New CHIPS Tax Credit Provides Opportunities and Complexity for Companies and Investors in Superconductor Manufacturing
August 12, 2022
At a glance
- The main takeaway: The recently passed CHIPS Act creates a new Advanced Manufacturing Tax Credit to provide incentives for US companies to invest in domestic semiconductor manufacturing. The Act allows a credit of up to 25% of qualified investment amounts in facilities or equipment used to manufacture semiconductors in the US. There are significant details that still need to be fleshed out by the IRS in terms of how the credit works, however, taxpayers involved or contemplating investment in semiconductor equipment or facilities should be aware of this potentially valuable tax incentive.
- Impact on your business: For US companies operating, or planning investments, in the semiconductor sphere, the new Advanced Manufacturing Tax Credit could provide valuable tax and tangible bottom-line benefits. However, businesses should beware of potential pitfalls in the form of credit limitations for certain taxpayers and possible claw-back repayments of credit amounts claimed.
- Next steps: The rules governing this new tax credit are complex and evolving, and a lot of details remain to be clarified. Aprio’s Manufacturing and Distribution team as well as our Tax Credits and Incentives Consulting team are both monitoring these developments and are beginning to advise clients on the particulars of the CHIPS Act. Your Aprio tax advisor can help you determine whether your business may benefit from this potentially valuable tax credit.
Schedule a consultation with the Aprio Manufacturing & Distribution Team Today.
The full story:
On Tuesday, August 9, 2022, President Biden signed the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act into law. The bill is designed to improve US competitiveness against China in the production of semiconductors and includes direct taxable grants for facility improvements, direct loans and loan guarantees to taxpayers engaged in semiconductor production activity and amounts set aside for research & development and workforce programs.
From a tax standpoint, the key provision of the CHIPS Act is the enactment of Internal Revenue Code Section 48D, which establishes the Advanced Manufacturing Tax Credit (AMTC), a refundable tax credit equal to 25% of a taxpayer’s investment in qualified property that is integral to a facility where its primary purpose is the manufacturing of semiconductors or semiconductor equipment. Taxpayers are eligible to take the credit in the year the qualified property is placed into service.
The statute provides a four-part test to determine what constitutes qualified property eligible for the AMTC:
- The property must be tangible, either real or personal property such as equipment.
- The property must be eligible for depreciation.
- The property must either be constructed by the taxpayer or acquired for original use.
- The property must be “integral to the operation of the advanced manufacturing facility.”
Under this definition, qualified property includes buildings and structural components, except those portions used for offices, administrative services, or other functions not related to manufacturing.
The AMTC as currently structured has a relatively short lifespan. To be eligible for the credit, qualified property must be placed in service after December 31, 2022, and construction on the qualified property must be commenced before January 1, 2027. In the event construction of what would constitute qualified property began before January 1, 2023, taxpayers may only claim credit under the AMTC for costs that are added to the depreciable tax basis of the qualified property after August 9, 2022 (the date the bill was signed into law by the President). However, taxpayers investing in qualified property, which had a construction beginning date after August 9, 2022, may treat all qualified investment costs as eligible for the credit.
Direct pay option for credit amounts
A unique feature of the AMTC, often not found in other tax credit provisions, allows a taxpayer claiming the AMTC to treat the credit amount as a payment of the taxpayer’s estimated or actual income tax liabilities. This “direct pay” feature functionally converts the AMTC into a refundable credit by allowing a taxpayer whose AMTC amount is greater than its federal income tax liability to claim a refund as an “overpayment” of income tax. The statute also allows pass-through entities such as partnerships and S corporations to make a “direct pay” election to pass the credit through to partnership/LLC members or S corporation shareholders.
Limitations on the AMTC availability
Taxpayers who claim an AMTC will be required to reduce their basis in the qualified property by the amount of the credit claimed. The statute also contains recapture provisions, requiring taxpayers who claim the AMTC to repay all or some portion of the credit under listed circumstances, specifically:
- If the taxpayer disposes of the qualified property or of the taxpayer’s ownership interest in a pass-through entity which claimed the AMTC within five years of the date the qualified property was placed in service.
- If the property which generated the credit ceases to be a qualified property within five years of the date it was placed in service.
- If the taxpayer enters a transaction that materially expands its semiconductor manufacturing capacity in either China or any country on the Office of Foreign Assets Control (OFAC) list of sanctioned countries within 10 years.
Additionally, taxpayers who have engaged in certain “significant transactions” expanding the material of semiconductor manufacturing in either China or any other foreign country on the OFAC sanctions list, will be ineligible to claim the AMTC. It is likely this prohibition will apply to US companies with foreign subsidiaries in China, as well as to US subsidiaries of parent companies domiciled in China.
It is important to note that the AMTC is subject to the passive activity loss (PAL) rules of Internal Revenue Code Section 469, similar to other tax credits. In some cases, this could provide disallowance of some, or all credit amounts claimed by pass-through entities with partners or members who face credit disallowance or loss deduction carryovers due to the PAL rules. However, LLC members who are not subject to the passive activity loss rules are also eligible to take advantage of the AMTC.
Further guidance from the IRS is still needed
There are several areas of uncertainty for which taxpayers and their advisers will need guidance from the Treasury Department prior to filing credit claims. The term “integral to the operation of the advanced manufacturing facility” is yet to be defined, creating uncertainty at the onset of the bill as to what improvements are eligible for the credit.
There likely will be some questions as to what constitutes being “placed in service” for purposes of determining the tax period in which the taxpayer is eligible to claim the AMTC. This will become increasingly critical as the sunset/expiration date of the credit comes nearer. The bill is also silent as to whether a company may carry forward AMTC amounts if construction is not completed by the scheduled expiration date of the credit.
Additionally, taxpayers will need guidance on how the credit applies to partnerships and S corporations, in terms of both the PAL limitations and the “direct pay” election. At present, the bill is not clear as to the refundability component of the credit as it applies to pass-through entities.
There is also concern arising from the novel provisions allowing claw-backs in the case of expansion of semiconductor manufacturing capacity in China or other OFAC-listed countries, as well as certain transactions involving those listed countries. Likewise, taxpayers will need guidance in determining when property ceases to be classified as qualified property, requiring a claw-back payment of claimed credit amounts, as well as how those repayments must occur.
The bottom line
The new, temporary AMTC for superconductor manufacturing investment presents a potentially significant tax savings opportunity and incentive for tech-oriented companies and their investors. However, the provisions are complex, and many significant details must be ironed out through IRS guidance. Aprio’s Manufacturing and Distribution Services team as well as the Tax Credits and Incentives Consulting team are closely following developments of this dynamic tax incentive and can provide you with the guidance you need to determine whether your company can benefit from this tax credit provision.
About the Author
Carli is the partner-in-charge of R&D Tax Credit Services at Aprio. Carli has dedicated the last five years to performing R&D Tax Credit studies for clients in a variety of industries, with a specialty in the manufacturing and technology industries. She has worked to prepare R&D Tax Credits for companies ranging from startups to Fortune 500 businesses, performing technical interviews with subject matter experts, calculating complex credits and preparing technical reports.