Biden signs CHIPS bill, including brand new investment tax credit for semiconductor facilities |  Morrison & Forster LLP

Biden signs CHIPS bill, including brand new investment tax credit for semiconductor facilities | Morrison & Forster LLP

On July 28, 2022, Congress passed the CHIPS Act (CHIPS). Among other things, CHIPS is adding Section 48D to the Internal Revenue Code, which provides a new semiconductor manufacturing investment tax credit for advanced manufacturing investments. CHIPS, including the new tax credit, is a standalone bill separate and separate from the recent legislative package reportedly agreed between Senators Joe Manchin and Chuck Schumer. President Biden is expected to sign the law.

The new investment tax credit provides eligible taxpayers with a refundable tax credit equal to 25% of their “qualifying investments” related to each “advanced manufacturing facility.”

In general, a qualifying investment for each tax year is a taxpayer’s investment in depreciable property that is an integral part of a “modern manufacturing facility” and that is brought into service by the taxpayer during that year. Qualifying investments include buildings and structural components, excluding those parts used for offices, administrative services, or other functions not related to production. An advanced manufacturing facility is a facility with the primary purpose of manufacturing semiconductors or semiconductor manufacturing facilities. The various special regulations that generally apply to investment tax credits apply to the new credit, e.g.

Credit applies to properties commissioned after December 31, 2022 with construction beginning before January 1, 2023. Credit expires December 31, 2026 and does not apply to properties whose construction begins after that date.

CHIPS was passed with the goal of incentivizing US semiconductor manufacturing. As with other investment loans, facilities and equipment primarily used outside the United States are not eligible for the loan. In addition, taxpayers who are not eligible for the credit include (i) foreign corporations that qualify as “foreign corporations of concern” under the National Defense Authorization Act of 2021 (e.g., foreign terrorist organizations or organizations listed by OFAC), and (ii) taxpayers involved in certain significant transactions involving the substantial expansion of semiconductor manufacturing capacity in China or another “foreign country of significance” (as defined in the National Defense Authorization Act of 2021 ) include.

Semiconductor manufacturing plants are expensive projects that require significant capital investments. CHIPS, including its new investment tax credit, is designed to encourage investment and can significantly impact the financing landscape for facility projects. For example, in a marked departure from the historical treatment of tax credits from renewable energy projects, the new advanced manufacturing credit is said to be “repayable” under a “direct payment” election. Thus, semiconductor manufacturers who otherwise could not have benefited directly from the loan (e.g., due to a lack of sufficient taxable income and income tax liabilities) could use the refundable loan to fund their projects with less reliance on third parties. Tax Justiceā€ Investors. Additionally, investors who have not been significantly involved in financing renewable energy projects, such as REITs and other real estate investors, may be better placed to invest in these assets due in part to the significant real estate aspects of the projects and the nature of the credits than potentially refundable.

We anticipate that the new Section 48D will require significant guidance from the US Treasury and IRS to function as intended, including on how the loan may be repaid.

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