Tom Talks Taxes - August 5, 2022
What you need to know about the new advanced manufacturing tax credit
Sec. 107 of the CHIPS Act of 2022, which was recently enacted into law, created a temporary tax credit to incentivize semiconductor manufacturing under new §48D.
The advanced manufacturing investment credit is equal to 25% of the qualified investment for a tax year with respect to any advanced manufacturing facility of an eligible taxpayer:
An eligible taxpayer is a taxpayer who is not a “foreign entity of concern” and has not made a §50(a) applicable transaction (i.e., with China) during the tax year.
An advanced manufacturing facility is a facility whose primary purpose is manufacturing semiconductors or semiconductor manufacturing equipment.
A qualified investment is the basis of any qualified property placed in service during the tax year. Qualified property is tangible property integral to the operation of the advanced manufacturing facility that is eligible for depreciation or amortization and is either (1) constructed or reconstructed by the taxpayer or (2) acquired by the taxpayer if its original use begins with the taxpayer. A building or structural component can qualify, but not any portion used for offices, administrative services, or functions unrelated to manufacturing.
Taxpayers may elect to treat the credit as a payment against tax. Partnerships and S corporations will receive a direct payment of the credit upon election by the entity. The payment is treated as tax-exempt income for partnership and S corporation basis purposes. A partner’s distributive share of the tax-exempt income will follow their share of the otherwise applicable credit.
Any credit treated as a payment that is determined to be an excessive payment (i.e., the amount of payment that exceeds the allowed credit) will be added back to the tax liability of the taxpayer plus an additional 20% of the excessive payment. The 20% addition will not apply if the excessive payment resulted from reasonable cause.
The §48D credit is part of the §46 investment credit, and thus also the §38 general business credit, so rules applicable to those credits also apply to this credit. Rules similar to §50(a), relating to recapture, and §50(c), pertaining to basis reduction of property, will also apply to credits treated as payments.
The §48D credit is generally allowed for property placed in service after December 31, 2022, and for which construction begins before January 1, 2027.
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