Co-authored by Nolon Blaylock
The CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science Act of 2022 was recently signed into law by President Biden. The purpose of this bill is to develop domestic manufacturing of semiconductors critical to U.S. competitiveness and national security.
The CHIPS Act of 2022 appropriates more than $57 billion to fund the development of domestic semiconductor manufacturing and the accompanying research and development, $1.5 billion to encourage wireless supply chain innovation, and establishes a 25% advanced manufacturing investment credit. The remainder of this article focuses on the details of the tax credit.
The Tax Credit
The CHIPS Act of 2022 created the section 48D Advanced Manufacturing Investment Credit (“AMIC”), which is a nonrefundable, general business tax credit. The credit is equal to 25% of a taxpayer’s qualified investment in an advanced manufacturing facility. A qualified investment is equal to the basis of any qualified property placed in service by the taxpayer and that is part of an advanced manufacturing facility.
The AMIC does not apply to any property for which construction begins after December 31, 2026.
Qualified property is any property which is: (1) tangible, (2) depreciable or amortizable, (3) constructed, reconstructed, erected, or acquired by the taxpayer (acquired property is only qualified if the original use of the property is commenced by the taxpayer), and (4) integral to the operation of the advanced manufacturing facility.
Buildings or portions of buildings that are used for administrative purposes, such as offices or other functions unrelated to manufacturing, are not qualified property even if they satisfy the qualification requirements. A cost segregation analysis would be necessary to understand the eligible components of the property and appropriately measure the credit.
While the basis of qualified property is generally creditable in the year it is placed in service, if the qualified property has a normal construction period of at least two years, the taxpayer can elect to claim the credit for a certain percentage of qualified progress expenditures paid or incurred during the tax year.
Advanced Manufacturing Facility
For the purposes of the credit, an advanced manufacturing facility is a facility for which the primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment.
Any taxpayer may take the credit as long as the taxpayer is not a foreign entity of concern nor has made any significant transaction involving the expansion of semiconductor manufacturing in China or other foreign countries of concern.
Elective Payment/Excessive Payment Provision
The new AMIC provides the taxpayer the option to elect to be treated as having made payments directly against their tax liability in an amount equal to the credit. This election bypasses the normal general business credit limitation of 25% of a taxpayer’s tax liability in excess of $25,000. Congress has provided an important benefit to the taxpayer—by making the election and circumventing the credit limitation, a taxpayer is able to significantly reduce their overall tax liability or eliminate it altogether. See below as an example.
However, this bypass comes at a slight cost. The taxpayer will be taxed at a 20% rate on the amount of AMIC in excess of the taxpayer’s tax liability before taking into account other general business credits and without regard to the general business credit limitation. It is an all-or-nothing election—either all of the AMIC bypasses the traditional general business credit limitation or all of the credit is subject to the limitation. If the taxpayer makes the election, the credit is reduced to zero for general business credit purposes. The chart below shows the mechanics of the excessive payment provision.
Basis Reduction/Credit Recapture
A taxpayer that receives the credit for a piece of property must reduce the basis of the property by the amount of the credit so that the taxpayer cannot receive a double benefit—from both the AMIC and the depreciation or amortization.
Moreover, a taxpayer that disposes of property for which a credit was received may be required to recapture a certain amount of the claimed credit (or deemed payment via the election) depending on the amount of time that has lapsed from the placed in-service date to the date of disposition. The recapture period is phased out over five years. Additionally, if a taxpayer that had received a credit enters into a transaction involving the material expansion of semiconductor manufacturing capacity in China or a foreign country of concern within 10 years of receiving the AMIC, the taxpayer is required to recapture 100% of the credit received.
The AMIC can drastically reduce your tax liability if it is utilized in the correct manner. With the option to bypass the general business credit limitation, this credit has the potential to reduce your tax liability all the way to zero.
We Can Help
If you believe this tax credit is applicable to you or are interested in learning more about the credit, please contact our team for further assistance.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.