IRS Issues Final Regulations on Advanced Manufacturing Investment Credit
Posted by Kristin Re’ on May 07, 2024
In accordance with the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act, enacted in 2022, the Internal Revenue Service (IRS) has recently released definitive regulations concerning the Advanced Manufacturing Investment Credit. This legislation aims to bolster domestic semiconductor production by offering substantial tax incentives. Notably, the final regulations include adjustments regarding the election to treat the credit as a federal tax payment.
Credit Overview
Enshrined in Section 48D of the Internal Revenue Code, the credit generally amounts to 25% of the qualified investment associated with an advanced manufacturing facility. This refers to facilities primarily engaged in manufacturing semiconductors or semiconductor manufacturing equipment. A manufacturer's qualified investment includes the basis in any qualified property placed in service during the taxable year.
For pass-through entities like partnerships or S corporations, the qualified investment is computed based on the partner's or shareholder's pro rata basis in the property. Consequently, manufacturing partnerships and S corporations with qualifying property may pass on a portion of the qualified basis to taxpayers who can then claim the credit, subject to any applicable limits at the partner or shareholder level.
Qualified property includes tangible property that qualifies for depreciation or amortization, is constructed, reconstructed, or erected by the taxpayer, or acquired by the taxpayer if its original use commences with the taxpayer, and is integral to the operation of the advanced manufacturing facility. This may encompass buildings, portions of buildings (excluding portions used for non-manufacturing functions), and certain structural components of buildings.
Claiming the Credit
Manufacturers can claim the Sec. 48D credit for qualified property placed in service after December 31, 2022, with construction commencing before January 1, 2027. However, if construction began before the enactment of the CHIPS Act, only the portion of the basis attributable to post-enactment construction is eligible.
Typically, the credit is claimed in the tax year when the qualified property is placed in service for federal tax purposes. Thus, the property must be ready and available for its intended function. For instance, if construction on qualified property begins in 2024 but is not placed in service until 2025, the credit is claimed on the company's 2025 federal tax return.
Eligible entities can opt for a "direct pay" election, treating the credit as a payment against their federal income tax liability. This payment offsets any tax liability of the entity and any surplus is refundable.
Key Focus Areas in Final Regulations
The final regulations introduce modifications to certain provisions in the proposed regulations and offer an interim rule for determining a partner's distributive share of tax-exempt income. Effective as of April 22, 2024, the final regulations address three specific areas:
1. Direct-Pay Election: Clarifying confusion regarding the timing of the direct-pay election, the final regulations stipulate that each qualified investment must have its own registration number. However, the election itself is made on the manufacturer's tax return and is irrevocable.
2. Double Benefit Rule: Concerns over potential duplicate benefits for expenditures led to provisions aimed at preventing double tax benefits, including correlation with the general business credit. The final regulations outline a comprehensive five-step process to determine the allowable credit amount that may be elected, though these complexities are best addressed by tax advisors.
3. Pass-Through Entities: Offering more flexibility for pass-through entities, the final regulations include an interim rule for written binding partnership agreements entered into after December 31, 2021, and before June 22, 2023. This rule, applicable to partnerships formed for owning and operating advanced manufacturing facilities or qualified property, determines a partner's distributive share of the direct payment based on more favorable allocation rules.
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The IRS's issuance of final regulations provides much-needed clarity regarding the Sec. 48D credit for manufacturers under the CHIPS Act. Should you have questions regarding this credit, reach out to us for guidance.
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As a manager in our tax department, Kristin serves businesses and individuals. She works primarily with commercial entities in a variety of industries, including Partnerships, S-Corporations, and C-Corporations. She has also worked extensively with manufacturers and start-up companies. Kristin helps companies obtain various tax incentives to reduce tax liability and improve cash flow. Her focus is on various federal, state, and local business development incentives, including Start-Up New York, Excelsior Jobs Program, New York State Film Tax credits, and Federal Research and Development tax credits.