CHIPS Act Manufacturing Investment Credit

The CHIPS Act provides temporary relief for the manufacturing sector in the form of a new, temporary, tax credit for producing semiconductors. The “advanced manufacturing investment credit” for investments in semiconductor manufacturing property amounts to 25% of qualified investment related to an advanced manufacturing facility, that is, a facility with the primary purpose of manufacturing semiconductors or semiconductor manufacturing equipment. Manufacturers may claim the credit for producing semiconductors or building specialized tooling equipment required in the semiconductor manufacturing process.

Any taxpayer is eligible to claim this credit if they are not a “foreign entity of concern” and have not made an “applicable transaction” during the taxable year.

How Is the Credit Calculated?

The CHIPS Act tax credit is equal to 25% of any qualified investment, e.g., the basis of any qualified property, that is part of an advanced manufacturing facility and placed in service by the taxpayer after December 31, 2022. If construction began prior to January 1, 2023, the CHIPS Act tax credit is only available to the extent of the basis of qualified property attributable to the construction, reconstruction, or erection after the CHIPS Act was enacted on August 9, 2022.

The requirements to be treated as qualified property include:

• Tangible with respect to which depreciation or amortization is allowable
• Constructed, reconstructed, or erected by the taxpayer or acquired by the taxpayer (if the original use of the property commences by the taxpayer)
• Integral to the operation of an advanced manufacturing facility whose primary purpose is manufacturing semiconductors or semiconductor manufacturing equipment. Property is integral to the manufacturing process if it is used directly in the manufacturing operation and is essential to the completeness of the manufacturing operation. A research or storage facility may be considered qualified property if it is used in connection with the manufacturing of semiconductors or semiconductor manufacturing equipment.

Which Facilities Are Eligible for the CHIPS Act Tax Credit?

The facility’s primary purpose must be to manufacture finished semiconductors or Semiconductor manufacturing equipment. This is a facts and circumstances test; however, the proposed regulations do clarify that a facility that manufactures, produces, grows, or extracts materials or Chemicals that are supplied to an advanced manufacturing facility that manufactures semiconductors, or semiconductor manufacturing equipment, does not meet the primary purpose requirement. Facts that may indicate a facility has a primary purpose of manufacturing finished semiconductors or manufacturing finished semiconductor manufacturing equipment include:

• Designs or other documents that demonstrate that the facility is designed to make finished semiconductors or finished products consisting of specialized equipment that can only be used for semiconductor manufacturing
• Possession of permits or licenses needed to manufacture finished semiconductors or finished semiconductor manufacturing equipment; and
• Executed contracts to supply finished semiconductor manufacturing equipment to a finished semiconductor manufacturer in place either before or within six months after the facility is placed in service

Treasury is asking for comments on whether for purposes of the CHIPS Act tax credit, the definition of “semiconductor” should include semiconductive substances on which an electronic device or system is manufactured, e.g., polysilicon and compound semiconductor wafers.

What Is the Direct Pay Option?

Eligible taxpayers may elect to treat the CHIPS Act tax credit as a payment against their federal income tax equal to the credit amount, even if the taxpayer has zero tax liability, effectively resulting in a refundable credit.

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