CHIPS Act – Tax Incentive for Manufacturers
The CHIPS Act was enacted on Aug. 9, 2022, adding Internal Revenue Code Section 48D that provides a new advanced manufacturing investment credit (AMIC). This Act seeks to bolster the U.S. semiconductor supply chain and promote research and development of advanced technologies. In addition, it could reduce the risks of future supply chain issues for the many goods and devices that rely on semiconductor chips, such as cell phones and vehicles. The following is a summary of key provisions of the legislation and the expected financial statement consequences.
The New Tax Credit – Advanced Manufacturing Investment Credit
Newly added Code Section 48D provides that the AMIC for any taxable year is an amount equal to 25% of the qualified investment for such taxable year for an advanced manufacturing facility of an eligible taxpayer.
A qualified investment is defined as the basis of any eligible property placed in service by the taxpayer during the taxable year that is part of an advanced manufacturing facility. Qualified property means property that is:
- Tangible property for which depreciation or amortization is allowable
- Constructed, reconstructed or erected by the taxpayer, or acquired if the original use of the property commences with the taxpayer
- Integral to the operation of an advanced manufacturing facility.
Note: There is an exception for the portion of buildings and structural components that is used for offices, administrative services or other services unrelated to manufacturing.
An “advanced manufacturing facility” is a facility for which the primary purpose is to manufacture semiconductors or equipment for manufacturing semiconductors.
The CHIPS Act provides basis reduction by the amount of the credit and recaptures rules similar to Code Sections 50(a) and (c).
Obtaining the Advanced Manufacturing Investment Credit
Under the CHIPS Act, the AMIC is monetized as follows:
- Taxpayers may claim the credit as a reduction of the income tax liability shown on their current year return.
- Taxpayers may obtain a refund of some or all of the credit by electing to treat the credit as a prepayment of income tax (elective payment option).
- Where the elective payment option is exercised by a partnership or S corporation (pass-through entity (PTE)), the credit payment is made directly to the PTE. The amount of the credit is treated as tax-exempt income for purposes of Code Sections 705 and 1366.
Elective payment option
The CHIPS Act’s elective payment option allows taxpayers to elect to receive a direct payment of the AMIC, whether or not they have taxable income. The election is irrevocable and is made by filing the tax return, including extensions.
The benefit of the elective payment is that entities that may not be in a position to benefit from the credit as an offset to their income tax liability can still receive a refund of the credit as if it were a prepayment of tax, even where the entity has zero tax liability.
The AMIC applies to qualified property placed in service after Dec. 31, 2022, and for any property where construction began before Jan. 1, 2023, only to the extent of the basis attributable to construction, reconstruction, or erection occurring after the date of enactment of the CHIPS Act. The AMIC does not apply to properties where construction begins after Dec. 31, 2026.
If your business qualifies for the new tax credit, keep an eye out for additional IRS guidance on how it will work, including the direct pay provision. Contact an Adams Brown advisor to help you make the most of this and other tax credits.