D(e).
7. Sec. 48D(b)(1).

EXECUTIVE SUMMARY semiconductor manufacturing equipment. Certain “foreign
equipment. Because taxpayers entities of concern” or taxpayers
• National concerns about may elect to be treated as making certain “applicable
lagging U.S. production of making payments against tax transactions” are ineligible for the
semiconductors as a share equal to the credit amount, the credit. The latter include certain
of global production led to credit is in effect refundable. transactions involving a material
legislation in 2021 and 2022, expansion of semiconductor
providing funding incentives and • Qualified property eligible for the manufacturing capacity in certain
a new advanced manufacturing credit must be placed in service “foreign countries of concern.”
investment tax credit. after 2022, and its construction
must begin before Jan. 1, 2027. • Credit recapture rules apply
• The credit, under Sec. 48D, where taxpayers dispose of
equals 25% of qualified • An advanced manufacturing credit property within specified
investment in new buildings, facility for purposes of the periods and in the case of
facilities, and other depreciable credit must have as its primary applicable transactions.
tangible property integral to purpose the manufacturing
the operation of a facility to of semiconductors or
manufacture semiconductors or semiconductor manufacturing

32 April 2023 The Tax Adviser