On March 23, 2023, the Department of the Treasury (“Treasury”) published a Notice of Proposed Rulemaking to implement the Advanced Manufacturing Investment Credit established by the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act (“CHIPS Act”). The CHIPS Act was enacted in August 2022 to incentivize the manufacture of semiconductors and semiconductor manufacturing equipment in the United States, especially amid growing national security concerns and economic competition risks posed by China’s increasing chip production in recent years. It provides appropriations to develop domestic manufacturing critical to U.S. competitiveness and national security interests (see Update of July 29, 2022).
Generally, the investment tax credit, known as the “CHIPS ITC” or the “Section 48D Credit” – given its location in the Internal Revenue Code – extends a tax credit equal to 25% of an eligible taxpayer’s “qualified investment” in a facility built after the enactment of the CHIPS Act and in service after December 31, 2022, with the “primary purpose” of manufacturing semiconductors or semiconductor manufacturing equipment. The proposed rule clarifies that a new chip factory’s human resources, legal, accounting, sales, distribution, and non-cybersecurity operations are not “qualified investments” covered under the CHIPS ITC because these functions are not used directly in the manufacture of semiconductors or semiconductor manufacturing equipment and so are not “integral to the operation of the [] facility.”
The proposed rule also addresses the eligibility requirements of the CHIPS ITC as well as how to claim the credit. For example, the proposed rule considers allowing a qualified taxpayer to be treated as though having already made a tax payment (including an overpayment of tax), and for eligible partnerships or S corporations to receive an elective payment instead of claiming the credit.
A special 10-year credit “recapture rule” is included in the proposed rule which would allow Treasury to claw back the full value of the CHIPS ITC claimed in all prior years if, within 10 years of claiming the credit, a taxpayer (or affiliates) materially expanded the semiconductor manufacturing capacity of the taxpayer in a “foreign country of concern” – countries such as China, Russia, Iran and North Korea.
Treasury will accept comments from all interested parties through May 22, 2023 via the federal eRulemaking portal or in hard copy.
Treasury’s proposed rule seeks to align with a related Department of Commerce Notice of Proposed Rulemaking, also published on March 23, 2023, that seeks to establish certain national security “guardrails” on funding under the CHIPS Act Incentives Program; see that update here.