The CHIPS Act’s semiconductor production credit

By Adam Wallwork, J.D., LL.M.; Quynh Nguyen, E.A.; Gary Hecimovich, CPA; Jeremy DeMuth, J.D.; Matthew Normington, CPA; and Andrew Black, E.A.



  • National concerns about lagging U.S. production of semiconductors as a share of global production led to legislation in 2021 and 2022, providing funding incentives and a new advanced manufacturing investment tax credit.
  • The credit, under Sec. 48D, equals 25% of qualified investment in new buildings, facilities, and other depreciable tangible property integral to the operation of a facility to manufacture semiconductors or semiconductor manufacturing equipment. Because taxpayers may elect to be treated as making payments against tax equal to the credit amount, the credit is in effect refundable.
  • Qualified property eligible for the credit must be placed in service after 2022, and its construction must begin before Jan. 1, 2027.
  • An advanced manufacturing facility for purposes of the credit must have as its primary purpose the manufacturing of semiconductors or semiconductor manufacturing equipment. Certain "foreign entities of concern" or taxpayers making certain "applicable transactions" are ineligible for the credit. The latter include certain transactions involving a material expansion of semiconductor manufacturing capacity in certain "foreign countries of concern."
  • Credit recapture rules apply where taxpayers dispose of credit property within specified periods and in the case of applicable transactions.

U.S. companies have gone from leading global semiconductor chip production at the inception of the industry to comprising only approximately 12% of global production capacity today. According to the Semiconductor Industry Association (SIA), the United States is behind other countries when it comes to semiconductor chip production "mostly because other countries' governments have invested ambitiously in chip manufacturing incentives and the U.S. government has not. Meanwhile, federal investments in chip research have held flat as a share of GDP, while other countries have significantly ramped up research investments."1

The decline in U.S. domestic chip production capacity began garnering national attention during 2020 and 2021 as the COVID-19 pandemic, difficulties in foreign trade and logistics, spiking demand for consumer electronics, and disasters at certain critical foreign manufacturing facilities led to a sudden and projected multiyear semiconductor shortage. The shortage has had an impact on multiple sectors of the economy including automobile manufacturers and has heightened scrutiny on the vulnerabilities associated with increasing reliance on a global semiconductor supply chain. In response, lawmakers on both sides of the aisle have come to view the expansion of semiconductor manufacturing in the United States as an important economic and national security issue.

Against this backdrop, the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (2021 NDAA) was enacted on Jan. 1, 2021.2 Congress authorized activities related to semiconductor manufacturing and research and development (R&D) through various government agencies in Title XCIX of the 2021 NDAA (CHIPS for America programs) under multiple sections, including, but not limited to, Section 9902. Under Section 9902, the U.S. Department of Commerce is authorized to provide financial assistance to eligible applicants through a competitive selection process.

Although Commerce, as well as other government agencies, had the authority to establish the CHIPS for America programs, funding appropriations were lacking for nearly two years after the enactment of the 2021 NDAA. After much anticipation, Congress passed the bipartisan Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act of 2022, which President Joe Biden signed into law on Aug. 9, 2022.3 The Biden-Harris administration concurrently announced that the legislation "will boost American semiconductor research, development, and production, ensuring U.S. leadership in the technology that forms the foundation of everything from automobiles to household appliances to defense systems" and "strengthen American [semiconductor] manufacturing, supply chains, and national security, and invest in research and development, science and technology, and the workforce of the future to keep the United States the leader in the industries of tomorrow, including nanotechnology, clean energy, quantum computing, and artificial intelligence."4

Division A of the CHIPS and Science Act, designated as the CHIPS Act of 2022, enhanced the CHIPS for America programs and provides over $50 billion in associated appropriations. Of that amount, $39 billion is allocated under Section 103 of the CHIPS Act of 2022 to the semiconductor incentives program established under Section 9902 of the 2021 NDAA (over five fiscal years) "to incentivize investment in facilities and equipment in the United States for the fabrication, assembly, testing, or packaging of semiconductors at mature technology nodes" and production or research and development of semiconductors, materials used to manufacture semiconductors, or semiconductor manufacturing equipment through a competitive application process.5 Commerce announced its goal to begin soliciting applications for the fiscal year 2022 allocation ($19 billion of the $39 billion) by early February 2023, within six months of the enactment date.

In addition, Section 107 of the CHIPS Act of 2022 creates a new refundable 25% advanced manufacturing investment tax credit (ITC) under Sec. 48D for qualified investment related to facilities that primarily manufacture semiconductors and semiconductor manufacturing equipment. Importantly, this new ITC can supplement and be paired with other funding secured under the CHIPS for America programs. This article summarizes the key features of the new Sec.48D credit and highlights key considerations for manufacturers of semiconductors and semiconductor manufacturing equipment, including current uncertainties surrounding the credit.

Advanced manufacturing ITC overview

The refundable Sec. 48D credit is equal to 25% of the qualified investment in new depreciable tangible property integral to the operation of a facility to manufacture semiconductors or semiconductor manufacturing equipment. The refundable nature of the credit stems from a taxpayer's ability to make an election to be treated as making a payment against tax equal to the credit amount otherwise determined in lieu of claiming the credit (direct-pay election) as a general business tax credit.6 Through the direct-pay election, taxpayers are entitled to a payment from the federal government to the extent that they do not have a tax liability to offset or if the taxpayer is in a tax loss position.

The costs associated with building or expanding a semiconductor manufacturing facility can easily surpass $1 billion, meaning a 25% tax credit would be significant to the project's economic viability. With such a substantial incentive value tied to qualifying for the Sec. 48D credit, it is critical for potential credit claimants to assess eligibility in order to plan accordingly. Considerations include: (1) understanding the meaning of the terms "qualified investment," "qualified property," "advanced manufacturing facility," "eligible taxpayer," "foreign entity of concern," and "applicable transaction"; (2) identifying which costs will qualify and areas of uncertainty; (3) implementing a process to track qualified investments, including planning around timing, basis reduction, and recapture provisions; and (4) substantiating and monetizing the Sec. 48D credit.

Qualified investment and qualified property

An eligible taxpayer's qualified investment with respect to an advanced manufacturing facility is the tax basis (i.e., capitalized costs) of any qualified property originally placed in service by the taxpayer after 2022.7 The construction of such property must begin before Jan. 1, 2027.8 If the construction began before Jan. 1, 2023, only capitalized costs attributable to the construction, reconstruction, or erection of the property after Aug. 9, 2022 (i.e., the CHIPS Act of 2022 enactment date), are eligible for the Sec. 48D credit, provided that the property is placed in service after Dec. 31, 2022. It is necessary for taxpayers that have qualified investments incurred on or before Aug. 9, 2022, to separately track costs after that date to help substantiate and determine the credit-eligible portion of the tax basis of qualified property.

Historically, the IRS and Treasury have focused on eligible basis associated with federal ITC claims through exams as well as part of the Sec. 1603 grant-in-lieu-of-ITC program. Having sufficient documentation is crucial to accurately calculating and substantiating Sec.48D credit claims. Best practices may include commissioning a cost-segregation study. Note that the IRS may impose a 20% penalty on any excessive amounts treated as payments or amounts received as payments due to a lack of reasonable cause, which may include insufficient documentation to substantiate the credit amount.9

Furthermore, taxpayers that have planned projects with an expected placed-in-service date after Dec. 31, 2026, should consider contemporaneous documentation of a beginning-of-construction strategy to support a determination that construction began before Jan. 1, 2027. The IRS provides two methods to establish the beginning of construction when determining eligibility for ITCs: (1) having paid or incurred at least 5% of the total cost of the depreciable basis of the qualified facility or property, excluding land and property not integral to the facility (5% safe harbor), and (2) starting physical work of a significant nature on-site or off-site related to a qualified facility or property (physical work test).

Moreover, once it has been determined that construction has commenced under the 5% safe harbor and/or the physical work test, the beginning-of-construction requirement is satisfied only if the taxpayer further satisfies certain continuity requirements that require continuous efforts or construction toward completion of the qualified facility or property during the period beginning in the calendar year immediately succeeding the calendar year that construction has commenced, through the date that the qualified facility or property is placed in service.10

Generally, the Sec. 48D credit is claimed in the tax year that the qualified property is placed in service for federal tax purposes (i.e., ready and available for its assigned function). For example, if a company begins construction related to qualified property on Dec. 31, 2026 (the day before the statutory sunset date), and places the property in service on Jan. 1, 2028, the Sec. 48D credit is claimed in tax year 2028. However, taxpayers may instead elect to accelerate claiming the Sec. 48D credit based on certain progress expenditure rules under Secs. 46(c)(4) and (d).11

Generally, this applies with respect to the taxpayer's expenditures for the construction of any progress expenditure property with a normal construction period of two years or more that is expected to be qualified property in the hands of the taxpayer when placed in service.12 Sec. 48D(b)(2) defines "qualified property" as tangible property (including any building or its structural components, except for a building or portion of a building used for offices, administrative services, or other functions unrelated to manufacturing), with respect to which depreciation (or amortization in lieu of depreciation) is allowable, that is either: (1) constructed, reconstructed, or erected by an eligible taxpayer; or (2) acquired by the taxpayer, if the original use of the property commences with the taxpayer; and (3) that is integral to the operation of an advanced manufacturing facility of an eligible taxpayer.

The phrase "building or its structural components" in Sec. 48D(b)(2)(B)(i) is similar to the threshold requirement for a qualified rehabilitated building that is eligible for the rehabilitation credit under Sec. 47(c)(1)(A), which refers to a "building (and its structural components)." The regulations under former Sec. 48(a), which included the investment credit for a qualified rehabilitated building, provided that the term "building" generally means "any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purpose of which is, for example, ... to provide working, office, parking, display, or sales space."13

It is unusual for the eligible basis of an ITC to include the cost of a building or its structural components, so this provision can significantly increase the percentage of a project's costs that may be credit-eligible. However, as noted above, any buildings or their structural components, including a portion of them, used for offices, administrative services, or other functions unrelated to manufacturing do not satisfy the requirements as qualified property and must be excluded from eligible basis. Nor does the qualified investment with respect to any advanced manufacturing facility for any tax year include that portion of the basis of any property that is attributable to qualified rehabilitation expenditures with respect to a qualified rehabilitated building, as defined in Sec. 47(c)(2).14

Advanced manufacturing facility

While Sec. 48D(b)(3) defines "advanced manufacturing facility" as a facility for which "the primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment," the terms "semiconductors" and "semiconductor manufacturing equipment" are not defined. In fact, the concept of "semiconductor manufacturing equipment" was a late modification to the legislation. When the advanced manufacturing ITC was included as part of the Build Back Better Act (BBBA),15 which passed in the House of Representatives on Nov. 19, 2021, the term "advanced manufacturing facility" was defined as "a facility for which the primary purpose is the manufacturing of semiconductors or semiconductor tooling equipment" (emphasis added).16 The subsequent version of the BBBA released by the Senate on Dec. 11, 2021, (and ultimately stalled) included this same language. In the CHIPS Act of 2022, Congress changed "semiconductor tooling equipment" to "semiconductor manufacturing equipment," so that the facility's primary purpose must be either (1) manufacturing semiconductors or (2) manufacturing semiconductor manufacturing equipment.

Multiple other bills were proposed within both the House and Senate to create an ITC for semiconductor manufacturing prior to the enactment of the CHIPS Act of 2022, including the proposed CHIPS for America Act17 introduced in June 2020, and the proposed Facilitating American-Built Semiconductors (FABS) Act introduced in June 2021.18 Notably, the latter bill included property to manufacture, process, or perform research with respect to semiconductors and semiconductor tooling equipment.19 However, Congress ultimately did not include language related to processing and research and leveraged the version proposed under the BBBA, with the modification from "tooling" to "manufacturing" noted above within the enacted legislation under Sec. 48D. The change from "tooling" to "manufacturing" may be viewed as more expansive, since it is generally understood that "manufacturing equipment" encompasses tooling equipment and potentially many other types of equipment.

'Semiconductor' and 'semiconductor manufacturing equipment'

Generally, semiconductors are materials that have electrical conductivity, acting as either a conductor or an insulator of electricity, depending on small changes in voltage.20 However, the term "semiconductors" is often used synonymously with semiconductor chips and integrated circuits. The SIA states that "semiconductors, sometimes referred to as integrated circuits ... or microchips, are made from pure elements, typically silicon or germanium, or compounds such as gallium arsenide. In a process called doping, small amounts of impurities are added to these pure elements, causing large changes in the conductivity of the material."21

A microchip or chip may include transistors (i.e., switches) that turn on or off, depending on changes in voltage, to make an integrated circuit. It may have as its base a wafer (i.e., thin piece of semiconductor material, also known as "substrate") for building multiple integrated circuits. Semiconductor chips are manufactured at "fabs" or fabrication plants, industrial facilities where raw wafers become fully functioning electronic chips, using an etching process called lithography.22

Again, the term "semiconductor" is not defined under Sec. 48D. In the absence of a definition in the tax law, the IRS and Treasury would likely construe such a word with a technical or specialized meaning to have its usual, established meaning as it is commonly or commercially understood.23 Specifically, in interpreting a statute, the IRS may look to other government agencies, including the departments of Commerce and Energy, as well as industry trade groups, for the ordinary meaning of the term "semiconductor."24

As part of the fact sheet released on June 8, 2021, the White House stated the following related to a 100-Day Supply Chain Review Report (100-Day Report) prepared under Executive Order 14017: "Semiconductors are essential to our national security, our economic competitiveness, and to our daily lives. These tiny chips are vital to virtually every sector of the economy — including energy, healthcare, agriculture, consumer electronics, manufacturing, defense, and transportation."25

In a news release issued June 17, 2021, the U.S. Senate Committee on Finance announced the introduction of the previously noted FABS Act, which proposed a 25% ITC for domestic manufacturing of semiconductors, cosponsored by Sen. Ron Wyden, D-Ore., and Sen. Mike Crapo, R-Idaho. As part of the release, Sen. Wyden stated:

Chips are a critical technology in our economy, as recent supply chain disruptions and shortages have made crystal clear. The supply of everything from computers to cars is affected by these shortages, and the way to fix this problem is to bring chip manufacturing back to the United States. Our bill would provide a significant investment tax credit to companies that build chips here at home, rather than overseas.

Further, Sen. Crapo stated, "It is critical that we leverage federal government incentives to bolster American companies and bring chip and semiconductor manufacturing back to the United States. This tax incentive is a great step toward our goal of fortifying our supply chains, strengthening national security, and boosting economic competitiveness."26 Based on the news releases, one could infer that Congress intended for the term "semiconductor" under Sec. 48D to include chips or integrated circuits, as defined by the SIA.

Beyond semiconductor chips or integrated circuits, there is less certainty regarding whether Congress intended the term to include semiconducting materials used to produce the final product, such as wafer substrates. Wafer manufacturing is itself a complex process resulting in characteristics that vary by source material (e.g., silicon, germanium); doping material (e.g., boron, phosphorus, arsenic); size (generally, up to 300 millimeters or 12 inches); thickness (generally, up to 775 micrometers); and surface characteristics (e.g., flatness, particle density, haze). Wafers meet the physics definition of semiconductor and are the primary source material for the chip or integrated circuit manufacturing process.

Despite wafers' being an essential part of the semiconductor supply chain, it is unclear whether Congress intended the term "semiconductor" under Sec. 48D to include the manufacturing of wafers or other essential supply chain materials. Moreover, various types of equipment are used across the entire life cycle of semiconductor manufacturing, and the definition of "semiconductor" will heavily influence what type of equipment constitutes "semiconductor manufacturing equipment" for purposes of the Sec. 48D credit. Note that companies that fall into this gray area related to the semiconductor supply chain would be able to explore potential grants under the CHIPS for America incentive program through Commerce.

Semiconductor fabs

Based on the White House's 100-Day Report prepared under Executive Order 14017, there are two basic industry models for semiconductor fabs: (1) the vertically integrated device manufacturer (IDM) model, where IDMs perform all of the steps in the semiconductor manufacturing process — from design to final testing, accounting for about two-thirds of global semiconductor production capacity — and (2) the fabless-foundry business model, in which the design process is separate from the manufacturing process.

The report states that many U.S. leaders in semiconductors operate with a fabless business model, providing their designs to a third-party foundry company (also referred to as a "pure-play semiconductor foundry") that specializes in contract manufacturing of semiconductors. Foundry companies sometimes provide additional capacity or otherwise produce certain chips for IDMs. Furthermore, the fabless-foundry model has become increasingly prevalent as the costs of building and maintaining a state-of-the-art semiconductor manufacturing facility have skyrocketed, and continued advances in chipmaking technology require entirely new, increasingly costly fabrication equipment.27

In removing "processing and research" from the CHIPS Act of 2022's final language, Congress may have considered the availability of other tax and nontax incentives for such activities, specifically the Sec. 41 R&D credit, as well as grants and/or loans under the CHIPS for America incentive program through Commerce, as noted, to incentivize investments in facilities and equipment in the United States for the fabrication, assembly, testing, advanced packaging, production, or research and development of semiconductors, materials used to manufacture semiconductors, or semiconductor manufacturing equipment. Because the R&D credit is generally calculated based on incremental qualified research expenditures from prior years, it generally would not provide the same level of benefit as a 25% credit for qualified research investment.

As noted previously, buildings or their structural components, including portions of them, used for offices, administrative services, or other functions unrelated to manufacturing do not satisfy the requirements as "qualified property" and must be excluded from eligible basis for purposes of the credit under Sec. 48D. Accordingly, the IRS and Treasury may consider addressing methods for allocating qualifying activity and nonqualifying activity related to buildings, as well as for equipment (dual-function property).

Eligible taxpayer, foreign entity of concern, and applicable transaction

Sec. 48D(c) defines an "eligible taxpayer" as any taxpayer that: (1) is not a "foreign entity of concern," as defined by Section 9901(6) of the 2021 NDAA, and (2) has not made an "applicable transaction," as defined by Sec. 50(a), during the tax year.28

The term "foreign entity of concern" is defined as including any foreign entity, including a foreign individual, a foreign country or political party, or a partnership, association, corporation, organization, or other combination of persons organized, or having its principal place of business, in a foreign country, that is (1) owned by, controlled by, or subject to the jurisdiction or direction of a foreign country that is listed as a "covered nation" under 10 U.S.C. Section 4872(d)(2)29 (i.e., China, Russia, North Korea, or Iran); (2) a designated foreign terrorist organization; (3) an entity included on the list of specially designated nationals and blocked persons maintained by Treasury's Office of Foreign Assets Control; or (4) that has been alleged by the U.S. attorney general to have engaged in certain criminal activities in violation of the International Economic Emergency Powers Act and certain other provisions.30

Under Sec. 50(a)(6)(D), the term "applicable transaction" is defined as any "significant transaction," as determined by Treasury, in coordination with Commerce and the U.S. Department of Defense, involving the material expansion of semiconductor manufacturing capacity of an applicable taxpayer in China, Russia, or other foreign country of concern, as defined by Section 9901(7) of the 2021 NDAA. A transaction is excluded from being a significant transaction if it involves the expansion of the taxpayer's manufacturing capacity of certain "legacy semiconductors." Under Section 9902(a)(6) of the 2021 NDAA, the term "legacy semiconductor" includes:

(I)(aa) a semiconductor technology that is of the 28 nanometer generation or older for logic; (bb) with respect to memory technology, analog technology, packaging technology, and any other relevant technology, any legacy generation of semiconductor technology relative to the generation described in item (aa), as determined by the Secretary, in consultation with the Secretary of Defense and the Director of National Intelligence; and (cc) any additional semiconductor technology identified by the Secretary in a public notice issued under clause (ii); and

(II) does not include a semiconductor that is critical to national security, as determined by the Secretary, in consultation with the Secretary of Defense and the Director of National Intelligence.

Basis reduction and recapture rules

Once a taxpayer determines whether it can qualify for the Sec. 48D credit by satisfying the definition of an "eligible taxpayer," it is important to understand how the credit may be lost or reduced pursuant to the relevant recapture, or clawback, rules. The general rules for ITC recapture under Sec. 50, together with the special recapture rules incorporated into that section by the CHIPS Act of 2022 (i.e., Secs. 50(a)(3) and (a)(6)(D)), apply to the Sec. 48D credit and the elective payment provision if the direct-pay election is made.

In general, these rules provide that the Sec. 48D credit is subject to recapture if the qualified property placed in service by the taxpayer as part of an advanced manufacturing facility ceases to be eligible for the credit in the taxpayer's hands or is disposed of by the taxpayer (each a "recapture event") within a five-year period beginning on the placed-in-service date of the qualified property (recapture period). The credit vests by 20% each full year the associated property is placed in service during the five-year recapture period.

If a recapture event is triggered before the date that is one year from the placed-in-service date, the recapture percentage is 100% (i.e., full recapture). The recapture percentage is reduced to 80% if a recapture event occurs during year 2; to 60% during year 3; to 40% during year 4; and to 20% during year 5.31 Certain exceptions to recapture apply in the case of mere changes in the form of ownership of the qualified property eligible for the Sec. 48D credit.

Secs. 50(a)(3) and 50(a)(6)(D) provide additional special recapture rules that apply to the Sec. 48D credit. Specifically, if there is an applicable transaction (see discussion above) by an applicable taxpayer (defined as the taxpayer allowed a credit under Sec. 48D(a)) before the close of the 10-year period beginning on the date the taxpayer placed in service qualified property that is eligible for the Sec. 48D credit, then the taxpayer must recapture 100% of the amount of the tax credit or elective payment amount determined under Sec. 46 that is attributable to the Sec. 48D credit with respect to the property.

An exception to this 10-year recapture rule applies if the taxpayer demonstrates to Treasury's satisfaction that the applicable transaction has ceased or has been abandoned within 45 days of a determination and notice by Treasury.32 However, this provision does not describe the time, place, or manner of such a determination and notice by the government to the taxpayer or the means by which a taxpayer can demonstrate cessation or abandonment of the applicable transaction so as to avoid full recapture of the Sec. 48D credit under Sec. 50(a)(3).

These special recapture rules, together with the definition of "eligible taxpayer," discussed above, are intended to prohibit the Sec. 48D credit from being claimed by certain foreign-controlled entities with semiconductor manufacturing capacity in a foreign country of concern and to trigger tax credit recapture should the recipient of the credit subsequently be acquired by or merge with such an entity or otherwise enter into a significant transaction, as described above.

As with other ITCs, taxpayers must reduce the depreciable or amortizable basis of any qualified property with respect to which the Sec. 48D credit is claimed or a refund payment of the credit is determined under the elective payment provision, as applicable. This basis reduction is reversed in the case of the ITC recapture, pursuant to relevant provisions under Sec. 50.

Credit monetization

As noted above, Sec. 48D(d) allows an eligible taxpayer to elect to treat the advanced manufacturing ITC as a direct payment against income taxes, essentially making it a refundable credit, since the eligible taxpayer would be entitled to a refund if such a payment exceeds its federal income tax liability for the tax year. The direct-pay election, which is irrevocable, must be made no later than the due date (including extensions) of the entity's income tax return for the year for which the election is made, but in no event can the election be made earlier than May 6, 2023 (i.e., 270 days after Aug. 9, 2022, the date of enactment of Sec. 48D).33

Special rules apply to partnerships and S corporations under Sec. 48D(d)(2)(A) for qualified property held directly by a partnership or S corporation. The direct-pay election under Sec. 48D(d) to treat the credit as a payment against tax is made at the entity level, even though neither the partnership nor the S corporation is directly liable for federal income tax. Moreover, if the partnership or S corporation makes the direct-pay election, the payment amount is treated as tax-exempt income for purposes of Secs. 705 and 1366, respectively.34 As a result, a partner in a partnership or shareholder of an S corporation that makes the direct-pay election under Sec. 48D(d)(2)(A) should receive a basis step-up with respect to its allocable share of such tax-exempt income.

It is important to note that the BBBA proposed the creation of Sec. 6417, which provided for the ability to make direct-pay elections (i.e., refundability) of applicable credits, including the advanced manufacturing ITC, which was then proposed under Sec. 48E. At the time, the BBBA was stalled in the Senate for months, with ongoing negotiations between Sens. Chuck Schumer, D-N.Y., and Joe Manchin, D-W.Va. With an amplified emphasis on building a resilient supply chain and revitalizing domestic semiconductor production capacity, Congress pulled the advanced manufacturing ITC from the BBBA and included it as part of the CHIPS and Science Act under Sec. 48D with slight modifications, including the direct-pay provision within the Code section itself, aligned with the provision under the BBBA.

The week following the CHIPS and Science Act's enactment, Congress passed the Inflation Reduction Act of 2022 on Aug. 16, 2022.35 The Inflation Reduction Act includes an "energy security" subtitle largely mirroring the "green energy" subtitle under the BBBA, with some modifications. Notably, the Inflation Reduction Act limits the Sec. 6417 direct-pay election to certain "applicable entities" and adds a new transferability election under Sec. 6418, which is available to taxpayers that do not have the option to make a direct-pay election under Sec. 6417.

Under Sec. 6417(d)(1), an "applicable entity" is narrowly defined to include: (1) a tax-exempt organization; (2) a state or political subdivision thereof; (3) the Tennessee Valley Authority; (4) an Indian tribal government; (5) an Alaska Native corporation; and (6) a corporation operating on a cooperative basis that is engaged in furnishing electric energy to persons in rural areas. Note that there are certain provisions for three select credits (i.e., under Secs. 45Q, 45V, and 45X), where a taxpayer may be treated as an "applicable entity" for a five-year period. For nonapplicable entities, the transferability election allows the taxpayer to sell the credits to an unrelated third party in exchange for cash.

If the Sec. 48D credit had not been taken out of the BBBA and enacted under the CHIPS and Science Act, the Sec. 48D credit might have met the same fate as applicable credits under Secs. 6417 and 6418, with a direct-pay provision limited to applicable entities and a refundability option (as well as being subject to the two-tiered credit structure, where prevailing wage and apprenticeship requirements must be met for the full 25% rate). However, Sec. 48D allows the direct-pay election for any eligible taxpayer that is not a foreign entity of concern and has not made an applicable transaction previously described and does not have the prevailing wage and apprenticeship requirements for the ITC.

Regulatory guidance

Sec. 50(a)(3)(C) expressly directs Treasury to issue appropriate guidance to carry out the purposes of the special recapture rule related to an applicable transaction for the Sec. 48D credit. These include, among other things, regulations or other guidance that provide for recordkeeping or information-keeping requirements for purposes of administering the prohibition on significant transactions and the relevant exceptions to that rule. In addition, Sec. 48D(d)(6) requires Treasury to issue regulatory guidance necessary or appropriate to carry out the purpose of the advanced manufacturing ITC, including: (1) guidance under the credit's direct-pay election provision to ensure that the amount of any refund payment is commensurate with the amount of the credit that would be otherwise allowable, and (2) guidance providing rules for determining a partner's distributive share of the tax-exempt income in the case of a direct-pay election under Sec. 48D(d)(2)(A).

The 2022—2023 Priority Guidance Plan released by the IRS and Treasury listed 205 guidance projects under 16 categories (e.g., Energy Security, General Tax Issues) that are priorities for allocating resources for the fiscal year ending June 30, 2023. "Guidance regarding the advanced manufacturing investment credit under [IRC] § 48D established by section 107 of the CHIPS Act of 2022" is listed as the ninth item under the General Tax Issues category.36 It is expected that the guidance will cover many of the Sec. 48D key terms, concepts, and uncertainties summarized in this article, including the definitions of "qualified investment," "qualified property," "advanced manufacturing facility," "eligible taxpayer," "foreign entity of concern," and "applicable transaction."

The 2022—2023 Priority Guidance Plan does not provide any deadline for completing the guidance projects, and there are no statutory deadlines associated with guidance related to the Sec. 48D credit. Accordingly, the timing of when the Sec. 48D credit guidance will be issued, as well as the type of guidance (e.g., notice, revenue procedure, regulations), is currently unknown.

This article does not constitute tax, legal, or other advice from Deloitte Tax LLP, which assumes no responsibility with respect to assessing or advising the reader as to tax, legal, or other consequences arising from the reader's particular situation.


1"Congress Passes Investments in Domestic Semiconductor Manufacturing, Research & Design," Semiconductor Industry Association (2023).

2William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, P.L. 116-283.

3Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act of 2022, P.L. 117-167.

4White House Fact Sheet, "CHIPS and Science Act Will Lower Costs, Create Jobs, Strengthen Supply Chains, and Counter China" (Aug. 9, 2022).

5CHIPS Act of 2022, §103, amending 2021 NDAA, §§9902(e)(1) and (2).

6Sec. 48D(d).

7Sec. 48D(b)(1).

8Sec. 48D(e).

9See Secs. 6676(a) (relating to refund claims) and 48D(d)(2)(F) (relating to amounts treated as payments).

10See Notice 2013-29, as clarified or modified by subsequent notices through Notice 2021-41.

11Sec. 48D(b)(5).

12Regs. Sec. 1.46-5(d).

13Regs. Sec. 1.48-1(e).

14Sec. 48D(b)(4).

15H.R. 5376, ultimately, the Inflation Reduction Act of 2022, P.L. 117-169.

16H.R. 5376, §136503.

17S. 3933 and H.R. 7178.

18S. 2107.

19Id., §2 (June 17, 2021).

20National Institute of Standards and Technology, U.S. Department of Commerce, "Semiconductor Glossary."

21Semiconductor Industry Association, "What is a Semiconductor?"

22National Institute of Standards and Technology, U.S. Department of Commerce, "Semiconductor Glossary."

23See McDermott Int'l, Inc. v. Wilander, 498 U.S. 337, 342 (1991); Old Colony Railroad Co., 284 U.S. 552, 560 (1932) ("The legislature must be presumed to use words in their known and ordinary signification. ... This rule is applied to taxing acts.").

24See Sterrett, "Use of Industry Definitions in Interpretation of the Internal Revenue Code: Toward a More Systematic Approach," 16 Va. Tax. Rev. 1, 6—7 (1996) (describing external definitions of statutory language, such as industry definitions of terms, as "intrinsic aids" that can be used in any exercise of statutory interpretation).

25White House Fact Sheet, "Biden-Harris Administration Announces Supply Chain Disruptions Task Force to Address Short-Term Supply Chain Discontinuities" (June 8, 2021).

26Senate Committee on Finance, "Wyden, Crapo, Cornyn, Warner, Daines, Stabenow Introduce Bill to Boost Domestic Manufacturing of Semiconductors" (June 17, 2021).

27See White House, "Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth: 100-Day Reviews Under Executive Order 14017" (June 2021).

28Note that although Sec. 48D(c)(1) provides that "foreign entity of concern" is defined by §9901(6) of the 2021 NDAA, the CHIPS Act of 2022 redesignates paragraph 6 as paragraph 8.

29Formerly 10 U.S.C. §2533c(d)(2), prior to its transfer and redesignation by §§1870(d)(2) and (3) of the 2021 NDAA, as amended by §§1701(t)(2)(B) and (C) of the National Defense Authorization Act for Fiscal Year 2022, P.L. 117-81.

30See 15 U.S.C. §§4651(6) and (8).

31Sec. 50(a)(1).

32Sec. 50(a)(3)(B).

33Sec. 48D(d)(2)(B).

34Sec. 48D(d)(2)(A).

35nflation Reduction Act of 2022, P.L. 117-169.

36See U.S. Department of Treasury Office of Tax Policy and Internal Revenue Service, "2022—2023 Priority Guidance Plan" (Nov. 4, 2022).



Summary of Inflation Reduction Act of 2022


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