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On July 28, 2022, Congress passed the CHIPS Act. Among other things, CHIPS adds Section 48D to the Internal Revenue Code, which provides a new manufacturing investment tax credit for investments in semiconductor manufacturing. CHIPS, including the new tax credit, is a stand-alone bill separate from the recent legislative package reportedly negotiated 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” in respect of any “expanded manufacturing facility”.
In general, a qualified investment for any tax year is the taxpayer’s investment in depreciable property that is an integral part of an “improved manufacturing facility” and placed in service by the taxpayer in that year. Qualifying investments include buildings and structural components, excluding those parts used for offices, administrative services or other non-production functions. 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 recapture of credits, reductions in depreciable basis and investments by tax-exempt entities, will apply to the new credit.
The credit will apply to properties placed in service after December 31, 2022 and whose construction begins before January 1, 2023. The credit will end on December 31, 2026 and will not apply to properties whose construction begins after that date .
CHIPS was enacted to stimulate US semiconductor manufacturing. As with other investment credit property, plant and equipment used primarily outside the United States will not qualify for the credit. In addition, taxpayers ineligible for the credit include (i) foreign entities deemed to be “foreign entities of concern” under the National Defense Authorization Act of 2021 (e.g., foreign terrorist organizations or entities included in the OFAC list), and (ii) taxpayers that have engaged in certain significant transactions involving a significant expansion of semiconductor manufacturing capacity in China or another “foreign country of concern” (as defined in the National Authorization Act defense from 2021).
Semiconductor manufacturing plants are expensive projects that require significant capital investment. CHIPS, including its new Investment Tax Credit, is intended to encourage investment and can significantly impact the financing landscape for facilities projects. For example, in a significant departure from the historical treatment of tax credits arising from renewable energy projects, the new Advanced Manufacturing Credit is intended to be “refundable” pursuant to the “direct payment” election. Thus, semiconductor manufacturers that would otherwise not be able to benefit directly from the credit (due to, for example, lack of sufficient taxable income and income tax liabilities) could use the refundable credit to help finance their projects with less reliance on third-party “tax equity” investors. In addition, investors who have not been significantly involved in the financing of renewable energy projects, 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 potentially repayable nature of the loans.
We expect that the new section 48D will require significant guidance from the US Treasury and the IRS to function as intended, including with respect to how the credit can be recovered.
Due to the general nature of this update, the information provided here may not be applicable in all situations and no action should be taken without specific legal advice based on specific situations.
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