Posted by Jeffrey Feingold on 09.19.22

Part of the CHIPS Act of 2022 – (Creating Helpful Incentives to Produce Semiconductors for America). The Credit is a component of the Section 38 General Business Credit. New Code Section 48D.

For “Advanced Manufacturing Facility”: a facility whose primary purpose is to manufacture semiconductors or to manufacture equipment used to manufacture semiconductors.

Ineligible taxpayers – those designated as “a foreign entity of concern.” Russia, North Korea, Iran, and China; and other security threats, whose conduct is considered detrimental to US national security or foreign policy. Also excluded are foreign entities and taxpayers who have engaged in signifcant transactions expanding semiconductor capacity in China or other countries on OFAC list. (“OFAC” = Office of Foreign Assets Control.)

For projects placed in service after 12/31/22; sunsets for properties where construction begins after 12/31/26.

Allowable costs - If construction began before 1/1/2023, costs related to construction work done on or after 8/9/22 when the Act was signed are eligible.

25% of Qualified Investment.

•  Tangible property subject to depreciation.
• Investment made In the US.
• Integral to operation of an advanced manufacturing facility.
• Equipment and buildings or structural components related to the advanced manufacturing facility (excludes portion of building used for office, administrative or other functions unrelated to manufacturing).
• Property cannot also be claimed for rehabilitation credit Sec 47( c )(2).

Tax Accounting Issues for the taxpayer: Must reduce tax basis of affected assets for which the credit is claimed as noted in Sec 50 ( c ). Recapture if the asset is disposed of within 5 years, ceases to be Qualifying Property, or within 10 years if taxpayer expands semiconductor capacity in China or another OFAC country.

Refundable credit option: The AMIC is refundable if such an election is made to treat the credit as a “payment against tax” (i.e., like an estimated tax payment), which would reduce tax due on return. If credit exceeds tax liability, the balance is refunded (like an estimated tax payment).

• If you make this election, the credit cannot be claimed on federal income tax return.
• Shareholders can’t make the election. Credit is paid to the entity in same manner as a refund.
• Sub S or Partnerships would not pass credit on to shareholders if this option is taken.
• Instead, the payment is made to Sub S or Partnership and is treated as tax exempt income.
• On the other hand, passthrough entities may elect to pass the AMIC to owners if this election was not made.