On July 28, 2022, Congress passed the CHIPS Act (CHIPS). Among other things, CHIPS adds Section 48D to the Internal Revenue Code, which provides a new advanced manufacturing investment tax credit for investments in semiconductor manufacturing. CHIPS, including the new tax credit, is a separate and separate bill from the recent legislative package agreed between Senators Joe Manchin and Chuck Schumer. President Biden is expected to sign the bill.
The new investment tax credit offers eligible taxpayers a refundable tax credit of 25% of their “qualifying investments” over any “advanced manufacturing facility”.
In general, a qualifying investment for any taxable year is the taxpayer’s investment in a depreciable asset integrated into an “advanced manufacturing facility” and put into service by the taxpayer during that year. Qualifying investments include buildings and structural components, with the exception of those portions used for offices, administrative services or other functions not related to production. 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 in general will apply to the new credit, such as the rules relating to credit recovery, depreciation base reductions and investments by tax-exempt entities.
The credit would apply to properties put into service after December 31, 2022 and for which construction begins before January 1, 2023. The credit will expire on December 31, 2026 and will not apply to properties whose construction begins after that date.
CHIPS was approved with the aim of incentivising semiconductor manufacturing in the United States. As with other investment credits, property and equipment used predominantly outside the United States will not be eligible for the credit. In addition, non-creditable taxpayers include (i) foreign entities deemed “foreign entities of concern” under the National Defense Authorization Act of 2021 (for example, foreign terrorist organizations or organizations included in the OFAC list) and (ii) taxpayers who they have engaged in some significant transactions involving the physical expansion of semiconductor manufacturing capacity in China or another “foreign country of concern” (as defined in the National Defense Authorization Act of 2021).
Semiconductor manufacturing plants are expensive projects that require large capital investments. CHIPS, including its new investment tax credit, is intended to encourage investment and can have a significant impact on the financing landscape for facility projects. For example, in a significant departure from the historical treatment of tax credits deriving from renewable energy projects, the new advanced manufacturing credit is destined to be “repayable” based on a “direct payment” election. Therefore, semiconductor manufacturers who otherwise would not have been able to benefit directly from the credit (due, for example, to lack of sufficient taxable income and income tax liabilities) could use the repayable credit to help finance their projects with a lower dependence on third-party “tax equity” investors. In addition, investors who have not significantly participated in the financing of renewable energy projects, such as REITs and other real estate investors, may find themselves more able to invest in these structures due to, among other things, other, the substantial real estate aspects of the projects and the nature of the credits as potentially repayable.
We anticipate that the new Section 48D will require significant guidance from the US Treasury and the IRS to function as intended, including in terms of how credit can be repaid.