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Secs. 50(a)(3) and 50(a)(6)(D) pro- As with other ITCs, taxpayers must (2)(A) should receive a basis step-up
vide additional special recapture rules reduce the depreciable or amortizable with respect to its allocable share of such
that apply to the Sec. 48D credit. basis of any qualified property with tax-exempt income.
Specifically, if there is an applicable respect to which the Sec. 48D credit It is important to note that the
transaction (see discussion above) is claimed or a refund payment of the BBBA proposed the creation of Sec.
by an applicable taxpayer (defined as credit is determined under the elective 6417, which provided for the ability to
the taxpayer allowed a credit under payment provision, as applicable. This make direct-pay elections (i.e., refund-
Sec. 48D(a)) before the close of the basis reduction is reversed in the case of ability) of applicable credits, including
10-year period beginning on the date the ITC recapture, pursuant to relevant the advanced manufacturing ITC,
the taxpayer placed in service qualified provisions under Sec. 50. which was then proposed under Sec.
property that is eligible for the Sec. 48E. At the time, the BBBA was stalled
48D credit, then the taxpayer must Credit monetization in the Senate for months, with ongo-
recapture 100% of the amount of the As noted above, Sec. 48D(d) allows an ing negotiations between Sens. Chuck
tax credit or elective payment amount eligible taxpayer to elect to treat the Schumer, D-N.Y., and Joe Manchin,
determined under Sec. 46 that is at- advanced manufacturing ITC as a direct D-W.Va. With an amplified emphasis
tributable to the Sec. 48D credit with payment against income taxes, essen- on building a resilient supply chain and
respect to the property. tially making it a refundable credit, since revitalizing domestic semiconductor
An exception to this 10-year the eligible taxpayer would be entitled production capacity, Congress pulled
recapture rule applies if the taxpayer to a refund if such a payment exceeds its the advanced manufacturing ITC from
demonstrates to Treasury’s satisfac- federal income tax liability for the tax the BBBA and included it as part of the
tion that the applicable transaction year. The direct-pay election, which is CHIPS and Science Act under Sec. 48D
has ceased or has been abandoned irrevocable, must be made no later than with slight modifications, including the
within 45 days of a determination the due date (including extensions) of direct-pay provision within the Code
and notice by Treasury.³² However, the entity’s income tax return for the section itself, aligned with the provision
this provision does not describe the year for which the election is made, but under the BBBA.
time, place, or manner of such a in no event can the election be made The week following the CHIPS
determination and notice by the gov- earlier than May 6, 2023 (i.e., 270 days and Science Act’s enactment, Congress
ernment to the taxpayer or the means after Aug. 9, 2022, the date of enact- passed the Inflation Reduction Act of
by which a taxpayer can demonstrate ment of Sec. 48D).³³ 2022 on Aug. 16, 2022.³⁵ The Inflation
cessation or abandonment of the Special rules apply to partnerships Reduction Act includes an “energy secu-
applicable transaction so as to avoid and S corporations under Sec. 48D(d) rity” subtitle largely mirroring the “green
full recapture of the Sec. 48D credit (2)(A) for qualified property held direct- energy” subtitle under the BBBA, with
under Sec. 50(a)(3). ly by a partnership or S corporation. The some modifications. Notably, the Infla-
These special recapture rules, direct-pay election under Sec. 48D(d) to tion Reduction Act limits the Sec. 6417
together with the definition of “eli- treat the credit as a payment against tax direct-pay election to certain “applicable
gible taxpayer,” discussed above, are is made at the entity level, even though entities” and adds a new transferability
intended to prohibit the Sec. 48D neither the partnership nor the S cor- election under Sec. 6418, which is avail-
credit from being claimed by certain poration is directly liable for federal in- able to taxpayers that do not have the
foreign-controlled entities with semi- come tax. Moreover, if the partnership or option to make a direct-pay election
conductor manufacturing capacity in S corporation makes the direct-pay elec- under Sec. 6417.
a foreign country of concern and to tion, the payment amount is treated as Under Sec. 6417(d)(1), an “applicable
trigger tax credit recapture should the tax-exempt income for purposes of Secs. entity” is narrowly defined to include:
recipient of the credit subsequently be 705 and 1366, respectively.³⁴ As a result, (1) a tax-exempt organization; (2) a
acquired by or merge with such an en- a partner in a partnership or shareholder state or political subdivision thereof; (3)
tity or otherwise enter into a signifi- of an S corporation that makes the the Tennessee Valley Authority; (4) an
cant transaction, as described above. direct-pay election under Sec. 48D(d) Indian tribal government; (5) an Alaska

32. Sec. 50(a)(3)(B). 34. Sec. 48D(d)(2)(A).
33. Sec. 48D(d)(2)(B). 35. Inflation Reduction Act of 2022, P.L. 117-169.

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